SERIES 65 chapter 2 part 1

An investor purchases a Treasury note and the confirmation shows a price of 102.21. Rounded to the nearest cent, the investor's cost, excluding commissions, is

$1,026.56.

Of the following securities, which is most commonly recommended to fund a child's college education?

Zero-coupon Treasury bonds

GNMA mortgage-backed securities are

a direct obligation of the U.S. government.

In general, from the choices given, the type of security offering the greatest degree of safety to an investor is

a mortgage bond.

Regardless of the nature of the issuer, one thing an investor in debt securities can expect is

a stated maturity date.

A corporation is capitalized with common stock, senior preferred stock, mortgage bonds, and subordinated debentures. Your client, who holds $10,000 of the debentures, is concerned about the future viability of the enterprise. You can inform the client that the debentures have a claim

ahead of the common stock and the preferred stock but after the bonds.

The call feature available on some bonds

allows the issuer the option to escape high interest rates if market rates decline.

As defined in the Securities Exchange Act of 1934, the term municipal security would include all of the following except

an Illinois Tool Company debt issue backed by its full faith and credit.

When a U.S. resident investor purchases foreign bonds,

appreciation of both the bonds and the foreign currency benefits the domestic investor.

A municipal bond has a coupon of 6.25%, and at the present time, its yield to maturity is 6.75%. From this information, it can be determined that the municipal bond is trading

at a discount.

If a company's dividend increases by 5% but its market price remains the same, the current yield of the stock will

increase.

All of the following are true about GNMAs except

interest is paid semiannually.

An individual purchases a $10,000 CD with a 5-year maturity from her local bank branch. In doing so, she is eliminating

interest rate risk.

Treasury bills are

issued in book-entry form.

XYZ Corporation's A-rated convertible debenture is currently selling for 90. If the bond's conversion price is $40, what is the parity price of the stock?

$36.00 per share

A client approaches the investment adviser representative handling the advisory account with a request to find a preferred stock that will offer a 6% income return. The investment adviser representative suggests a stock paying a $0.28 quarterly dividend. That stock will exactly meet the income objective if it has a current market price of

$18.67.

An investor is trying to decide whether to purchase $10,000 face amount of a U.S. Treasury bond or a highly rated corporate bond. The price of the Treasury bond is 102.20 while the price of the corporate bond is 99 3/8. If the investor decides to purchase the Treasuries, disregarding commissions, the price difference is

$325.00.

A $1,000 bond with a nominal yield of 8% will pay how much interest each year?

$80

The DERP Corporation has an outstanding convertible bond issue that is convertible into eight shares of stock. If the current market price of the bond is 80, the parity price of the stock is

$100 per share.

A client approaches the investment adviser representative handling the advisory account with a request to find a preferred stock that will offer a 5.4% income return. The IAR suggests a stock paying a $1.73 quarterly dividend. That stock will meet the income objective if it has a current market price of

$128.15.

A bond selling for $20 above par would be quoted

102.

If a convertible bond is purchased at its $1,000 par value and is convertible at $83.33 per common share, what is the conversion ratio of common shares per bond?

12 shares for each bond

BFJ Corp.'s 5% convertible bond is trading at 120. The bond is convertible at $50. An investor buying the bond now and immediately converting into common stock would receive

20 shares.

A client in the 30% tax bracket owns a 5% XYZ, Inc., debenture due to mature shortly. What yield in a municipal bond will result in the same after-tax return that now exists has with the debenture?

3.5%

A client has TIPS with a coupon rate of 3.5%. The inflation rate has been 4% for the last year. What is the inflation-adjusted return?

3.50%

Your client in the 35% federal income tax bracket currently owns some corporate bonds with a coupon yield of 7%. In order to receive the same income after taxes, he would need to buy municipal bonds with a coupon of

4.55%.

The current yield on a bond with a coupon rate of 5.5% selling at 110 is

5.0%.

