Debt QUIZ #1

Interest income received from a collateralized mortgage obligation is: A. subject to both Federal and State and Local income tax B. exempt from Federal income tax, but subject to State and Local tax C. subject to federal income tax, but exempt from State and Local tax D. exempt from both federal and state and local income tax

A

For bonds trading at a discount, rant the yield measures from lowest to highest? A. Nominal; Current: Yield to Maturity; Yield to Call B. Yield to Call; Yield to Maturity; Current: Nominal C. Yield to Maturity; Nominal; Yield to Call; Current D. Current; Nominal; Yield to Call; Yield to Maturity

A. Nominal Current Yield To Maturity Yield To Call

Interest payments on Ginnie Mae pass-through vertificates are made: A. weekly B. monthly C. semi-annually D. annually

B

A corporate bond which obligates the issuer to pay interest ONLY if the company meets a specified earnings test is a(n): A. guaranteed bond B. subordinated bond C. income bond D. collateral trust certificate

C. Adjustment bonds AKA income bonds: obligate issuer to pay interest ONLY IF the company meets a specified earnings test.

The type of municipal bond issue that would be used to finance the construction of public schools would be a: A. revenue bond B. special tax bond C. moral obligation bond D. general obligation bond

D

Regular way trades of U.S. Government bonds settle: I. through a National Securities Clearing Corporation II. through the Federal Reserve System III. on the same day as trade date IV. on the business day after trade date A. I and III B. I and IV C. II and III D. II and IV

D. II and IV on the business day following trade date in fed funds through the Federal Reserves' Wire System

All of the following would be purchasers of Eurodollar bonds EXCEPT: A. British investors B. French investors C. Japanese investors D. United States investors

D. The best answer is D. Since Eurodollar bonds are not registered with the SEC, and they are not exempt from these registration requirements, they cannot be offered within the United States.

Which of the following quotes is an approximate market value given by a municipal dealer, with no bid or offer given? A. Nominal B. Subject C. Workable D. Firm

The best answer is A. This is a nominal quote. A nominal quote is really no quote - it is simply an approximate price. The dealer is not obligated to trade at this quote and must identify it as a nominal quote.

Which statements are TRUE regarding bonds? I short term bonds fluctuate more invalue 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 maturites are more liquid than long term maturities IV Long term maturities are more liquid than short term maturities A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. 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.

Commercial paper with a maturity of 270 days or less: I. must be registered under the Securities Act of 1933 II. does not have to be registered under the Securities Act of 1933 III. is a non exempt security IV. is an exempt security A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. Commercial paper is an exempt security under the Securities Act of 1933. It does not have to be registered and sold with a prospectus if its maturity is 270 days or less. This makes it much less expensive for an issuer to market the securities, since the regulatory burden is much lower.

A 10% year 7% municipal bond, quoted on a 5.00 basis, is priced at 104. A 10 year 65 municipal bond, quoted on a 5.00 basis, is priced at 101. What is the price of a 10 year, 6.40% municipal bond, quoted on a 5.00 basis? A. 101.25 B. 101.80 C. 102.05 D. 102.20

The best answer is D. This question is asking for the following: 7% Coupon 5.00 Basis 104 6.4% Coupon 5.00 Basis ? 6% Coupon 5.00 Basis 101 The difference in price between the 6% and 7% bonds is 3 points. The 6.40% bond is 40% of the way from 6%. 40% x 3 points = 1.20 point price increment from the 6% price. 101 + 1.20 = 102.20 price for the 6.40% bond.

In 2018, a customer buys 1 PDQ 10%, $1000 par debenture, M'33, at 115. The interest payment dates are Jan 1st and Jul 1st. The nominal yield on the bond is: A. 8.37% B. 8.69% C. 10.00% D. 10.23%

Work worked out on graph paper Nominal Yeild: if right is (Total Interest per year/ Par value)*100= nominal yield percentage % SO answer C.

To smooth out tax collections, a municipality will issue a ? A. BAN B. TAN C. RAN D.TRAN

B. Municipalities issue TANs (Tax Anticipation Notes) to "pull forward" funds that will be collected as taxes in later months. For example, if taxes are due on April 15th, and it is now January 15th, and the municipality wishes to get funds at this time, it can issue 3 month TANs. When the taxes are actually collected, the proceeds are used to retire the TAN issue. RANs (Revenue Anticipation Notes) are issued to "pull forward" revenues that are expected to be received by the municipality in the coming months. For example, the City of New York will receive a $200,000,000 payment from the Federal government on July 1st to support mass transit. It is now April 1st. The city can issue 3-month RANs and borrow against the upcoming revenue to be received from the Federal Government. A TRAN is a combination Tax and Revenue Anticipation Note. A BAN is a Bond Anticipation Note - a short term note that will be retired by a later long term bond sale.

