SIE Unit 3

An investor holds a 5% corporate bond with a yield to maturity of 2.75%. How much will be received in interest on each of the scheduled interest payment dates? A) $25 B) $400 C) $40 D) $27.50

$25 With a 5% coupon (nominal or stated yield), this corporate bond will pay $50 annually (0.05 × $1,000 PAR). For corporate bonds, this is paid in semiannual interest payments in which each payment would be $25.

Which of the following is a money market security? A) A 30-year T-bond issued by the Treasury 29 years ago B) A TAN maturing in 14 months C) A newly issued T-note D) A short-term T-bond mutual fund

A 30-year T-bond issued by the Treasury 29 years ago A money market security is a high quality and highly liquid security with one year, or less, left to maturity. Both the T-note and the Tax Anticipation Note are more than a year form maturity. The mutual fund has no maturity.

Your customer is a resident of a state with no income tax. They want an income-producing investment that produces tax-free income for them. Which of the following meets the customer's needs? A) A Treasury bond B) Only a municipal bond issued by the customer's home state C) A municipal bond issued from any state D) A GNMA certificate

A municipal bond issued from any state The customer's state of residence has no income tax, so any municipal bond would meet the customer's need. A municipal bond issues by the customer's home state is not the correct answer only because it states "only," which is not true. The customer would pay federal income tax on the T-bond and the GNMA.

In safety of principal, municipal bonds are considered second only to A) corporate common stock issues. B) U.S. government and agency bonds. C) AAA-rated corporate debt issues. D) corporate preferred stock issues.

U.S. government and agency bonds. Municipal securities are considered second in safety of principal only to U.S. government and agency issues.

A 6% corporate bond trading on a 7% basis is trading A) at a premium. B) with a coupon rate below 6%. C) at a discount. D) with a current yield above 7%.

at a discount. The term a 7% basis means that the YTM is 7%. YTM is higher than the coupon rate (6%), so the bond trades at a discount. Current yield must be between the coupon rate and the YTM.

T-notes pay interest A) semiannually. B) monthly. C) annually. D) quarterly.

semiannually Treasury notes (T-notes) and bonds (T-bonds) pay interest on a semiannual basis.

Distinguishing by the issue's term to maturity for those securities issued by the U.S. federal government, which of the following is correct? A) Bills represent short-term issues. B) Bonds represent intermediate-term issues. C) Notes represent long-term issues. D) Bonds and notes are both intermediate-term issues.

Bills represent short-term issues. Securities issued by the U.S. federal government, the shortest term to the longest term are bills, notes, and bonds.

Which of these Treasury securities is in correct order of shortest to longest maturities? A) Notes, bills, bonds B) Bonds, notes, bills C) Bills, notes, bonds D) Notes, bonds, bills

Bills, notes, bonds Bills have the shortest maturities with a maximum of one year (52 weeks), notes are from two to ten years, and bonds have maturities of more than ten years.

The Alta Loma High School District is asking voters to approve a bond to fund the purchase of new computers and software. The bond will mature in 40 years and the interest and principal payments will be funded from real estate taxes. This is an example of a A) GO bond. B) revenue bond. C) an equipment trust bond. D) a debenture.

GO bond. If a municipal bond requires a vote it is most likely a GO bond. Generally revenue bonds do not require a vote (note that there is no revenue generating source here). Debentures and equipment trust certificates are issued by corporations, not municipalities

In what order would claimants receive payment in the event of a corporate bankruptcy? I. Holders of secured debt II. Holders of subordinated debt instruments III. General creditors IV. Preferred stockholders A) IV, I, II, III B) I, II, III, IV C) III, I, II, IV D) I, III, II, IV

I, III, II, IV For corporate bankruptcies, the liquidation priority is as follows: secured debtholders, unsecured debtholders (including general creditors), holders of subordinated debt instruments, preferred stockholders, and common stockholders.

