Chapter 2
Expressed as a percentage of par, one basis point equals:
A) 1/1000 of 1% B) 1/10 of 1% C) 1/100 of 1% D) 10% Your answer, 1/100 of 1%, was correct!. One basis point equals 1/100 of 1% of par. 1% of par ($1,000) equals $10, therefore one basis point equals 1/100 of $10 or $.10 (ten cents). Reference: 2.1.5.1 in the License Exam Manual.
A bond would be considered speculative below which of the following Standard & Poor's (S&P) ratings?
A) B. B) BBB. C) A. D) BB. Your answer, BBB., was correct!. A rating of BBB is the lowest investment-grade rating assigned by Standard & Poor's. Any rating beneath this is considered speculative.
A corporation is likely to call eligible debt when interest rates are:
A) declining. B) volatile. C) stable. D) rising. Your answer, declining., was correct!. A corporation generally calls in its debt when interest rates are declining, in order to replace old, higher interest-rate debt with new, lower interest-rate issues.
If interest rates are falling, issuers will likely call which of the following bonds?
Bonds with low coupons. Bonds with high coupons. Bonds trading at a discount. Bonds trading at a premium. A) II and IV. B) I and III. C) II and III. D) I and IV. The correct answer was: II and IV. An issuer will call higher coupon bonds first because the interest payments on them are more costly to the issuer than those for lower coupon bonds. Bonds with higher coupons are the ones trading at a premium (above par) as they are more desirable to investors and demand for them pushes their prices up.
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The best time for an investor seeking returns to purchase long-term, fixed-interest-rate bonds is when: A) short-term interest rates are high and beginning to decline. B) long-term interest rates are low and beginning to rise. C) short-term interest rates are low and beginning to rise. D) long-term interest rates are high and beginning to decline. The correct answer was: long-term interest rates are high and beginning to decline. The best time to buy long-term bonds is when interest rates have peaked. In addition to providing a high initial return, as interest rates fall, the bonds will rise in value.
Which of the following would be considered funded debt?
A) Commercial paper maturing in 270 days. B) U.S. Treasury bonds maturing in 20 years. C) Municipal revenue bonds maturing in 10 years. D) Corporate debt maturing in 10 years. The correct answer was: Corporate debt maturing in 10 years. Funded debt is simply another name for medium- to long-term corporate debt. If a corporate bond has 5 or more years to maturity, it is said to be funded debt of the issuer.
Moody's bond ratings are based primarily on an issuer's:
A) expected marketability of a bond issue. B) expected trading volume of a bond issue. C) capitalization. D) financial strength. Your answer, financial strength., was correct!. Bond ratings are credit ratings for an issuer and measure the issuer's ability to repay principal and interest and, thus, its financial strength.
An investor anticipating a fall in interest rates would likely purchase:
A) noncallable and callable bonds. B) noncallable bonds. C) callable bonds. D) none of these. Your answer, noncallable bonds., was correct!. If rates fall, bonds are likely to be called.
A 7% bond is selling to yield 4-½%. The next time interest is paid, an investor who owns $10,000 face amount of the bonds will receive:
A 7% bond is selling to yield 4-½%. The next time interest is paid, an investor who owns $10,000 face amount of the bonds will receive: A) $350. B) $700. C) $225. D) $450. The correct answer was: $350. The bond is a 7% bond. The total amount paid each year on 10 bonds is $700. The amount paid for a 6 month's interest is $350.
A debenture maturing in 2012 is bid at 77-7/8 and asked at 78-3/4;. Which of the following are TRUE of the spread?
A debenture maturing in 2012 is bid at 77-7/8 and asked at 78-3/4;. Which of the following are TRUE of the spread? 7/8 per bond $.875 per bond. $8.75 per bond. $87.50 per bond. A) I and IV. B) I only. C) I and III. D) I and II. The correct answer was: I and III. 78-3/4; - 77-7/8 = 7/8 = .875 On a per-bond basis, this is $8.75. 7/8 × 1% of $1,000 = .875 × $10 = $8.75 Reference: 2.1.5 i
A single bond has been issued with successive maturity dates set from 1985 through 2015. What type of bond is this?
