UNITS 1 & 2 Review

Rights are short-term, given to existing shareholders, allowing one to purchase shares below CMV

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Treasury receipts are issued by broker-dealers. Although Treasury securities (T-notes and bonds) are held in trust at a bank and collateralize the Treasury receipts, unlike Treasury securities backed by the U.S. government, these Treasury receipts can only be backed by their issuer, the issuing broker-dealer.

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Warrants are long-term and bundled with other securities.

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All US government issues settle when?

Next business day (T+1)

Which is priced as a percentage of par? T-bills, T-notes or T-bonds?

Only T-notes and T-bonds are priced as a percentage of par

Which has interest stated as a percentage of par, T-bills, T-notes or T-bonds?

Only T-notes and T-bonds are priced as a percentage of par, have interest stated as a percentage of par, and pay semiannual interest payments.

Federal funds represent A) the amount of a bank's deposits required to be held on reserve at the Federal Reserve Board (FRB). B) the amount by which a bank falls short of its required deposits to be held on reserve at the Federal Reserve Board (FRB). C) the amount by which a bank exceeds its required deposits to be held on reserve at the Federal Reserve Board (FRB). D) the amount the Federal Reserve Board (FRB) holds in reserve for its member banks.

The FRB mandates how much money its member banks must keep on reserve at the Federal Reserve. Any deposits in excess of the required amount are known as federal funds.

When a corporation calls in preferred shares, the shares stop trading and dividend payments cease on the call date, true or false?

True

Term bonds are structured so that the principal of the entire issue is all payable on the same date—the maturity date, true or false?

True.

An investor is able to purchase a bond at $725, well below par value. Buying the bond so cheaply tells us that the investors return at maturity A) will be low, reflecting the low price paid. B) increases. C) is unaffected. D) decreases.

A $1,000 par value bond purchased at $725 is bought at a discount to par. Whenever a bond is purchased for an amount less than will be received at maturity ($1,000 par), the discount initially paid increases the return. In other words, in addition to receiving the coupon interest payments, the investor will also receive at maturity an additional $275 more than the $725 paid when the bond matures.

Which of the following best describes what 1 bond point equals? A) 1% of $100 B) 10% of $1,000 C) 10% of the current market price D) 1% of $1,000

A bond point is 1% of the bond's par value of $1,000 ($10).

A bankers acceptance are short-term drafts, making them what type of instrument?

A money market instrument.

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) Notes and bonds D) 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.

A penny stock is an unlisted stock valued at less than $____ per share?

A penny stock is an unlisted (not listed on a U.S. stock exchange) security offered at less than $5 per share.

For preferred shares, the annual dividend payment is A) subject to variation and stated as a percentage of its par value. B) fixed and stated as a percentage of its current market value (CMV). C) fixed and stated as a percentage of its par value. D) subject to variation and stated as a percentage of its current market value (CMV).

A preferred stock's annual dividend payment is its fixed rate of return, unlike that of common shares where the dividend is subject to variation.

A financial institution, in order to raise cash on a short-term basis, sells some of the securities it owns, with an agreement to buy them back at a later date at a slightly higher price. This is known as a what?

A repurchase (repo) agreement is one where a financial institution, such as a bank or a broker-dealer, raises cash by temporarily selling some of the securities it holds with an agreement to buy back the securities at a later date at a slightly higher price. Hence, agreement to do a transaction and then reverse the transaction in the future.

Which of the following corporate actions are designed to allow investors to buy shares of stock under specific, defined conditions? A rights offering A forward split Issuing warrants A stock dividend A) I and III B) II and III C) I and IV D) II and IV

A rights offering allows current shareholders to purchase enough additional stock to maintain their proportionate ownership of the corporation, in the event more shares are sold to the public. The shareholders may purchase the stock before the public has access and will purchase the stock at a discount from its market price. Warrants allow the owner to purchase a certain number of shares of stock at a specified price at a specified time later. Splits and stock dividends, the other choices, do not involve the purchase of stock but instead are adjustments to existing stock positions.

A serial bond is best described as A) portions of bond principal scheduled to mature at intervals over a period of years until the entire balance has been repaid. B) bonds in which the principal is secured by food-quality grains. C) debt structured so that the principal of the whole issue matures at one time. D) the issuer repaying part of the bond's principal before the final maturity date, but paying off the largest portion of the bond at maturity.

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

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) II and III B) I and III C) II and IV D) I and IV

A. 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.

An investor holds a debt security backed by ad valorem taxes. This security is issued by A) a city or local municipality. B) the federal government. C) either a state or city government. D) a state.

