Unit 2 (Debt Securities)

A customer bought a bond that yields 6-½% with a 5% coupon. If the bond matures at this point, the customer will receive: A) $1,050. B) $1,065. C) $1,025. D) $1,000 plus a call premium.

A customer bought a bond that yields 6-½% with a 5% coupon. If the bond matures at this point, the customer will receive: A) $1,050. B) $1,065. C) $1,025. D) $1,000 plus a call premium. Your answer, $1,025., was correct!. Upon redemption of a bond, whatever current interest rates may be, the investor receives par ($1,000) plus the final semiannual interest payment ($25 in this case), for a total of $1,025.

MNO is planning to raise capital through an offering of 30-year bonds. Which call price would be most beneficial to MNO? A) 110. B) 102. C) 106. D) 104.

MNO would benefit most from the ability to call bonds at the lowest possible price. The call feature enables MNO to buy the bonds before maturity to reduce their fixed interest costs. A call price of 102 requires the lowest call premium of the options shown.

corporate bond is quoted at 102-5/8. A customer buying 10 bonds would pay: A) $10,258.00. B) $10,262.50. C) $10,025.80. D) $10,285.00.

Par ($1,000) × 102% = $1,020. 5/8 of one bond point ($10) = .625 × $10 = $6.25. Therefore, the quote reading 102-5/8 = $1,026.25 per bond ($1,020 + $6.25). Because we are told the customer is buying 10 bonds, we multiply $1,026.25 × 10 bonds which equals the amount the customer will need to pay in order to make the entire purchase; $10,262.50.

An investor sells 10 5% bonds at a profit and buys another 10 bonds with a 5-1/4% coupon rate. The investor's yearly return will increase by: A) $1.50 per bond. B) $1.00 per bond. C) $2.00 per bond. D) $2.50 per bond.

Your answer, $2.50 per bond., was correct!. The first bonds are 5% and pay $50 per year per bond. The new bonds are 5-1/4% and pay $52.50 per year per bond, for a difference of $2.50 per bond.

An investor's portfolio includes 10 bonds and 200 shares of common stock. If both positions increase by one point, what is the appreciation? A) $100. B) $220. C) $210. D) $300.

Your answer, $300., was correct!. The gain would be $100 for the bonds (one point for one bond is $10 × 10 bonds) and $200 for the common stock (one point is $1 × 200 shares). The total portfolio gain is $300.

A 7% bond is selling to yield 4-½%. The next time interest is paid, an investor who owns $10,000 face amount of the bonds will receive: A) $225. B) $700. C) $350. D) $450.

Your answer, $350., was correct!. The bond is a 7% bond. The total amount paid each year on 10 bonds is $700. The amount paid for a 6 month's interest is $350.

Expressed as a percentage of par, one basis point equals: A) 10% B) 1/10 of 1% C) 1/100 of 1% D) 1/1000 of 1%

Your answer, 1/100 of 1%, was correct!. One basis point equals 1/100 of 1% of par. 1% of par ($1,000) equals $10, therefore one basis point equals 1/100 of $10 or $.10 (ten cents).

A corporate bond valued at $1,012.50 is shown in the Standard & Poor's Bond Guide as: A) 101-1/4. B) 101-4/16. C) 101.25. D) 101-8/32.

Your answer, 101-1/4., was correct!. Corporate bonds are quoted as a percentage of par in eighths. The quote of 101-1/4 = $1,012.50 is correct. This represents $1,010 (101% of par) + $2.50 (1/4 of $10). Each point in a corporate bond is equal to $10.

All of the following have been recognized by the SEC under the Credit Rating Agency Reform Act as being registered with the commission to rate debt instruments. Which of the following historically has specialized in ratings for the insurance sector? A) Moody's. B) Fitch Ratings. C) A.M. Best. D) Standard & Poor's.

Your answer, A.M. Best., was correct!. A.M. Best historically has specialized exclusively on the insurance marketplace. They issue financial strength ratings measuring insurance companies' ability to pay claims and rate financial instruments issued by insurance companies, such as bonds and notes. They can issue debt and financial strength ratings for other sectors as well, under the Credit Rating Agency Reform Act.

