Series 65 Chapter 12

Which bonds would have the greatest sensitivity to changes in interest rates? 1. Bonds with a long duration 2. Bonds with a short duration 3. Bonds with a high coupon 4. Bonds with a low coupon

1 ,4

An investor purchased a new issue municipal bond at 101. Which of the following statements would be TRUE if the investor held the bond to maturity? 1. The premium must be amortized over the life of the bond 2. The investor may not claim a capital loss at maturity 3. The cost basis of the bond will be adjusted annually to reflect the amortization 4. The annual amortization will be deducted from ordinary income for tax purposes

1, 2, 3

Which TWO of the following are TRUE concerning the relationship between a bond's yield to call and its yield to maturity? 1. When a bond is priced at a discount, the yield to call will be greater than the yield to maturity 2. When a bond is priced at a discount, the yield to call will be less than the yield to maturity 3. When a bond is priced at a premium, a premium call price will increase the yield to call 4. When a bond is priced at a premium, a premium call price will decrease the yield to call

1, 3

Which of the following are characteristics of corporate bonds? 1. An investor's capital is at less risk than if the investor purchased stock in the same company 2. If the issuer defaults, holders of debentures have claim to the company's assets after all stockholders 3. Secured bonds are backed by specific assets the company owns 4. These bonds do not offer the same potential for capital appreciation that common stocks do

1, 3, 4

Rate the following bonds in terms of yield from lowest to highest: 1. Treasury bonds 2. Municipal bonds 3. Corporate bonds

2, 1, 3

In comparing two bonds, each with a 20-year maturity, if one has a low coupon, while the other has a high coupon, you would expect the: 1. Low coupon bond to have a lower duration 2. High coupon bond to have a lower duration 3. Low coupon bond to have greater pricing volatility 4. High coupon bond to have greater pricing volatility

2, 3

Which TWO of the following investments are NOT considered money-market instruments? 1. A U.S. Treasury bill 2. A money-market mutual fund 3. A convertible debenture 4. A tax anticipation note

2, 3

Which TWO of the following statements are TRUE regarding a bond's current yield? 1. Current yield measures the investor's total return 2. Current yield does not consider the price appreciation of a discount bond held to maturity or the price depreciation of a premium bond held to maturity 3. Current yield measures the interest the investor receives in relation to the current market price 4. Current yield is more important than the yield to maturity as investors always want to know how their investment is currently performing

2, 3

Compared to Treasury securities, agency securities are: 1, More liquid 2. Less liquid 3. Lower yielding 4. Higher yielding

2, 4

Rank the following investments from least to most risky: 1. Common stocks 2. Preferred stocks 3. U.S. government securities 4. Limited partnerships

3, 2, 1, 4

A bond is convertible at $50 and is selling in the market for $1,080. At what price per share must the common stock be trading to be at parity with the bond A. $54 B. Par C. $1,080 D. $20

A. $54

A bond with a $1,000 par value pays semi-annual interest of $35. If the market price of the bond is $900, what's the bond's coupon rate? A. 0.07 B. 0.078 C. 0.035 D. 0.038

A. 0.07

An investor purchased $50,000 worth of a 6% bond that was issued by a Brazilian company. If the bond is held to maturity, what will the investor receive at the maturity date? A. 51,500 Brazilian reals B. 50,000 Brazilian reals C. 50,000 U.S. dollars D. 53,000 U.S. dollars

A. 51,500 Brazilian reals

Identify the bond that's trading at a discount. A. A bond with a current yield of 5% and a yield-to-maturity of 6% B. A bond that's callable in 20 years C. A bond with a nominal yield of 5% and a yield-to-maturity of 2% D. A bond with a current yield of 7% and a yield-to-maturity of 4%

A. A bond with a current yield of 5% and a yield-to-maturity of 6%

An investor who maintains a large portfolio of debt securities anticipates a small change in interest rates. The investor would like to measure the effect that this change would have on the value of her portfolio. Which of the following would BEST provide her with this information? A. Duration B. Yield-curve analysis C. Reinvestment yields D. Convexity

A. Duration

Which of the following securities are NOT direct obligations of the U.S. government? A. Fannie Mae and Freddie Mac securities B. T-bills and T-notes C. Ginnie Mae securities and TIPS D. T-bonds and Treasury Cash Management Bills

A. Fannie Mae and Freddie Mac securities

Your client purchased a U.S. government bond with a YTM of 4%, and a coupon of 5%. Later he sells the bond at a price producing a YTM of 6%. This indicates that when your client originally purchased the bond it was trading at a: A. Premium but at the time of sale it was trading at a discount B. Discount and it was still trading at a discount at the time of sale C. Premium and it was still trading at a premium at the time of sale D. Discount but at the time of sale it was trading at a premium

A. Premium but at the time of sale it was trading at a discount

If a bond has a long-term maturity and long duration, how will its price move if interest rates are falling? A. The bond's price will increase more than other bonds. B. The bond's price will decrease less than other bonds. C. The bond's price will decrease more than other bonds. D. The bond's price will increase less than other bonds.