Ad valorem taxes are real estate taxes. Real estate taxes can only back debt securities issued by towns, cities, or counties (never states). These are collectively known as local municipalities.

During times when interest rates are rising, which of the following preferred are likely to pay a higher annual dividend? A) Convertible B) Callable C) Participating D) Adjustable rate

Adjustable-rate preferred dividends are tied to benchmark interest rates such as Treasury securities. As these rates fluctuate up and down, so do the dividends on the adjustable shares.

Subordinate debentures are senior to which of the following fixed income securities? A) Mortgage bonds B) Collateral trust certificates C) Preferred stock D) Equipment trust certificates

All debt securities are senior to equity securities.

An ADR is created when what type of shares of a foreign issuer are purchased in the foreign company's home market?

An ADR is created when common shares of a foreign issuer are purchased in the foreign company's home market. These shares are then deposited in a foreign branch of a U.S. bank and a receipt (the ADR) is created. Each ADR may represent one or more shares of foreign-company stock held on deposit.

If a preferred shareholder received a $3.50 annual dividend each year, it could be assumed that A) these shares are trading at $35.00. B) the shares had increased by 3.5% each year. C) this is a 3.5% preferred class. D) the common shareholders receive the same $3.50 annual dividend.

An annual dividend of $3.50 simply tells you that this is a 3.5% preferred class of stock (3.5% × par ($100) = $3.50) or ($3.50 ÷ par ($100) = 0.035). The current market value is not used to calculate the fixed dividend, nor does this dividend amount tell us what common shareholders received.

Mr. Smith bought an American depositary receipt (ADR) in a French company at $13.03 and recently sold the shares for $24.88. How would this trading profit be taxed? A) The profit is taxed as income in France only. B) The profit is taxed as a capital gain in the United States only. C) The profit is taxed as income in the United States only. D) The profit is not taxed because ADRs are tax-exempt securities.

Any trading profits (capital gains) from an ADR would only be taxable here in the United States. A capital gain is the profit realized when buying then selling the shares. Remember, dividends paid to a U.S. investor may be subject to a withholding tax by the home country of the underlying foreign stock issuer. In many cases, the amount of tax withheld by the foreign government is applied as a credit against the investor's U.S. tax liability.

A bond is trading at a price of $1,150 in the secondary market. If purchased at this price and held to maturity, this will A) give the investor a $150 return at maturity. B) have no impact on return C) increase the investor's return. D) reduce the investor's return.

At a price of $1,150, this bond is trading at a premium—in this case, a $150 premium. Because the bond will mature at par value ($1,000), any premium paid at the time of purchase will reduce the overall return. Conversely, if purchased at a discount and held to maturity, the amount representing the discount increases the investor's return.

Most municipals pay interest that is tax free at the federal level. Which one of the following is a taxable municipal bond? A) BABs B) TANs C) RANs D) GANs

BABs are Build America Bonds that were issued without the tax free status. The others are tax-free municipal notes. Though BABs are not covered in the SIE material, the other three items are, and are all tax free. Note that industrial development revenue bonds (IDRs or IDBs) are also taxable for investors subject to the alternative minimum tax (AMT).

Short-term securities that generate funds for a municipality that expects alternate longer-term financing include all of the following except A) real estate investment trusts (REITs). B) bond anticipation notes (BANs). C) revenue anticipation notes (RANs). D) tax anticipation notes (TANs).

BANs. TANs, for example, are used to finance current operations in anticipation of future tax receipts. This helps municipalities to even out cash flow between tax collection periods. Similarly, BANs will be converted to long-term financing through the sale of bonds, and so on. REITs are not a municipal security. They issue shares of beneficial interest in a trust set up for real estate investment.

The repayment or maturity date of a banker's acceptance is normally which of the following? A) As short as 3 months or as long as 9 months B) As short as 1 day or as long as 30 days C) As short as 1 month or as long as 6 months D) As short as 1 day or as long as 270 days

Banker's acceptances are short-term time drafts, making them money market instruments. Maturity (payback) dates are normally between 1 day and 270 days (9 months).

What is a subordinated debt holder?

Bondholders that are paid last in liquidation priority

T-bonds are delivered in what form?

Book entry. U.S. Treasury-issued debt instruments are all issued in book-entry form.