A bond would be considered speculative below which of the following Standard & Poor's (S&P) ratings? A) BBB. B) A. C) BB. D) B.

Your answer, BBB., was correct!. A rating of BBB is the lowest investment-grade rating assigned by Standard & Poor's. Any rating beneath this is considered speculative.

One of your clients owns 2 different 6% corporate bonds maturing in 15 years. The first bond is callable in 5 years, while the second has 10 years of call protection. If interest rates begin to fall, which bond is likely to show a greater change in price? A) Both will increase by the same amount. B) Both will decrease by the same amount. C) Bond with the 5-year call. D) Bond with the 10-year call.

Your answer, Bond with the 10-year call., was correct!. As interest rates fall, the investor benefits from having the highest interest rate for as long as possible. The price change will not be the same for both bonds. The greater the call protection, the more likely a bond will appreciate if rates fall.

Which of the following would be considered funded debt? A) Corporate debt maturing in 10 years. B) Municipal revenue bonds maturing in 10 years. C) U.S. Treasury bonds maturing in 20 years. D) Commercial paper maturing in 270 days.

Your answer, Corporate debt maturing in 10 years., was correct!. Funded debt is simply another name for medium- to long-term corporate debt. If a corporate bond has 5 or more years to maturity, it is said to be funded debt of the issuer.

If a bond has a basis price of 7%, which of the following would most likely be refunded? A) Coupon 7-½%, maturing in 2033, callable in 2013 at 100. B) Coupon 6-½%, maturing in 2033, callable in 2013 at 100. C) Coupon 6-½%, maturing in 2033, callable in 2013 at 103. D) Coupon 7-½%, maturing in 2033, callable in 2013 at 103.

Your answer, Coupon 7-½%, maturing in 2033, callable in 2013 at 100., was correct!. An issuer is most likely to refund the issue that will cost it the most money over the life of the issue. Always use the following order in making this choice: (1) highest coupon, (2) lowest call premium, (3) earliest call date, and (4) longest maturity.

Your customer is interested in long-term corporate bonds. Which of the following interest-rate environments makes a call protection feature most valuable to your customer? A) Rising interest rates B) Declining interest rates C) Volatile interest rates D) Stable interest rates

Your answer, Declining interest rates, was correct!. A call protection feature is an advantage to bondholders in periods of declining interest rates. When interest rates are falling, issuers are more likely to call in bonds previously issued at higher interest rates. For bondholders this creates reinvestment risk for them when the bonds are called as they are unlikely to be able to reinvest at the rate they had been earning. Call protection gives the bond holder a specified length of time during which the bond cannot be called.

Which of the following rate commercial paper issued by corporations? Moody's Standard & Poor's MSRB SEC

Your answer, I and II., was correct!. Moody's, Standard & Poor's and Fitch's as well are all recognized as rating companies that would rate commercial paper issued by corporations. The Securities Exchange Commission (SEC) is a federal government regulatory body.

Seventy-five basis points are equal to which of the following? .75%. 7.5%. $7.50. $75.00. A) I and IV. B) I and III. C) II and III. D) II and IV.

Your answer, I and III., was correct!. There are 100 basis points in each point. One point represents 1% of a bond's value therefore one basis point represents .01% and 75 basis points would represent .75%. Because each point is worth $10, 75 basis points represents $7.50.

Twenty-five basis points on a par bond with 1 year to maturity are equal to: $.25 per $1,000. $2.50 per $1,000. 0.25%. 2.5%. A) I and III. B) II and IV. C) I and IV. D) II and III.

Your answer, I and III., was incorrect. The correct answer was: II and III. If 1 basis point equals .01%, 25 basis points equal .25%. .25% of $10 (which is the value of one full point for a bond) = $2.50.

Which of the following statements regarding put and call features of bonds are TRUE? The put feature would likely be exercised if interest rates fall. The put feature would likely be exercised if interest rates rise. The issuer will likely call bonds if interest rates fall. The issuer will likely call bonds if interest rates rise. A) I and IV. B) II and III. C) I and II. D) III and IV.

Your answer, II and III., was correct!. A put feature on a bond benefits the bondholder. Once the bond becomes puttable, its holder has the right to put it back to the issuer at par. At this point, the bondholder is insulated from rate risk (the risk that rates will rise, putting downward pressure on bond prices). Once puttable, the bond will not trade below par. Issuers will likely call bonds if rates fall. The issuer can issue new bonds at a lower rate and use the proceeds to call in the original bond.

