Fixed Income Basics

A $1,000 par TIPS is issued with 5 years to maturity. The coupon rate on the bond is 3.50%. If the inflation rate for the next 5 years is 2.50%, the bond will be worth how much in 5 years?

$1,131

A TIPS is issued with a 3.5% coupon rate and a 5 year maturity. If inflation runs at 4% per year for the 5-year life of the bond, the redemption value of the bond at maturity will be approximately:

$1,219

In 2022, a customer buys 5 ABCD 10% debentures, M '50, at 85. The interest payment dates are Feb 1st and Aug 1st. The bonds are callable as of 2027 at 103. The current yield on the bonds is:

11.76%

A customer has a 10-year investment time horizon and has $5,000 available for investment each year over that time frame. The customer wishes to have $100,000 at the end of that time. In order to accumulate $100,000 at the end of 10 years, the approximate rate of return on investment would need to be:

12%

In 2022, a customer buys 5 GM 10% debentures, M '32 at 85. The interest payment dates are Feb 1st and Aug 1st. The bonds are callable as of 2027 at 103. The yield to maturity on the bonds is:

12.43%

If market interest rates rise from 6% to 7%, which security's price would be MOST adversely affected?

15 year Treasury STRIP

A customer has purchased three different bonds, each yielding 9%, with 5 year, 10 year, and 15 year maturities. If prevailing interest rates drop by 20 basis points, which will show the greatest percentage price change?

15 year maturity

Which security would be expected to have the greatest duration?

20 year; zero-coupon bond

A customer buys a 2-year maturity, 10% coupon bond at par. If market interest rates rise to 12%, then the bond's price will fall by approximately:

3.4%

A municipal dealer quotes a 2 year, 8% term revenue bond at 106. The yield to maturity is:

4.85%

A customer buys a 3-year maturity, 6% coupon bond at par. If market interest rates rise to 8%, then the bond's price will fall by:

5%

In 2022, a customer buys 1 GE 8%, $1,000 par debenture, M '37, at 110. The interest payment dates are Jan 1st and Jul 1st. The bond is callable in 5 years at 105. The yield to call on the bond is:

6.51%

A customer who lives in Minnesota buys a Florida General Obligation bond with a 4.5% coupon at par. The customer is in the 30% federal tax bracket and the 5% Minnesota state tax bracket. What is the customer's equivalent taxable yield?

6.577%

In 2022, a customer buys 1 PDQ 10%, $1,000 par debenture, M '37, at 115. The bond is callable in 2027 at a 5% call premium. The interest payment dates are Jan 1st and Jul 1st. The yield to call on the bond is:

7.27%

If market interest rates rise, which statement is TRUE?

A bond's yield to maturity will rise

At which Standard and Poor's rating is a bond first considered to be speculative ("junk bond")?

BB

When making a recommendation of corporate commercial paper to a customer, which risk is the MOST important consideration?

Credit risk

If market interest rates increase, which statement is TRUE? Current yields will increase Dividend yields will decrease Price-earnings ratios will increase Bond prices will increase

Current yields will increase

All of the following terms relating to mortgage backed securities are synonymous EXCEPT: Call risk Contraction risk Prepayment risk Extension risk

Extension risk

When a recession is expected: I investors will sell corporate bonds II investors will sell government bonds III yields on corporate bonds would increase IV yields on government bonds would increase

I and III

Which statements are TRUE when a bond sells at a discount? I The nominal yield is less than the yield to maturity II The nominal yield is more than the yield to maturity III The current yield is less than the yield to maturity IV The current yield is more than the yield to maturity

I and III

What happens to the rate of return calculation on a non-callable bond if the rate of interest stays the same and the time intervals are changed? I Shortening the time intervals will increase the rate of return II Shortening the time intervals will decrease the rate of return III Lengthening the time intervals will increase the rate of return IV Lengthening the time intervals will decrease the rate of return

I and IV

Which characteristics make a security LEAST subject to liquidity risk? I Short term maturity II Long term maturity III Low credit rating IV High credit rating

I and IV

For bonds trading at a discount, rank the yield measures from lowest to highest? I Nominal II Current III Basis IV Yield to Call Basis

I, II, III, IV

Yield curve analysis is useful for an investor in debt securities because: I the curve shows market expectations for interest rates II investors can compare rates of return relative to changing maturities III the yield of a specific security can be compared to the market expectation for similar securities IV the curve can show relative demand for differing maturities by comparing the change in yield to the change in maturity

I, II, III, IV

Which statements are TRUE when a bond sells at a premium? I The nominal yield is less than the yield to maturity II The nominal yield is more than the yield to maturity III The current yield is less than the yield to maturity IV The current yield is more than the yield to maturity

II and IV

A customer buys a premium bond with 20 years to maturity that is callable at par at any time during its life. In which situation will the customer earn the lowest yield on the bond?

If the bond is called in 5 years

The Internal Rate of Return computation assumes that cash flows will be reinvested at the:

Internal Rate of Return

A customer who is retired wants to select an investment that is marketable, and that provides the highest rate of return. The BEST choice would be to recommend:

Investment Grade Preferred Stock

An investor believes that interest rates will be flat or falling into the future; and that prices may deflate. The MOST appropriate investment is:

Long term U.S. Government bonds

During periods when the yield curve has a "normal" shape, as market interest rates change, which statement is TRUE?