Which of the following is an example of an unsecured debt security? I. Debenture II. Preferred stock III. Mortgage bond IV. Income bond A) II and IV B) I and II C) I and III D) I and IV

I. Debenture IV. Income bond A debenture and income bonds are examples of unsecured debt instruments. Preferred stock is an equity security and a mortgage bond is secured (collateralized) by real estate.

Your customer, Shea, has a large portfolio of bonds and dividend paying stocks. Her primary interest is generating current income. She is trying to understand how taxes work for her T-bonds. You explain that A) the interest from her T-bonds is exempt at all levels. B) the interest from her T-bonds is exempt at the state and local level, but she will still owe taxes at the federal level. C) the interest from her T-bonds is exempt at the federal level, but she will still owe taxes at the state and local level. D) the interest from her T-bonds is exempt at the state level, but she will still owe taxes at the local and federal level.

the interest from her T-bonds is exempt at the state and local level, but she will still owe taxes at the federal level. Securities issued by the federal government produce interest that is not taxed at the state or local level. It is taxed at the federal level.

All of the following characteristics are true of securities issued by the Government National Mortgage Association except A) they are backed by the federal government. B) they are called pass-through securities because the payments are made up of both interest and principal. C) they generate tax-free interest. D) they pay monthly.

they generate tax-free interest. GNMA interest is fully taxable. All the other statements are true.

An investor holds a Treasury note with a stated interest of 6%. The investor will receive A) two $60 interest payments per year. B) two $30 interest payments per year. C) one $60 interest payment per year. D) one $6 interest payment per year.

two $30 interest payments per year. Treasury note (T-note) annual interest is stated as a percentage of par value ($1,000) and is paid in semiannual payments. Therefore, a 6% T-note pays $60 per year in two payments of $30 each.

Evan is a 75-year-old customer with $100,000 to invest. He would like the money to generate additional income. He relates that he intensely hates paying taxes and dislikes the government in general. He is, however, interested in tax-free municipal bonds. All of these are important to gather before making a recommendation except A) why he hates the government. B) his current tax bracket. C) his liquid net worth. D) the makeup of his portfolio.

why he hates the government. Though it might be interesting to find out why he hates the government, the others are all basic points of suitability.

A basis point is valued at A) 1% of market value. B) 1% of face value or $10. C) 1/100th of 1%. D) 1/1000th of 1%.

1/100th of 1%. A basis point is a measurement of yield equal to 1/100 of 1%. A full percentage point is made up of 100 basis points (bps). A point is a measurement of the change in a bond's price which equals 1% of face value or $10 per bond.

Treasury bonds mature in A) 1 year or more. B) less than 2 years. C) 2 years or more. D) 10 years or more.

10 years or more. Treasury bonds (T-bonds) are the U.S. government's long-term debt instrument having maturities of 10 years and up to 30 years.

Your customer is in the 30% federal tax bracket. They consider purchasing a 7% corporate bond. Their after-tax yield would be A) 4.9%. B) 7%. C) 10%. D) 2.1%.

4.9%. The formula for the calculation is 7% (corporate rate) × (100% — 30% (tax bracket)). 7 × (1 - 0.3) = = 7 × 0.7 = 4.9%

Your customer, Eleanor, purchased an InDebt, Inc., 5% debenture at a price of 94. It matures in 12 years. What is the yield to maturity? A) 4.69 B) 5.73 C) 5 D) 5.32

5.73 You do not have to calculate YTM for this problem. You could if you really wanted to, but it is not necessary for the question. You do need to recall the bond inverse relationship chart. The bond is trading at a discount so the YTM must be higher than the coupon of 5%; that eliminates two responses. Note that YTM is higher than current yield, and that you do need to calculate CY. The bond's annual interest divided by the price (50/940) is 5.32% (the CY). Only one response is higher than 5.32%.

An issuer has a subordinated debt issue outstanding. Which of the following is true? A) A subordinated debenture has a claim that is senior to all other debt issues and equity issues. B) A subordinated debenture has a claim that is senior to all other debt and senior to common stock. C) A subordinated debenture has a claim that is junior to all other debt but senior to preferred stock. D) A subordinated debenture has a claim that is junior to all other debt issues.