All of the following statements are true about ETNs EXCEPT: A. ETNs can be traded in the market like any other stock B. ETNs offer an investment return tied to a benchmark index C. ETNs are an equity security D. ETNs are tax-advantaged

C

Treasury Receipts: I pay interest semi-annually II pay interest at maturity III are essentially zero coupon T-Notes or T-bonds IV are essentially zero coupon T-Bills A. I and III B. I and IV C. II and III D. II and IV

C. Are essentially zero coupon T notes and T bonds that pay interest at maturity

A pass through certificate is best described as a : A. corporation or trust through which investors pool their money in order to obtain diversification and professional management B. security which is backed by the full faith, credit, and taxing power of the U.S. Government C. security which is backed by real property and/or a lien on real estate D. security which gives the holder an undivided interest in a pool of mortgages

D

All of the following are true statements regarding corporate obligations EXCEPT: A. debentures are usually term issues B. commercial paper is usually sold at a discount C. corporate yields are higher than municipal yields D. most corporate bonds are traded through the New York Stock Exchange

D

A corporation has issued 9% $1000 par convertible debentures, convertible at $50. The common stock is currently trading at $60. If the bond and the common are trading at parity, a customer purchasing 5M of the bonds will pay: A. $1000 B. $1200 C. $5000 D. $6000

D. $6,000 The bonds are convertible at $50, based on $1000 par value. Therefore each bond converts into 20 shares ($1,000 par / $50 conversion price). If the common is trading at $60, the bond must be trading at 20 times this to be at parity. $60 x 20 = $1,200 parity price of one bond. The parity price of "5M" ($5,000 face amount, "M" is Latin for $1,000) is $1,200 x 5 = $6,000.

Which of the following disclosures must be made to customers who wish to purchase long term negotiable certificates of deposit? I. Sale prior to maturity can result in a price that is lower than the original purchse amount II. Trading in secondary market is limited III. Step Down CD yields may not reflect the actual markety interest rate IV. Callable CDs are subject to reinvestment risk A. I and II only B. III and IV only C. I, II , III D. I, II , III, IV

D. All of them

Which of the following is an example of a derivative product? A. collateral trust certificate B. American depository receipt C. collateralized mortgage obligation D. mutual fund

I chose C because of the following: A collateralized mortgage obligation is best defined as a derivative product. A derivative product is one whose value is "derived" via a "formula" from an underlying investment. Collateralized mortgage obligation values are derived from the underlying mortgage backed pass-through certificates held in trust by recutting the cash flows and applying them to the CMO tranches.

Which of the following are considered to be creditors of a corporation? I. Common Shareholders II. Preferred Shareholders III. Convertible Bondholders IV. Non convertible bondholders A. I and II B. III only C. III and IV D. I, II, IV

I chose C heres why: Persons who own stock in a company are considered owners; thus, both common and preferred shareholders have ownership (equity) in a corporation. Bondholders are creditors of the corporation. Although convertible bonds convert into shares of common stock, convertible bonds remain a debt of a corporation until they are actually converted

In a period of falling interest rates, a bond dealer would engage in which of the following activities? I. raise prices in interdealer quote publications such as Bloomberg for Municipal Bonds II. Place "request for bids" in services such as Bloomberg on appreciated positions where the dealer has no current interest III. Bid for bonds to cover previously established short positions IV. Buy put options on debt instruments to hedge existing short positions A. I and II only B. III and IV only C. I, II, III D. I, II, III, IV

I selected C here is why: In a period of falling interest rates, bond prices will be rising. Therefore, a dealer would raise his quoted prices in Bloomberg. If the dealer has appreciated bonds that he wishes to sell, he can place "Requests for Bids" for those bonds in Bloomberg. The dealer may bid (buy) bonds that he has previously sold short to limit losses due to rising prices. To hedge existing short positions against rising prices, the dealer would buy CALL options, NOT PUT options. Put options are used to hedge existing long positions from falling prices.