Long term bond prices move more sharply than short term bond prices

An investor that buys securities issued by companies based in Third World countries would be MOST concerned with:

Political risk

In 2022, a customer buys 5 GM 10% debentures, M '31, at 85. The interest payment dates are Feb 1st and Aug 1st. The bonds are callable as of 2024 at 103. If the bonds are called prior to maturity, which statement is TRUE?

The yield to call will be higher than the yield to maturity

An analysis of yield curves of U.S. Government and lower medium quality corporate bonds shows the yield spread to be widening over the last 4 months. Based upon investor expectations as evidenced by the widening of the yield spread, an appropriate investment is:

U.S. Government bonds

The measure that is closest to IRR is:

YTM IRR is the Internal Rate of Return. This is the rate of return that discounts all of the cash flows from an investment to a present value of "0." For a bond, it is the same as the YTM (Yield to Maturity) given by that investment.YTC stands for Yield to Call; ROI stands for Return on Investment; and AIR stands for Assumed interest Rate - the estimated conservative rate of return used in a variable annuity return illustration.

Which investment cash flows for an investment with a 3 year time horizon would have the highest net present value?

Year 1 - $1,500; Year 2 - $1,000; Year 3 - $500; Total = $3,000

An investor buys a $50,000, 10% corporate bond maturing in 2047 for $62,500. The bond is callable starting in the year 2022. What is the most appropriate measure for calculating yield?

Yield to Call

An investor buys a $25,000, 8% corporate bond maturing in 2047 for $20,000. The bond is callable starting in the year 2022. What is the most appropriate measure for calculating yield?

Yield to Maturity

An investor buys a $30,000, 10% corporate bond maturing in 2047 for $24,000. The bond is callable starting in the year 2022. What is the most appropriate measure for calculating yield?

Yield to Maturity

Which of the following is essentially the "Internal Rate of Return?"

Yield to Maturity on a bond

The yield to maturity on a bond is more than the current yield. This bond is trading:

at a discount

Dow Corning's stock price drops on the announcement of a recall of its silicone breast implants. This is an example of:

business risk

When borrowing money, the interest rate charged measures the:

cost of money

A 7% coupon bond is being offered on an 8% basis. If interest rates for similar bonds fall below 8%, the basis for this bond will:

decrease

The best description of the "term" of a bond is the:

end date of the bond when the final payment will be received

Market uncertainty regarding future interest rate levels would indicate that the yield curve should be:

flat

When short term interest rates are the same as long term interest rates, the yield curve is said to be:

flat

When prices in an economy are adjusted with relation to a price index by force of contract, this is called:

inertial inflation

A customer who buys a 10 year zero coupon bond with the intention of holding it to maturity would be MOST concerned with:

inflation risk

The risk of tax law changes that may negatively affect securities held in a portfolio is called:

legislative risk

If the market rate of interest is 10%, the net present value of $1,000 to be received 2 years from now is: less than $1,000 more than $1,000 $1,000 more or less than $1,000, depending on market demand

less than $1,000

During a period when the yield curve is flat:

long term bond prices are more volatile than short term bond prices

During a period of steep economic decline, equity investments fall out of favor with investors, who rotate their investments out of equities into safe investments such as Treasury Bills. This is an example of:

market risk

Equity investments fall out of favor with investors due to a period of steep economic decline and stock prices fall broadly. This is an example of:

market risk

The yield curve shows the yields of different:

maturities of the same type of security

A retired married customer, age 73, has a portfolio that is invested in Blue Chip stocks and Treasury bonds that provides current income. The customer is concerned that he is paying a very high Federal and State combined income tax rate. An appropriate recommendation for this customer would be to diversify part of his portfolio into an investment in:

municipal bonds

A yield curve with a positive slope is one that is:

normal

A customer holds a $250,000 portfolio invested solely in U.S. Government bonds. If the equities market were to rally because of the expectation of a growing economy, while market interest rates remained stable, the risk associated with holding the bond portfolio would be:

opportunity cost

The risk that is unique to mortgage backed securities is:

prepayment risk

The disadvantage of owning a mutual fund that invests in common stocks is the risk of loss of:

principal

An investor that purchases 10 year zero-coupon Treasury bonds with the intention of holding them to maturity should be MOST concerned with:

purchasing power risk

A retired individual invests $75,000 in a 5-year bank Certificate of Deposit. This investor will be susceptible to:

purchasing power risk and reinvestment risk

An individual buys a multiple dwelling apartment house for investment purposes. He is hoping that the real estate market will increase in value; however, real estate prices decline by 20% due to an unfavorable tax ruling. This is an example of:

regulatory risk

An investor in municipal bonds would be primarily concerned with which risk?

regulatory risk

The Internal Rate of Return of an investment is the:

return which discounts the net cash flows to a present value of "0"

During periods when the yield curve is inverted, investors wishing to maximize current income would buy:

short term maturities

Bond A and Bond B both have an 8% coupon. Bond A matures in 2 years, while Bond B matures in 10 years. If market interest rates fall:

the price of Bond B will rise faster than the price of Bond A

An investment of $1,000 is projected to give an annual return of $100 for 5 years, at which point the $1,000 invested will be returned. The comparable market rate of return for 5-year investments is 5%. Based on this information, the Net Present Value of the investment:

will be positive