Debt Securities

Which of the following interest rates is set by the Federal Reserve Bank (FRB)? A) Discount rate B) Call rate C) Prime rate D) Federal funds rate

A) Discount rate The discount rate is the interest rate charged on loans from the Federal Reserve Bank to its depository institutions (federal member banks).

The overnight repo interest rate is usually lower than bank rates and just below or comparable to the: A) Fed funds rate. B) prime rate. C) T-bill rate. D) discount rate.

A) Fed funds rate. From a duration standpoint, usually overnight, the repo rate is closest to the Fed funds rate, which is also overnight.

Primary Dealers in U.S. government securities are selected by: A) Federal Reserve Board (FRB). B) Securities Investors Protection Corporation (SIPC). C) Financial Industry Regulatory Authority (FINRA). D) Securities and Exchange Commission (SEC).

A) Federal Reserve Board (FRB). The Federal Reserve Board (FRB) chooses banks and broker/dealers to act as Primary Dealers in U.S. government securities.

If interest rates fall, which of the following statements regarding CMOs are TRUE? Prepayment risk will increase. Prepayment risk will decrease. Prices of each tranche will rise. Prices of each tranche will fall. A) I and III. B) II and III. C) II and IV. D) I and IV.

A) I and III. Prepayment risk is the risk that the underlying mortgages will be paid off sooner than expected. If rates fall, mortgage holders will refinance, paying off the existing high rate mortgages with lower rate mortgages. Thus, a tranche with an expected average life of 5-½ years may be extinguished in 2 years because of an acceleration in prepayments. As rates fall, prices of the underlying mortgages will rise.

Money market instruments guaranteed by a bank that are used to provide capital for exporters to foreign countries are called: A) banker's acceptances. B) ADRs. C) foreign bills. D) eurodollars.

A) banker's acceptances. BAs provide short-term financing for importers and exporters.

An investor seeking a high level of income combined with a moderate level of risk would purchase: A) mortgage bonds. B) junk bonds. C) income bonds. D) convertible bonds.

A) mortgage bonds. Bonds provide a semiannual stream of fixed income. Because convertible bonds normally have a lower coupon rate than nonconvertible bonds-and income bonds only pay interest if the company declares a payment-the best choice is the mortgage bond, which is secured by real estate.

An investor purchases an ABC Corporation convertible bond at 98 on June 18, 1997. The bond is convertible at $25 and the investor converts his bond into the stock on June 19, 1998, when the common stock is trading at $26 per share. For tax purposes, these transactions will result in: A) neither gain nor loss. B) a $60 capital gain. C) a $40 capital loss. D) a $40 capital gain.

A) neither gain nor loss. Converting a bond into shares of common stock does not result in tax consequences. For a taxable gain or loss to exist, the shares received as a result of the conversion must be sold.

Which of the following investments is the most liquid? A) Common stock. B) Money market funds. C) Variable annuities. D) Foreign stock funds.

B) Money market funds. Money market funds are the most liquid investment.

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

B) replaces one debt with another. 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.

Ten municipal bonds were purchased with 9% nominal yield for settlement on February 1, 2005. The maturity date of the bonds is July 1, 2020. What is the number of days of accrued interest on the 10-bond trade? A) 37 B) 31 C) 30 D) 29

C) 30 The maturity month and day will always match one of the two semiannual coupon dates. Since maturity is July 1, the bond pays interest on January 1 and July 1 of each year. With settlement on February 1, the bond accrued interest from January 1 up to but not including settlement (30 days).

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) municipality has applied the standard municipal bond servicing charge to the issue price. B) amount exceeding par includes accrued interest. C) 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.D) amount exceeding par represents the underwriter's spread.

C) 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. 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.

All of the following statements are true regarding eurodollar bonds EXCEPT: A) they are not subject to withholding taxes. B) they are issued in bearer form. C) they are registered with the SEC. D) interest is paid once a year.

C) they are registered with the SEC. Eurodollar bonds are issued in bearer form, pay interest once a year, and are not subject to withholding taxes. They are issued outside the United States and are therefore not subject to SEC registration.

An investor purchases 5 Mt. Vernon Port Authority J & J bonds in a regular way transaction on Wednesday, October 18. How many days of accrued interest are added to the bond's price? A) 110 B) 114 C) 108 D) 109

D) 109 Interest accrues on municipal bonds on a 360-day-year basis, with all months having 30 days. Therefore, July, August, and September each have 30 days of accrued interest and October has 19 days of accrued interest; this totals 109 days. Settlement date is Friday, October 20.

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

D) Corporate debt maturing in 10 years. 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.

Freddie Mac does which of the following? Issues pass-through securities. Purchases student loans. Purchases conventional residential mortgages from financial institutions. Issues securities backed directly by the full faith and credit of the U.S. government. A) II and III. B) II and IV. C) I and IV. D) I and III.

D) I and III. Freddie Mac is a publicly owned and traded U.S. government agency that issues pass-through securities based on a pool of conventional residential mortgages purchased from financial institutions. Ginnie Mae is the only U.S. agency that issues securities backed by the full faith and credit of the U.S. government.

If the value of the U.S. dollar increases against other currencies, which of the following are TRUE? U.S. exports are more competitive in foreign countries. U.S. exports are less competitive in foreign countries. Foreign imports into the U.S. are more competitive in U.S. markets. Foreign imports into the U.S. are less competitive in U.S. markets. A) I and III. B) II and IV. C) I and IV. D) II and III.

D) II and III. If the value of the U.S. dollar increases against other currencies, then U.S. exports cost more for foreign markets to purchase. This also makes foreign imports less expensive for U.S. consumers.

Your customer wishes to lock in a long-term yield with minimal risk and is not interested in regular income. Which of the following securities should you recommend? A) Treasury Bill. B) Treasury Bond. C) Corporate A-rated zero coupon bond. D) Treasury STRIPS.

D) Treasury STRIPS. The Treasury STRIPS is long-term, no-interim income, and has a locked-in yield since it is purchased at a discount from par. The T-bill is short term, the T-bond provides semiannual interest, and the corporate zero is riskier than the STRIPS.

The floating exchange rate for a nation's currency: A) fluctuates based on the London Interbank Offered Rate. B) is set by the nation's central bank. C) is tied to the current market price of gold. D) fluctuates based on the values of other currencies.

D) fluctuates based on the values of other currencies. Most of the world's currencies go up and down in value in relation to one another.