Which of the following statements regarding put and call features of municipal bonds are TRUE? The put feature would likely be exercised if interest rates fall. The put feature would likely be exercised if interest rates rise. The issuer will likely call bonds if interest rates fall. The issuer will likely call bonds if interest rates rise. A) I and IV. B) II and IV. C) II and III. D) I and III.

Your answer, II and III., was correct!. A put feature on a bond benefits the bondholder. Once the bond becomes puttable, its holder has the right to put it back to the issuer at par. At this point, the bondholder is insulated from rate risk-the risk that rates will rise, putting downward pressure on bond prices. Once puttable, the bond will not trade below par. Issuers will likely call bonds if rates fall. To generate funds for calling the bonds, the issuer can issue new bonds at a lower rate.

Which of the following would make a corporate bond more subject to liquidity risk? Short-term maturity. Long-term maturity. High credit rating. Low credit rating. A) I and IV. B) II and III. C) II and IV. D) I and III.

Your answer, II and IV., was correct!. The most marketable bonds have shorter maturities and higher credit ratings.

Two conservative customers in their 50s are interested in preserving principal and high-current income from their investments. In which order, from first to last, are the following bonds ranked in meeting your customer's needs? A1 Fort Worth Gas 9¼s of '25. AA+ San Antonio Transit 9¼s of '25. Aaa Texas Telecom 9¼s of '25. AA- Dallas Electric 9¼ of '25. A) III, IV, II, I. B) III, II, IV, I. C) IV, III, I, II. D) I, II, III, IV.

Your answer, III, II, IV, I., was correct!. Because the maturity and coupon rates are all the same, we can rank the bonds by rating. Based on the ratings given, the highest-quality bond is the Texas Telecom, rated Aaa, followed in order by the bonds rated AA+, AA-, and A1.

A single bond has been issued with successive maturity dates set from 1985 through 2015. What type of bond is this? A) Term. B) Series. C) Balloon. D) Serial.

Your answer, Series., was incorrect. The correct answer was: Serial. Serial bonds are all issued at one time and mature in successive years. Term bonds all have the same maturity date

Consider a municipal bond issue that has been defeased. Which of the following statements is NOT true? A) The marketability of the issue increases. B) The issue is now backed by U.S. government securities. C) The rating on the issue decreases. D) The issue is no longer considered part of the issuer's outstanding debt.

Your answer, The marketability of the issue increases., was incorrect. The correct answer was: The rating on the issue decreases. Once a municipal issue has been defeased (pre-refunded), its rating increases as it is now backed by U.S. government securities held in escrow. As the rating of a bond increases, so does its marketability. Once defeased, the issue is no longer considered part of the issuer's outstanding debt (although it will remain outstanding with interest paid until called).

Crossover refunding, which is a type of advance refunding, is best described by which of the following statements? A) The revenue stream originally pledged to secure the refunded issue continues to pay debt service on those bonds until they mature or are called. B) Revenues can never cross over to fund a new issue. C) The revenue stream is halted completely from the project until the new bonds are issued. D) The new issue will not be funded by the revenue stream from the project that funded the initial bond offering.

Your answer, The revenue stream originally pledged to secure the refunded issue continues to pay debt service on those bonds until they mature or are called., was correct!. Crossover refunding is a method of advance refunding in which the revenue stream originally pledged to secure the refunded bonds continues to be used to pay debt service on those bonds until they mature or are called in by the issuer.

A debenture maturing in 2019 is bid at 77-7/8 and asked at 78-3/4. Which of the following is TRUE of the spread? A) The spread represents 7/8 per bond equivalent to $8.75. B) The spread represents 3/4 per bond equivalent to $0.75. C) The spread represents 7/8 per bond equivalent to $87.50. D) The spread represents 3/4 per bond equivalent to $75.

