SIE/S7: Debt
A customer buys a new corporate bond with a dated date of 1/01, settling on 1/21. The 1st interest payment is due on 3/01. How many days of accrued interest must the customer pay to the Underwriter?
20 days
Interest on a Corporate Bond accrues:
30/360 basis
A municipal dealer quotes a 2 year, 8% term revenue bond at 106. The yield to maturity is: 1.88% 4.85% 7.54% 8.00%
4.85% $80 - ($60 premium / 2 years to maturity)/($1,060 + $1,000) / 2 = ($80 - $30)/$1,030 = $50/$1,030= 4.85%
Which of the following would be a quote for a U.S. Government bond? 1. 99.50 2. 99-16 3. 99 1/2 4. 99 8/16
99-16 U.S. Government bonds are quoted on a percentage of par basis in 32nds. 99-16 = 99 16/32nds = 99.50% of $1,000 par = $995.00 per bond. Choice C is a corporate bond. Corporate bonds are quoted on a percentage of par basis in 1/8ths. 99 1/2 = 99.50% of $1,000 par = $995.00 per bond. Note that corporate, municipal and government bonds are not quoted in penny movements, as is the case with equities.
The "interest" received from a zero-coupon corp. bond is:
Accreted and taxed annually
A corporation has posted a large financial loss for this year. It has a legal obligation to pay interest on all of the following bonds except: 1. Debentures 2. Subordinated debentures 3. Adjustment bonds 4. Equipment trust certificates
Adjustment bonds
Series EE Bonds: I. are negotiable II. are non-negotiable III. pay interest semi-annually IV. pay interest at redemption
Are non-negotiable Pay interest at redemption
A short-term corp. debt which is back solely by the full faith and creditor of the issuer is:
Commercial paper
"Funded debt" refers to:
Corporate Debt with at least 5 years to maturity
Which risk is avoided when making an investment in GNMA pass-through certificate? Credit Risk Purchasing power risk extension risk prepayment risk
Credit Risk
A high-income client who lives in CA would be more likely to buy a Treasury security as an investment because the interest income is:
Exempt from CA state income tax
Zero coupon bonds trade: and interest with accrued interest flat at par
Flat
When bonds are trading at a large discount, which of the following statements are TRUE? I The deeper the discount, the more volatile the bond's price movement in response to interest rate changes II The deeper the discount, the less volatile the bond's price movement in response to interest rate changes III Discount bonds with long maturities are more volatile than ones with short maturities IV Discount bonds with short maturities are more volatile than ones with long maturities
I and III
During periods when a normal yield curve exists, which of the following statements are TRUE? I Long term bond prices are less volatile than short term bond prices II Long term bond prices are more volatile than short term bond prices III Yields on long term maturities are greater than yields on short term maturities IV Yields on short term maturities are greater than yields on long term maturities I and III I and IV II and III II and IV
II and III
Which statements are TRUE regarding bonds? I Short term bonds fluctuate more in value than long term bonds due to interest rate movements II Long term bonds fluctuate more in value than short term bonds due to interest rate movements III Short term maturities are more liquid than long term maturities IV Long term maturities are more liquid than short term maturities I and III I and IV II and III II and IV
II and III Long term bonds fluctuate more in value than do short term bonds in response to market interest rate changes. Short term bonds do not fluctuate much in value as interest rates move since they will be redeemed shortly at par. There is more active trading of short term debt than long term debt, so short term debt is more liquid.
A customer buys a $1,000 par Treasury Inflation Protection security with a 4% coupon and a 10 year maturity. If the inflation rate during the first year of the security's life is 5%, the: I. coupon rate is adjusted to 9% II. coupon rate remains at 4% III. principal amount is adjusted to $1,050 IV. principal amount remains at $1,000
II. coupon rate remains at 4% III. principal amount is adjusted to $1,050
Most corporate bond trades are executed:
Over-the counter by bond dealers
In a period of steep decreases in interest rates, which issuer is most likely to be positively affected? 1. Public Utility 2. Consumer Goods 3. Railroad 4. Mining
Public Utility The vast majority of utility financing is done via issuance of mortgage bonds. If int. rates drop steeply, a utility can call its outstanding bonds and refund at lower current market rates.
