Bonds
Which of the following corporate bonds would be considered most secured? [A]Mortgage bonds[B]Debentures[C]Subordinated debentures[D]Income bonds
A Mortgage bonds would be considered the most secured bond of those listed because it is backed by some asset of the corporation. Debentures are only backed by the good faith and credit of the corporation. Income bonds only pay interest to its holders if there are profits during the payment period.
Which statement is correct regarding negotiable CDs? [A]They can be issued as long-term CDs. [B]Minimum deposit is $10,000. [C]No penalties incurred if CD is cashed in prior to maturity. [D]They are guaranteed by the U.S. Treasury.
A The correct statement is they can be issued as long-term CDs, which could have maturities of 3,5, or even 10 years. The other statements are incorrect: minimum deposit is $100,000; penalties will be incurred if cashed in prior to maturity and they are not guaranteed by the U.S. Treasury (but they are by the banks that issue them).
Place the following investments in order of highest anticipated yield to lowest anticipated yield: Municipal Bonds U.S. Government Securities Corporate Bonds [A]III, I, II[B]II, I, III[C]I, II, III[D]II, III, I
A The greater the risk, the greater the reward, so the order would be Corporate Bonds (greatest risk), Muni Bonds (less risk), and then Government Securities (least risk).
Of the securities listed below, which one is subject to Federal, State, and local tax? [A]Treasury Notes[B]Equipment Trust Certificates[C]Federal Farm Credit notes[D]Federal Land Bank Bonds
B Equipment Trust certificates are issued by corporations and are fully taxable.
An investor who purchases a CMO (Collateralized Mortgage Obligation) can expect distributions of cash how frequently? [A]The investor can expect distributions on a weekly basis. [B]The investor can expect distributions on a monthly basis. [C]The investor can expect distributions on a quarterly basis. [D]The investor can expect distributions on a semi-annual basis.
B Since CMOs are backed by mortgages, and home owners make mortgage payments monthly, investors owning CMOs would also receive monthly payments.
Municipal securities which have interest and principal payments dependent on rental income from corporate facilities built to improve local environment are [A]special tax bonds. [B]industrial revenue bonds. [C]special assessment bonds .[D]limited tax general obligation bonds.
B The key words in the questions are "corporate facilities." Municipal bonds issued on behalf of corporations are called Industrial Revenue Bonds.
The "Call Protection" period on an outstanding callable bond would be most advantageous to which of the following? [A]Common stock holder[B]Issuer of the bonds[C]Bondholder[D]Preferred stockholders
C Call protection is the time period during which the bonds may not be called, which is most beneficial to the bondholders.
Monthly interest received from collateralized mortgage obligations (CMOs) is [A]tax-free at all levels.[B]taxable only at the state level.[C]taxable at the federal, state, and local levels.[D]taxable only at the federal level.
C Interest payments from CMOs are allocated pro-rata to each tranche based on formulas disclosed in relation to the CMO. The interest is paid monthly and can be subject to federal, state, and local income taxes, where applicable.
Greg has been investing in stocks for years and now decides to buy some Treasury Securities in the secondary market. He enters an order to buy 10 US T-Bonds on Friday, September 15th. When can Greg expect settlement? [A]Wednesday, September 20th, trade date plus three business days[B]Tuesday, September 19th, trade date plus two business days[C]Monday, September 18th, trade date plus one business day[D]Friday, September 15th, for same-day settlement
C US Government Securities trading in the secondary market will settle T+1 business day. In this case, T+1 puts settlement date on Monday, September 18th due to the weekend. This differs from settlement of common stocks in the secondary market, which normally settle T+2. Settlement of US Government Securities in the primary market from auction is T+3.
The two issuance formats used when Corporate Bonds are issued are Serial Form and Series Form. In describing Serial Form, the issues typically have which two features? Different issuance dates A balloon maturity Different maturity dates The same maturity date [A]I and III[B]I and IV[C]II and III[D]II and IV
C When you think about Serial bonds, think of what you do when you eat a bowl of cereal for breakfast - you would issue it all at once, and then it would have staggered maturity dates and if no one was watching you, you would make a balloon payment at the very end!!! Also, most serial bonds have a balloon payment after the staggered maturity dates.
Interest payments to investors on CMOs are subject to which of the following? [A]State income tax only [B]Federal income tax only [C]Both federal and state income tax [D]Neither federal nor state income tax
C CMO interest payments are subject to BOTH Federal and State income tax.
What is the current yield on a corporate bond trading at 103 with a 7% coupon? [A]6.3%[B]6.5%[C]6.8%[D]7.0%
C The current yield on a corporate bond equals the annual interest income divided by the market price of the bond ($70 / 1,030 = 0.06786 or 6.8%). In this case, the annual interest income is $70 ($1,000 par value x 7% coupon = $70) and the market price of the bond is $1,030. (103 points x $10 per point = $1,030).
Assume your customer has 300 shares of common stock with a current market value of 21.25 and 20 first mortgage bonds at par. Both increase 3/4 of a point. What is the increase in the value of his holdings? [A]$224[B]$240[C]$350[D]$375
D 1 pt on a stock=$11 pt on a bond=$103/4 pt on a stock=.75per shr3/4 pt on a bond=7.50per bond.75 x 300 shrs=$225increase on Stock7.50 x 20 bonds=$150increase on bonds$375Overall increase in value
Collateralized Debt Obligations (CDOs) can be backed by all of the following, EXCEPT: [A]Auto loans[B]Credit card debt[C]Mortgages[D]A basket of stocks
D CDOs are asset-backed debt securities. They can be backed by various assets such as mortgages, auto loans, corporate debt, and credit card debt. CDOs would NOT be backed by stocks. Exchange-traded funds (ETFs) would be created using a basket of stocks.