A single bond has been issued with successive maturity dates set from 1985 through 2015. What type of bond is this? A) Term. B) Balloon. C) Series. D) Serial. Your answer, Serial., was correct!. Serial bonds are all issued at one time and mature in successive years. Term bonds all have the same maturity date.
Which of the following types of bonds would be characterized by decreasing interest costs to the issuer?
A) Serial bonds. B) Term bonds. C) Revenue bonds. D) Limited tax bonds. The correct answer was: Serial bonds. Periodically, serial bonds pay off part of the principal through serial maturities. This eliminates the interest costs on the matured bonds.
Which of the following types of bonds would be characterized by decreasing interest costs to the issuer?
A) Term bonds. B) Serial bonds. C) Revenue bonds. D) Limited tax bonds. Your answer, Serial bonds., was correct!. Periodically, serial bonds pay off part of the principal through serial maturities. This eliminates the interest costs on the matured bonds.
Which of the following best describes book entry?
A) The transfer of ownership is entered on the books of the SRO. B) The transfer of ownership is entered on the books of the issuer or the issuer's transfer agent. C) The transfer of ownership is entered on the books of the clearing agency. D) The transfer of ownership is entered only on the books of the buyer. The correct answer was: The transfer of ownership is entered on the books of the issuer or the issuer's transfer agent. For book-entry ownership, transfers of ownership are accounting functions in the records of the issuer or the issuer's transfer agent.
When a corporation issues a long-term bond, one of the factors influencing the bond's interest rate is the credit rating of the issuer. Another factor is the:
A) cost of money in the marketplace. B) tax status of the bond. C) par value of the bond. D) call loan rate. Your answer, cost of money in the marketplace., was correct!. Money is a commodity, and its cost is determined by supply and demand. When the cost of money is higher, borrowers incur a higher interest rate. The call loan rate impacts broker/dealers, not issuers of bonds. The par value of the bond has nothing to do with the cost of borrowing and, with almost no exception, all corporate bonds pay taxable interest so that is not a variable factor.
A corporation with a single outstanding bond issue chooses to refund this debt. This means that the corporation:
A) established a sinking fund for use in making regular open market purchases of the bonds. B) issues stock to replace the bonds. C) replaces one debt with another. D) buys back the bonds, at par, from the bondholders, using corporate profits. The correct answer was: replaces one debt with another. Refunding is synonymous with refinancing. When we refinance, we take out a new debt and use the proceeds of that debt to pay off the old one.
The terminology "guaranteed full faith and credit" is most applicable to:
A) interest and principal on a U.S. government issued bond. B) interest and principal on a municipal revenue bond. C) interest only on a U.S. government issued bond. D) interest and principal on a corporate bond. Your answer, interest and principal on a U.S. government issued bond., was correct!. Of the choices given, the terminology would be most applicable to both interest and principal on a U.S. government bond. Remember that the U.S. government's guarantee is backed by their authority to tax and print money. While corporate bonds can be backed by the issuer's full faith and credit, the guarantee is only as good as the corporation's ability to pay. Municipal revenue bonds are backed by the expected revenue generated from the project being financed.
A newly issued bond cannot be called for the first five years after it is issued. This call protection feature would be most valuable if, during this five-year period, interest rates are generally:
A) stable. B) falling. C) rising. D) fluctuating. Your answer, falling., was correct!. Issuers generally call bonds when interest rates are falling so they can reduce their interest cost (the same concept as a homeowner refinancing a mortgage). During a call protection period, bonds cannot be called, so the investor will continue to receive the coupon rate of interest. This protects the bondholder from losing a relatively high rate of fixed income until the call protection period ends.
If a customer believes that interest rates have peaked and wants to buy long-term, fixed-income securities providing semiannual interest payments, you would recommend:
If a customer believes that interest rates have peaked and wants to buy long-term, fixed-income securities providing semiannual interest payments, you would recommend: A) noncallable bonds. B) puttable bonds. C) premium bonds with low call premiums. D) Treasury STRIPS. Your answer, noncallable bonds., was correct!. The purchase of noncallable bonds provides the investor with a constant flow of semiannual interest income until maturity. Treasury STRIPS do not make regular interest payments.