Your answer, The spread represents 7/8 per bond equivalent to $8.75., was correct!. The spread between the bid and ask price is 7/8. 7/8 of one bond point ($10) = $8.75

Which of the following best describes book entry? A) The transfer of ownership is entered on the books of the issuer or the issuer's transfer agent. B) The transfer of ownership is entered on the books of the SRO. C) The transfer of ownership is entered on the books of the clearing agency. D) The transfer of ownership is entered only on the books of the buyer.

Your answer, The transfer of ownership is entered on the books of the issuer or the issuer's transfer agent., was correct!. For book-entry ownership, transfers of ownership are accounting functions in the records of the issuer or the issuer's transfer agent.

Which of the following statements regarding puttable bonds is TRUE? A) The put feature is likely to be exercised when interest rates are falling. B) The issuer may require that the put feature be exercised if interest rates drop significantly. C) The bondholder can expect to receive a premium over par if he chooses to put the bonds. D) Their yields are usually lower than those of nonputtable bonds.

Your answer, Their yields are usually lower than those of nonputtable bonds., was correct!. A put feature is advantageous to the bondholder, and therefore carries with it a lower yield. Exercise of the put feature is at the discretion of the bondholder, not the issuer, and will most likely be used if interest rates are rising. pg. 58

All of the following statements regarding discount bonds are correct EXCEPT: A) they are more likely to be called than comparable premium bonds. B) their discounted price can indicate that interest rates have risen. C) their discounted price can indicate that the issuer's credit rating has fallen. D)

Your answer, at maturity they will be valued at par., was incorrect. The correct answer was: they are more likely to be called than comparable premium bonds. Bonds trading at a premium have higher coupons than current interest rates and therefore are more likely to be called. Bonds trading at a discount have coupons that are lower than current interest rates and therefore less likely to be called. If rates rise, prices fall. If a bond's rating falls, it will be less attractive to investors and its price will fall as well. All bonds move toward par value as they get closer to maturity.

All of the following statements regarding a 6% municipal bond that is puttable at par are true EXCEPT the: A) bond may be put to the issuer at the owner's discretion. B) bond is likely to trade at a discount in the secondary market when it is puttable. C) owner would likely put the bond to the issuer when interest rates are rising. D) owner will receive $1,000 from the issuer when the put option is exercised.

Your answer, bond is likely to trade at a discount in the secondary market when it is puttable., was correct!. Once a bond becomes puttable, the holder has the right to put the bond to the issuer at par. As a result, the bond would not trade below par in the secondary market. This effectively insulates the holder from interest rate risk-the risk that rising rates will force prices down.

Corporate bonds are considered safer than common stock issued by the same company because: A) bonds place the issuer under an obligation but stock does not. B) if there is a shortage of cash, dividends are paid before interest. C) the par value of bonds is generally higher than that of stock. D) bonds and similar fixed-rate securities are guaranteed by SIPC.

Your answer, bonds place the issuer under an obligation but stock does not., was correct!. A bond represents a legal obligation to repay principal and interest by the company. Common stock carries no such obligation.

When a corporation issues a long-term bond, one of the factors influencing the bond's interest rate is the credit rating of the issuer. Another factor is the:

Your answer, cost of money in the marketplace., was correct!. Money is a commodity, and its cost is determined by supply and demand. When the cost of money is higher, borrowers incur a higher interest rate. The call loan rate impacts broker/dealers, not issuers of bonds. The par value of the bond has nothing to do with the cost of borrowing and, with almost no exception, all corporate bonds pay taxable interest so that is not a variable factor.

A corporation is likely to call eligible debt when interest rates are: A) volatile. B) declining. C) rising. D) stable.

Your answer, declining., was correct!. A corporation generally calls in its debt when interest rates are declining, in order to replace old, higher interest-rate debt with new, lower interest-rate issues.

A corporate issuer has issued a new bond and escrowed the proceeds to be used to call in an existing bond issue as soon as the first call date for the existing bond is reached. Known as pre-refunding, the concept would be most closely associated with A) disintermediation B) secondary offering C) amortization D) defeasance

Your answer, defeasance, was correct!. When an issue is pre-refunded (advance refunded) with all of the funds needed to call it in as soon as the first call date is reached, the issue is known to be defeased. Because all of the capital needed to call in the existing bond has been escrowed and is available, the issue can now be removed from the issuer's debt statement.

