Debt

A 5 year 3 1/2% Treasury Note is quoted at 98-4 - 98-9. The note pays interest on Jan 1st and Jul 1st. A customer buys 5M of the notes. Approximately how much will the customer pay, disregarding commissions and accrued interest?

"5M" means that the customer is buying $5,000 par value of the notes (M is Latin for $1,000). A customer will buy at the ask price, which is 98 and 9/32nds = 98.28125% of $5,000 par = $4,914.06.

Collateralized mortgage obligation issues have:

A CMO divides the cash flow from a pool of underlying mortgages into a number of tranches, each with a different maturity. All of the tranches are issued on the same date; but the maturities extend over a sequence of years. This is a serial structure.

A municipal "GAN" could be backed by all of the following EXCEPT:

A municipal "GAN" is a Grant Anticipation Note. These are used by municipalities to "pull forward" federal grant monies that are received to support mass transit improvements in cities, pollution control facilities and energy conservation infrastructure.

A municipality would defease its debt with all of the following EXCEPT:

A municipality will defease its debt with securities of the highest credit rating, that provide the highest interest income to the municipality (since this interest income will be used to pay the interest expenses on the municipality's outstanding bonds that have been defeased). Acceptable securities to the bondholders are U.S. Governments, Agencies, and sometimes (rarely) bank certificates of deposit. AAA municipals would not be used because their yield is lower than governments (since the interest is exempt from Federal income tax, while the others are taxable).

A municipality would defease its debt with which of the following? I U.S. Government securities II U.S. Government agency securities III AAA Municipal securities IV Bank certificates of deposit

A municipality will defease its debt with securities of the highest credit rating, that provide the highest interest income to the municipality (since this interest income will be used to pay the interest expenses on the municipality's outstanding bonds that have been defeased). Acceptable securities to the bondholders are U.S. Governments, Agencies, and sometimes (rarely) bank certificates of deposit. AAA municipals would not be used because their yield is lower than governments (since the interest is exempt from Federal income tax, while the others are taxable).

An investor is most likely to put a bond with a tender option at par when

A put option at par allows the bondholder to "put" the bond back to the issuer at par value. Usually, such an option can only be exercised after the issue has been outstanding in the market for 5 to 10 years, depending on the specifics of the trust indenture

Which of the following are TRUE regarding municipal bonds offered out "firm" by one dealer to another? I The buying dealer is able to renegotiate the price II The buying dealer can sell the bonds before actually purchasing them III The selling dealer will not change the price for a specified time period IV The buying dealer has control over the bonds for a specified time period

A quote offered out "firm" means that the selling dealer will not change the price for the time period specified. During this time period, the buying dealer has control over the bonds and can sell the bonds before actually purchasing them.

Which statement is TRUE about the liquidity and risk associated with federal agency securities?

Agency bonds have little marketability risk; the trading market for U.S. Government and Agency Bonds is the most active in the world. As with any fixed income security, there is market risk associated with these securities. If interest rates rise, their prices will drop, with longer maturity and lower coupon issues dropping much faster than shorter maturity and higher coupon issues

All of the following statements are true about ETNs EXCEPT:

An ETN is an Exchange Traded Note. It is a type of structured product offered by banks that gives a return tied to a benchmark index. The note is a debt of the bank, and is backed by the faith and credit of the issuing bank. They are not an equity security - they are a debt instrument. ETNs are listed on an exchange and trade, so they have minimal liquidity risk. Finally, ETNs make no interest or dividend payments. Their value grows as they are held based on the growth of the benchmark index, with any gain at sale or redemption currently taxed at capital gains rates. Thus, they are tax-advantaged as compared to conventional debt instruments.

An ETN does NOT have which risk

An ETN is an Exchange Traded Note. It is a type of structured product offered by banks that gives a return tied to a benchmark index. The note is a debt of the bank, and is backed by the faith and credit of the issuing bank. Thus, if the bank's credit rating is lowered, the value of the ETN will fall as well - so it has credit risk. ETNs are listed on an exchange and trade, so they have minimal marketability risk. ETNs have market risk - if market prices fall, their value will fall in the market. Finally, ETNs make no interest or dividend payments - so they do not have reinvestment risk. Their value grows as they are held based on the growth of the benchmark index, with any gain at sale or redemption currently taxed at capital gains rates.