Once a municipal bond issue has been defeased, which of the following statements are TRUE?
The rating on the issue increases. The marketability of the issue increases. The issue is now backed by U.S. government securities. The issue is no longer considered part of the issuer's outstanding debt. A) I and IV. B) I, II, III and IV. C) I and III. D) II and III. Your answer, I, II, III and IV., was correct!. Once a municipal issue has been defeased (pre-refunded), its rating increases, as it is now backed by U.S. government securities held in escrow. As the rating of a bond increases, so does its marketability. Once defeased, the issue is no longer considered part of the issuer's outstanding debt (although it will remain outstanding with interest paid until called). Reference: 2.1.7.3 in the License Exam Manual.
A corporate issuer has issued a new bond and escrowed the proceeds to be used to call in an existing bond issue as soon as the first call date for the existing bond is reached. Known as pre-refunding, the concept would be most closely associated with
A corporate issuer has issued a new bond and escrowed the proceeds to be used to call in an existing bond issue as soon as the first call date for the existing bond is reached. Known as pre-refunding, the concept would be most closely associated with A) defeasance B) secondary offering C) amortization D) disintermediation Your answer, defeasance, was correct!. When an issue is pre-refunded (advance refunded) with all of the funds needed to call it in as soon as the first call date is reached, the issue is known to be defeased. Because all of the capital needed to call in the existing bond has been escrowed and is available, the issue can now be removed from the issuer's debt statement.
A customer bought a bond that yields 6-½% with a 5% coupon. If the bond matures at this point, the customer will receive:
A) $1,000 plus a call premium. B) $1,025. C) $1,065. D) $1,050. Your answer, $1,025., was correct!. Upon redemption of a bond, whatever current interest rates may be, the investor receives par ($1,000) plus the final semiannual interest payment ($25 in this case), for a total of $1,025.
A customer has 10 municipal bonds which each increased in yield by 1 basis point. For the 10 bond position this increase is equal to:
A) $1.00. B) $5.00. C) $0.50. D) $10.00. Your answer, $1.00., was correct!. In terms of bonds, a basis point is an increment of yield equal to $.10 per $1,000 face value. This equals .01% or 1/100%. A movement of 1 basis point is a movement of $.10 per bond × 10 bonds = $1.
A corporate bond is quoted at 102-5/8. A customer buying 10 bonds would pay:
A) $10,285.00. B) $10,025.80. C) $10,258.00. D) $10,262.50. Your answer, $10,262.50., was correct!. Par ($1,000) × 102% = $1,020. 5/8 of one bond point ($10) = .625 × $10 = $6.25. Therefore, the quote reading 102-5/8 = $1,026.25 per bond ($1,020 + $6.25). Because we are told the customer is buying 10 bonds, we multiply $1,026.25 × 10 bonds which equals the amount the customer will need to pay in order to make the entire purchase; $10,262.50.
An investor sells 10 5% bonds at a profit and buys another 10 bonds with a 5-1/4% coupon rate. The investor's yearly return will increase by:
A) $2.50 per bond. B) $1.50 per bond. C) $1.00 per bond. D) $2.00 per bond. Your answer, $2.50 per bond., was correct!. The first bonds are 5% and pay $50 per year per bond. The new bonds are 5-1/4% and pay $52.50 per year per bond, for a difference of $2.50 per bond.
An investor's portfolio includes 10 bonds and 200 shares of common stock. If both positions increase by one point, what is the appreciation?
A) $210. B) $220. C) $100. D) $300. Your answer, $300., was correct!. The gain would be $100 for the bonds (one point for one bond is $10 × 10 bonds) and $200 for the common stock (one point is $1 × 200 shares). The total portfolio gain is $300.
MNO is planning to raise capital through an offering of 30-year bonds. Which call price would be most beneficial to MNO?