All of the following statements regarding bonds with both a convertible and callable feature are correct EXCEPT: A) after the call redemption date, interest payments will cease. B) the coupon rate on a convertible bond would be less than the rate for comparable nonconvertible debt. C) dilution of company stock will occur on conversion of the bonds. D) if called, the owners have the option of retaining the bonds and will continue to receive interest.

Your answer, if called, the owners have the option of retaining the bonds and will continue to receive interest., was correct!. After bonds are called, the issuer no longer pays interest. Conversion of convertible bonds causes more shares outstanding, resulting in a reduced proportionate ownership interest (dilution) for current shareholders. The coupon rate paid on convertible bonds is lower than the coupon for nonconvertible bonds. There is a trade-off in the amount of interest for the ability to convert the bonds into common stock.

All of the following statements regarding bonds with both a convertible and callable feature are correct EXCEPT: A) dilution of company stock will occur on conversion of the bonds. B) if called, the owners have the option of retaining the bonds and will continue to receive interest. C) the coupon rate on a convertible bond would be less than the rate for comparable nonconvertible debt. D) after the call redemption date, interest payments will cease.

Your answer, if called, the owners have the option of retaining the bonds and will continue to receive interest., was correct!. After bonds are called, the issuer no longer pays interest. Conversion of convertible bonds causes more shares outstanding, resulting in a reduced proportionate ownership interest (dilution) for current shareholders. The coupon rate paid on convertible bonds is lower than the coupon for nonconvertible bonds. There is a trade-off in the amount of interest for the ability to convert the bonds into common stock.

An investor purchasing long-term AAA rated bonds should be concerned most with: A) inflation risk. B) reinvestment risk. C) marketability risk. D) no risk.

Your answer, inflation risk., was correct!. The major risk assumed by any investor in long-term high-quality bonds is inflation or purchasing power risk. AAA rated debt securities are likely to earn a lower rate of return, which over a longer period of time might not keep up with the rate of inflation.

The terminology "guaranteed full faith and credit" is most applicable to: A) interest and principal on a U.S. government issued bond. B) interest and principal on a corporate bond. C) interest only on a U.S. government issued bond. D) interest and principal on a municipal revenue bond.

Your answer, interest and principal on a U.S. government issued bond., was correct!. Of the choices given, the terminology would be most applicable to both interest and principal on a U.S. government bond. Remember that the U.S. government's guarantee is backed by their authority to tax and print money. While corporate bonds can be backed by the issuer's full faith and credit, the guarantee is only as good as the corporation's ability to pay. Municipal revenue bonds are backed by the expected revenue generated from the project being financed.

All of the following statements regarding municipal bond put options are true EXCEPT that the put option: A) is generally exercisable immediately after the bond has been issued. B) protects the holder from a loss of principal when bond prices fall. C) ensures that the holder will never receive less than par for the bond. D) protects the holder from depreciation because of rising interest rates.

Your answer, is generally exercisable immediately after the bond has been issued., was correct!. Put options are exercisable only after the put protection period has passed; this protects the issuer. Once puttable, the put feature isolates the bondholders from market risk-the risk that rising rates will force prices down.

A call premium is best described as the amount the: A) issuer pays above par to redeem the bonds early. B) bondholder receives at maturity. C) investor pays above par value. D) common stock is above the conversion price.

Your answer, issuer pays above par to redeem the bonds early., was correct!. When bonds are called at a premium, the issuer redeems them before maturity at a price exceeding par. The call premium is the difference between the call price and par.

The following items are all correct statements regarding liquidity EXCEPT: A) liquid assets include CDs and Treasury bills. B) it is the inability to find willing buyers for an asset. C) the most liquid of assets is cash. D)

Your answer, it is the inability to find willing buyers for an asset., was correct!. Liquidity and marketability are often used synonymously. Liquidity is the ability to turn an asset into cash whereas marketability is the ability to easily find buyers for an asset. If an asset is easily marketable this would imply that it is also liquid.

If a bond has a call provision, this will tend to: A) have no effect on the price. B) place a floor on how low the price will decline. C) make the bond more attractive to investors because most bonds are called at a premium. D) make the bond less attractive to investors because a call would terminate the interest payments.

