Series 66 Unit 2 Checkpoint Exam

An investor pays 95.28 for a Treasury bond, how much did the bond cost? A) $958.75 B) $9,528.00 C) $95.28 D) $950.28

A) $958.75 $950 + (28/32 * 10) = $958.75

The DERP Coporation has an outstanding convertible bond issue with a conversion price of $125 per share. If the current market price of the bond is 80, the parity of the stock is A) $125 per share B) $100 per share C) $156.25 per share D) $64 per share

B) $100 per share $1,000 / $125 = 8 conversion ratio $800 CMV / 8 = $100 per share

An investor purchasing 10 corporate bonds at a price of 102 1/4 each will pay A) $1,022.50 B) $1.020.25 C) $10,202.50 D) $10,225.00

D) $10,225.00 $1,020 + (1/4 * 10) = $1,022.5 $1,022.5 * 10 = $10,225

A client has indicated that his primary objective is maximizing current income regardless of the risk. Which of the following mutual funds would probably be most suitable for achieving that goal? A) JKL Municipal Bond Fund B) GHI Index Fund C) ABC Growth and Income Fund D) DEF High-Yield Bond Fund

D) DEF High-Yield Bond Fund High-yield (junk) bonds, although carrying more risk, produce higher current income than other funds.

The GHIJ Corporation has a 3% convertible debenture outstanding with a conversion price of $40. The bond's current market price is 126. The most probable reason for this is A) interest rates have risen since the debenture was issued B) GHIJ's earnings have risen since the debenture was issued C) the current market price of the GHIJ common stock is approximately $35 per share D) the current market price of the GHIJ common stock is approximately $50 per share

D) The current market price of GHIJ common stock is approximately $50 per share $1,000 par value / $40 conversion price = 25 conversion ratio $1,260 CMV of bond / 25 conversion ratio = $50.04

A bond with a par value of $1,000 and a coupon rate of 6% paid semi-annually is currently selling for $1,200. The bond is callable in 15 years at 105. In the computation of the bond's yield to call, which of these would be a factor? A) 15 payment periods B) Interest Payments of $30 C) Present Value of $1,050 D) Future Value of $1,200

B) Interest Payments of $30 The yield to call (YTC) computation involves knowing the amount of interest payments to be received, the length of time to the call, the current price, and the call price. A bond with a 6% coupon will make $30 semiannual interest payments. With a 15-year call, there are 30 semiannual payment periods, not 15. The present value is $1,200 and the future value is $1,050, which is the reverse of the numbers indicated in the answer choices.

A bond issued by the GEMCO Corporation has been rated BBB by a major bond-rating organization. This bound would be considered A) a high-yield corporate bond B) an investment-grade corporate bond C) callable D) secured

B) an investment-grade corporate bond An investment-grade bond has a bond rating between AAA and BBB. Lower-rated bonds are considered high-yield bonds and are often referred to as junk bonds. The bond may or may not be secured; the rating does not indicate that fact.

Your client is interest in investing in preferred stocks in an effort to receive dividend income. The client's target goal is a 6% current return on investment (ROI). If the RIF Series B preferred stock is paying a quarterly dividend of $0.53, your client's goal will be achieved if the RIF can be purchased at A) $50 B) $8.83 C) $22.55 D) $35.33

D) $35.33 ($0.53 * 4)/$35.33 = 6%

The current yield on a bond with a coupon rate of 7.5% currently selling at 105-1/2 is approximately A) 8% B) 6.50% C) 7.50% D) 7.11%

D) 7.11% ($1,000 * 7.5%) / $1055 = 7.11%

Which of the following would be most likely to increase a bond's liquidity? A) A lower rating B) A longer maturity C) No Call Protection D) A higher rating

D) a higher rating Liquidity risk is the risk that when an investor wishes to dispose of an investment, no one will be willing to buy it or that a very large purchase or sale would not be possible at the current price. The available pool of purchasers for bonds with a low credit rating is much smaller than for those with investment-grade ratings. (Many institutions are only able to purchase bonds with higher credit ratings.) As a result, the lower the credit rating is, the greater the chance is of the bond having liquidity issues. Similarly, bonds with short-term maturities attract many more investors than those with long-term maturities, causing the long-term bonds to be less liquid. The absence of call protection is negative to many investors, thus limiting the number of potential investors.