Which statements are TRUE regarding moral obligation bonds that are issued by authorities? I The bonds are typically secured by the revenues from a financed project II The bonds are typically secured by the special taxing power of the issuer III Ultimate payment on a moral obligation bond occurs if the U.S. Government apportions the funds to service the debt IV Ultimate payment on a moral obligation bond occurs if the State legislature apportions the funds to service the debt

Any bond issued by an "authority" is a revenue bond issue - such as the "Port Authority of New York" or the "New Jersey Turnpike Authority." Moral obligation bonds are typically issued by state agencies or authorities, and are secured by the revenues from the financed project (recent issues have been used to finance hyper-expensive ball stadiums, where the projected revenues appear to be insufficient to cover all costs), and additionally, by a non-binding undertaking that any deficiency in pledged revenues will be reported to the State legislature which may apportion State monies to make up the shortfall. Thus, the State has a moral obligation to pay; but not a legal obligation to pay.

A bank wishes to make an investment in municipal bonds. The most advantageous security for this investor is a:

Bank qualified municipal bonds are small dollar issues (less than $10,000,000) of General Obligation bonds. If a bank invests in these bonds, it is given a substantial tax break - 80% of the interest cost of carrying bank deposits that funded the purchase of those bonds is tax deductible to the bank. This benefit is only available on bank qualified issues. It does not apply to bankers' acceptances (a type of money market instrument); Bond Anticipation Notes; or bearer bonds.

The LEAST liquid money market instrument is:

Banker's Acceptances are a money market instrument used to finance imports and exports with Third World countries. The bank agrees to pay a fixed amount at a date in the future, which is the expected date of receipt of the goods. The exporter then has assurance that he will be paid and will ship the goods. BAs trade at a discount to their face amount until maturity, but the trading market is rather thin since the use of BAs is declining as international payment systems are modernized.

When comparing a Variable Rate Demand Obligation (VRDO) to an Auction Rate Security (ARS), which statement is FALSE?

Both variable rate demand obligations (VRDOs) and auction rate securities (ARSs) are long-term bonds that have the interest rate reset weekly or monthly, giving the issuer the advantage of lower short-term interest rates on a long-term bond issue. The interest rate on a VRDO is typically set to a market index and the issue can be put back to the issuer at the reset date. With an ARS, the interest rate is reset by Dutch auction, and the owner can only sell at the auction to another buyer - there is no embedded put option. Both are subject to credit risk and both are marketed by broker-dealers.

Which statement is FALSE about CMBs?

CMBs are Cash Management Bills. They are sold at auction by the Treasury on an "as needed" basis to meet unexpected cash shortfalls, so they are not part of the regular auction cycle. They are the shortest-term U.S. government security, often with maturities as short as 5 days. They are sold in $100 minimums at a discount to par value, just like Treasury Bills.

Arrange the following CMO tranches from highest to lowest yield: I Plain vanilla II Targeted amortization class III Planned amortization class IV Companion

Companion tranches are the "shock absorber" tranches, that absorb prepayment risk out of a TAC (Targeted Amortization Class) tranche; or both prepayment risk and extension risk out of a PAC (Planned Amortization Class) tranche. Because the companion absorbs both of these risks, it has the greatest risk and trades at the highest yield. A Plain Vanilla tranche is not relieved of either extension risk or prepayment risk, so it will offer a yield that is higher than a PAC or a TAC, but lower than the yield on a companion. A TAC is only relieved of prepayment risk, so its yield will be lower than a Plain Vanilla tranche. However, the TAC yield will be higher than the yield on a PAC, which is relieved of both extension and prepayment risk, while the TAC is only relieved of prepayment risk.

Term corporate bonds are quoted on a:

Corporate bonds are usually term bonds - all bonds of an issue having the same interest rate and maturity. Term bonds are quoted on a percentage of par basis in 1/8ths, which is the same as a "dollar" quote.