Your answer, make the bond less attractive to investors because a call would terminate the interest payments., was correct!. Callability is unattractive to the investor. It is attractive to the issuer because, with a call, the bonds are bought back at par or a small premium, and interest payments end.

A corporate or municipal issuer might include a put option on a newly issued bond to: A) increase the yield on the bond. B) make the offering more attractive to investors. C) allow the issuer to redeem the bond before maturity. D) raise additional capital by issuing more bonds in the future.

Your answer, make the offering more attractive to investors., was correct!. A puttable bond grants the investor the right to put the bond back to the issuer at par before maturity. In other words, the issuer must redeem the bond on the bondholder's request. Investors find this feature attractive when rising interest rates cause bond prices to decline. In return, the issuer can offer bonds with a lower coupon. Once the bond becomes puttable, interest rate risk has been eliminated.

A corporate or municipal issuer might include a put option on a newly issued bond to: A) raise additional capital by issuing more bonds in the future. B) increase the yield on the bond. C) allow the issuer to redeem the bond before maturity. D) make the offering more attractive to investors.

Your answer, make the offering more attractive to investors., was correct!. A puttable bond grants the investor the right to put the bond back to the issuer at par before maturity. In other words, the issuer must redeem the bond on the bondholder's request. Investors find this feature attractive when rising interest rates cause bond prices to decline. In return, the issuer can offer bonds with a lower coupon. Once the bond becomes puttable, interest rate risk has been eliminated.

If a customer believes that interest rates have peaked and wants to buy long-term, fixed-income securities providing semiannual interest payments, you would recommend: A) puttable bonds. B) Treasury STRIPS. C) premium bonds with low call premiums. D) noncallable bonds.

Your answer, noncallable bonds., was correct!. The purchase of noncallable bonds provides the investor with a constant flow of semiannual interest income until maturity. Treasury STRIPS do not make regular interest payments.

Defeasement can be best described as a: A) prerefunding. B) matched sale. C) refinancing. D) refundment.

Your answer, prerefunding., was correct!. Pre-refunding involves issuing one bond to call an outstanding bond at a future date. When this is done, the money raised is held in escrow to redeem the outstanding bonds at a future call date. What was originally pledged to back the bonds is now replaced by the escrowed funds. The issuer no longer has to show these bonds as an obligation on its debt statement. This is known as defeasement. The escrowed funds are invested in U.S. government securities.

A city waterworks publishes a tombstone offering a $20 million new issue of bonds priced at 100.65%. The bonds are priced above par because the: A) amount exceeding par represents the underwriter's spread. B) price reflects the fact that the coupon rate for the bonds at issuance is more than the rates of similar newly issued bonds available in the market. C) municipality has applied the standard municipal bond servicing charge to the issue price. D) amount exceeding par includes accrued interest.

Your answer, price reflects the fact that the coupon rate for the bonds at issuance is more than the rates of similar newly issued bonds available in the market., was correct!. If a bond issue is priced above par, it is usually because the coupon rate at which the bonds were issued is more than the prevailing rate for other newly issued bonds.

A corporation with a single outstanding bond issue chooses to refund this debt. This means that the corporation: A) issues stock to replace the bonds. B) established a sinking fund for use in making regular open market purchases of the bonds. C) buys back the bonds, at par, from the bondholders, using corporate profits. D) replaces one debt with another.

Your answer, replaces one debt with another., was correct!. Refunding is synonymous with refinancing. When we refinance, we take out a new debt and use the proceeds of that debt to pay off the old one.

A newly issued bond cannot be called for the first five years after it is issued. This call protection feature would be most valuable to bondholders if during this five-year period, interest rates are generally: A) fluctuating. B) falling. C) stable. D) rising.

Your answer, rising., was incorrect. The correct answer was: falling. Issuers generally call bonds when interest rates are falling so they can reduce their interest cost (the same concept as a homeowner refinancing a mortgage). During a call protection period, bonds cannot be called, so the investor will continue to receive the coupon rate of interest. This protects the bondholder from losing a relatively high rate of fixed income until the call protection period ends.

A newly issued bond cannot be called for the first five years after it is issued. This call protection feature would be most valuable to bondholders if during this five-year period, interest rates are generally: A) rising. B) fluctuating. C) stable. D) falling.