A subordinated debenture has a claim that is junior to all other debt but senior to preferred stock. Subordinated debt (usually debentures) have a junior claim to all other debt issues but, like all debt, is senior to the claims of all equity holders, both preferred and common.

Which one of the following best describes a debenture? A) A long-term corporate debt obligation backed by the title to equipment owned by the corporation B) An unsecured corporate debt obligation C) A debt obligation allowing the holder to purchase shares of the company's common stock D) An investment in the debt of another corporation

An unsecured corporate debt obligation A debenture is unsecured corporate debt, not backed by any physical assets but only the issuer's good faith and credit.

Which of the following statements regarding bond interest is true? A) The par value of a bond will decrease as market interest rates fall. B) Bond prices have an inverse relationship to interest rates. C) Bond prices have a direct relationship to interest rates. D) The par value of a bond will increase as market interest rates fall.

Bond prices have an inverse relationship to interest rates. Bond prices have an inverse relationship to interest rates. If interest rates go up, bond prices for those bonds trading in the secondary markets will go down. Conversely, if interest rates decline, bond prices rise. Par value is a fixed number for the life of the bond.

Which of these risks are not normally associated with bonds? A) Purchasing power risk B) Default risk C) Interest rate risk D) Business risk

Business risk Business risk is related to the growth prospects of a business and is most closely associated with common stock. Bond prices are subject to changes in interest rates. Default occurs when a company fails to meet its obligations to the bond holders. Most bonds are subject to a loss of purchasing power due to inflation.

If a callable bond is priced at par, which of the following is true? A) Current yield (CY) is less than yield to maturity (YTM). B) Current yield (CY) is greater than yield to maturity (YTM). C) Yield to maturity (YTM) is less than yield to call (YTC). D) Current yield (CY) equals yield to call (YTC).

Current yield (CY) equals yield to call (YTC). For any bond priced at par, all of the yields are equal; nominal = CY = YTM = YTC if callable.

Which of the following is an unsecured corporate debt security? A) Mortgage backed security B) Equipment trust certificate C) Debenture D) Collateral trust certificate

Debenture Debentures are unsecured. Mortgage bonds are backed by property. Equipment trust certificates are backed by equipment. Collateral trust certificates are backed by securities.

All of the following are considered money market instruments except A) commercial paper. B) banker's acceptances (BAs). C) negotiable jumbo certificates of deposit (CDs). D) exchange-traded funds (ETFs).

ETFs Money market instruments are short-term debt instruments. ETFs are equity securities. Remember that in order to be considered a money market security, the debt instrument should have one year or less to maturity. Banker's acceptances and commercial paper both have maximum maturities of 270 days; most negotiable jumbo certificates of deposit mature in one year or less.

A customer buys a 10% bond with a current yield of 12% and holds the bond until one year before maturity. The bond is sold when current interest rates are 8%. Which of the following statements are correct? I. The bond was purchased at a premium. II. The bond was purchased at a discount. III. The bond was sold at a premium. IV. The bond was sold at a discount. A) I and III B) I and IV C) II and III D) II and IV

II. The bond was purchased at a discount. III. The bond was sold at a premium. When the current yield (12%) is higher than the coupon (10%), it means the bond was purchased at a discount. Because the question tells us that current interest rates are now 8%, the bond maturing within a year with a 10% coupon would now be able to be sold at a premium.

A bond backed by a corporation's full faith and credit is I. secured. II. unsecured. III. backed by a specific asset. IV. not backed by any assets. A) II and III B) II and IV C) I and III D) I and IV

II. unsecured.IV. not backed by any assets. When a bond is backed by a corporation's full faith and credit, it is backed only by the reputation, credit record, and financial stability of the corporation. Not being backed by any of the corporation's assets, this bond is unsecured.