A bond issue where the bonds have the same maturity but different dates of issuance is a: 1. term bond offering 2. series bond offering 3. serial bond offering 4. combined serial and term bond offering
Series Bond A bond issue where the bonds have the same maturity but different dates of issuance is a series bond issue. These are rarely issued and are used to finance long-term construction projects where all of the money is not needed at once.
Municipal dollar bonds are generally: 1. term bonds 2. series bonds 3. serial bonds 4. short term maturities
Term Bonds Municipal dollar bonds (quoted on a percentage of par basis) are term bonds. Municipal bonds quoted in basis points (yield quotes) are serial bonds. Review
If interest rates are rising rapidly, which US gov't debt prices would be MOST volatile? Treasury Bills Treasury Notes Treasury Bonds Series EE Bonds
Treasury Bonds
True or False: a debenture is issued under an indenture
True
How are Treasury Notes quoted? 1. Coupon 2. Yield to Maturity 3. whole and Fractional 4. Decimal
Whole and Fractional Treasury Notes and Bonds are quoted as a percentage of par value, with each "whole" point movement representing 1% of $1,000 par or $10. The minimum price increment is 1/32nd of 1%, so it is a fraction of par. Thus, Treasury Notes and Bonds are quoted in whole and fractional points. For example, a Treasury Note quoted at 100-8 is priced at 100 and 8/32nds % of $1,000 par = 100.25% = $1,002.50.
A government securities dealer quotes a 3 month Treasury Bill at 5.00 Bid - 4.90 asking. A customer who wishes to buy 1 Treasury Bill will pay:
a dollar price quoted to a 4.90 basis
What is the benefit of a zero coupon bond?
capital appreciation
Yield quotes for collateralized mortgage obligations are based upon:
expected life of the tranche
Principal repayments on a CMO are made:
in varying dollar amounts every month
A customer buys 5M of 6 1/4% Treasury Bonds at 100. How much interest income will the customer receive at each interest payment? A. $31.25 B. $62.50 C. $156.25 D. $312.50
$156.25 =6.25% * (5*1000) =$312.50 (paid semi-annually)/2 =$156.25
Treasury Bills: 1. Mature in 1 Year or Less 2. Mature in Over 1 Year 3. Are issued by the US Gov't 4. Are issued by the US Gov't Agencies
1. Mature in 1 Year or Less 3. Are issued by the US Gov't
A bond's yield moves from 5.00% to 6.00%. The yield has increased by: 1. 1 point 2. 1 basis point 3. 100 basis points 4. 1,000 basis points
100 basis points Basis points measure yield change. 1 basis point is .01%, so 100 basis points is 1%. If a bond's yield has moved by 1 point (as in this example), this is the same as a 100 basis point move. Do not mix up basis points with price points. If a bond's price moves from, say, 95 to 96, this is a movement in price from 95% of $1,000 par ($950) to 96% of $1,000 par ($960). Thus, a 1 point price move on a bond is 1% of par value, which is a $10 move.
Interest earned on a corporate bond is: 100% taxable at the Fed Level 80% taxable at the Fed Level 70% taxable at the Fed Level 0% taxable at the Fed Level
100% taxable at the Fed Level
An 8% corporate bond with 20 years left to maturity is currently trading at 120. The bond is callable in 4 years at 104. If a client buys the bond and then the issuer calls it in 4 years, the yield to call will be: 2.98% 3.57% 3.63% 6.66%
3.57%
Which bond will exhibit the greatest price volatility? 8-year bond; 6% coupon; 7% yield; duration of 6.41 7-year bond; 0% coupon; 7% yield; duration of 7.00 3-year bond; 2% coupon; 3% yield; duration of 2.93 2-year bond; 1% coupon; 3% yield; duration of 1.98
7-year bond; 0% coupon; 7% yield; duration of 7.00 The best answer is B. The longer the expiration, the more volatile a bond's price movements, which narrows the Choices to either A or B. The lower the coupon, the more volatile the bond's price movements, with the lowest coupon being "0." A 7-year zero coupon bond will actually be more volatile in price movements than a slightly longer maturity bond (8 years) with a fairly high coupon (6% in this case). The higher coupon means that more of the bond's value is represented by the interest stream than comes in early and this stabilizes the bond's price as market interest rates move. Duration is a concept that is tested as a "basic" idea on Series 7. It represents the amount of time that it will take for an investor to recoup his or her purchase price. The longer the duration, the longer it will take for an investor to get his or her money back and longer term bonds are more volatile. So the higher the duration number, the greater the bond volatility, and duration is often used as a measure of bond price volatility.