In the municipal trading market, a secondary market joint account could be formed for which of the following reasons? I. To purchase a block of bonds offered through another municipal trading firm II. To purchase a block of bonds offered by a a bank III. To purchase securities offered in an Official Notice of Sale in the Daily Bond Buyer IV. To purchase a block of bonds offered AON in Bloomberg A. II, III, IV B. I, II, III C. I, II, IV D. I, III, IV

I think it is C because of the following : i think things formed on the official notice of sale in the Daily bond buyer are new bonds so it wouldn't be for the secondary market yet.(if i am understanding correctly) Municipal secondary market joint accounts are formed to acquire, and then resell, large blocks of bonds in the secondary (trading) market. Dealer offerings of municipal bonds in the secondary market are found in Bloomberg. These accounts do not operate in the primary market (new issues from issuers). The municipal primary market publication is the Bond Buyer.

A municipality wishes to sell a bond issue that is NOT backed by taxing power. Which of the following bonds could be issued? I Revenue Bond II Industrial Revenue Bond III General Obligation Bond IV Lease Rental Bond A. I and II only B. III and IV only C. I, II, IV D. I, II, III, IV

I think its C. Sources of Revenue (Revenue Bonds) Interest and principal payments are payable to bondholders only from the specific earnings and net lease payments of revenue-producing facilities, such as: -Utilities (water, sewer, and electric) -Housing -Transportation (airports and toll roads) -Education (college dorms and student loans) -Health (Hospitals and retirement centers) -Industrial (industrial development and pollutioon control) -Sports *Debt service payments do not come from general or real estate taxes and are not backed by the municipality's full faith and credit. Revenue bonds are considered self-supporting debt because principal and interest payments are made exclusively from revenues generated by the project for which the debt was issued.

Which of the following sources of income are used to back revenue bond issues? I. Excise taxes II. lease rentals III. Ad valorem taxes IV. Enterprise activity income A. I and II only B. II and IV only C. I, II, IV D. I, II, III, IV

So i chose C. backed by any tax (excise tax, lease rentals, any enterprise activity.) OTHER THAN an ad valorem tax, such as an income tax or sales tax.

Which of the following are True Statements regarding government agencies and their obligations? I. Fannie Mae is publicly traded company II. Ginnie Mae obligations trade at higher yields than Fannie Mae obligations III. Agency obligations have the direct backing of the U.S. government IV. Ginnie Mae securities are listed and trade A. I only B. I and II only C. II and IV only D. I, III, IV

The best answer is A. Fannie Mae was "spun off" by the government as a public company listed on the NYSE (so was Freddie Mac). Its stock was listed for trading on the NYSE, but Fannie went "bust" in 2008 after purchasing too many "sub prime" mortgages and was placed into government conservatorship. Its shares were delisted from the NYSE and now trade OTC in the Pink OTC Markets. Ginnie Mae obligations trade at lower yields than Fannie Mae obligations since Ginnie Maes are directly backed by the U.S. Government whereas Fannie Maes are only implicitly backed. Ginnie Mae has not been "spun off" by the government as a private company and cannot be spun off because of the guarantee of the U.S. Government that its securities carry.

Two 20 year corporate bonds are issued at par, with stated interest rates of 10%. One issue is puttable at par in 5 years, while the other is puttable at par in 10 years. If interest rates rise by 200 basis points shortly after issuance, which statement is TRUE? A. The bond puttable in 5 years will depreciate more than the bond puttable in 10 years B. The bond puttable in 10 years will depreciate more than the bond puttable in 5 years C. Both bonds will depreciate by equal amounts D. The rate of depreciation depends on the credit rating of the bonds

The best answer is B. If a bond is puttable at par in the near future, any price decline due to rising interest rates will be suppressed since the holder is able to put the bond back to the issuer sooner. Thus, the bond puttable in 10 years will depreciate more than the bond that is puttable in 5 years if interest rates rise.

A corporation has issued 8% AA rated sinking fund debentures at par. Three years later, similar issues are being offered in the primary maket at 7%. Which are TRUE statements about the outstanding 8 % issue? I. The current yield will be higher than the nominal yield II. The current yield will be lower than the nominal yield III. The dollar price of the bond will be at a premium to par IV. The dollar price of the bond will be at a discount to par A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. The bond was issued with a coupon of 8%. Currently, yield for a similar issue is 7%. Therefore, interest rates have fallen subsequent to the issuance of the bond; or the credit quality of the bond has improved. When interest rates fall, yields on bonds already trading must also fall. What causes this is a rise in the dollar price of the issue - the bond now trades at a premium.