One year ago, ABC Widgets, Inc., funded an expansion to its manufacturing facilities by issuing a 20-year first mortgage bond. The bond is secured by the new building and land. The bond was issued with a 5.5% coupon and is currently rated Aa. The current market price of the bond is 105, resulting in a current yield of approximately

5.24%.

A bond purchased at $900 with a 5% coupon and a five-year maturity has a current yield of

5.56%.

Which of the following choices offers the highest tax-equivalent yield?

6.2% municipal bond to a corporation in the 21% tax bracket

GHI common stock has a $10 par value and is selling in the market for $60 per share. If the current quarterly dividend is $1, the current yield is

6.7%.

An investor in the 25% federal income tax bracket is considering the purchase of some fixed-income instruments. Which of the following would provide the investor with the greatest after-tax return?

7% Ba rated corporate bond

Which of the following indicates a bond selling at a premium?

8% coupon yielding 7.5%

Richard purchased a 30-year bond for 103½ with a stated coupon rate of 8.5%. What is the approximate yield to maturity for this investment if Richard receives semiannual coupon payments and expects to hold the bond to maturity?

8.19%

Which of the following rates of return is used by investment professionals as the risk-free rate?

91-day Treasury bill rate

The value of which of the following would be least likely to be impacted by changes in interest rates?

A bank CD maturing in 5 years

The term Eurodollars refers to

American dollars held by banks in other countries, especially in Europe.

Which of the following statements regarding credit risk is not true?

An A-rated mortgage bond has less credit risk than a AA rated debenture.

Which of the following expressions describes the current yield of a bond?

Annual interest payment divided by current market price

DERP Corporation's 5% convertible debentures maturing in 2030 are currently selling for 120. The conversion price is $40. One would expect the DERP common stock to be selling

somewhat below $48 per share.

The Straitened Corporation filed for bankruptcy. One of your clients held a mortgage secured by the corporation's building. When the building was sold, the proceeds were less than the mortgage balance, creating a deficiency balance. Where does this investor's claim stand?

As a general creditor on a pro rata basis

High-yield bonds are frequently called junk bonds. Which of the following expresses the highest rating that would apply to a junk bond?

BB

Which of the following is true of Ginnie Maes but not of other agency mortgage-backed securities?

Backed by the full faith and credit of the U.S. government

Kate, age 59, has an investment portfolio exceeding $250,000. She considers herself a moderate to conservative investor. To generate additional income, she is anticipating adding bonds to her portfolio. She lives in a state that does not have an income tax and she is in the 28% federal income tax bracket. Which of the following bonds would be the best recommendation for her portfolio?

Bond A, A-rated corporate debenture with a 6.50% coupon rate

A company has two outstanding bond issues, both with a coupon rate of 10%. Bond A will mature in 3 years while Bond B will mature in 20 years. If interest rates were to decrease to 8%, which of the following statements is correct?

Bond B will be selling at a greater premium than Bond A.

In the event of a company's insolvency, which of the following has first claim on assets?

Bondholders

Which of the following usually does not pay interest semiannually?

GNMA

An investor is considering the purchase of $100,000 maturity value of zero-coupon AAA rated corporate bonds scheduled to mature in 20 years. Which of these are among the risks that this investor will be assuming? I. Default risk II. Interest rate risk III. Prepayment risk IV. Reinvestment risk

I and II

Which of the following are characteristics of commercial paper? I. It represents a loan by the holder to the issuer. II. It is a certificate of ownership in the corporation. III. It is commonly issued to raise working capital for a corporation. IV. It is junior in preference to convertible preferred stock.

I and III

Which of the following regarding corporate debentures are true? I. They are certificates of indebtedness. II. They give the bondholder ownership in the corporation. III. They are unsecured bonds issued to finance capital expenditures or to raise working capital. IV. They are the most senior security a corporation can issue.