Rule 144 imposes volume limitations on the number of shares that can be sold by 1. control persons selling registered stock held for one year. 2. control persons selling restricted stock held for two years. 3. nonaffiliates selling registered stock held for one month. 4. nonaffiliates selling restricted stock held for more than six months.

Both 1 & 2. Control persons are always subject to volume limitations. Nonaffiliates have no volume (or any other restrictions) when selling registered stock. If, however, the shares are restricted, volume limits for nonaffiliates are imposed for six months.

Common shareholders have the right to A) access a company's books and records with Securities and Exchange Commission (SEC) permission. B) no access to a company's books and records. C) full access to a company's books and records. D) limited access to a company's books and records.

By virtue of owning the company's common stock, shareholders have a limited right to review the company's books and records. For example, they have the right to examine the minutes of meetings of the board of directors (BOD).

Which of the following terms best describes a corporate debt instrument secured by a pledge by the issuer of property that consists of stocks or bonds of other corporations? A) Debenture B) Collateral trust certificate C) Equipment trust certificate D) Unit investment trust

Collateral trust bonds or certificates are issued by corporations that own securities of other companies as investments. The certificates are secured by a pledge of those securities as collateral.

A common stockholder's voting rights apply to which of the following? Election of the board of directors (BOD) Declaration of dividends Authorization or issue of more common shares Changing suppliers for raw material or parts used in production A) II and IV B) I and III C) I and IV D) II and III

Common stockholders never vote directly on dividend payment or size. They may elect the BOD indirectly influencing the policy on payment of dividends) and may vote on issues concerning the company's capitalization, such as the issuance of more common stock. They do not vote on day-to-day business decisions, such as suppliers used.

Which of the following preferred issues is most likely to fluctuate in line with the issuer's common shares? A) Participating B) Callable C) Adjustable rate D) Convertible

Convertible preferred shares can be converted into shares of the issuer's common stock. In this light, the value of a convertible preferred stock is linked to the value of the common stock and the convertible preferred share price tends to fluctuate in line with the common.

Accrued interest on corporate bonds is calculated using A) actual days in each month and actual days in the year. B) 30 days in each month and 360 days in each year. C) actual days in each month and 360 days in each year. D) 30 days in each month and 365 days in each year.

Corporate and municipal bonds use the artificial 30-day, 360-day calendar, but government bonds use actual days.

Promissory notes are a form of A) Treasury notes issued by the U.S. government. B) jumbo CDs issued by banks. C) commercial paper issued by corporations. D) Treasury bills issued by the U.S. government.

Corporations issue short-term, unsecured commercial paper, known as promissory notes. The proceeds from these notes are generally used to fund such items as pending accounts receivable and seasonal inventory gluts.

Money market instruments can be associated with high-yielding debt instruments, true or false?

False. Money market instruments are highly liquid, short-term debt securities. The short time to maturity makes them less volatile and relatively safe, suitable to meet short-term investment horizons. In return for the safety, investors sacrifice high potential yields for low yields.

Which of the following regarding federal funds is true? A) These funds can provide long-term loans for Federal Reserve Board (FRB) members. B) These funds are the amount required to be held on reserve at the Federal Reserve Board (FRB). C) These funds may be loaned from one Federal Reserve Board (FRB) member bank to another. D) These funds can provide intermediate-term loans for Federal Reserve Board (FRB) members.

Federal funds are the excess amounts above the amount of a bank's deposits required to be held on reserve at the Federal Reserve member banks can lend these funds to one another to meet the FRB reserve requirements. These loans are very short term and, in most cases, are utilized overnight.

All of the following may be callable except A) muni bonds. B) corporate bonds. C) preferred stock. D) common stock.

Fixed income and debt securities may have a call feature. Common stock does not.

For restricted stock (unregistered) held by a nonaffiliated, which of the following applies? A) No holding period, but volume limits always apply B) Six-month holding period, with volume limits thereafter C) Six-month holding period, with sales allowed freely thereafter D) No holding period or any volume restrictions

For restricted stock (unregistered) held by a nonaffiliated, a six-month holding period before any sales can be made applies. After the holding period, sales can be made freely.

Of the following government-sponsored entities, which is backed by the full faith and credit of the U.S. government? A) GNMA B) All of these C) FNMA D) FHLMC

GNMA. FNMA and FHLMC are backed by the implied backing but not full faith and credit.

Common stockholders owning dividend paying stocks are exposed to A) current income risk but not market risk. B) market risk but not current income risk. C) neither market risk nor current income risk. D) market risk and current income risk.