Special tax bonds are: I. backed by ad valorem taxes II. backed by sales or excise taxes III. a self supporting debt IV. a non self supporting debt A. I and III B. I and IV C. II and III D. II and IV

The best answer is D. Special tax bonds are backed by taxes other than an ad valorem tax, such as liquor taxes, gasoline taxes, cigarette taxes or sales taxes. They are considered to be a non-self supporting debt since they are paid from tax collections. Self supporting debts are revenue bond issues that pay their own way from collected revenues.

A municipal revenue bond trust indenture includes an "additional bond test" covenant. This means that: A. the issuer is prohibited from issuing new debt under any circumstance. B. the issuer is prohibited from issuing new debt unless the facility's revenues are sufficient to pay for existing and additional debt. C. the issuer is progibited from issuing new debt unless outstanding bonds are called D. additional debt can be issued without restriction

B

A municipality is at its statutory debt limit and cannot legally issue more debt backed by taxing power. Which of the following bonds can be issued? A. General obligation bonds B. Moral obligation bonds C. Double barreled bonds D. Treasury bonds

B. Moral obligation bonds If a municipality is at its debt limit, it cannot issue more debt backed by ad valorem taxing power - thus it cannot issue more G.O. bonds; nor can it issue double barreled bonds (the second backing of these issues is ad valorem taxing power). The municipality can issue moral obligation bonds. Moral obligation bonds are backed by pledged revenues and also by a non-binding pledge to report any revenue deficiencies to the state legislature. The legislature is authorized to apportion the funds necessary to service the debt, but is under no obligation to do so. Municipalities do not issue Treasury Bonds - these are issued by the U.S. Government

At which Standard and Poor's rating is a bond considered to be speculative ("junk bond")/ A. AA B. BBB C. BB D. C

C because A junk bond refers to high-yield or noninvestment-grade bonds. Junk bonds are fixed-income instruments that carry a credit rating of BB or lower by Standard & Poor's, or Ba or below by Moody's Investors Service. Junk bonds are so called because of their higher default risk in relation to investment-grade bonds.

All of the following insure municipal bonds EXCEPT: A. FGIC B. BIGI C. FDIC D. AMBAC

C. FDIC i am pretty sure they dont insure municipal bonds

Which of the following are TRUE regarding municipal bonds offered out "firm by one dealer to another? I The buying dealer is able to renegotiate the price II The buying dealer can sell the bonds before actually purchasing them III The selling dealer will not change the price for a specified time period IV The buying dealer has control over the bonds for a specified time period A. I and II only B. III and IV only C. II, III, IV D. I, II , III, IV

C. The buying dealer is NOT able to renegotiate the price so C is the answer I believe

Which of the following investments gives a rate of return that cannot be affected by "reinvestment risk" A. Treasury Notes B. Treasury Stock C. Treasury Strips D. Treasury Bonds

C. Treasury Strips Treasury "STRIPS" are bonds which have been stripped of coupons - essentially they are zero coupon Treasury obligations. The rate of return on the bonds is "locked in" at purchase since the discount represents the compounded yield to be earned over the life of the bond. Because no interest payments are received, the bond is not subject to reinvestment risk - the risk that interest rates will drop and the interest payments will be reinvested at lower rate

A municipal issues has sold housing bonds to build subsidized housing, where the homeowners make the mortgage payments to the municipal authority. The homeowners begin to prepay their mortgages at a faster than expected rate. If this occurs, the issuer will retire outstanding bonds by making a(n): A. mandatory call B. extraordinary mandatory call C. optional call D. extraordinary optional call

D. extraordinary optional call Since the homeowners are prepaying their mortgages faster than expected, the issuer will use the excess monies to call in outstanding bonds, rather than continue to pay interest on them. This call results from an extraordinary event, and is at the option of the issuer. Hence, it is an extraordinary optional call.

A government securities dealer quotes a 3 month Treasury Bill at 5.00 Bid - 4.90 Ask. A customer who wishes to sell 1 Treasury Bill will receive: A. a dollar price quoted to a 4.90 basis B. a dollar price quoted to a 5.00 basis C. 4900$ D.5000$

I am chosing B. i am not sure what a 5.00 basis means but i am making my deduction from: Treasury Bills are quoted on a yield basis. From the basis quote, the dollar price is computed. A customer who wishes to sell will receive the "Bid" of 5.00. This means that the dollar price will be computed by deducting a discount of 5.00 percent from the par value of $100.