An investor buys two bonds: a 7.5% bond and a 8.5% bond, maturing in 2030, and at a 6.00 basis (ytm). The price of both of the bonds moves to 90.5. Which bond is likely to have the most price appreciation? [A]The 7.5% bond[B]The 8.5% bond[C]Both will appreciate by the same amount.[D]Neither, because the market price decreased.
D The bonds were purchased with a 6% basis (ytm) when the coupons were higher at 7.5% and 8.5%. This indicates that the bonds had been purchased at a premium, or at a value higher than $1,000 (the par value). The question states the price of both bonds goes to 90.5 or $905, which is a quote at a discounted price (below par value); therefore, the price of the bonds would have declined. D is the correct answer.
If yields on all marketable fixed income bonds increase approximately 1%, which of the following is correct concerning changes in bond prices? [A]There will be no changes in bond prices[B]The prices of short-term and long-term bonds will decrease by exactly the same amount[C]The prices of short-term bonds will decrease more than the prices of long-term bonds[D]The prices of long-term bonds will decrease more than the prices of short-term bonds
D When interest rates change, prices of short term bonds react the quickest but long term bond prices react the greatest.
What is the amount of interest payable per year on a $1,000 par value 5% bond selling at 80 and redeemable at par in 10 years? [A]$10[B]$40[C]$45[D]$50
D Annual interest is the coupon rate (5%) times par ($1000) or in this case $50
Most CMOs carry which of the following credit ratings? [A]A[B]AA[C]AA+[D]AAA
D Most CMOs carry a AAA credit rating because the mortgages in the portfolio are excellent mortgages such as Fannie Mae's and Ginnie Mae's.
Which of the following would represent a quote for a railroad bond? [A]106 1/2[B]106 16/32[C]106.50[D]106.16
a A railroad bond quote would be a corporate bond. Corporate bonds are quoted in eighths only (1/8). (They will use the lowest denominator in the quote, for example: 2/8 = 1/4, 4/8 = 1/2) Government securities are the only securities quoted using decimals and 32nds. Last, 16ths are not normally used in quoting corporate or government securities.
If a bond has a Coupon Rate of 7% and a Basis of 6%, the bond is trading at a: [A]Premium[B]Discount[C]Parity[D]Disparity
a Whenever a bond's coupon rate is higher than the basis, the bond is trading at a premium.
The following bond offerings have identical maturity dates. Which would result in the highest dollar purchase cost to the investor? [A]4 7/8% coupon offered on a 5.20 basis[B]5 1/4% coupon offered on a 5.00 basis[C]5 1/2% coupon offered on a 5.50 basis[D]5 7/8% coupon offered on a 5.95 basis
b "Highest dollar purchase cost" means we bought the bond at a premium. When a bond is purchased at a premium, the coupon will be higher than the basis (ytm). There is only one answer in which the coupon is higher than the basis. Answer A is purchased at a discount. Answer B is purchased at a premium. Answer C is purchased at par. Answer D is purchased at a discount.
Brady is a municipal finance professional for XYZ Municipal Broker-Dealer. He lives in Little Town, USA, where his neighbor, Drew, is running for mayor. Brady wants Drew to win and has contributed $150 to his election campaign. XYZ Broker-Dealer has been working with Little Town, putting together a new issue of municipal bonds. Based on MSRB Rules, what additional amount, if any, could Brady contribute to Drew's campaign without exceeding the allowable contribution limit to ensure there is no impact for XYZ's ability to continue the business relationship with Little Town, USA? [A]$250[B]$100[C]$75[D]$ 0
b Under MSRB Rules, contributions cannot exceed $250 per election if the individual can vote in the election. Brady has already contributed $150, therefore he would only be allowed to contribute another $100 to stay within the $250 limit. Do not confuse this MSRB Rule with the SEC Pay-to-Play rule limit of $350.
The effect of steadily declining interest rates on the secondary bond market is: Yields decrease Prices decrease Yields increase Prices increase [A]I, II[B]I, IV[C]II, III[D]III, IV
b When interest rates decline, yields decline, and prices rise. Think about the see-saw.
The Trust Indenture Act of 1939 regulates corporate debt issues and requires the designation of a trustee. What duty does this trustee have? [A]The trustee is charged with ensuring that the proper filing procedures take place with relation to the issue and SEC registration.[B]The trustee is charged with allocating any remaining bonds that may not have been sold in the initial issuance.[C]The trustee is charged with acting on behalf of bondholders and ensuring that the rights of these bondholders are not infringed upon.[D]The trustee is charged with being the liaison to the SEC in relation to all matters associated with the bond issue.
c The Trust Indenture Act of 1939 pertains to corporate debt issues and requires that each corporate debt issue has an indenture and a trustee. The trustee's main function is the representation of bondholders and ensuring the safeguarding of bondholder rights.
When interest rates change, prices of short term bonds react the quickest but long term bond prices react the greatest. [A]current yield[B]coupon rate[C]basis or yield to maturity[D]stated discount
c When a bond is purchased at a discount, the yield to maturity will always be greater than the current yield or coupon rate because the calculation takes into consideration the difference between the price the investor paid and what the investor will receive at maturity which would increase the overall yield since the investor would have paid less than $1,000 (discount) but would receive $1,000 par value at maturity.
Which of the following represents funded debt? [A]U.S. Treasury note[B]municipal bond[C]corporate mortgage bond[D]flower bond
c Funded Debt is a corporate term used to describe debt that has one year or more to maturity, therefore the corporate mortgage bond would represent funded debt.