A. The bond's price will increase more than other bonds.

Two bonds each have a coupon rate of 3.5%, but one has a five-year maturity and the other has a 10-year maturity. If interest rates increase by 1%: A. The price of the 10-year bond depreciates more than the price of the five-year bond. B. Since both bonds have the same coupon rate, their prices will be the same. C. The price of the 10-year bond appreciates more than the price of the five-year bond. D. The duration on the five-year bond will be larger than the duration on the 10-year bond.

A. The price of the 10-year bond depreciates more than the price of the five-year bond.

An investor owns a TIPS bond that has a coupon rate of 5%. What happens to her TIPS if the CPI increases 3%? A. The principal increases by 3%. B. .The coupon rate decreases by 3%. C. The principal increases by 2%. D. The coupon rate increases to 8%.

A. The principal increases by 3%.

If a bond is selling at a premium and is callable at par, how is the yield generally calculated? A. To the call date B. To the final maturity date C. As a percentage of the par value D. By dividing the annual income by the current price

A. To the call date

A client buys a bond that pays $35.00 in interest every six months and the bond is selling in the market for $900. What's the bond's coupon rate? A. 3.5% B. 7.0% C. 3.3% D. 7.7%

B. 7.0%

A municipality is issuing 8 1/4% general obligation bonds at par value. The bonds will mature in 20 years. An investor purchasing a bond at its offering price and holding the bond for 20 years will receive a yield to maturity of: A. Less than 8.25% B. 8.25% C. Cannot be determined D. More than 8.25%

B. 8.25%

Your client has been investing in bonds for a number of years. His portfolio has some bonds that are trading at a discount, while others are trading at a premium. All of the following statements are TRUE, EXCEPT: A. Interest rates would likely have risen since the time the bonds trading at a discount were issued B. A bond that is trading below par value is more likely to be called than a bond trading above par value C. If interest rates were to fall, he would most likely see greater price appreciation on the discount bonds in his portfolio than on the premium bonds D. If the creditworthiness of an issuer were to decline, the price of the bonds potentially could fall

B. A bond that is trading below par value is more likely to be called than a bond trading above par value

A bond pays a 7% coupon. Later, a 9% coupon bond is issued. This bond is issued at: A. A discount to the 7% bond B. A premium to the 7% bond C. A flat price D. Par with the 7% bond

B. A premium to the 7% bond

All of the following will impact the value of a bond, EXCEPT: A. A decrease in inflation B. An increase in the company's dividend payment C. A decrease in the company's credit rating D. Rising interest rates

B. An increase in the company's dividend payment

All of the following investments issued by commercial banks would potentially have the protection of FDIC insurance, EXCEPT: A. Brokered certificates of deposit B. Bankers' acceptances C. Checking accounts D. Demand deposits

B. Bankers' acceptances

As an investment adviser, you would consider municipal bonds to be suitable investments for all of the following clients, EXCEPT a(n): A. Insurance company B. Corporate pension plan C. Wealthy individual D. Bank

B. Corporate pension plan

A 6% coupon bond is selling at a basis of 6.20. If interest rates in the market decline below 6%, the bond's basis will: A. Increase or decrease, depending on its maturity B. Decline C. Increase D. Remain the same

B. Decline

Which of the following statements about barbell strategies is NOT TRUE? A. The strategy consists of purchasing bonds with both short and long maturities, but no intermediate-term securities are included B. Gains from the short-term maturities will offset losses in the long-term maturities C. The short-term bonds will provide for quick cash to purchase new bonds upon maturity D. A barbell strategy is used to take advantage of potential interest-rate changes

B. Gains from the short-term maturities will offset losses in the long-term maturities

All of the following are true about a zero-coupon corporate bond, EXCEPT: A. It has no reinvestment risk B. It would be a suitable investment for a customer who needs cash flow C. The bondholder receives all interest at maturity D. The bondholder pays tax each year on the accretion

B. It would be a suitable investment for a customer who needs cash flow

A bond has a low coupon, relative to other bonds with the same maturity and credit rating. Which of the following statements about the bond's price is TRUE? A. The bond's price will have the same volatility as bonds with higher coupons. B. The bond's price will be more volatile than bonds with higher coupons. C. The bond's price will be less volatile than bonds with higher coupons. D. The bond's price will always be greater than bonds with the same credit rating.