A customer would ask far a bond appraisal when selling a municipal bond: I. because there is little or no active trading market for municipal bonds II. because there is an active trading market from municipal bonds III. to obtain an indication of the likely market price of the bond IV to obtain a firm bid on the bonds A. I and III B. I and IV C. II and III D. II and IV

The best answer is A. Municipal dealers are often asked for bond appraisals by customers who wish to sell bonds. Because there is no active trading market for municipal bonds, last trading price information is not available. To get an idea of the value of the bond, the dealer will get prices of similar bonds and then give an estimated price to the customer. This is a likely sale price - not a firm quote.

The term "flow of funds" found in a trust indenture applies to municipal: A. revenue bonds B. general obligation bonds C. special assessment bonds D. bond anticipation notes

The best answer is A. The term "flow of funds" means the order in which revenues will be applied under the terms of a revenue bond trust indenture. The typical order is to apply revenues first to operation and maintenance; then to debt service; followed by debt service reserve; and last to operation and maintenance reserve.

A rising rate of inflation would lead to: I. lower bond prices II. high bond prices III. lower bond yields IV. higher bond yields A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. A rising rate of inflation will lead to higher interest rates. If interest rates rise, then bond prices will drop. because when the rate of inflation rises its the opposite? Declining inflation means declining interest rates. If interest rates decline, bond prices rise

Issuers are MOST likely to call their outstanding fixed income securities: I. when stock prices have reached a peak II. when stock prices have reached a trough III. during periods of high levels of inflation IV. during periods of high levels of deflation

The best answer is B. Issuers are most likely to call in their securities when interest rates have bottomed. The issuer can issue new securities at lower current interest rates, and can use the proceeds to call the outstanding securities that are paying a higher rate of interest. When stock prices have peaked, this usually indicates that interest rates have fallen, making stocks a relatively more attractive investment than fixed income securities that are paying lower rates of interest. During such periods, issuers will sell common stock at high market prices, and use the proceeds to retire outstanding debt with high interest rates. Regarding periods of inflation and deflation, as the inflation rate increases, interest rates tend to rise, since an "inflation premium" is added to the real interest rate that is paid on fixed income securities. Conversely, as deflation occurs, interest rates tend to fall as that "inflation premium" is eliminated from interest rate levels.

A corporation has issued 10% AA rated sinking fund debentures at par. Three years later, similar issues are being offered in the primary market at 12%. Which of the following are TRUE statements about the outstanding 10% issue? I. The current yield will be higher than the nominal yield II. The current yield will be lower than the nominal yield III. The dollar price of the bond will be at premium to par IV. The dollar price of the bond will be at discount to par A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. The bond was issued with a coupon of 10%. Currently, yield for a similar issue is 12%. Therefore, interest rates have risen subsequent to the issuance of the bond or the credit quality of the bond has deteriorated. When interest rates rise, yields on bonds already trading must also rise. What causes this is a drop in the dollar price of the issue - the bond now trades at a discount.

When interest rates rise, which of the following statements are TRUE? I. Longer maturity bond prices are affected more than shorter maturity bond prices II. shorter maturity bond prices are affected more than longer maturity bond prices III. T-bill prices are affected more than T-bond prices IV .T-bond prices are affected more than T-Bill prices A. I and III B. I and IV C. II and III D. II and IV

The best answer is B. The longer the maturity, the more volatile the price movements of the bond as interest rates move (rise or fall). Since T-Bonds have a longer maturity than T-Bills, T-Bond prices are affected more than T-Bill prices.

Which statements are true when comparing traditional CDs to market index linked CDs? I. Traditional CDs have market risk if redeemed prior to maturity II. Traditional CDs do not have market risk if redeemed prior to maturity IV. Markey index linked CDs do not have market risk if redeemed prior to maturity

The best answer is C. Market Index Linked CDs are a type of "structured product" that consists of a "zero-coupon" synthetic bond component that grows based on the returns of an equity index; and that has a maturity established by an embedded option, typically 3 years from issuance. Market Index Linked Certificates of Deposit tie their investment return to an equity index, usually the Standard and Poor's 500 Index. This can give a potentially better rate of return than that of a traditional CD. If held to maturity, there is no penalty imposed on any CD. For an early withdrawal, traditional CDs may reduce the interest earned, but there is no loss of principal. In contrast, market index linked CDs typically impose a 3-5% principal penalty for early withdrawal. This "early withdrawal" penalty is imposed because the embedded option that established the maturity of the instrument was paid for and now is not being used. Both regular and market index linked CDs qualify for FDIC insurance. Finally, the minimum life for market index linked CDs is typically 3 years; whereas traditional bank CDs can have lives as short as 3 months.