Private CMOs are: A. rated AAA because the underlying mortgages are government backed B. assigned credit ratings by independent credit agencies based on their structure, issuer, and collateral C. not rated by independent credit agencies because they are private placements that cannot be traded in the market D. not rated by independent credit agencies because of the uncertainty surrounding the quality of the mortgage loans collateralizing the issue
Assigned credit ratings by independent credit agencies based on their structure, issuer, and collateral
Current dealer offerings of corporate bonds can be found in: Bond Buyer Bloomberg Moody's Fitch's
Bloomberg
All of the following affect the marketability of corporate bonds EXCEPT: Bond denominations Block size Maturity Bond rating
Bond denominations For corporate bonds, the most marketable blocks are 5 bonds up to 100 bonds. Under 5 is an odd lot; over 100 is a large block which is more difficult to trade. The shorter the maturity, the more marketable the bond. The higher the rating, the more marketable the bond. The bond denominations have no effect on marketability.
New issues of Treasury Bonds are issued by the US gov't in which form? book entry bearer registered to principal only registered to principal and interest
Book entry
Which CMO tranche has the least certain repayment date? A. Planned Amortization Class B. Plain Vanilla C. Companion Class D. Targeted Amortization Class
Companion Class
A corporate bond which is backed solely by the full faith and creditor of the issuer is a:
Debenture
Which CMO tranche is LEAST susceptible to interest rate risk?
Floating rate tranche
A customer has bought a fully registered Exxon-Mobile debenture. The customer will receive:
From the paying agent twice/year
Which of the following trades settle in "clearing house" funds? I. General Obligation Bonds II. US Gov't Bonds III. Agency Bonds IV. GNMA Pass-Through Certificates
General obligation bonds
Which of the following securities would be used as "collateral" for a collateralized mortgage obligation? I. Ginnie Mae's II. Fannie Mae's III. Sallie Mae's IV. Freddie Mac's
Ginne, Fannie and Freddie
When compared to plain vanilla CMO tranches, PAC have: I. higher extension risk II. lower extension risk III. the same level of extension risk IV. no extension risk
Lower extension risk
In the event of a corporate liquidation, arrange the priority of claims: Unpaid Wages Secured Bondholders Subordinated bondholders Debenture bondholders
Secured Bondholders Unpaid Wages Debenture bondholders Subordinated bondholders
Bonds quoted on a yield to maturity basis are generally: 1. term bonds 2. series bonds 3. serial bonds 4. short term maturities
Serial Bonds Bonds quoted in basis points (yield quotes) are serial bonds - this is the usual case for municipal bonds. Bonds quoted on a percentage of par basis are term bonds.
Which of the following is an original issue discount obligation? GNMA certificate Treasury Bill US Gov't Bond FNMA Bond
Treasury Bill
Which security has, as its return, the "pure" interest rate? Treasury bill Treasury Note Treasury Bond Treasury STRIP
Treasury Bill
Which of the following trade "flat" Treasury Bills Treasury STRIPS Treasury Bonds Treasury Receipts
Treasury Bills, Treasury STRIPS, and Treasury Receipts
Price volatility of a CMO issue would most closely parallel that of an equivalent maturity:
Treasury Bond
If interest rates rise, which of the following US government debt instruments would show the greatest percentage drop in value? Treasury Bills Treasury Notes Treasury Bonds Series EE Bonds
Treasury Bonds
Which of the following trade "and interest"? Treasury bills Treasury notes Treasury Bonds Municipal Bonds
Treasury notes, Treasury Bonds, Municipal Bonds
Interest income received from a GNMA pass-through certificate is:
subject to both federal and state income tax
CMO Targeted Amortization Classes (TACs) have: A. lower prepayment risk, but the same extension risk as a Planned Amortization Class B. higher prepayment risk, but the same extension risk as a Planned Amortization Class C. the same level of prepayment risk but a lower level of extension risk than a Planned Amortization Class D. the same level of prepayment risk but a higher level of extension risk than a Planned Amortization Class
the same level of prepayment risk but a higher level of extension risk than a Planned Amortization Class
Which of the following would be a quote for a U.S. Government bond with a dollar price of $1,012.50? 1. 101.25 2. 101-8 3. 101 1/4 4. 101 4/16
101-8 U.S. Government bonds are quoted on a percentage of par basis in 32nds. 101-8 = 101 8/32nds = 101.25% of $1,000 par = $1,012.50 per bond. Choice C is a corporate bond. Corporate bonds are quoted on a percentage of par basis in 1/8ths. 101 1/4 = 101.25% of $1,000 par = $1,012.50 per bond. Note that corporate, municipal and government bonds are not quoted in penny movements, as is the case with equities.
