Unit 2

Assume that a corporation issued a 5% Aaa/AAA rated debenture at par. Two years later, similarly rated debt issues are being offered in the primary market at 5.5%. Which of the following statements regarding the outstanding 5% debenture are true? The current yield on the debenture will be higher than 5%. The current yield on the debenture will be lower than 5%. The dollar price per bond will be higher than par. The dollar price per bond will be lower than par. A) I and IV B) II and III C) II and IV D) I and III

A) I and IV

Which of the following is the most significant difference between corporate secured debt and unsecured debt? A) Secured debt has specific collateral pledged to protect the lender's interest. B) Secured debt generally has longer maturities than unsecured debt. C) Secured debt is rarely callable, while unsecured debt is generally callable. D) Secured debt will carry a higher coupon than that issuer's unsecured debt.

A) Secured debt has specific collateral pledged to protect the lender's interest.

One of the likely consequences of a rating downgrade on a bond is A) a reduction in the market price of the bond. B) an increase to the coupon by the issuer. C) the call feature will be employed. D) the current yield will be reduced.

A) a reduction in the market price of the bond.

The market price of a convertible bond depends on all of the following except A) current interest rates. B) the conversion prices of bonds from similar companies. C) the rating of the bond. D) the value of the underlying stock into which the bond can be converted.

B) the conversion prices of bonds from similar companies.

The value of which of the following would be least likely to be impacted by changes in interest rates? A) A laddered bond portfolio B) A bank CD maturing in 5 years C) A U.S. Treasury bond issued 25 years ago with a 30-year maturity D) A convertible preferred stock

B) A bank CD maturing in 5 years

GHI currently has earnings of $4.00 and pays a $0.50 quarterly dividend. If GHI's market price is $40.00, the current yield is A) 15.00%. B) 1.25%. C) 5.00%. D) 10.00%.

C) 5.00%.

The Straitened Corporation filed for bankruptcy. One of your clients held a mortgage secured by the corporation's building. When the building was sold, the proceeds were less than the mortgage balance, creating a deficiency balance. Where does this investor's claim stand? A) After the unsecured creditors B) There is no further claim once the building has been sold C) As a general creditor on a pro rata basis D) After the secured creditors

C) As a general creditor on a pro rata basis

Which of the following are characteristics of commercial paper? Backed by money market deposits Negotiated maturities and yields Issued by insurance companies Not registered with the SEC A) I and III B) I and II C) III and IV D) II and IV

D) II and IV

If a resident of New York City purchases an Albany, New York, general obligation bond that yields $600 of interest during the course of the year, how is the interest taxed? A) It is subject to federal income tax at ordinary rates. B) Taxation is deferred until the bond matures. C) It is subject to state income tax at ordinary rates. D) It is not subject to federal income tax.

D) It is not subject to federal income tax.

A money market mutual fund would be least likely to invest in which of the following assets? A) Jumbo CDs B) Newly issued ​U.S. Treasury bills C) Repurchase agreements D) Newly issued ​U.S. Treasury notes

D) Newly issued ​U.S. Treasury notes

What happens to outstanding fixed-income securities when interest rates decline? A) Yields increase B) No change C) Coupon rates increase D) Prices increase

D) Prices increase

A customer purchased new issue bonds at par two years ago. Since then, the cost of living as measured by the consumer price index (CPI) has declined by almost half and the current yield on the bonds has also declined. Which of the following best describes the value of the bonds purchased? A) It cannot be determined from the information presented. B) Their market price has declined. C) Their market price has remained unchanged. D) Their market price has increased.

D) Their market price has increased.

An 8% corporate bond is offered on an 8.25 basis. Which of the following statements are true? Nominal yield is higher than YTM. Current yield is higher than nominal yield. Nominal yield is lower than YTM. Current yield is lower than nominal yield. A) II and IV B) I and IV C) II and III D) I and III

C) II and III

All of the following statements regarding bonds selling at a discount are correct except A) they will appreciate more than comparable bonds selling at a premium if interest rates fall. B) they are more likely to be called than comparable bonds selling at a premium. C) they can indicate that the issuer's credit rating has fallen. D) they can indicate that interest rates have risen.

B) they are more likely to be called than comparable bonds selling at a premium

Kate, age 59, has an investment portfolio exceeding $250,000. She considers herself a moderate to conservative investor. To generate additional income, she is anticipating adding bonds to her portfolio. She lives in a state that does not have an income tax and she is in the 28% federal income tax bracket. Which of the following bonds would be the best recommendation for her portfolio? A) Bond C, CCC rated corporate debenture with an 8.00% coupon rate B) Bond A, A-rated corporate debenture with a 6.50% coupon rate C) Bond B, BBB rated municipal bond with a 3.75% coupon rate D) Bond D, AAA rated Treasury note with a 2.55% coupon rate

B) Bond A, A-rated corporate debenture with a 6.50% coupon rate

A customer buys a 5% bond at par. The bond is callable in 5 years at par and matures in 10 years. Which of the following statements is true? A) YTC is lower than YTM. B) YTC is the same as YTM. C) Nominal yield is higher than either YTM or YTC. D) YTC is higher than YTM.

B) YTC is the same as YTM.

The most common collateral securing a Brady bond is A) U.S. Treasury zero-coupon bonds with a maturity corresponding to the maturity of the individual Brady bond. B) an asset, or group of assets, pledged by the borrowing entity. C) the credit standing of the banking institution acquiring the Brady bond. D) the credit standing of the sovereign nation issuing the Brady bond.

A) U.S. Treasury zero-coupon bonds with a maturity corresponding to the maturity of the individual Brady bond.

A corporation is capitalized with common stock, senior preferred stock, mortgage bonds, and subordinated debentures. Your client, who holds $10,000 of the debentures, is concerned about the future viability of the enterprise. You can inform the client that the debentures have a claim A) ahead of the common stock, the preferred stock, and the bonds. B) ahead of the common stock but after the preferred stock and the bonds. C) ahead of the common stock and the preferred stock but after the bonds. D) behind the bonds, the preferred stock, and the common stock.

C) ahead of the common stock and the preferred stock but after the bonds.