Which of the following municipal issues would be exempt from taxation of interest by the Federal Government? I. San Francisco, California - Convention Center Revenue Bond II. Miami, Florida- Sewer and Water Revenue Bond III. Nassau County, New York- Pollution Control Bond IV. Des Moines, Iowa- Baseball Stadium Revenue Bond A. I only B. I and IV C. II and III D. I, II, III, IV

The best answer is C. Non-essential use, private purpose municipal issues are subject to Federal Income tax, via the Alternative Minimum Tax computation (AMT). The building of a convention center constitutes such a use, as does the building of a baseball stadium. Sewers, water, pollution control, and schools are all essential public uses and these issues qualify for the Federal Income Tax exemption on interest *NON ESSENTIAL IS NOT EXEMPT FROM TAXATION*

A municipal dealer offers bonds to another dealer "firm fro one-half hour with a five minute recall. " This means that the: I. Selling dealer can change the price at will II. selling dealer cannot change the price for one-half hour unless the buying dealer is recontacted III. buying dealer can solicit orders for the bonds before actually purchasing them IV. buying dealer cannot solicit orders for the bonds before actually purchasing them A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. The selling dealer offering the bonds "firm" means that for a stated time period the price will not be changed. These bonds are offered firm for one-half hour; during this time period that buying dealer can try and find a customer for the bonds before actually purchasing them. The selling dealer also specifies a "five minute recall." This means that during the half hour, the selling dealer can recontact the buying dealer to tell him that he has five minutes to buy the bonds at the offered price or else the quote will be changed.

A municipal "workable" quote is a: A. firm offer B. firm bid C. indication of a likely bid D. indication of a likely offer

The best answer is C. A municipal "workable quote" is used to get an indication of a likely price at which a dealer will buy specified bonds. The municipal trading market is very thin, so quotes are not readily available for all bonds. Assume that a customer wants to sell certain municipal bonds and wants to know what price he can get. By calling other dealers, you can get a "workable" from each of the dealers giving a likely price at which they would buy. Now you can go back to the customer with a likely price at which the bonds would be bought. If the customer agrees, you can recall the dealer with the best "workable" and sell the bonds.

Which of the following statements are TRUE regarding corporate zero coupon bonds? I. The rate of return for zero coupon bonds is subject to reinvestment risk II. The rate of return for zero coupon bonds is not subject to reinvestment risk III. The interest income from such obligations is taxable annually IV. The interest income from such obligations is not taxable until maturity. A. I and III B. I and IV C. II and III D. II and IV

The best answer is C. Zero coupon bonds do not offer a current return; instead, the holder earns the discount on the bond over its life. This "earning" of the discount is taxed annually as interest income to the bondholder even though no physical payment is made. With bonds that make interest payments, the holder is subject to "reinvestment risk" on the interest payments. Rates may fall, causing the bondholder to reinvest the interest payments at lower rates. This risk is not present in zero coupon bonds since no interest payments are made.

A guaranteed corporate bond is one which is: A. insured by a private agency such as FGIC B. guaranteed by the Federal Government C. guaranteed by another corporation D. funded through mandatory sinking fund payments

The best answer is C. A guaranteed corporate bond is one guaranteed by another corporation. For example, a corporation may want to issue bonds through a subsidiary. The subsidiary may have a lower credit rating than the parent company. The parent can guarantee the issue, which then takes on the parent's higher credit rating.

A sweage treatment plant has been financed 5hrough a revenue bond issue containing a NEt Revenue Pledge. Prior to paying Debt Service, which of the folloiwn gexpecses would be deducted by the issuer? I. Sewage transport costs II. Sewage treatment costs III. General and administrative expenses IV.Depreciation and amortization A. I and II only B. III and IV only C I, II, III D. I, II, III, IV

The best answer is C. Under a Net Revenue Pledge, operation and maintenance is funded before Debt Service is paid. This is accounted for on a cash basis. Thus, operating costs such as sewage transport, sewage treatment, and general and administrative costs are funded before monies go to pay Debt Service. Depreciation and amortization are non-cash expenses and are not counted.