The primary risk associated with investing in ETNs is:

ETNs are "Exchange Traded Notes." They are an equity index linked structured product, that is listed and trades on an exchange. Because they trade, the liquidity risk aspect of structured products is eliminated. What is not eliminated, however, is credit risk. These products are only as good as the guarantee of the issuing bank. They typically have a 7 year life - and a lot can go wrong in 7 years (just ask anyone who purchased Lehman Brothers structured products or ETNs).

Treasury Receipts pay interest:

Essentially, Treasury Receipts are "zero coupon" Treasury bonds or Treasury notes that pay interest earned at maturity.

Which statements are TRUE regarding Eurodollar bonds? I U.S. issuers of Eurodollar bonds are subject to foreign currency risk II U.S. issuers of Eurodollar bonds are not subject to foreign currency risk III Non-U.S. issuers of Eurodollar bonds are subject to foreign currency risk IV Non-U.S. issuers of Eurodollar bonds are not subject to foreign currency risk

Eurodollar bond issues are sold overseas (in Europe), but pay in U.S. Dollars. Multinational U.S. issuers tap the Eurodollar bond market if interest rates are lower in this market than those available in the U.S. Foreign issuers may also sell Eurodollar issues. For U.S. issuers, there is no currency exchange risk, since payments are made in U.S. dollars. However, foreign issuers are exposed to currency risk, since they must convert their currency into U.S. dollars to make payments on Eurodollar issues.

Which of the following agencies may issue securities? I FHLMC II FHLB III TVA IV FRB

FHLMC (Federal Home Loan Mortgage Corporation), FHLB (Federal Home Loan Bank), and TVA (Tennessee Valley Authority) all issue debt securities. The FRB - Federal Reserve Bank does not issue bonds.

The "modification" of Ginnie Mae modified pass through certificates is:

Ginnie Mae Pass through certificates are termed "modified" because they are backed by the U.S. Government as well as the agency. Fannie Mae and Freddie Mac offer pass through certificates that are not modified because there is no government guarantee.

A facility built with a revenue bond issue has been condemned. Which of the protective covenants found in the trust indenture would be activated?

If a facility is condemned, it can no longer generate revenues. Though the question is not clear as to why it was condemned, the best choice is that a catastrophe call provision would be activated. This requires the issuer to call in the bonds, repaying the bondholders if a disaster occurs. Of the other choices, sinking fund covenants and defeasance covenants have no bearing. A maintenance covenant requires the issuer to maintain the facility in good repair. This covenant is not "activated" by a condemnation, as is a catastrophe call covenant.

A municipal dealer places a quote as "Bids Wanted." The dealer: I can do this just to get an idea of how much the bonds are worth II cannot do this just to get an idea of how much the bonds are worth III must intend to sell the bonds IV does not have to intend to sell the bonds

If a municipal dealer places a quote as "BW" or Bids Wanted, the dealer is soliciting bids for certain bonds. He cannot do this just to get an idea of the worth of the bonds - there must be a bona-fide intention to sell those securities.

Arrange the following in priority of claim in a corporate liquidation: I Unpaid Wages II Secured Bondholders III Subordinated Bondholders IV Debenture Bondholders

In a corporate liquidation, secured bondholders are paid first; then unpaid wages and taxes; then debenture holders; then subordinated bondholders; then preferred stockholders; and finally, common stockholders.

In a period of falling interest rates, a bond dealer would engage in all of the following activities EXCEPT:

In a period of falling interest rates, bond prices will be rising. Therefore, a dealer would raise his quoted prices in Bloomberg. If the dealer has appreciated bonds that he wishes to sell, he can place "Requests for Bids" for those bonds in Bloomberg. The dealer may bid (buy) bonds that he has previously sold short to limit losses due to rising prices. To hedge existing short positions against rising prices, the dealer would buy call options, not put options. Put options are used to hedge existing long positions from falling prices.