A) 104. B) 106. C) 102. D) 110. Your answer, 102., was correct!. MNO would benefit most from the ability to call bonds at the lowest possible price. The call feature enables MNO to buy the bonds before maturity to reduce their fixed interest costs. A call price of 102 requires the lowest call premium of the options shown. Reference: 2.1.7.1.4 in the License Exam Manual.
One of your clients owns 2 different 6% corporate bonds maturing in 15 years. The first bond is callable in 5 years, while the second has 10 years of call protection. If interest rates begin to fall, which bond is likely to show a greater change in price?
A) Bond with the 10-year call. B) Bond with the 5-year call. C) Both will increase by the same amount. D) Both will decrease by the same amount. Your answer, Bond with the 10-year call., was correct!. As interest rates fall, the investor benefits from having the highest interest rate for as long as possible. The price change will not be the same for both bonds. The greater the call protection, the more likely a bond will appreciate if rates fall.
The price of which of the following will fluctuate most with a change in interest rates?
A) Common stock. B) Long-term bonds. C) Short-term bonds. D) Money-market instruments. The correct answer was: Long-term bonds. Long-term debt prices fluctuate more than short-term debt prices as interest rates rise and fall.
If a bond has a basis price of 7%, which of the following would most likely be refunded?
A) Coupon 7-½%, maturing in 2033, callable in 2013 at 100. B) Coupon 7-½%, maturing in 2033, callable in 2013 at 103. C) Coupon 6-½%, maturing in 2033, callable in 2013 at 103. D) Coupon 6-½%, maturing in 2033, callable in 2013 at 100. Your answer, Coupon 7-½%, maturing in 2033, callable in 2013 at 100., was correct!. An issuer is most likely to refund the issue that will cost it the most money over the life of the issue. Always use the following order in making this choice: (1) highest coupon, (2) lowest call premium, (3) earliest call date, and (4) longest maturity.
Crossover refunding, which is a type of advance refunding, is best described by which of the following statements?
A) The revenue stream is halted completely from the project until the new bonds are issued. B) The revenue stream originally pledged to secure the refunded issue continues to pay debt service on those bonds until they mature or are called. C) The new issue will not be funded by the revenue stream from the project that funded the initial bond offering. D) Revenues can never cross over to fund a new issue. Your answer, The revenue stream originally pledged to secure the refunded issue continues to pay debt service on those bonds until they mature or are called., was correct!. Crossover refunding is a method of advance refunding in which the revenue stream originally pledged to secure the refunded bonds continues to be used to pay debt service on those bonds until they mature or are called in by the issuer. Reference: 2.1.7.3.1 in the License Exam Manual.
Which of the following statements regarding puttable bonds is TRUE?
A) Their yields are usually lower than those of nonputtable bonds. B) The issuer may require that the put feature be exercised if interest rates drop significantly. C) The put feature is likely to be exercised when interest rates are falling. D) The bondholder can expect to receive a premium over par if he chooses to put the bonds. The correct answer was: Their yields are usually lower than those of nonputtable bonds. A put feature is advantageous to the bondholder, and therefore carries with it a lower yield. Exercise of the put feature is at the discretion of the bondholder, not the issuer, and will most likely be used if interest rates are rising.
Which of the following statements regarding puttable bonds is TRUE?
A) Their yields are usually lower than those of nonputtable bonds. B) The put feature is likely to be exercised when interest rates are falling. C) The bondholder can expect to receive a premium over par if he chooses to put the bonds. D) The issuer may require that the put feature be exercised if interest rates drop significantly. Your answer, The put feature is likely to be exercised when interest rates are falling., was incorrect. The correct answer was: Their yields are usually lower than those of nonputtable bonds. A put feature is advantageous to the bondholder, and therefore carries with it a lower yield. Exercise of the put feature is at the discretion of the bondholder, not the issuer, and will most likely be used if interest rates are rising.
In comparing long-term and short-term bonds, all of the following are characteristics of long-term bonds EXCEPT that they:
A) are more likely to be callable. B) usually provide greater liquidity. C) will fluctuate in price more in response to interest rate changes. D) usually have higher yields. The correct answer was: usually provide greater liquidity. Long-term bonds are not as liquid as short-term obligations.