Being secured by no physical asset and backed only by a bank's good faith and credit, a bank's promise to pay principal and interest can be evidenced in which of the following securities that are traded in the secondary market? A) Negotiable CDs B) Commercial paper C) CDs D) Notes and bonds

Negotiable CDs A negotiable CD is an unsecured money market instrument issued by banks. Negotiable means that it can be traded in the secondary market and unsecured means that it is backed only by a promise to pay—a bank's good faith and credit.

When interest rates in the marketplace move up, what happens to the coupon rate on existing bond? A) Nothing; it does not change. B) The coupon rate moves in the same direction. C) The coupon rate moves in the opposite direction. D) The movement depends on the duration of the bond.

Nothing; it does not change. The coupon rate (the fixed rate, the nominal rate, the stated rate) is fixed when the bond is issued and does not change.

Which of these is in correct order of priority for a corporate liquidation? A) Guaranteed bond, secured bond, debenture, common stock B) Secured bond, debenture, subordinated debenture, common stock C) Convertible bonds, participating preferred stock, common stock, subordinated debentures D) Subordinated debenture, participating preferred stock, common stock, convertible preferred stock

Secured bond, debenture, subordinated debenture, common stock Any debt issue is superior to any equity issue. Any preferred stock is senior to any common stock. A guaranteed bond is unsecured debt, or a debenture.

The BBB Corporation is liquidating under a Chapter 7 bankruptcy. What is the order of payout? A) Senior bondholders, preferred shareholders, common shareholders, and general creditors B) General creditors, senior bondholders, preferred shareholders, and common shareholders C) Common shareholders, preferred shareholders, general creditors, and senior bondholders D) Secured bondholders, senior bondholders, subordinated bondholders, and then common shareholders

Secured bondholders, senior bondholders, subordinated bondholders, and then common shareholders The corporation's bondholders get paid first in bankruptcy—secured before unsecured. Next come the general creditors (this would include wages and taxes). The preferred holders are senior to the common, and the common holders are the most junior—making them the last to be paid out.

When an issuer schedules portions of a bond issue's principal to mature at predetermined intervals over a period of years until the entire balance has been repaid, the issuer has issued what type of bond? A) Term B) Balloon C) Predetermined D) Serial

Serial A serial bond issue schedules portions of the principal to mature at intervals over a period of years until the entire principal balance has been repaid.

Which of the following statements is most accurate about feature benefits? A) The call feature benefits the issuer; the put feature benefits the investor. B) The call feature benefits both the issuer and investor. C) The put feature benefits both the issuer and investor. D) The put feature benefits the issuer; the call feature benefits the investor.

The call feature benefits the issuer; the put feature benefits the investor. The call feature allows the issuer to call in old bonds at a high rate of interest and then issue new bonds at a lower rate, similar to refinancing a high interest rate loan. The put feature allows the investor to sell the bond back to the issuer at par when the bond market value has declined, thus avoiding a loss.

A municipality wants to issue general obligation (GO) bonds that will put it over its statutory debt limit. Which of the following is true? A) This is statutorily forbidden. B) They may do so with voter approval. C) This is prohibited by the federal government. D) They may do so with the approval of their state senators.

They may do so with voter approval. The amount of GO debt that a municipal government may incur can be limited by state or local statutes to protect taxpayers from excessive taxes. In order to issue bonds that would exceed this borrowing limit voter approval would be needed—that is, the approval of those who would be paying the taxes.

BigCo, Inc., issues a collateral trust bond. Which of the following statements about this bond is true? A) This is a secured bond backed by rolling stock owned by the issuer. B) This is a secured bond backed by marketable securities owned by the issuer. C) This is a secured bond backed by real estate owned by the issuer. D) This is an unsecured bond backed by marketable securities owned by a third party.

This is a secured bond backed by marketable securities owned by the issuer. When issuing collateral trust bonds or certificates, an issuing corporation deposits marketable securities it owns into a trust in order to secure the loan. The securities it deposits can be securities in other corporations or those of partially or fully owned subsidiaries as long as the securities are marketable. The securities become the lender's (bondholder's) collateral.