Which statements are TRUE about adjustment (income) bonds? I Semi-annual payment of interest is assured II Semi-annual payment of interest is not assured III Repayment of principal at maturity is assured IV Repayment of principal at maturity is not assured

Income bonds only pay interest if the corporation earns enough "income" to make that interest payment. So payment of interest is not assured. In addition, if the issuer defaults (which could happen), then the principal will not be repaid either.

A debt obligation issued by a municipality for the benefit of a corporate user is a(n):

Industrial development bonds are issued by municipalities to build facilities that are leased to corporate users. These are a type of revenue bond where the lease payments made by the corporate lessee are the source of funds to pay debt service on the issue.

A customer buys a $1,000 par 3 1/2% Treasury Bond, maturing July 1, 2035, at 104-16 on Friday, February 7th in a regular way trade. The interest payment dates are January 1st and July 1st. How many days of accrued interest are due?

Interest on U.S. Government bonds accrues on an actual day month / actual day year basis. Interest accrues up to but not including settlement. Settlement on U.S. Governments is next business day. Since the last interest payment date covered the period up to January 1st and the bond was purchased on Friday, February 7th, the trade will settle on Monday, February 10th. The buyer must pay the seller: January: 31 days February: 9 days (settlement takes place on Monday the 10th of February)

Issuers are MOST likely to call their outstanding fixed income securities: I when stock prices have reached a peak II when stock prices have reached a trough III during periods of high levels of inflation IV during periods of high levels of deflation

Issuers are most likely to call in their securities when interest rates have bottomed. The issuer can issue new securities at lower current interest rates, and can use the proceeds to call the outstanding securities that are paying a higher rate of interest. When stock prices have peaked, this usually indicates that interest rates have fallen, making stocks a relatively more attractive investment than fixed income securities that are paying lower rates of interest. During such periods, issuers will sell common stock at high market prices, and use the proceeds to retire outstanding debt with high interest rates. Regarding periods of inflation and deflation, as the inflation rate increases, interest rates tend to rise, since an "inflation premium" is added to the real interest rate that is paid on fixed income securities. Conversely, as deflation occurs, interest rates tend to fall as that "inflation premium" is eliminated from interest rate levels.

Level debt service is best described as:

Level debt service means that the issuer pays the same amount each year, with the funds being used to pay both interest and a portion of principal on the issue. The balance of the level payment is used to pay off bonds for that year. Thus, each year, the principal repayment amount increases; and the interest amount decreases. The total of the two remains the same. This is essentially the same idea as a mortgage amortization schedule.

Long-term negotiable certificates of deposit are subject to which of the following risks? I Interest rate risk II Call risk III Reinvestment risk IV Marketability risk

Long-term negotiable Certificates of Deposit (over 1 year maturity) are subject to interest rate risk, as is any fixed rate debt instrument. If market rates go up, the market value of the CD will decline. Long-term CDs can be callable, so they are subject to call risk in a declining interest rate environment. Interest is paid semi-annually and, again in a declining interest rate environment, if these payments are reinvested in new CDs, the rate of return on reinvested monies will decline - thus they have reinvestment risk. Finally, the secondary market for these securities is limited - so they can have marketability risk.

MBIA insures municipal bonds for the:

MBIA (Municipal Bond Insurance Association Corporation) insures municipal bonds for loss due to default by the issuer. Both the payment of interest on a timely basis and the repayment of principal (par value at maturity) are insured.

Municipalities would issue tax exempt commercial paper for all of the following reasons EXCEPT to:

Most municipalities finance short term needs through BANs (Bond Anticipation Notes), TANs (Tax Anticipation Notes), RANs (Revenue Anticipation Notes) and TRANs (Tax and Revenue Anticipation Notes). However, commercial paper could be used by a municipality to finance short term cash shortages caused by slow tax collections or unforeseen extraordinary expenses (these could also be financed by tax anticipation notes). Also, commercial paper could be used for an interim construction loan, because when a building is under construction, the long term financing may not yet be in place (of course, the municipality could also finance the construction through a bond anticipation note). Commercial paper cannot be used for long term financing such as a bond refunding.

