SIE STC Ch. 5
What is the dollar price of a T-bond with a bid of 98-24 and a par value of $100?
98 and 24/32. Convert fraction into a decimal 24 ÷ 32 = .75. Now multiply $100 by 98.75% = $98.75.
Which of the following securities is an example of a collateralized time draft? ACommercial paper BAmerican Depositary Receipts CBankers' acceptances DEurodollars
A BA (banker's acceptance) is used to facilitate foreign trade. It is a time draft that has been guaranteed (collateralized) by a bank.
A double-barreled security is a municipal security that: AIs exempt from federal and state taxes BIs exempt from state and local taxes CCan be paid from the revenues of a project and is a general obligation of the U.S. government DCan be paid from the revenues of a project and is a general obligation of a municipal government
A double-barreled security is a municipal security that can be paid from the revenues of a project and is also a general obligation of a municipal government.
A grant anticipation note is normally paid from: AProceeds from the issuance of long-term bonds BFunds received from the federal government CRevenues received at a future date DReceipts of future property taxes
A grant anticipation note (GAN) is normally paid from funding provided by the federal government. A bond anticipation note (BAN) is paid from proceeds from the issuance of long-term bonds. A revenue anticipation note (RAN) is paid from revenues to be received at a future date. A tax anticipation note (TAN) is normally paid from future tax receipts, such as property (ad valorem) taxes
A municipality borrowing for a short-term period to finance a capital project would issue: ACommercial paper BTax anticipation notes CDebentures DBond anticipation notes
A municipality borrowing for a short-term period to finance a capital project would issue bond anticipation notes. Commercial paper is primarily issued by corporations and some municipalities to raise short-term funds for working capital, but not to finance capital projects. Tax anticipation notes are used to meet operational expenditures.
Which of the following always trade at a discount? ATreasury bonds BTreasury notes CTreasury bills DTIPS
Although all debt securities may trade at a discount at some point, Treasury bills are issued and trade at discounts since they don't have interest coupons.
The credit rating of a municipality will likely improve with a(n): AIncrease in tolls BIncrease in property taxes CDecrease in residents DDecrease in fees being charged for licenses
An increase in property taxes results in more funds becoming available to the municipality. As a result, the credit rating of the municipality will likely improve. Decreases in residents and fees being charged for licenses will generally result in a decline in the credit rating. An increase in tolls will provide a benefit to the facility, not the municipality.
What is often required before a revenue bond can be issued?
Conducting a feasibility study
A corporate bond that's not backed by any specific asset is referred to as a: ADebenture BCollateral trust bond CRevenue bond DConvertible bond
Corporate bonds that are not backed by specific assets of the corporation are referred to as debentures (i.e., unsecured corporate bonds).
Which of the following choices BEST describes Eurodollars? AU.S. dollars on deposit in U.S. banks BU.S. dollars on deposit in European banks CU.S. dollars on deposit in foreign banks DEuropean currency on deposit in U.S. banks
Eurodollars are defined as U.S. dollars on deposit in foreign banks, not just in Europe.
True or False: T-Bills are quoted on a dollar basis.
False. T-Bills are quoted on a discount yield basis.
An investor has purchased a Bristol County General Obligation bond. Which of the following statements is TRUE concerning this investment? AEarnings from the bond are subject to federal taxes. BPayment of principal and interest is ultimately the responsibility of Bristol County. CIf the Bristol County toll road goes bankrupt, the bonds will go into default. DThe assets of the county are used to secure the bond.
For a general obligation bond (a type of municipal bond), the interest is exempt from federal income tax. In addition, a general obligation bond is backed by the taxing authority of the issuer and the issuer's general promise to repay the debt. In this example, only the taxes that are collected by Bristol County (not the assets of the issuer) are used to back the bonds. If the county cannot produce enough revenue (taxes) to pay the bond's interest and/or principal, there will be a default.
For corporate bonds, accrued interest is calculated based on: AActual calendar days in every month and 365 days in the year B30 days in every month and 360 days in the year CActual calendar days in every month and 360 days in the year D30 days in every month and 365 days in the year
For corporate and municipal bonds, accrued interest is calculated based on 30 days in every month and 360 days in the year. On the other hand, Treasury notes and bonds use the actual calendar days in every month and a 365 days in the year.
How often do GNMA pass-throughs make payments?
GNMA pass-throughs make payments monthly.
Of the choices listed, which one is Moody's lowest rating for a municipal note? AMIG 1 BMIG 3 CAaa DD
MIG stands for Moody's Investment Grade and refers to ratings given municipal notes. There are three MIG ratings, with the best rating being MIG 1 and the lowest rating being MIG 3. Aaa is Moody's best rating for bonds, and C is its lowest rating for bonds.