In owning common shares, the investor stands to lose current income through dividend reduction or suspension (current income risk), as well as capital loss, should the market price decline (market risk).

Your client is about to retire and wants to rearrange his portfolio in order to have predictable income. Which of the following would not be a good investment vehicle? A) AA-rated debentures B) U.S. Treasury notes C) AA-rated mortgage bonds D) Adjustment bonds

Income bonds, also known as adjustment bonds, are issued when a company is reorganizing and coming out of bankruptcy. Income bonds pay interest only if the company has enough income to meet the interest payment. Therefore, the interest payments are not predictable, and they are not suitable for customers seeking income.

A company reorganizing with the intent to emerge from a bankruptcy is likely to issue which of the following type of bonds to accomplish that goal? A) Subordinated debt B) Debentures C) Adjustment bonds D) Mortgage bonds

Income bonds, also known as adjustment bonds, are used when a company is reorganizing. These bonds allow the issuer to only pay interest if the corporation has enough income to meet the interest payment obligations. This allows the corporation some flexibility while attempting to reorganize and emerge from bankruptcy.

T-bills are issued at par and have a stated interest rate, correct?

Incorrect. T-bills are issued at a discount, have no stated interest rate, and do not pay interest until maturity.

A Nasdaq stock trading at $3 per share is what kind of stock?

It's NOT a penny stock. If a stock is listed on an exchange or listed on Nasdaq, it is not a penny stock, regardless of price.

A bond's current yield (CY) measures its annual coupon payment relative to what?

Its market price. The CY measures a bond's annual coupon payment (interest) relative to its market price, as shown in the following equation: annual coupon payment ÷ market price = current yield.

Treasury note (T-note) interest is stated as A) a percentage of the purchase price. B) a discount to the face value. C) a percentage of par value. D) a premium over the price paid.

Like Treasury bonds (T-bonds), Treasury notes (T-notes) have interest stated as a percentage of par value. Example: Par value $1,000, with 8% interest, equals $80 interest per year (0.08 × $1,000 = $80).

Warrants are ________-term.

Long-term. It's a long term instrument that gives the investor the option of buying shares at a later date at the specified (exercised) price.

Which of the following statements is correct concerning the pricing of American depositary receipts (ADRs)? A) ADR pricing is dollar-based using an end of day net asset value (NAV). B) ADRs are priced in foreign currency. C) ADR pricing is dollar-based and fluctuates throughout the day. D) ADR pricing is dollar-based using an end of day public offering price (POP).

Many ADRs are listed on exchanges such as the NYSE or Nasdaq. ADRs trade throughout the day and settle in the same manner as would the shares of a U.S.-based company. ADRs are priced in U.S. dollars.

Money market debt instruments typically have maturities of A) 10-30 years. B) 1-2 years. C) longer than 2 years. D) 1 year or less.

Money market debt instruments typically have maturities of one year or less. Generally, securities with maturities of 1-10 years are considered intermediate term and those with 10 years or more to maturity are long term.

Municipal securities can be issued by A) states and the U.S. federal government. B) U.S. Treasury and local governments. C) states and local governments. D) corporations and local governments.

Municipal securities can be issued by state or local governments or by U.S. territories, authorities, and special districts.

Penny stock rules only apply to ______________ (solicited or unsolicited?) transactions, and statements of account activity ___________ (must or do not have to) be provided monthly when an account holds penny stocks.

Penny stock rules only apply to solicited transactions, and statements of account activity must be provided monthly when an account holds penny stocks.

Preferred shares have A) only the characteristics matching those of debt securities. B) characteristics of both equity and debt securities. C) characteristics of neither equity nor debt securities. D) only the characteristics matching those of equity securities.

Preferred shares are equity securities, but not only do they have the characteristics of equity securities, they share some of the characteristics of debt securities as well. The most notable characteristic is that a preferred stock's annual dividend represents its fixed rate of return, like the fixed rate of return for a bond (debt security).

The potential that inflation will devalue the fixed dividend income payments received by preferred shareholders is known as

Purchasing power risk. Remember that the fixed dividends received by preferred shareholders are a stated percentage of par value. Purchasing power risk is the possibility that the income produced via the fixed dividend received will not purchase as much in the future for preferred shareholders as it does today due to inflation.

Repurchase agreements and reverse repurchase agreements are A) intermediate-term notes. B) equity instruments. C) money market instruments. D) long-term bonds.

Repurchase (repo) agreements and reverse repurchase agreements are short-term debt securities and are, therefore, a type of money market instrument.

