Chapter 1.2
a treasury bond quoted at 98.08 would have a dollar value of
a) $98.60 b) $980.80 c) $982.50 d) $986.00 C) a treasury bond quoted at 98.08 would have a dollar value of $982.50 98x10 = $980 and 0.08/32 x 10 = $2.50 govt bonds are quoted in 32nds so anything after the decimal is put over 32. $980 + $2.50 = $982.50
which of the following are quotes on govt bonds 1. 85.04 2. 5.5% 3. 95.08 4. 78 1/8
a) 1 and 2 b) 1 and 3 c) 1 and 4 d) 2 and 4 B) 85.04 and 95.08 are quotes on govt bonds. 5.5% is a municipal bond quote and 78 1/8 is either a quote on a corporate bond or a municipal bond
which two of the following might allow a bond issuer to pay a lower coupon on a bond issuance when compared to similar bonds? 1. a non-convertible feature 2. a conversion feature 3. a non-callable feature 4. a call feature
a) 1 and 3 b) 1 and 4 c) 2 and 3 d) 2 and 4 C) anytime that a bond issuer provides something of benefit to the bond buyer, the bond issuer may be able to pay a lower coupon rate or sell the bonds for a higher price. in this situation, the conversion feature is a benefit to investors, so it may allow a bond issuer to pay a lower coupon than when compared to non-convertible bonds. as well, the non-callable feature ensures that the bonds will not get called away from the bond buyer, so the bond issuer may be able to pay a lower coupon than when the bond issuer issues callable bonds
which of the following statements are true regarding characteristics of treasury bonds? 1. have maturities of 2-10 years 2. have maturities of 10-30 years 3. may be issued as callable 4. not issued as callable
a) 1 and 3 b) 2 and 3 c) 1 and 4 d) 2 and 4 B) treasury bonds have maturities of 10-30 years and may be issued as callable. treasury notes have maturities of 2-10 years and are not issued as callable
when it comes to pricing a zero coupon bond, which of the following are true 1. the pricing of a zero coupon bond will factor in the rate of inflation as a key consideration 2. the pricing of zero coupon bonds is very similar to pricing of normal bonds, aside from the fact that semi-annual interest payments will not be received 3. the pricing of zero coupon bonds takes into consideration the original yield, accreted value, and face value, as well as market conditions 4. the pricing of zero coupon bonds takes into consideration the bond's coupon rate and accrued interest
a) 1 and 3 b) 1 and 4 c) 2 and 3 d) 2 and 4 C) though in some pricing models the rate of inflation can be included, it is not ever going to be a key consideration when computing the price of a zero coupon bond. more accurately, the bond's original yield, accreted value, face value, as well as market conditions will play key roles in pricing of a zero coupon bond. in terms of computing the market prices or regular bonds and zero coupon bonds, the manner in which the two are priced is very similar. most often, a present value or overall yield to maturity approach is taken. a key difference is adjusting a regular bond's pricing for incoming coupon payments which do not occur with zero coupon bonds. zero coupon bonds do not have a coupon rate or accrued interest, since zero coupon bonds do not pay semi annual interest
TIPs are treasury inflation protected securities. how is the appreciation on the principal value of TIPs treated for taxation purposes 1. it must be reported immediately 2. it must be reported annually 3. it is subject to taxation at the time reported 4. interest is subject to federal tax
a) 1 and 4 b) 2 only c) 2 and 3 d) 2, 3, and 4 D) appreciation on the principal value of TIPs must be reported annually and is subject to taxation at the time reported (phantom income). interest is subject to federal tax but exempt from state and local tax
ABC corporation wants to issue $20 mil of debentures each of which would be convertible into 20 shares of common stock. how many common shares are issued if all the debentures are converted
a) 100,000 b) 200,000 c) 400,000 d) 600,000 C) you get 20 shares of common stock per bond. 20 mil/1000 par value = 20,000 bonds owned in total. for each bond, you can receive 20 shares of stock. 20,000 x 20 = 400,000 common shares issued
regular way settlement for treasury inflation protected securities (TIPs) in the primary auction market is
a) T + 1 b) T + 2 c) T + 3 d) T + 4 C) regular way settlement for treasury notes, bonds, and TIPs is T + 3 in the primary auction market. regular way settlement is T + 1 in the secondary market
all of the following securities are issued by the US govt or a US govt agency EXCEPT
a) a General Obligation (GO) bond b) a GNMA bond c) a Treasury bond d) a FNMA bond A) GO bonds are issued by municipalities. GOs are backed by the taxing authority of the municipality which issued them (state and local govts). treasury bonds are direct debts of the US govt and are issued through the treasury department. GNMA and FNMA are both govt agencies which issue bonds associated with collateralized mortgage debt
of the instruments listed below, which is the most actively traded in the secondary market?