Which of the following statements best describe the activities of a municipal securities broker's broker? I Municipal broker's brokers assist institutions that wish to buy blocks of municipal bonds II Municipal broker's brokers assist institutions that wish to sell blocks of municipal bonds III Municipal broker's brokers act as agents for their clients IV Municipal broker's brokers trade for their own accounts

Municipal broker's brokers act as agents for institutional clients, helping to buy or sell large blocks of municipal bonds. However, they do not trade for their own accounts, nor do they take inventory positions.

Municipal broker's brokers: I deal with the general public II do not deal with the general public III take inventory positions IV do not take inventory positions

Municipal broker's brokers perform specialized trades for institutional investors on an agency basis only - they do not carry inventory positions nor do they deal with the general public.

Which of the following statements are TRUE about the activities of municipal securities brokers' brokers? I The use of municipal brokers' brokers allows financial institutions to maintain anonymity when buying or selling municipal securities II Any quotes offered by municipal brokers' brokers must be "bona-fide" III Municipal brokers' brokers are required to disseminate their bids and offers through Bloomberg IV Fees charged by municipal broker's brokers are established by the Municipal Securities Rulemaking Board

Municipal brokers' brokers handle large block trades of municipal securities for institutions such as banks. These middlemen perform the trades without disclosing the identity of the bank - which helps the bank acquire or dispose of large blocks without alerting the market as to its activities. Municipal broker's brokers perform this very specialized service (there are only about 12 such firms in the U.S.) on an agency basis only - they do not carry inventory positions. As with all municipal traders, they are subject to MSRB rules - therefore all quotes disseminated by brokers' brokers must be bona-fide. There is no requirement that their quotes be disseminated through quote providers such as Bloomberg or Reuters. The broker's broker may publish its quotes in Bloomberg or can simply phone other firms to attempt trades. The MSRB does not establish or regulate fees - the MSRB requirement is simply that charges be "fair and reasonable."

When a municipal dealer gives a customer a "bond appraisal," he is disclosing:

Municipal dealers are often asked for bond appraisals by customers who wish to sell bonds. Because there is no active trading market for municipal bonds, last trading price information is not available. To get an idea of the value of the bond, the dealer will get prices of similar bonds and then give an estimated price to the customer. This is a likely sale price - not a firm quote.

Municipal dollar bonds are: I term bonds II serial bonds III quoted on a percentage of par basis IV quoted on a yield basis

Municipal dollar bonds are quoted on a percentage of par basis and are term bonds. Municipal serial bonds are quoted on a yield to maturity basis.

Municipal variable rate demand notes: I have a market value which will never go below par II have a market value which will never go above par III have a yield which will never fall below the stated rate IV have a yield which will never rise above the stated rate

Municipal variable rate demand notes are issued by a municipality. The interest rate is reset to the market rate weekly; and at the reset date, the holder can "put" the bonds back to the issuer at par. Here, the minimum value of the bond is par - because of the put feature. Because the price of the bond cannot go below par, these bonds are not subject to market risk and the yield cannot go above the stated rate. However, if interest rates fall, the price can go above par (by a small amount) and the yield can fall below the stated rate until the next reset date.

25 Basis Points equal:

One basis point = .01% in interest, or .01% of $1,000 par in annual interest = $.10. 25 basis points equal .25% of annual interest on a $1,000 per bond = $2.50.

Which of the following agency's securities are directly backed by the U.S. Government?

Only GNMA - Government National Mortgage Association - issues pass through certificates that are directly backed by the U.S. Government. FNMA - Federal National Mortgage Association - also issues pass through certificates, but these are implicitly backed - not directly backed. FHLMC - Federal Home Loan Mortgage Corporation and FHLB - Federal Home Loan Banks - do not issue pass through certificates and are implicitly backed.

The Federal Reserve would enter into a transaction involving which of the following with a primary U.S. Government securities dealer?

Overnight repurchase agreements are common for transactions between banks and the Federal Reserve. In such an agreement, the Fed buys U.S. Government securities from the dealer for 1 day; agreeing to sell them back to the dealer the next day. The difference in buying and selling price represents one day's worth of interest. By using repurchase agreements, each day the Fed can deposit "cash" into the primary dealers (most of whom are the large commercial banks). This eases credit availability.