B. The bond's price will be more volatile than bonds with higher coupons.

A client purchases a TIPS with a 2% coupon and, over the course of the year, the CPI increases by 1%. Which of the following statements is TRUE? A. .The client will earn 2% on a fixed principal amount. B. The client will earn 2% on an adjusted principal amount. C. The client will earn 3% on a fixed principal amount. D. The client will earn 3% on an adjusted principal amount.

B. The client will earn 2% on an adjusted principal amount.

An investor is evaluating an ABC 6.5 bond that matures in 25 years. What does 6.5 represent? A. The credit rating B. The coupon or nominal yield C. The maturity D. The call price

B. The coupon or nominal yield

Four municipal bonds each have a 3% coupon, the same face value, but different maturities. One bond matures in one year, another in five years, another in 10 years, and the last in 20 years. Duration is: A. The longest for the one-year bond and shortest for the 20-year bond B. The longest for the 20-year bond and shortest for the one-year bond C. Longer than the maturity for each bond D. The same for all four bonds

B. The longest for the 20-year bond and shortest for the one-year bond

An investor is evaluating whether she should add a municipal bond or corporate bond to her portfolio. The bonds have the same maturity, the same coupon payment, and are trading for roughly the same price. Which bond will add greater value to the investor's portfolio? A. The bonds will add the same value B. The municipal bond C. It depends on the other securities in the investor's portfolio D. The corporate bond

B. The municipal bond

The yield for a zero-coupon bond is based on: A. The dividends that are paid each quarter B. The purchase price relative to face value C. A market based premium to face value at maturity D. A fixed rate of interest

B. The purchase price relative to face value

One month ago, a client purchased a convertible debenture, which is convertible at $20. If the underlying common stock is currently trading at $22 per share, what is the parity price of the bond? A. Par value B. $1,020 C. $1,100 D, $440

C. $1,100

An investor in the 35% tax bracket is considering investing in a corporate bond, which has a 6% coupon. In order to earn an amount equal to her after-tax return from the corporate bond, she would need to invest in a tax-free bond that is yielding: A. 2.5% B. 2.1% C. 3.9% D. 6%

C. 3.9%

A resident of State A buys a 4% general obligation bond offered by State B. The investor is in the 30% federal tax bracket and State A imposes a 5% tax. What is the bond's taxable equivalent yield? A. 13.33% B. 5.20% C. 5.71% D. 9.00%

C. 5.71%

An investor in the 28% tax bracket buys a 12% corporate bond at par. After taxes, what would be the net yield? A. 9.67% B. 9.36% C. 8.64% D. 8.83%

C. 8.64%

Which bond has the most interest rate risk? A. A six-year bond B. A five-year zero-coupon bond C. A 15-year bond D. A three-month bond

C. A 15-year bond

An investor maintains a portfolio of debt securities. She is concerned that the FRB may tighten the money supply, leading to an increase in interest rates. To measure the effect that this change will have on the value of her portfolio, which of the following choices will be the BEST in providing her with this information? A. Evaluating the credit risk in her portfolio B. Evaluating the business risk in her portfolio C. Analyzing the duration in her portfolio D. Analyzing her current yield

C. Analyzing the duration in her portfolio

All of the following are true of U.S. government agency bonds, EXCEPT they: A. May be issued in book-entry form B. Are taxable at the federal level C. Are a direct obligation of the U.S. government D. Are generally a low-risk investment

C. Are a direct obligation of the U.S. government

Which of the following statements concerning duration is CORRECT? A. A well-diversified index stock fund will have duration of approximately 1.0 B. Duration is the measurement of the period in which a CDSC will be assessed on a Class B share C. Duration is a measurement of a given bond's sensitivity to interest-rate swings D. Due to their extended holding period, long-duration funds are right only for young investors with a suitable time horizon