a) certificates of deposits b) treasury bills c) commercial paper d) bankers' acceptances B) t-bills are short term and safe. they have a very active secondary market as compared to the other choices
which of the following are collateralized by zero-coupon US Treasury Bonds
a) domestic corporate bonds b) foreign corporate bonds c) foreign government bonds d) brady bonds D) brady bonds are US dollar denominated bonds that are issued by developing countries. most bonds are collateralized by US Treasury zero coupon bonds
a term used to describe a junk bond (credit rating BB or lower) would be a:
a) high yield bond b) investment grade bond c) low yield bond d) high grade bond A) junk bonds or high yield bonds are issued by companies that have little or no track record of sales and earnings and the bonds would be rated BB or lower or not at all
ABC's callable convertible 4% preferred stock ($100 par) is called for $70 per share. it is convertible into common stock at $25 per share. the current market value of the common stock is $15.50 per share. an ABC preferred shareholder should:
a) hold the preferred stock to continue to get interest b) tender the preferred stock for the call c) convert to common and sell the common immediately d) convert to common bc the common stock is selling above parity B) if the company calls the stock, the stockholder must tender it, unless the stockholder has already converted it to common stock. if the stockholder tenders the preferred, he will get $70 per share. if the stockholder converts, he will get 4 shares ($100/$25 = 4) of common stock which he can sell for $15.50 per share, then receiving $62 for each preferred share. the $70 call price would give the investor a $8 profit over converting to common
all of the following are characteristics of commercial paper except
a) it is normally issued at a discount b) it is a non-negotiable promissory note issued by a corporation c) it can be issued directly by the issuer d) the maximum maturity is normally 270 days B) commercial paper is an unsecured promissory note issued by corporations that can be traded negotiable in the secondary market. all of the other choices are correct
when do foreign bonds pay interest and principal
a) pay principal at set intervals and interest at maturity b) pay interest monthly, and principal at set intervals c) pay principal and interest at maturity d) pay interest at set intervals and principal at maturity D) foreign bonds pay interest at set intervals and principal at maturity, similar to US govt and corporate bonds
if a corporate convertible bond with a conversion price of $25 is currently trading at 80, while the common stock is at $23, this situation would best be described as:
a) premium b) discount c) parity d) disparity D) conversion parity means that the current market value of a convertible bond = the current market value of the shares of the common stock into which it is convertible. disparity means that they are unequal. there is disparity bc the convertible bond is selling for $800 (quoted at $80) and it is convertible into common shares selling for $920 ($1000 par value / $25 conversion price = 40 shares x $23 per share current market value)
an investor bought a 3 month treasury bill at a discount and held it to maturity. for tax purposes, the difference between the purchase price and the maturity value would be
a) short term capital gain b) long term capital gain c) interest income d) tax exempt C) treasury bill discounts are taxed as interest income to investors and not as a capital gain
which of the following treasury securities best preserves an investor's capital?
a) treasury notes b) treasury bills c) treasury inflation-protected securities (TIPs) d) treasury bonds C) TIPs preserve an investor's capital best among all Treasury securities bc they have an indexing feature
which of the following investments is best described as a debt security that matures in one year or less that is considered close to riskless?
a) zero-coupon treasury securities b) CMOs (collateralized mortgage obligations) c) money market instruments d) notes issued by the US Treasury C) money market instruments are debt securities that mature in one year or less and are considered to be close to riskless. zero coupon treasury securities may or may not mature in one year or less (T-bills: yes, T-notes and T-bonds: no). CMOs do not mature in one year or less