What is a specific risk that may be attributed to a GNMA fund?
Prepayment risk. This is the risk that mortgages may be paid off early.
A town has started the construction of public sewers. This project is likely paid by: AFees paid to use the sewers BAn increase in property taxes CAn increase in income taxes DAn increase in sales taxes
Public sewers are typically built with the proceeds of a bond offering that's supported by user fees.
Standard & Poor's three ratings for municipal notes are ______, ______, ______.
Standard & Poor's three ratings for municipal notes are SP-1, SP-2, SP-3.
Which of the following approvals is required before a municipality can begin making payments on a moral obligation bond? AApproval by a majority of legal age voters BApproval by the state legislature CApproval by the bond trustee DApproval by the appropriate state agency
State legislative approval is required before a municipality can begin making payments on a moral obligation bond.
Name some of the different types of money-market instruments
T-Bills, Bankers' Acceptances (BAs), Commercial Paper, Negotiable CDs
The U.S. government does NOT guarantee the payment of interest and principal for which of the following securities? AGNMA (Ginnie Mae) securities BTreasury notes CTreasury Receipts DFHLMC (Freddie Mac) securities
The U.S. government guarantees the payment of interest and principal on all Treasury securities as well as securities that are issued by the Government National Mortgage Association (GNMA or Ginnie Mae). Securities that are issued by the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac), which is a government-sponsored enterprise (GSE), are not guaranteed or backed by the U.S. government.
A corporation has raised money to use for expansion of its plant within the next six months. In which of the following securities should the corporation invest the funds until they are used? AHigh-quality commercial paper BLong-term municipal zero-coupon bonds CU.S. Treasury bonds DHigh-quality preferred stocks
The corporation intends to use the money in a short period and does not want to assume undue investment risks. Of the choices given, the most suitable investment is high-quality commercial paper since it is extremely safe and can be purchased with a short maturity to match the corporation's needs
Which of the following is TRUE regarding the tax treatment of municipal bonds? AInterest and capital gains are taxable. BInterest and capital gains are tax-free. CInterest is taxable, but capital gains are tax-free. DInterest is tax-free, but capital gains are taxable
The interest paid on municipal bonds is federally tax-free; however, any resulting capital gains are taxable
What price do non-competitive bidders agree to pay at a Treasury auction?
The lowest price (highest yield) of the accepted competitive bids
The minimum denomination for negotiable certificates of deposit is: A$100,000 B$10,000 C$5,000 D$1,000
The minimum denomination for negotiable CDs is $100,000. Typical denominations are often $1,000,000 or more.
True or False: When deflation occurs (a decline in CPI), the principal value of TIPS will decrease.
True. However, the principal value will not decrease below par.
True or False: Interest paid on GNMA, FNMA, FHLMC, and SLMA agency bonds is fully taxable to investors.
True. The interest is taxed at the federal, state, and local level.
What is the proper order of liquidation for a corporation at bankruptcy?
Unpaid workers, IRS, secured creditors, unsecured creditors, preferred, and then common.
A corporation that has filed for bankruptcy is to be liquidated. Which of the following securities issued by that corporation has seniority in the liquidation process? AMortgage bonds BDebenture bonds CCommon stock DParticipating preferred stock
When a corporation is liquidated, its assets are sold and the proceeds are distributed. Secured creditors are paid first (i.e., mortgage bondholders), then unsecured creditors (debenture holders), then preferred stockholders, and last the common stockholders. This would make mortgage bonds the senior security of those listed.
A type of security that is issued in the U.S. by foreign governments and corporations, trades in U.S. markets, and is denominated in U.S. dollars is called a: AGlobal mutual fund BEurodollar bond CYankee bond DRepurchase agreement
Yankee bonds are issued in the U.S. by foreign corporations and governments, are dollar-denominated securities, and trade in U.S. markets. Yankee bonds are normally issued by foreign entities when conditions in the U.S. are better than in the foreign country. Eurodollar bonds are issued by U.S. companies and sold to investors overseas and pay their interest in Eurodollars (dollars on deposit in banks outside the U.S.). Since Eurodollar bonds are not initially offered to investors in the U.S., they are exempt from SEC registration.
What is the maturity range of a T-Bond?
more than 10 years
For an Industrial Development Bond (IDB), the primary source that backs the bond is: AThe issuing authority only BThe leasing corporation only CThe issuing authority and the leasing corporation DThe treasurer of the city or town of issuance
n IDB is issued by a municipality, but secured by a lease agreement with a corporation.