Which of these statements regarding Treasury bills is correct? A) Treasury bills are the only type of Treasury security issued without a stated interest rate. B) They are usually issued at a slight premium to par value. C) They have the highest interest rate risk of all Treasury securities. D) They are issued with initial maturities of 3, 12, 24, and 50 weeks.

Treasury bills are the only type of Treasury security issued without a stated interest rate. Treasury bills are always issued at a discount, without a stated interest rate. Receiving par value back at maturity represents the interest income to the investor. Because of their short-term maturities, they have the lowest interest rate risk for Treasury securities, not the highest. T-Bills are issued in initial maturities of 4, 13, 26, and 52 weeks.

Rank the following government-issued securities from shortest to longest maturity. A) Treasury notes, bills, and bonds B) Treasury bonds, notes, and bills C) Treasury bills, notes, and bonds D) Treasury bills, bonds, and notes

Treasury bills, notes, and bonds For U.S. government-issued securities, T-bills have the shortest maturities (1 year or less), T-notes have longer maturities (2-10 years), and T-bonds have the longest maturities (greater than 10 years, up to 30 years).

A brokerage firm places U.S. Treasury notes and bonds in a trust at a bank and then issues securities collateralized by either the principal or interest payments those notes and bonds represent. These new securities the broker-dealer is offering are A) collateralized obligations. B) Treasury receipts. C) Treasury STRIPS. D) Treasury bills.

Treasury receipts. Brokerage firms can create a type of bond known as a Treasury receipt from U.S. Treasury notes and bonds placed in trust at a bank. They then sell separate receipts against the principal and coupon payments the notes and bonds represent.

A customer buys a callable 5% coupon bond at par that will mature in 10 years. Which of the following statements is true? A) Yield to call (YTC) is lower than yield to maturity (YTM). B) Yield to call (YTC) is higher than yield to maturity (YTM). C) Yield to call (YTC) is the same as yield to maturity (YTM). D) Nominal yield is higher than either yield to maturity (YTM) or yield to call (YTC).

Yield to call (YTC) is the same as yield to maturity (YTM). This bond was purchased at par. If a bond is trading at par, the nominal yield (coupon rate) = current yield (CY) = YTC = YTM. YTC is higher than YTM if the bond is trading at a discount to par. YTC is lower than YTM if the bond is trading at a premium over par. Nominal yield is higher than either YTM or YTC if the bond is trading at a premium over par.

When selling a bond, the issuer is taking A) a creditors position. B) a borrower's position. C) a loaners position. D) an equity position.

a borrower's position. Issuers of bonds are borrowing money from the purchaser of the bond.

An investor who is seeking income might choose a corporate bond because A) bonds can grow faster than the rate of inflation. B) bonds pay a higher dividend than stocks. C) a corporate bond pays a steady income and are generally reliable. D) corporate bond interest is tax free.

a corporate bond pays a steady income and are generally reliable. Corporate bonds are, depending on rating, generally reliable producers of income through interest payments. Bonds do not pay dividends, nor do they grow in value with inflation. Corporate interest is fully taxable.

When purchasing a bond, the investor is taking on A) a debtor position. B) an equity position. C) an obligation. D) a creditor position.

a creditor position. When an investor is purchasing a bond, he is lending money to the issuer and becomes a creditor of the issuer.

An investor purchases a bond in the secondary market at $950. Assuming $1,000 par value, this bond is trading at A) a discount. B) par value. C) the market. D) a premium.

a discount. When a bond is priced below par value, it is trading at a discount (discount to par).

A money market security will have all of the following characteristics except A) a limited market. B) high liquidity. C) a higher credit rating. D) a short term to maturity.

a limited market. Money market securities have short-term maturities. With little time left to default, they are considered to be highly liquid and, therefore, relatively safe. Safety or less risk equates to lower returns. Typically issued at a discount and maturing at face value, they generally make no regular interest payments. The difference between the discounted purchase price and the face value received at maturity represents their return.