A corporate bond was issued on Jan 1, 2010, that matures on Jan 1, 2030. The trust indenture allows the corporation to call the bond starting in 2020 at a price equaling 100 1/2 plus an additional 1/4 point premium for every 6 month period remaining until maturity. If the bond is called on Jan 1, 2026, the redemption price will be: 102 1/2 102 101 1/2 100 1/2
102 1/2 If the bond is called on Jan 1, 2026, it has 4 years left to maturity. This is the same as 8 - six month periods. For each six month period prior to maturity that the bond is called, 1/4 point is added to the call price (total equals 2 points). Since the call price is 100 1/2 plus the additional premium of 2 points, the total call price is 102 1/2.
XYZ Debentures Issue Date: 8-1-XX Payment Dates: J 1 & J 1 Maturity Date: 7-1-XX Some years after issuance, a customer buys 10 debentures in a regular way trade on Thursday, October 13th. The customer will owe the seller: A. 105 days of accrued interest B. 106 days of accrued interest C. 107 days of accrued interest D. 108 days of accrued interest
105 Days of accrued interest July = 30 days August = 30 days September = 30 days October = 15 days
An outstanding bond issue which is currently trading at 103 1/4 is callable starting next year at 102 1/2. The call premium on the bond issue is: 3/4 points 1 3/4 points 2 1/2 points 3 1/4 points
2 1/2 Points A bond "call premium" is simply the price above par at which the issuer has the right to call in the bonds from the bondholders. These bonds are callable at 102 1/2, hence the call premium is 2 1/2 points.
A 7% corporate bond with 10 years left to maturity is currently trading at 108. The bond is callable in 3 years at 102. If a client buys the bond and then the issuer calls it in 3 years, the yield to call will be: 3.98% 4.76% 4.81% 6.86%
4.76% YTC is Net Annual Return / Average Value. The annual income is 7% of $1,000 par = $70 per year. The bond can be purchased at 108, but it will be called in 3 years at 102, so there will be a 6 point ($60) loss over 3 years = 2 point loss ($20) per year. The Net Annual Return is: Annual Income ($70) - Annual Loss ($20) = $50 The Average Value is: $1,080 Purchase Price + $1,020 Redemption Price / 2 = $2,100 / 2 = $1,050 YTC is: $50 / $1,050 = 4.76%
A customer buys a $1,000 par 3 1/2% Treasury Bond, maturing July 1st 2035 at 104-16 on Friday Feb, 7th in a regular way trade. The interest payment dates are Jan 1st and July 1st. How many days of accrued interest are due? 37 38 39 40
40 January = 31 days Feb = 9 days (settlement takes place on Monday the 10th of Feb). =31+9 = 40
The longest initial maturity for new issues of Treasury Bills is:
52 Weeks
A municipal dealer quotes a 7 year, 5% term revenue bond at 94. The yield to maturity is: 4.78% 5.00% 6.04% 6.78%
6.04% This bond has a coupon rate of 5% = 5% of $1,000 par = $50 of annual income. The bond is purchased at 94% of $1,000 par = $940; and will mature at $1,000 in 7 years, Thus, the $60 capital gain is earned over 7 years for an annual gain of $60 / 7 = $8.57 per year. The bond is purchased at $940 and matures at $1,000, for an average value of $940 + $1,000 / 2 = $970. The YTM is: $50 + $8.57/$970 = 6.038% = 6.04%
n 2022, a customer buys 1 GM 8%, $1,000 par debenture, M '37, at 110. The interest payment dates are Jan 1st and Jul 1st. The yield to maturity on the bond is: 6.98% 7.58% 8.00% 8.24%
6.98% Step 1: $80 - ($100 premium / 15 years to maturity)/($1,100 + $1,000) / 2 = Step 2: ($80 - $6.67)/$1,050 = Step 3: $73.33/$1,050= 6.98%
Which bond does NOT have interest rate risk? A bond that is currently callable A bond that is currently puttable A bond with a high current coupon A bond with a low current coupon
A bond that is currently puttable If market interest rates rise, bond prices fall. If the bond has a put option, the holder can put the bond back to the issuer at par. Thus, it is protected against interest rate risk and its price will not fall below the put price.