A corporation is NOT considered to be in default if it fails to pay interest on which of the following bonds? AMortgage bond BDebenture CConvertible bonds DIncome bond
Income bond. The issuer promises to repay the principal amount at maturity, but does not promise to pay interest unless it has sufficient earnings
Which of the following statements about municipal revenue bonds is NOT TRUE? AThey are not subject to the debt limitations that apply to general obligation bonds BThe maturity of the bonds will equal the useful life of the facility being built CThey can be issued by states, political subdivisions, interstate authorities, and intrastate authorities DThe interest and principal payments are derived from the funds being generated by the facility
Municipal revenue bonds do not always have maturity schedules that equal the useful life of the facility being built. Instead, the facility's useful life should significantly exceed the maturity of the bonds. Municipal revenue bonds do not have the debt limitations that apply to general obligation bonds. A debt limitation is considered the statutory or constitutional maximum debt that an issuer may legally incur. Revenue bonds can be issued by states, political subdivisions (e.g., counties and townships), interstate authorities, and intrastate authorities. Municipal revenue bond interest and principal payments are derived from the funds being generated by the facility.
Which of the following securities assist in financing importing and exporting operations? ABankers' acceptances (BAs) BTreasury bills CEurodollar CDs DAmerican Depositary Receipts (ADRs)
Of the choices given, a banker's acceptance (BA) is the only instrument that is used as a means of financing foreign trade. Do not confuse a BA with an ADR (American Depositary Receipt), which facilitates the trading of foreign securities in U.S. markets. Eurodollar certificates of deposit pay interest and principal in Eurodollars (U.S. dollars deposited in nondomestic banks) and are not used to finance importing and exporting operations.
A U.S. Treasury bond is selling in the market at 95.18. The dollar value of this bond is: A$951.80 B$955.62 C$958.75 D$952.18
U.S. Treasury bonds are quoted in full points and 32nds of a point. A T-bond quote of 95.18 represents 95 18/32. By converting the fraction to a decimal, the quote becomes 95.5625 percent of the par value of $1,000. $1,000 x 95.5625% = $955.62.
All of the following statements are TRUE concerning both auction rate securities (ARSs) and variable-rate demand obligations (VRDOs), EXCEPT: AInterest rates are set at specified intervals BThey are often issued by municipalities CThey are long-term securities with short-term trading features DThey have a put feature allowing the holder to redeem the security at par
Although they are both long-term securities with short-term trading features, only VRDOs have a put feature that permits the holder to sell the securities back to the issuer or third party. Auction rate securities (ARSs) do not have this feature and, if the auction fails, the investor may not have immediate access to her funds. In addition, ARSs use an auction process to reset the interest rate on the securities, whereas the interest rate on a VRDO is reset by the dealer at a rate that allows the securities to be sold at par value.
Which of the following securities are generally used by importers and exporters to finance foreign trade? ABanker's acceptances BADRs CEurodollar bonds DCommercial paper
Bankers' acceptances are letters of credit that are issued by banks and often used to finance foreign trade. Eurodollar bonds are issued outside of the U.S., but denominated in U.S. dollars; however, they are not a means of financing foreign trade. Commercial paper is short-term corporate debt. ADRs are depository receipts for foreign equities.
Which of the following statements is NOT TRUE regarding GNMA pass-through certificates? AThey are backed by the U.S. government. BInterest is subject to federal tax, but exempt from state tax. CInterest and principal payments are made on a monthly basis. DThe mortgage pools consist of fixed-rate residential mortgages.
The Government National Mortgage Association (Ginnie Mae) is an agency of the U.S. government. Ginnie Mae guarantees a pool of mortgages that are purchased by investors through Ginnie Mae pass-through certificates. These instruments pay interest and principal monthly at a stated rate on the remaining principal. The repayment of principal and interest is guaranteed by the U.S. government. Interest received from Ginnie Mae pass-through certificates is subject to federal, state, and local taxes.
A Treasury bond is quoted 105.04 - 105.24. The purchase price that a customer would expect to pay would be: A$1,051.25 B$1,052.40 C$1,054.00 D$1,057.50
U.S. Treasury notes and bonds are quoted in 32nds of a point. When purchasing the bond, the customer would pay the offering price of 105.24. To convert 105.24 into a dollar price: Step 1: 105.24 is equal to 105 24/32 Step 2: convert 24/32 into a decimal, which is .75 Step 3: convert 105.75% into a dollar price (105.75% x $1,000 = 1.0575 x $1,000 = $1,057.50) The customer would pay $1,057.50.
Which of the following statements BEST describes a banker's acceptance (BA)? AIt facilitates the trading of foreign stocks in the United States BIt helps to finance foreign trade between importers and exporters CIt is used by a municipal issuer in raising funds to meet a seasonal need for cash DIt is issued by nondomestic banks and is secured by Eurodollar deposits
Bankers' acceptances (BAs) help facilitate foreign trade. ADRs permit the trading of foreign stocks in the U.S.