All of the following will affect the marketability of a block of corporate bonds EXCEPT:
A) bond denominations. B) rating. C) block size. D) maturity. Your answer, bond denominations., was correct!. Block size is a key factor. Maturity is also important-shorter maturities tend to be more marketable than longer maturities. Also, the higher the rating, the more marketable the block. Bond denominations are not relevant.
Corporate bonds are considered safer than common stock issued by the same company because:
A) bonds place the issuer under an obligation but stock does not. B) if there is a shortage of cash, dividends are paid before interest. C) bonds and similar fixed-rate securities are guaranteed by SIPC. D) the par value of bonds is generally higher than that of stock. Your answer, bonds place the issuer under an obligation but stock does not., was correct!. A bond represents a legal obligation to repay principal and interest by the company. Common stock carries no such obligation.
All of the following statements regarding municipal bond put options are true EXCEPT that the put option:
A) ensures that the holder will never receive less than par for the bond. B) is generally exercisable immediately after the bond has been issued. C) protects the holder from a loss of principal when bond prices fall. D) protects the holder from depreciation because of rising interest rates. The correct answer was: is generally exercisable immediately after the bond has been issued. Put options are exercisable only after the put protection period has passed; this protects the issuer. Once puttable, the put feature isolates the bondholders from market risk-the risk that rising rates will force prices down.
A call premium is best described as the amount the:
A) investor pays above par value. B) bondholder receives at maturity. C) issuer pays above par to redeem the bonds early. D) common stock is above the conversion price. Your answer, issuer pays above par to redeem the bonds early., was correct!. When bonds are called at a premium, the issuer redeems them before maturity at a price exceeding par. The call premium is the difference between the call price and par.
The funds used for the retirement of a bond may be deposited into a:
A) level debt service account. B) priority capitalization account. C) collateral trust fund. D) sinking fund. Your answer, sinking fund., was correct!. A sinking fund is used as an escrow account to set funds aside for retiring a revenue bond.
If a bond has a call provision, this will tend to:
A) make the bond more attractive to investors because most bonds are called at a premium. B) place a floor on how low the price will decline. C) make the bond less attractive to investors because a call would terminate the interest payments. D) have no effect on the price. Your answer, make the bond less attractive to investors because a call would terminate the interest payments., was correct!. Callability is unattractive to the investor. It is attractive to the issuer because, with a call, the bonds are bought back at par or a small premium, and interest payments end.
An investor purchasing long-term AAA rated bonds should be concerned most with:
A) marketability risk. B) reinvestment risk. C) inflation risk. D) no risk. Your answer, inflation risk., was correct!. The major risk assumed by any investor in long-term high-quality bonds is inflation or purchasing power risk. AAA rated debt securities are likely to earn a lower rate of return, which over a longer period of time might not keep up with the rate of inflation.
All of the following statements regarding a 6% municipal bond that is puttable at par are true EXCEPT the:
A) owner would likely put the bond to the issuer when interest rates are rising. B) bond may be put to the issuer at the owner's discretion. C) bond is likely to trade at a discount in the secondary market when it is puttable. D) owner will receive $1,000 from the issuer when the put option is exercised. Your answer, bond is likely to trade at a discount in the secondary market when it is puttable., was correct!. Once a bond becomes puttable, the holder has the right to put the bond to the issuer at par. As a result, the bond would not trade below par in the secondary market. This effectively insulates the holder from interest rate risk-the risk that rising rates will force prices down.
A corporation plans to make a public tender for 50% of its outstanding subordinated debentures. The price of the tender will be set by the:
A) paying agent. B) trustee. C) issuer. D) transfer agent. Your answer, issuer., was correct!. In a tender offer, the issuer is offering to buy back all or a portion of the issue at a stated price. The price of the tender is set by the issuer although the issuer may engage an underwriter to help it set the price.
Each of the following securities are issued with a fixed rate of return EXCEPT:
A) preferred stock. B) common stock. C) convertible preferred stock. D) bonds. The correct answer was: common stock. Bonds and preferred stock are issued with a stated payment in interest or dividends, respectively. Common stockholders are entitled to receive a variable distribution of profits if a dividend is declared. Reference: 2.1.2 in the License Exam Manual.