I and III

A customer purchased a 5% U.S. government bond yielding 6%. A year before the bond matures, new U.S. government bonds are being issued at 4%, and the customer sells the 5% bond. The customer probably did which of the following? I. Bought it at a discount II. Bought it at a premium III. Sold it at a discount IV. Sold it at a premium

I and IV

Which of the following are characteristics of negotiable jumbo CDs? I. Issued in amounts of $100,000 to $1 million or more II. Typically pay interest on a monthly basis III. Always mature in one to two years with a prepayment penalty for early withdrawal IV. Trade in the secondary market

I and IV

An 8% corporate bond is offered on an 8.25 basis. Which of the following statements are true? I. Nominal yield is higher than YTM. II. Current yield is higher than nominal yield. III. Nominal yield is lower than YTM. IV. Current yield is lower than nominal yield.

II and III

The net asset value of an international bond fund can be expected to increase if which of these occur? I. Interest rates rise abroad. II. Interest rates fall abroad. III. The U.S. dollar strengthens. IV. The U.S. dollar weakens.

II and IV

Which of the following are characteristics of commercial paper? I. Backed by money market deposits II. Negotiated maturities and yields III. Issued by insurance companies IV. Not registered with the SEC

II and IV

Which of the following best describes the liquidation order when a company files for bankruptcy? I. Common stockholders II. Debenture holders III. Preferred stockholders IV. Secured creditors

IV, II, III, I

A client of yours owns some convertible preferred stock. She notices an article in the business section of her local newspaper that reports the company is going to pay a 20% stock dividend on their common stock. How will this affect her?

If there is an antidilution clause, her conversion privilege will permit her to acquire 20% more shares than before the stock dividend.

A bond with a par value of $1,000 and a coupon rate of 5%, paid semiannually, is currently selling for $1,200. The bond matures in 10 years and is callable in six years at 103. In the computation of the bond's yield to call, which of the following would be a factor?

Interest payments of $25

A bond with a par value of $1,000 and a nominal yield of 6% paid semiannually is currently selling for $1,300. The bond matures in 25 years and is callable in 15 years at $1,080. In the computation of the bond's yield to call, which of these would be a factor?

Interest payments of $30

Which of the following is unlikely to be issued at a discount?

Jumbo CD

The price of which of the following will fluctuate most with a change in interest rates?

Long-term bonds

An investor interested in investing in sovereign debt would most likely purchase

Sweden 2.5s of 2032.

A customer asks if there are any debt instruments providing income that might at least keep pace with inflation and offer some tax advantages. What suitable recommendation could be made that would meet the customer's criteria?

TIPS

Which of the following statements regarding a $1,000 corporate 8.50% bond offered at 110 is true?

The bond's current yield is calculated by dividing its annual interest by its current market price.

What is the name of the bond document that states the issuer's obligation to pay back a specific amount of money on a specific date?

The indenture

Which of the following statements is true if a corporate bond is callable?

The issuing corporation has the option to redeem the bond before it matures.

An investor in the 28% income tax bracket is considering purchasing either an 8% municipal bond or a 10% corporate bond. Which of the following regarding the bonds is true?

The municipal yield is higher than the corporate yield on an after-tax basis.

A customer purchased new issue bonds at par two years ago. Since then, the cost of living as measured by the consumer price index (CPI) has declined by almost half and the current yield on the bonds has also declined. Which of the following best describes the value of the bonds purchased?

Their market price has increased.

Which of the following is correct regarding zero-coupon bonds?

They eliminate reinvestment rate risk.

Which of the following investments gives the investor the least exposure to reinvestment risk?

Treasury STRIPS/zero-coupon bonds

Which of the following U.S. government securities do not bear a stated interest rate but are sold at a discount through weekly auctions?

Treasury bills

Which of the following statements regarding convertible debentures is true?

When compared with similar nonconvertible debentures, convertible debentures are issued with a lower coupon rate.

Corporate bonds are considered safer than common stock issued by the same company because

bonds place the issuer under an obligation but stock does not.

Corporate long-term debt securities that are issued on the general credit of the issuer and are not otherwise secured are called

debentures.