For revenue bonds issued by a state or municipality, which of the following is true? A) Interest and principal payment is guaranteed. B) Interest and principal payment is backed by the full faith and credit of the issuer. C) The bonds carry an unqualified promise to pay interest and principal backed by the power of the issuer to levy taxes. D) Interest will be paid only if the enterprise owned and operated by the state or municipality has sufficient earnings to cover the interest payments or the debt service reserve.

Revenue bonds are not backed by the full faith and credit of the municipality that issues them. Instead, they are backed by the revenue produced by the project or facility that they support. In that light, the revenue must be large enough to cover the interest and principal payments if those obligations are to be met.

An affiliate holding unregistered shares can sell under Rule 144 A) two times a year. B) four times a year. C) as often as wished. D) one time a year.

Rule 144 allows an affiliate to sell the greater of 1% of the outstanding shares or the average of the last four weeks' trading volume with each Form 144 filing. The filing is good for 90 days (three months), which would allow for as many as four filings per year.

Rule 144 stipulates that after holding restricted stock fully paid for six months, an affiliate may begin selling shares A) subject to volume restrictions within any 90-day period. B) subject to the volume restrictions on any single day. C) completely unrestricted. D) at the discretion of the issuer's board of directors (BOD).

Rule 144 stipulates that after holding restricted stock fully paid for six months, an affiliate may begin selling shares but is subject to volume restrictions within any 90-day period.

A secured debt security is backed by what?

Secured debt securities are backed by real assets.

Rights are ________-term.

Short-term. A company raises money by selling additional shares via a rights offering, allowing stockholders to purchase common stock below the CM price.

Stock rights, also known as preemptive rights or subscription rights, are issued to current stockholders in the event more stock is to be sold. This allows them to purchase the new stock at _________ (above or below) the current market price for a period of four to six weeks before the stock is offered to the public. Hence, they are __________ (long or short term). Warrants may be issued at any time and allow the holder to purchase the stock at a price _________ (above or below) the current market, for a period of typically two years or more. Hence, they are __________ (long or short term) term.

Stock rights, also known as preemptive rights or subscription rights, are issued to current stockholders in the event more stock is to be sold. This allows them to purchase the new stock at below the current market price for a period of four to six weeks before the stock is offered to the public. Hence, they are short term. Warrants may be issued at any time and allow the holder to purchase the stock at a price above the current market, for a period of typically two years or more. Hence, they are long term.

What is OTC stock?

Stock that is non-Nasdaq listed. If it's trading under $5 per share, it's a penny stock

Which of the following is true for U.S. Treasury-issued securities? A) T-notes and T-bills pay interest annually. B) T-bills and T-bonds pay interest semiannually. C) T-notes are purchased at a discount to par, while T-bonds are purchased as a percentage of par. D) T-bills are purchased at a discount, while T- bonds are purchased as a percentage of par.

T-bills are purchased at a discount, while T- bonds and T-note are purchased as a percentage of par. T-notes and T-bonds pay interest semiannually, but interest on T-bills is not paid until maturity (the difference between the discount paid and par value received).

Which of the following earn interest but don't pay interest? A) T-notes B) T-bills C) None of these D) T-bonds

T-bills are sold at a discount and pay par at maturity. The difference between the discounted price and par is considered interest, but T-bills don't make interest payments.

Control stock are those owned by directors, officers or persons who own or control what percent of the issuer's voting stock?

Ten percent

Which government bond is an important benchmark for interest rates?

The 10-year T-note yield is an important benchmark for interest rates.

Which of the following regarding capital and money markets is true? A) Money markets provide long-term financing. B) Capital markets provide short-term financing. C) Capital markets provide intermediate to long-term financing. D) Money markets provide intermediate to long-term financing.

The capital market serves as a source of intermediate to long-term financing. The money market, on the other hand, provides short-term financing.

When interest rates in the marketplace move up, what happens to the coupon rate on existing bond? A) The coupon rate moves in the same direction. B) The coupon rate moves in the opposite direction. C) The movement depends on the duration of the bond. D) 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 the following expressions describes the current yield of a bond? A) Yield to maturity divided by par value B) Annual interest (coupon) payment divided by par value C) Annual interest (coupon) payment divided by current market price D) Yield to maturity divided by current market price

The current yield on a bond is calculated by dividing the annual interest (coupon) payment by the current market price of the bond: Annual coupon payment ÷ market price = current yield.