The funds used for the retirement of a bond may be deposited into a:
A) priority capitalization account. B) collateral trust fund. C) sinking fund. D) level debt service account. The correct answer was: sinking fund. A sinking fund is used as an escrow account to set funds aside for retiring a revenue bond. Reference: 2.1.7.1.1 in the License Exam Manual.
A corporate or municipal issuer might include a put option on a newly issued bond to:
A) raise additional capital by issuing more bonds in the future. B) increase the yield on the bond. C) make the offering more attractive to investors. D) allow the issuer to redeem the bond before maturity. Your answer, make the offering more attractive to investors., was correct!. A puttable bond grants the investor the right to put the bond back to the issuer at par before maturity. In other words, the issuer must redeem the bond on the bondholder's request. Investors find this feature attractive when rising interest rates cause bond prices to decline. In return, the issuer can offer bonds with a lower coupon. Once the bond becomes puttable, interest rate risk has been eliminated.
When a corporation issues a long-term bond, one of the factors influencing the bond's interest rate is the credit rating of the issuer. Another factor is the:
A) tax status of the bond. B) cost of money in the marketplace. C) call loan rate. D) par value of the bond. The correct answer was: cost of money in the marketplace. Money is a commodity, and its cost is determined by supply and demand. When the cost of money is higher, borrowers incur a higher interest rate. The call loan rate impacts broker/dealers, not issuers of bonds. The par value of the bond has nothing to do with the cost of borrowing and, with almost no exception, all corporate bonds pay taxable interest so that is not a variable factor.
All of the following statements regarding bonds with both a convertible and callable feature are correct EXCEPT:
A) the coupon rate on a convertible bond would be less than the rate for comparable nonconvertible debt. B) after the call redemption date, interest payments will cease. C) if called, the owners have the option of retaining the bonds and will continue to receive interest. D) dilution of company stock will occur on conversion of the bonds. Your answer, if called, the owners have the option of retaining the bonds and will continue to receive interest., was correct!. After bonds are called, the issuer no longer pays interest. Conversion of convertible bonds causes more shares outstanding, resulting in a reduced proportionate ownership interest (dilution) for current shareholders. The coupon rate paid on convertible bonds is lower than the coupon for nonconvertible bonds. There is a trade-off in the amount of interest for the ability to convert the bonds into common stock.
A Notice of Defeasance informs bondholders that:
A) the funds for the principal and the interest are in escrow. B) the purpose of the issue has been defeated and the bonds are called. C) the facility has been condemned and the bonds have been called. D) the interest and the principal will not be paid. Your answer, the funds for the principal and the interest are in escrow., was correct!. A defeased issue is one in which the issuer placed U.S. government securities in the bank as collateral for the old issue. Reference: 2.1.7.3 in the License Exam Manual.
If a customer buys bonds that have already been called, the trade confirmation must disclose all of the following EXCEPT:
A) the yield to call. B) the yield to original maturity. C) the redemption price. D) the redemption date. Your answer, the yield to original maturity., was correct!. Once a bond has been called, the yield to original maturity is no longer a factor and need not be on the confirmation.
All of the following statements regarding discount bonds are correct EXCEPT:
A) their discounted price can indicate that the issuer's credit rating has fallen. B) they are more likely to be called than comparable premium bonds. C) at maturity they will be valued at par. D) their discounted price can indicate that interest rates have risen. Your answer, they are more likely to be called than comparable premium bonds., was correct!. Bonds trading at a premium have higher coupons than current interest rates and therefore are more likely to be called. Bonds trading at a discount have coupons that are lower than current interest rates and therefore less likely to be called. If rates rise, prices fall. If a bond's rating falls, it will be less attractive to investors and its price will fall as well. All bonds move toward par value as they get closer to maturity.