Which of the following securities is NOT backed by the credit of the U.S. government? ATreasury bills BTreasury STRIPS CGovernment National Mortgage Association (GNMA) bonds DFederal National Mortgage Association (FNMA) bonds
Federal National Mortgage Association (FNMA) bonds are issued by a privately owned organization and are not backed by the U.S. government. All of the other choices are directly backed by the U.S. government.
Government-sponsored enterprise securities are comparable to direct government obligations with regard to all of the following statements, EXCEPT: AThey trade in the over-the-counter market BAll are government guaranteed CShort-term securities are quoted on a discount yield DLong-term securities are quoted as a percentage of par
Government-sponsored enterprise securities are not guaranteed by the government. The other statements are true.
Which of the following choices has the lowest priority of claims in a bankruptcy? ASecured creditors BUnsecured creditors CPreferred stock DCommon stock
In the event a corporation goes bankrupt and it must liquidate its assets, secured bondholders or creditors would be paid first (secured bonds are backed by specific tangible assets), then owners of debentures (unsecured bonds backed by the full faith and credit of the issuing corporation). Bondholders are paid first, as they are considered creditors. Stockholders are paid next, with preferred stockholders being third in this order of priority and common stockholders paid last.
An investor has purchased a Bristol County Public Power System revenue bond. Which of the following statements is TRUE concerning this investment? AEarnings from the bond are exempt from federal, state, and local taxes BPayment of principal and interest is ultimately the responsibility of Bristol County CIf the power system declares bankruptcy, the bonds will go into default DThe assets of the power system secure the bond
Interest from a revenue bond (a type of municipal bond) is exempt from federal income tax. However, it is generally exempt from state and local taxes only if purchased by a resident of the state of issuance. In addition, a revenue bond is backed by a stream of income from a specific project or facility. Unlike a general obligation bond, it is not backed by a general promise by the issuer to repay the debt. In this example, only the revenue (not the assets) of the power system back the bonds. If the power system cannot produce enough revenue to pay the bond's interest and/or principal, there will be a default. Bristol County is not obligated to use any other funds to make payments on the bonds.
Interest on Treasury Inflation Protected Securities (TIPS) is: ASubject to federal and state income tax BExempt from federal and state income tax CSubject to state income tax, but exempt from federal income tax DSubject to federal income tax, but exempt from state income tax
Interest on any U.S. Treasury security is subject to federal income tax, but exempt from state income tax. This is the opposite of the tax treatment on municipal (state) bond interest, which may be subject to state tax, but is exempt from federal tax.
Which of the following securities is NOT guaranteed by the U.S. government? ATreasury notes BTreasury bills CGovernment National Mortgage Association (Ginnie Mae) certificates DFederal National Mortgage Association (Fannie Mae) bonds
Of the choices given, the only obligations that are not guaranteed by the U.S. government are FNMA (Fannie Mae) bonds. FNMA was created as a government-chartered private corporation. It borrows funds and uses the proceeds to purchase conventional residential mortgages. Although FNMA can borrow funds from the U.S. government, the securities it issues are not directly backed by the U.S. government
Which of the following statements is NOT TRUE concerning the Student Loan Marketing Association (Sallie Mae)? AIt issues securities that are not backed by the U.S. government BIt issues securities that can be redeemed to pay for college education CIt provides loans to educational institutions DIt purchases federally sponsored student loans
The Student Loan Marketing Association (known as SLMA or Sallie Mae) provides liquidity to student loan makers by purchasing federally sponsored student loans. It also lends funds directly to educational institutions. Sallie Mae securities are not backed by the full faith and credit of the U.S. government, but the SLMA maintains a direct line of credit with the U.S. government. It does not issue securities that can be redeemed to pay for college education.
Which of the following securities will provide an investor with protection against purchasing-power risk? ATreasury bills BTreasury notes CTIPS DSTRIPS
Treasury Inflation-Protected Securities (TIPS) are U.S. government securities that are inflation-adjusted based on the Consumer Price Index (CPI). With TIPS, the rate of interest is fixed. However, the principal amount on which that interest is paid will vary based on the CPI. They are usually purchased as protection against inflationary or purchasing power risk. The other choices are U.S. government securities that pay an investor either a fixed rate or a fixed amount.
A quote of 5.90 - 5.75 is a quote for which of the following securities? ATreasury bills BTreasury notes CTreasury bonds DA mortgage-backed security
Treasury bills are quoted on a discount yield basis while the other choices are quoted at a price. Since yield is inversely related (moves opposite) to price, the higher yield (5.90) represents the lower price and is the bid. The lower yield (5.75) represents the higher price and is the ask (offer). The other securities are all quoted as a percentage of par in 32nds.