Which of the following sell transactions is not subject to the holding period restriction specified in SEC Rule 144? A) Stock acquired by a corporate affiliate in a private placement B) Stock acquired on the NYSE by a corporate affiliate C) Unregistered stock acquired by a corporate affiliate in a stock option program D) Unregistered stock acquired by a nonaffiliate under an investment letter

The holding period rule applies only to unregistered stock, which may or may not be control stock. Unregistered stock results from either private placements or the exercise of a corporate stock option. Because this question asked which securities were not subject to the Rule 144 holding period, only stock acquired on the NYSE by a corporate affiliate is the correct answer. However, the affiliated person is subject to volume restrictions.

The hope with warrantsis that the market price will rise __________ the exercise price before the warrant expires.

The hope with warrantsis that the market price will rise above the exercise price before the warrant expires.

Which of the following preferred stocks allows the issuer to pay the shareholders par and cease dividend payments following a stated period? A) Callable B) Redeemable C) Adjustable D) Puttable

The issuer can pay off callable preferred at any time after the call protection period, and dividends will cease.

Unsecured debts are backed by what?

The issuer's full faith and credit, which includes characteristics such as credit rating, financial stability, and business reputation.

A corporate bankruptcy liquidation took place. Of the following—general creditors, secured bondholders, subordinated debenture holders, accrued taxes—who was paid first and who was paid last? A) General creditors first, secured bondholders last B) Secured bondholders first, subordinated bondholders last C) Secured bondholders first, general creditors last D) Secured bondholders first, accrued taxes last

The liquidation priority is as follows: secured debt, unsecured debt and general creditors, then subordinated debt, and then equity holders with preferred shareholders first, followed by common shareholders. Therefore, of those that are listed here, secured bondholders would be paid first, and subordinated bondholders last. General creditors and taxes are paid at the same level.

How long must customer complaints be kept on file by the broker-dealer? A) Two years B) Four years C) As long as the firm is in business D) Three years

The rule requires customer complaints to be kept on file for four years.

Bonds can typically be issued with A) term, serial, or balloon maturities. B) term, series, or balloon maturities. C) term or balloon maturities only. D) term or series maturities only.

The three types of maturities that bonds can typically be issued with are term, serial, or balloon maturities. Note that there is no series maturity type.

When interest rates in the open market move up or down, a bond's coupon rate will do what? What about the price of the bond?

Though the price of a bond will react to market forces, such as supply and demand, and be interest-rate sensitive (inverse), the coupon is always the same: A fixed percentage of par value established by the issuer when the bond was first issued.

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

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.

Treasury bills A) are always issued at a slight premium to par value. B) have the highest interest-rate risk of all Treasury securities. C) can be issued with initial maturities of 3, 12, 24, and 50 weeks. D) are issued at a discount without a stated interest rate.

Treasury bills are always issued at a discount, without a stated interest rate. Because of their short-term maturities, they have the lowest interest-rate risk for Treasury securities, not the highest. They are issued with maturities of 4, 13, 26, and 52 weeks.

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

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

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

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

Exempt from the penny stock rules are A) all transactions. B) both solicited and unsolicited transactions. C) unsolicited transactions. D) solicited transactions.

Unsolicited transactions (those not recommended by the broker-dealer or registered representative) are exempt from the penny stock rules. Solicited transactions are nonexempt and the rules therefore apply.

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

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.

Assuming $1,000 par value, a bond priced at $1,200 is trading at A) a discount. B) par. C) a premium. D) discount to premium.

When a bond is priced above par value, it is trading at a premium (premium to par).

The growth potential in the price of preferred shares is generally considered to be A) unrelated to the financial well-being of the issuer. B) less than that of the issuer's common shares. C) no different than that of the issuer's common shares. D) greater than that of the issuer's common shares.

While the growth potential of both common and preferred shares can be tied to a company's financial well-being, preferred share growth is generally less than that of the common shares. The trade-off is that the preferred shares have preference with dividends received, enjoy a fixed rate of return via those dividends, and have a priority claim over common shareholders in the event of bankruptcy and the dissolution of assets.

A bond that is structured so that a portion of the principal is scheduled to mature at intervals over several years is A) a balloon bond. B) a serial bond. C) a term bond. D) a series bond.

With a serial bond, portions of the issue mature over a period of years until the entire issue is paid.

Bond Maturities

With a term bond, the entire offer matures at the same time. A serial bond has portions maturing over a period of years. A balloon is a hybrid of a term and a serial maturity. Series is not a type of bond maturity.

Municipal bonds can be issued by any government entity except

the federal government