Defeasement can be best described as a:
Defeasement can be best described as a: A) prerefunding. B) matched sale. C) refinancing. D) refundment. The correct answer was: prerefunding. Pre-refunding involves issuing one bond to call an outstanding bond at a future date. When this is done, the money raised is held in escrow to redeem the outstanding bonds at a future call date. What was originally pledged to back the bonds is now replaced by the escrowed funds. The issuer no longer has to show these bonds as an obligation on its debt statement. This is known as defeasement. The escrowed funds are invested in U.S. government securities.
In which of the following will a change in interest rates cause the greatest price fluctuation?
In which of the following will a change in interest rates cause the greatest price fluctuation? A) 7% AA rated 1-year municipal note. B) Series EE bond. C) 7% AAA rated corporate bond with 8 years until maturity. D) 7% 30-year U.S. Treasury bond. The correct answer was: 7% 30-year U.S. Treasury bond. Price fluctuations are the greatest in bonds with the longest terms to maturity. The more risky the instrument, the more price volatility. Long-term bonds have greater risk than short-term bonds. Reference: 2.2.7.6 in the License Exam Manual.
Two conservative customers in their 50s are interested in preserving principal and high-current income from their investments. In which order, from first to last, are the following bonds ranked in meeting your customer's needs?
A1 Fort Worth Gas 9¼s of '25. AA+ San Antonio Transit 9¼s of '25. Aaa Texas Telecom 9¼s of '25. AA- Dallas Electric 9¼ of '25. A) III, IV, II, I. B) I, II, III, IV. C) III, II, IV, I. D) IV, III, I, II. Your answer, III, II, IV, I., was correct!. Because the maturity and coupon rates are all the same, we can rank the bonds by rating. Based on the ratings given, the highest-quality bond is the Texas Telecom, rated Aaa, followed in order by the bonds rated AA+, AA-, and A1.
Bond Yields
Bond Yields
Characteristics of Bonds
Characteristics of Bonds
Which of the following would make a corporate bond more subject to liquidity risk?
I.Short-term maturity. II.Long-term maturity. III.High credit rating. IV.Low credit rating. A) I and IV. B) I and III. C) II and III. D) II and IV. Your answer, II and IV., was correct!. The most marketable bonds have shorter maturities and higher credit ratings. Reference: 2.1.3 in the License Exam Manual.
Which of the following rate commercial paper issued by corporations?
Moody's Standard & Poor's MSRB SEC A) II and IV. B) I and II. C) II and III. D) I and III. Your answer, I and II., was correct!. Moody's, Standard & Poor's and Fitch's as well are all recognized as rating companies that would rate commercial paper issued by corporations. The Securities Exchange Commission (SEC) is a federal government regulatory body.
Which of the following statements regarding put and call features of municipal bonds are TRUE?
The put feature would likely be exercised if interest rates fall. The put feature would likely be exercised if interest rates rise. The issuer will likely call bonds if interest rates fall. The issuer will likely call bonds if interest rates rise. A) II and III. B) I and III. C) I and IV. D) II and IV. . The correct answer was: II and III. A put feature on a bond benefits the bondholder. Once the bond becomes puttable, its holder has the right to put it back to the issuer at par. At this point, the bondholder is insulated from rate risk-the risk that rates will rise, putting downward pressure on bond prices. Once puttable, the bond will not trade below par. Issuers will likely call bonds if rates fall. To generate funds for calling the bonds, the issuer can issue new bonds at a lower rate. Reference: 2.1.7.5 in the License Exam Manual.
Twenty-five basis points on a par bond with 1 year to maturity are equal to:
$.25 per $1,000. $2.50 per $1,000. 0.25%. 2.5%. A) II and III. B) I and III. C) II and IV. D) I and IV. Your answer, I and III., was incorrect. The correct answer was: II and III. If 1 basis point equals .01%, 25 basis points equal .25%. .25% of $10 (which is the value of one full point for a bond) = $2.50.
Seventy-five basis points are equal to which of the following?
.75%. 7.5%. $7.50. $75.00. A) I and III. B) II and IV. C) II and III. D) I and IV. Your answer, I and III., was correct!. There are 100 basis points in each point. One point represents 1% of a bond's value therefore one basis point represents .01% and 75 basis points would represent .75%. Because each point is worth $10, 75 basis points represents $7.50.