C. Duration is a measurement of a given bond's sensitivity to interest-rate swings

An investor purchases a bond that was quoted in terms of its yield-to-call. The best outcome for the investor is A. Selling the bond after one year B. Selling the bond immediately C. Holding the bond until it matures D. Holding the bond until it's called

C. Holding the bond until it matures

Which of the following types of risk would have the greatest impact on a 20-year corporate bond during the first year of the investment? A. Liquidity risk B. Inflation risk C. Interest-rate risk D. Market risk

C. Interest-rate risk

Which of the following is TRUE of a structured note? A. It's a trust owned by a large number of small investors which contains a basket of equity securities B. It's a bond issued by a municipality in order to raise funds for an infrastructure project C. It's a bond issued by a financial services company which offers a rate of return that's linked to other securities D. It's a contract between an individual and insurance company which guarantees income for remainder of the individual's life

C. It's a bond issued by a financial services company which offers a rate of return that's linked to other securities

Which of the following statements BEST describes a sovereign bond? A. It's a bond that's held in probate in the event a decedent dies without a will. B. It's a bond that's secured by securities of other issuers. C. It's a bond that's issued by a foreign government. D. It's a bond that's issued by a foreign corporation.

C. It's a bond that's issued by a foreign government.

When interest rates are fluctuating, which bonds are safer investments A. Long duration bonds B. Low coupon bonds C. Short-term bonds D. Long-term bonds

C. Short-term bonds

All of the following are found on a customer's confirmation statement for a bond, EXCEPT: A. The bond's purchase price B. The date of the transaction C. The bond's yield-to-maturity at the time it was originally issued D. Whether the bond is callable

C. The bond's yield-to-maturity at the time it was originally issued

An investor purchased a 6% bond for $11,000 and it's currently trading at $10,000. The bond is earning 0% in a money market account. What's the bond's current return? A. 6.67% B. 5% C. 0% D. 6%

D. 6%

A corporate bond has a 12% nominal yield. To be equivalent, an investor in the 28% tax bracket would need a municipal bond with a yield of: A. 10.2% B. 9.4% C. 7.9% D. 8.6%

D. 8.6%. To determine the net yield of a taxable bond, multiply the yield times the complement of the tax bracket. The net yield would be 8.6% (12% yield multiplied by 72%, which is the complement of the tax bracket)

Which of the following bonds is trading at a premium? A. Bond priced at 95 B. A bond with a current yield of 5% and a yield-to-maturity of 6% C. A bond with a nominal yield of 3% and a current yield of 4% D. A bond with a current yield of 7% and a yield-to-maturity of 4%

D. A bond with a current yield of 7% and a yield-to-maturity of 4%

Which of the following securities is typically sold with a markup? A. Exchange-traded fund (ETF) B. Stock C. Mutual fund shares D. Fixed income securities

D. Fixed income securities

All of the following statements are TRUE about zero-coupon bonds, EXCEPT: A. It has no reinvestment risk B. The bondholder pays tax each year on the accretion C. The bondholder receives all interest at maturity D. It would be a suitable investment for a customer who needs cash flow

D. It would be a suitable investment for a customer who needs cash flow

Which of the following statements regarding bond prices is TRUE during a period of fluctuation interest rates? A. Prices of bonds with short-term maturities will fluctuate more than prices of long-term bonds. B. All bond prices will fluctuate about the same amount. C. Bond prices will only fluctuate for changes in the issuer's credit rating. D. Prices of bonds with long-term maturities fluctuate more than prices of short-term bonds.

D. Prices of bonds with long-term maturities fluctuate more than prices of short-term bonds.

A married couple are both in their mid-30s and want to invest $75,000 jointly. If they need the money to purchase a home in two years, which of the following is the MOST suitable investment for the couple? A. Long-term U.S. government bonds B. A 529 plan C. A diversified portfolio of U.S. stocks D. Short-term corporate bonds

D. Short-term corporate bonds

Which of the following is TRUE if the price of a discount bond falls? A. The spread between the yield-to-maturity and yield-to-call will decrease and the yield-to-maturity will fall. B. The spread between the yield-to-maturity and yield-to-call will decrease and the yield-to-maturity will rise. C. The spread between the yield-to-maturity and yield-to-call will increase and the yield-to-call will fall. D. The spread between the yield-to-maturity and yield-to-call will increase and the yield-to-call will rise.

D. The spread between the yield-to-maturity and yield-to-call will increase and the yield-to-call will rise.