A customer bought a 10-year 6% AAA bond at par when it was issued. Two years later, if the CPI has increased from 2% to 4%, the price of the bond most likely

has declined.

When a bond is selling at a premium, a bond callable at par will

have a YTC that is less than the YTM.

For a bond selling at a discount, the yield to maturity will be

higher than the nominal yield.

Money market investments consistently fulfill all these roles within a client's portfolio except

outperform the stock market.

Bond prices are quoted as a percentage of

par value.

Issuing callable bonds is advantageous to the issuer because it allows the company to

replace a high, fixed-rate issue with a lower issue after the call date.

When an investor divides the coupon rate of a municipal bond by the complement of her tax rate, she is computing the bond's

tax-equivalent yield.

When referring to municipal bonds, the formula of (1 − tax bracket) is found in the computation of

tax-equivalent yield.

The market price of a convertible bond depends on all of the following except

the conversion prices of bonds from similar companies.

The bond document that states the issuer's obligation to pay the investor a specific rate of interest for the use of the funds as well as any collateral pledged as security for the loan and all other pertinent details might be referred to by all of these terms except

the debenture.

A new convertible debt security has a provision that it cannot be called for five years after the issue date. This call protection is most valuable to a recent purchaser of the security if

the market price of the underlying common stock is increasing.

If a corporate bond is convertible, this means that

the owner of the bond may exchange it for a set number of shares of stock.

All of the following are true of negotiable, jumbo certificates of deposit except

they are secured obligations of the issuing bank.

A risk-averse investor, who had only invested funds in bank certificates of deposits, was informed by his investment adviser representative that higher returns with safety could be achieved by investing in U.S. Treasury notes with a 10-year maturity. The adviser representative assured the client that investment in federal government-backed securities is riskless. In this situation, the representative acted

unethically because the agent failed to disclose that the customer retains interest rate risk.

Although bonds are issued by many different entities, most of their features are the same. With few exceptions, included in that list of similarities would be all of these except

safety of principal.

An agent is discussing a specific bond that would be a good addition to the client's portfolio. The client comments that the nominal yield is lower than its current yield. The agent would explain that the bond is

selling at discount

If a group of money managers was having a discussion and the term SOFR was mentioned, the topic would most likely be

short-term borrowing rates.

When discussing convertible debt securities, it would be incorrect to state that

holders receive a higher interest rate.

Which of the following best describes a Yankee bond?

A U.S. dollar-denominated bond issued by a non-U.S. entity inside the United States

Your client in the 25% federal income tax bracket lives in a state where his earnings place him in the 6% bracket for state income tax purposes. If he were to purchase a 4% bond issued by a political subdivision of another state, his total tax-equivalent yield would be

slightly less than 5.33%.

Your client in the 25% federal income tax bracket lives in a state where his earnings place him in the 6% bracket for state income tax purposes. If he were to purchase a 4% bond issued by a political subdivision of his state, his total tax-equivalent yield would be

slightly more than 5.33%.

An investor purchased a bond with a 6% coupon rate exactly three months after its most recent interest payment. As a result, I. the buyer will pay $15 accrued interest. II. the buyer will receive $15 accrued interest. III. the seller will pay $15 accrued interest. IV. the seller will receive $15 accrued interest.

I and IV

An advantage of being a bondholder compared with owning common stock in the same corporation is that

income payments are more reliable.

One year ago, ABC Widgets, Inc., funded an expansion to its manufacturing facilities by issuing a 20-year first mortgage bond. The bond is secured by the new building and land and is callable at par 15 years after the issue date. The bond was issued with a 5.5% coupon and is currently rated Aa. If the current market price of the bond is 105,

the yield to call is lower than the yield to maturity.

ABC Corporation's 5% mortgage bond is currently trading at a premium. The bond is callable at par in 10 years and matures in 15 years. When comparing the returns available to an investor, it would be accurate to state

the yield to maturity is higher than the yield to call.

Investors interested in acquiring convertible debentures as part of their investment portfolio would

want the safety of a fixed-income investment along with potential capital appreciation.