Your answer, rising., was incorrect. The correct answer was: falling. Issuers generally call bonds when interest rates are falling so they can reduce their interest cost (the same concept as a homeowner refinancing a mortgage). During a call protection period, bonds cannot be called, so the investor will continue to receive the coupon rate of interest. This protects the bondholder from losing a relatively high rate of fixed income until the call protection period ends. Reference

A Notice of Defeasance informs bondholders that: A) the facility has been condemned and the bonds have been called. B) the purpose of the issue has been defeated and the bonds are called. C) the interest and the principal will not be paid. D) the funds for the principal and the interest are in escrow.

Your answer, the funds for the principal and the interest are in escrow., was correct!. A defeased issue is one in which the issuer placed U.S. government securities in the bank as collateral for the old issue.

If a customer buys bonds that have already been called, the trade confirmation must disclose all of the following EXCEPT: A) the redemption date. B) the yield to original maturity. C) the yield to call. D) the redemption price.

Your answer, the yield to original maturity., was correct!. Once a bond has been called, the yield to original maturity is no longer a factor and need not be on the confirmation.

All of the following statements regarding discount bonds are correct EXCEPT: A) their discounted price can indicate that the issuer's credit rating has fallen. B) their discounted price can indicate that interest rates have risen. C) at maturity they will be valued at par. D) they are more likely to be called than comparable premium bonds.

Your answer, they are more likely to be called than comparable premium bonds., was correct!. Bonds trading at a premium have higher coupons than current interest rates and therefore are more likely to be called. Bonds trading at a discount have coupons that are lower than current interest rates and therefore less likely to be called. If rates rise, prices fall. If a bond's rating falls, it will be less attractive to investors and its price will fall as well. All bonds move toward par value as they get closer to maturity.

In comparing long-term and short-term bonds, all of the following are characteristics of long-term bonds EXCEPT that they: A) will fluctuate in price more in response to interest rate changes. B) usually have higher yields. C) are more likely to be callable. D) usually provide greater liquidity.

Your answer, usually provide greater liquidity., was correct!. Long-term bonds are not as liquid as short-term obligations.

If interest rates are falling, issuers will likely call which of the following bonds? Bonds with low coupons. Bonds with high coupons. Bonds trading at a discount. Bonds trading at a premium. A) I and IV. B) II and IV. C) I and III. D) II and III.

our answer, II and III., was incorrect. The correct answer was: II and IV. An issuer will call higher coupon bonds first because the interest payments on them are more costly to the issuer than those for lower coupon bonds. Bonds with higher coupons are the ones trading at a premium (above par) as they are more desirable to investors and demand for them pushes their prices up.

Which of the following types of bonds would be characterized by decreasing interest costs to the issuer? A) Serial bonds. B) Revenue bonds. C) Term bonds. D) Limited tax bonds.

our answer, Serial bonds., was correct!. Periodically, serial bonds pay off part of the principal through serial maturities. This eliminates the interest costs on the matured bonds.

Each of the following securities are issued with a fixed rate of return EXCEPT: A) preferred stock. B) convertible preferred stock. C) bonds. D) common stock.

our answer, common stock., was correct!. Bonds and preferred stock are issued with a stated payment in interest or dividends, respectively. Common stockholders are entitled to receive a variable distribution of profits if a dividend is declared.

A corporation plans to make a public tender for 50% of its outstanding subordinated debentures. The price of the tender will be set by the: A) trustee. B) paying agent. C) transfer agent. D) issuer.

our answer, issuer., was correct!. In a tender offer, the issuer is offering to buy back all or a portion of the issue at a stated price. The price of the tender is set by the issuer although the issuer may engage an underwriter to help it set the price.

An investor anticipating a fall in interest rates would likely purchase: A) callable bonds. B) noncallable bonds. C) none of these. D) noncallable and callable bonds.

our answer, noncallable bonds., was correct!. If rates fall, bonds are likely to be called.

The funds used for the retirement of a bond may be deposited into a: A) priority capitalization account. B) level debt service account. C) collateral trust fund. D) sinking fund.

our answer, sinking fund., was correct!. A sinking fund is used as an escrow account to set funds aside for retiring a revenue bond. Reference: 2.1.7.1.1 in the License Exam Manual.