A CMO consists of A) bonds and money market instruments. B) an FNMA, FHLMC, and other mortgage backed securities. C) different sorts of nonmortgage debt. D) various government backed mortgages.

an FNMA, FHLMC, and other mortgage backed securities. A Collateralized Mortgage Obligation is made up of different mortgage backed securities (including FNMA and FHLMC), not the mortgages directly.

A call feature attached to a bond allows A) an issuer to call in a bond before maturity at times that will benefit the issuer. B) a bondholder to call the issuer for a redemption before the maturity date. C) a bondholder to hold a bond beyond the maturity date benefitting the bondholder. D) an issuer to call in a bond before maturity at times that will benefit the bondholder.

an issuer to call in a bond before maturity at times that will benefit the issuer. A call feature attached to a bond allows an issuer to call in a bond before maturity. Issuers will do this when interest rates have fallen. For example, if an issuer has an outstanding bond paying 6% and interest rates have fallen to 4%, why pay out 6% when prevailing market rates are only 4%? Better to call in the 6% bond and reissue a new bond at the current rate of 4%. Obviously, the ability to call in the bond benefits the issuer.

At the time of maturity, an investor realizes that the overall return on the investment was actually greater than the coupon rate stated on the bond when purchased. This most likely would have occurred because the bond had initially been purchased A) as a callable bond. B) at par. C) at a discount. D) at a premium.

at a discount. Bonds are redeemed at par. When a bond is purchased at a discount (less than will be received at the time the bond matures), that discounted amount will increase the overall return of the bond, making it greater than the coupon rate. If the discount bond is called before it matures, the increased return due to the discount purchase would still occur but would now be accelerated.

A corporation wanting to raise cash to finance accounts receivable and seasonal inventory needs is likely to issue any of the following except A) promissory notes. B) prime paper. C) commercial paper. D) bonds.

bonds. To raise cash for short-term needs, such as accommodating accounts receivable or inventory needs, corporations would issue commercial paper (also known as prime paper or promissory notes). Bonds should always be associated with long-term debt financing.

Lando Entertainment, Inc., issues a bond collateralized by a trust holding the company's Las Vegas headquarters. This type of bond is called a A) guaranteed bond. B) headquarters debenture. C) collateral trust bond. D) mortgage bond.

collateral trust bond. A secured bond backed by real estate is called a mortgage bond. Collateral trust bonds hold other securities in trust as collateral. A guaranteed bond is an unsecured bond backed by a third party. A headquarters debenture is a fictional thing.

A corporation deposits 20-year Treasury bonds into a trust in order to secure a loan. The loan for this type of arrangement would be facilitated by the corporation issuing A) equipment trust certificates. B) Treasury guaranteed bonds. C) collateral trust bonds. D) mortgage bonds.

collateral trust bonds. When issuing collateral trust bonds or certificates, an issuing corporation deposits marketable securities it owns into a trust in order to secure the loan. Though Treasury securities are common collateral, the securities it deposits can be securities in other corporations or those of partially or fully owned subsidiaries as long as the securities are marketable. The securities become the lender's (bondholder's) collateral.

Regarding bankruptcy proceedings, A) the procedure is only available to individuals seeking protection from creditors and not business entities. B) a plan for reorganization must be submitted first before the courts can offer protection from creditors. C) courts protect both corporate and individual filers from creditors. D) liquidation of assets must occur first before the courts can offer protection from creditors.

courts protect both corporate and individual filers from creditors. Bankruptcy is a general term for court procedures available to both individuals and businesses. During the proceedings, filers are protected by the court from creditors. Protection is granted independent of any actions to liquidate or file a plan for reorganization.

A customer says they have a diversified portfolio of notes and bonds. This means their portfolio consists primarily of A) debt instruments. B) equity securities. C) limited partnerships. D) hedge funds.

debt instruments. Notes and bonds are types of debt and the term is often used generically to represent a debt securities.

A bond's rating is used primarily as a measure of its A) default risk. B) volatility risk. C) purchasing power risk. D) interest rate risk.

default risk. Bond ratings from credit rating agencies are used to compare the relative risk of default. None of the others are issues of default.