In 2022, a customer buys 5 GM 10% debentures, M '42. The interest payment dates are Feb 1st and Aug 1st. The current yield on the bonds is 11.76%. The bonds are callable as of 2031 at 103. The bond is trading: 1. at a premium 2. at a discount 3. at par 4. in the money
At a discount If the bond's current yield (11.76%) is higher than the coupon yield (10%), the bond is trading at a discount. In order for the yield to rise above the stated fixed coupon rate, the price of the bond must drop in the market.
When comparing a CMO Planned Amortization Class (PAC) to a CMO targeted amortization class (TAC), all of the following statement are TRUE except: I. Both PACs and TACs offer the same degree of protection against extension risk II. PAC differs from TACs in that TACs do NOT offer protection against a decrease in prepayment speeds III. PACs are similar to TACs in that both provide call protection against increasing prepayment speeds IV. TAC pricing will be more volatile compared to PAC pricing during periods of rising interest rates.
Both PACs and TACs offer the same degree of protection against extension risk
What do bonds and preferred stock have in common?
Both have a fixed payout rate Both bonds and preferred stock can be convertible into shares of common stock
Which security is MOST subject to reinvestment risk? Zero coupon bonds Low coupon bonds Medium coupon bonds High coupon bonds
High coupon bonds Reinvestment risk for bondholders is the risk that interest rates drop after issuance of the bonds; and that as interest payments are received over the life of the issue, they cannot be reinvested at the same rate. This risk is the greatest for high coupon bonds; and the lowest for low or zero coupon bonds. Review
An issuer would MOST likely call bonds with: low coupon rates high nominal yields high call premiums long call protection period
High nominal yields The bonds which are most likely to be called are bonds with high nominal yields, which is the same as the coupon rate. After calling the bonds, the issuer can refund the issue at lower current market rates (given that interest rates have fallen after issuance). Bonds with low coupon rates are not going to be called since the interest cost to the issuer is low. Bonds with high call premiums would be expensive for the issuer to retire and long call protection periods prevent the issuer from calling the bond during the protection period.
The current yield of a bond will: I increase as bond prices fall II decrease as bond prices rise III remain unchanged as bond prices fall IV remain unchanged as bond prices rise I and II III and IV I and IV II and III
I an II The current yield is the stated rate of interest as a percentage of the bond's market value. As bond prices fall, the current yield increases; as bond prices rise the current yield decreases.
Which statement is TRUE about a targeted amortization class (TAC)? I. A TAC is a variant of a PAC that has a higher degree of prepayment risk II. A TAC is a variant that has a lower degree of prepayment risk III. A TAC is a variant of a PAC that has a higher degree of extension risk IV. A Tac is a variant of a PAC that has a lower degree of extension risk
I and IV
During periods when interest rates are rising, which of the following statements are TRUE? I Bonds with low coupon rates exhibit the greatest price volatility II Bonds with high coupon rates exhibit the greatest price volatility III To minimize price volatility, low coupon bonds are appropriate investments IV To minimize price volatility, high coupon bonds are appropriate investments
I and IV Bonds with the lowest price volatility will be ones with the highest coupon rate. Bonds with low coupon rates exhibit greater price volatility, with the most volatile bond being a zero-coupon bond. Thus, to minimize price volatility due to interest rate movements ("interest rate risk"), high coupon bonds are more appropriate than low coupon bonds.
Which statements are TRUE regarding market risk for bondholders? I As interest rates rise, the price of long term bonds falls faster than that of short term bonds II As interest rates rise, the price of short term bonds falls faster than that of long term bonds III To avoid market risk, a customer would invest in bonds with long term maturities IV To avoid market risk, a customer would invest in bonds with short term maturities I and III I and IV II and III II and IV
I and IV Market risk for a bondholder is the risk of rising interest rates forcing the price of a bond to drop. As interest rates rise, the price of a long term bond falls faster than that of a short term bond. To avoid market risk, a bondholder would want to invest in the shortest maturity possible.
As interest rates rise, which of the following statements are TRUE? I Bonds trading at large discounts fall faster in price than bonds trading at small discounts. II Bonds trading at small discounts fall faster in price than bonds trading at large discounts. III Bonds trading at large premiums fall faster in price than bonds trading at small premiums IV Bonds trading at small premiums fall faster in price than bonds trading at large premiums.
I and IV The general rule is the lower the price of the bond, the faster that bond's price will move as market interest rates change. Deep discount bonds have a lower price than small discount bonds, hence their prices move faster. Small premium bonds have a lower price than large premium bonds, hence their prices move faster as well.
Which of the following statements are TRUE about CMO's? I. CMO issues have a serial structure II. CMO issues are rated AAA III. CMO issues are more accessible to individual investors than regular pass-through certificates IV. CMO issues have a lower level of market risk than regular pass-through certificates
I, II, III, IV
Which of the following statements are TRUE about Treasury Receipts? I. The underlying securities are backed by the full faith and creditor of the US gov't II. The interest coupons are sold off separately from the principal portion of the obligation III. The securities are purchased at a discount IV. The securities mature at par
I, II, III, IV
Which of the following will increase the marketability risk of a bond? I Active trading in that security II Inactive trading in that security III Round lot size transaction amount IV Large block size transaction amount I and III I and IV II and III II and IV
II and IV Marketability risk is the risk that a security will be difficult to sell. The easiest securities to trade are "round lots" of actively traded issues. For example, a round lot of stock is 100 shares; a round lot of bonds is 5 bonds. Large blocks are more difficult to market; and it is more difficult to sell thinly traded securities than actively traded securities.
When the price of a bond increases, which of the following statements regarding yields are TRUE? I Current yield increases II Current yield decreases III Yield to maturity increases IV Yield to maturity decreases
II and IV When the price of a bond increases, yield to maturity, yield to call, and current yield all decrease. The only yield that never changes is the nominal yield or stated interest rate.
For bonds trading at a premium, rank the yield measures from lowest to highest? I Nominal II Current III Basis IV Yield to Call Basis I, II, III, IV IV, III, II, I II, I, III, IV I, III, II, IV
IV, III, II, I
Zero coupon bonds
Pay interest at maturity are bought at a discount and mature at par
Treasury Notes
Pay interest semi-annually Issued with maturities ranging from 1-10 years are not callable
Which CMO tranche will be offered at the lowest yield? I. Plain vanilla II. Targeted amortization class III. Planned amortization class IV. Companion
Planned amortization class
Wide swings in market interest rates would affect which of the following for holders of collateralized mortgage obligations? I. Prepayment Rate II. Interest Rate III. Market Value IV. Credit Rating
Prepayment rate, market value
During a period when the yield curve is inverted: short term rates are more volatile than long term rates long term rates are more volatile than short term rates short term and long term rates are equally volatile no relationship exists between short term and long term rate volatility
Short term rates are more volatile than long-term rates Whether the yield curve is ascending (normal), flat or inverted, the true statement always is that short term rates are more volatile than long term rates. Short term rates are susceptible to Federal Reserve influence, and move much faster than do long term rates. Long term rates respond more slowly; and reflect longer term expectations for inflation and economic growth, among other factors.
A customer wishes to maximize liquidity and minimize interest rate risk. The best recommendation is (are): short term maturities long term maturities callable bonds non callable bonds
Short term securities Short term bonds do not fluctuate much in value as interest rates move since they will be redeemed shortly at par. (The longer the maturity, the greater the price movement in response to market interest rate changes). Short term maturities are also the most liquid.