Negotiable jumbo CDs are characterized by all of the following except A) each issue generally matures in 5-10 years. B) they are issued in amounts of $100,000-$1 million. C) they trade in the secondary market. D) they are unsecured debt of the issuing bank.

each issue generally matures in 5-10 years. Negotiable jumbo CDs are issued in denominations of $100,000-$1 million and trade in the secondary market. Most jumbo CDs are issued with maturities of one year or less. These CDs are unsecured promissory notes backed only by the credit standing of the issuing institution.

T-notes are the U.S. government's A) intermediate-term debt of 2-10 years. B) only callable debt. C) short-term debt of 1 year or less. D) long-term debt of over 10 years.

intermediate-term debt of 2-10 years. T-notes have maturities of 2-10 years when issued. The 10-year T-note yield is an important benchmark for interest rates.

An investor holds a 6% callable bond purchased at 105. If the issuer calls the bond before maturity, the yield to call (YTC) realized by the investor would be A) less than the coupon. B) greater the current yield (CY). C) greater than the yield to maturity (YTM). D) equal to the yield to maturity (YTM).

less than the coupon. When a bond purchased at a premium (105) is called before it matures, the accelerated premium loss is reflected in the calculated yield to call (YTC). In this light, remember that the YTC is always the lowest of all possible yields for premium bonds, less than the coupon, CY, and YTM.

T-bonds are the U.S. government's A) short-term debt of 1 year or less. B) only tax-free debt. C) long-term debt of over 10 years. D) intermediate-term debt of 2-10 years.

long-term debt of over 10 years. T-bonds have a maturity in excess of 10 years when issued.

Your customer asks to buy a bond that carries a very attractive yield. When checking the bond, you see that it has a B rating from the major credit rating agencies. When communicating such information to a customer, all of the following terms are commonly used in describing a B-rated bond except A) junk bond. B) high-yield. C) lower grade. D) noninvestment grade.

lower grade. Though a B rating is certainly a lower investment-grade rating, that is not a typical term used in the industry. All of the other terms are terms normally associated with these bonds carrying a greater risk of default.

An investor anticipates that a fall in interest rates is imminent. This investor, now wanting to purchase bonds in order to lock in interest income, would likely buy A) neither callable nor noncallable bonds. B) noncallable bonds. C) callable bonds. D) either callable or noncallable bonds.

noncallable bonds. If rates fall, bonds are likely to be called. Therefore, an investor who anticipates that rights might fall soon would look to purchase bonds that are not callable (noncallable). In this way, the investor is assured of receiving the coupon interest payments until maturity

An investor holding T-bonds will receive interest payments A) semiannually. B) monthly. C) annually. D) biennially.

semiannually. Treasury bonds (T-bonds) and notes (T-notes) pay interest on a semiannual basis.

Treasury bills (T-bills) are A) short-term debt obligations issued monthly. B) short-term debt obligations issued weekly. C) intermediate-term debt obligations issued monthly. D) intermediate-term debt obligations issued weekly.

short-term debt obligations issued weekly. Treasury bills are short-term debt obligations of the U.S. government issued weekly.

Your customer is a resident of the state of Utah. She owns bonds issued by Puerto Rico. The interest from these bonds is A) taxable at the state level only. B) taxable at the state and local level because she is not a resident of Puerto Rico, but still tax free at the Federal level. C) taxable at all levels because the bonds are not issued by a state. D) tax free at all levels for U.S. citizens.

tax free at all levels for U.S. citizens. Bonds issued by or from a territory of the United States have tax-free income at all levels to U.S. citizens.

Holders of subordinated debt instruments know that in the case of a corporate liquidation, they A) must be paid, regardless of any other claims being met. B) will be paid back last of all debtholders. C) will be paid only after common shareholders claims are satisfied. D) have no priority claim on assets.

will be paid back last of all debtholders. In the event of a corporate bankruptcy, subordinated debtholders, while having no guarantees of being paid, would come last of all bondholders in the liquidation priority—subordinate.