Interest earned on a corporate bond is: Subject to Federal Tax Subject to state and local tax Exempt from Federal tax Exempt from State and Local Tax
Subject to federal, state and local tax
Which of the following corporate obligations are NOT secured? Collateral trust certificate Subordinated debenture commercial paper Debenture
Subordinated debenture commercial paper Debenture
Which investment does NOT have purchasing power risk? STRIPS TIPS Treasury Bonds Treasury Receipts
TIPS
Reports of Corp. bond trades are made to: TRACE RTRS Within 10 seconds of execution As soon as practicable but no later than 15 minutes after execution
TRACE, ASAP but no later than 15 minutes after execution TRACE is FINRA's trade reporting and compliance engine
When a corporation is making a limited time offer to buy its own securities or the securities of another company at a price that is above the current market price, this is known as a:
Tender offer
Which of the following investments gives a rate of return that cannot be affected by "reinvestment risk" Treasury notes treasury bonds treasury receipts Ginnie Mae pass through certificates
Treasury Receipts
All of the following are true statements about discount bonds EXCEPT: 1. bonds trading at a discount can indicate that the issuer's rating has deteriorated 2. bonds trading at a discount are more likely to be called than bonds trading at a premium 3. discount bonds will appreciate more rapidly as interest rates fall than will similar premium bonds 4. a bond trading at a discount can indicate that interest rates have risen
bonds trading at a discount are more likely to be called than bonds trading at a premium If a bond issued at par is trading at a discount, it indicates that either market interest rates have risen; or that the issuer's rating has deteriorated. As interest rates fall, discount bonds will appreciate at a faster rate than will premium bonds. The change in value of the bond's price is a result of an increased "present value" of the remaining interest payments to be received. This increase in the "value" of the remaining interest payments is a larger percentage of a discount bond's price than of a premium bond's price. Thus, as interest rates drop, discount bond prices rise faster than premium bond prices. Similarly, as interest rates rise, discount bond prices fall faster than premium bond prices. If the bond is trading at a discount and is then called, then the issuer will have to pay par for the bonds. Why not, instead of paying par, purchase the bonds at the current market price? It would be better to pay the discount than the full market value. Furthermore, a bond trading at a discount indicates that market interest rates have risen - why would an issuer call in such an issue, when it has a bargain interest rate? The only bonds that are likely to be called are those trading at premiums - meaning that market interest rates have fallen. The issuer can call in the premium bonds at a price close to par, and refund at lower current market interest rates.
Moody's ratings measure: default risk of debt issues default risk of equity issues market risk of debt issues yields of debt issues
default risk of debt issues
The yield to maturity of a bond: 1 .increases as bond market prices decline 2. increases as bond market prices increase 3. is unaffected by changes in market interest rates 4. will vary with the earnings of the issuer
increases as bond market prices decline Since both the Annual Interest and Annual Capital Gain are fixed, as the cost of the bond falls, the Yield to Maturity must rise. Since both the Annual Interest and Annual Capital Gain are fixed, as the cost of the bond rises, the Yield to Maturity must fall.
During a period when the yield curve is inverted: short term bond prices are more volatile than long term bond prices long term bond prices are more volatile than short term bond prices short term and long term bond prices are equally volatile no relationship exists between short term and long term bond price changes
long term bond prices are more volatile than short term bond prices Whether the yield curve is ascending (normal), flat or inverted, long term bond prices always move faster than short term bond prices, as interest rates change. This is due to the compounding effect on the bond's price that occurs, which increases with longer maturities.
An increasing market rate of interest would lead to: 1. higher bond prices and higher bond yields 2. higher bond prices and lower bond yields 3. lower bond prices and lower bond yields 4. lower bond prices and higher bond yields
lower bond prices and higher bond yields A rising market rate of interest means that interest rates are increasing. If interest rates rise, then bond prices will drop, and yields on those bonds will rise.
Most of the value of a bond is established by the: 1. present value of the first payment 2. present value of the last payment 3. expected volatility of the bond's price 4. expected volatility of market interest rates
present value of the last payment The actual dollar price of a bond is computed by taking the yearly income stream and principal repayment at maturity and discounting it back to today's "present value" based on the current market interest rate. Most of the value of the bond comes not from the yearly interest payments, but rather from the final payment when the principal is being returned.
An investor in 30 year Treasury Bonds would be most concerned with: A. credit risk B. purchasing power risk C. marketability risk D. call risk
purchasing power risk
Corporate bonds are usually: 1. serial bonds and are quoted on a percentage of par basis 2. serial bonds and are quoted on a yield basis 3. term bonds and are quoted on a percentage of par basis 4. term bonds and are quoted on a yield basis
term bonds and are quoted on a percentage of par basis Corporate bonds are usually term bonds - all bonds of an issue having the same interest rate and maturity. Term bonds are quoted on a percentage of par basis in 1/8ths, which is the same as a "dollar" quote.