The manager of a pension plan would most likely invest in which of the following debt issues? I Corporate Bonds II Municipal Bonds III Government Bonds

Pension plans are "tax qualified" retirement plans. Earnings on securities held are tax deferred; so there is no benefit to investing in municipals, which have lower interest rates because their interest income is exempt from Federal income tax. Investments would be made in corporate and government bonds, both of which have higher interest rates because their interest income is taxable by the Federal government.

At what price did the Crane bonds close at on the preceding trading day?

The Crane bonds closed this day at 80 3/4, up 1/2 from the preceding trading day. Therefore, yesterday the bonds closed 1/2 point lower at 80 1/4.

If the Federal Reserve enters into reverse repurchase agreements with member banks, the: I Federal Reserve is tightening credit availability II Federal Reserve is loosening credit availability III Federal Funds rate is likely to go down IV Federal Funds rate is likely to go up

The Federal Funds rate is the interest rate charged between Federal Reserve member banks on overnight loans. The Federal Reserve can influence this rate through open market operations. If the Fed enters into reverse repurchase agreements with member banks, it drains the member banks of reserves, tending to drive up the Fed Funds rate (there would be less cash available for the member banks to lend). Conversely, if the Fed enters into repurchase agreements with member banks, it injects cash into the banks, which tends to drive the Fed Funds rate down (since there is more cash available for member banks to lend).

Which of the following municipal bonds should be trading at the lowest dollar price?

The basic truths about bond price movements caused by changes in market interest rates are: 1. The longer the maturity, the greater the price will move for a given change in interest rates. 2. The deeper the discount on the bond (caused by the coupon being lower than the market rate of interest), the greater the price will move for a given change in interest rates.

An individual who buys a $100,000 certificate maturing in 2023 would receive annual interest of:

The bonds of 2023 have a stated interest rate of 8 3/4% x $100,000 principal amount = annual interest of $8,750. These bonds are initially offered at a discount to raise the effective yield of 8.90%.

Which of the following are necessary to calculate the total purchase price for a bond quoted on a yield basis in a municipal bond transaction? I Yield to maturity II Coupon rate III Settlement date IV Dated date

The dated date has no bearing on the calculation of the purchase price of a municipal bond. It is the date of issuance of the bonds, from which time interest will be paid. The other items are necessary to calculate the purchase price in a municipal bond transaction. To find the price, one must use the coupon rate, yield to maturity, and years to maturity. The settlement date is necessary to compute the amount of accrued interest that is due.

Which of the following affect the marketability of corporate bonds? I Bond rating II Maturity III Block size IV Bond denominations

The higher rated a bond, the more marketable it is. The shorter the maturity, the more marketable it is. For corporate bonds, the most marketable blocks are 5 bonds up to 100 bonds. Under 5 is an odd lot; over 100 is a large block which is more difficult to trade. The bond denominations have no effect on marketability.

An investor wishes to "lock in" an assured stream of interest payments for the next several years. The best recommendation to the customer is

The key term in the stem of this question is an "assured" stream of interest payments. To assure a stream of interest payments, the bond must be of the lowest risk. Treasury debt is of lower risk than any corporate obligation. Treasury bonds pay interest semi-annually, while Treasury Receipts are "zero-coupon" obligations, which only pay interest at maturity. Therefore, Treasury bonds meet the desired characteristic of a "stream" of interest payments

In 2018, a customer buys 1 PDQ 10%, $1,000 par debenture, M '33, at 115. The interest payment dates are Jan 1st and Jul 1st. The nominal yield on the bond is:

The nominal yield is the stated rate of interest on the bond, based on par value. $100 $1,000 = 10%

All of the following statements are true regarding overlapping debt EXCEPT:

The only debt that can be overlapping is G.O. debt - not revenue bonds. An overlapping debt is one shared by taxpayers in differing political subdivisions. For example, a school district may encompass 5 different towns. A portion of the school district debt overlaps each town, and the taxpayers in each town pay for the debt service on the school district debt based upon their relative assessed property valuations. G.O. bond issues are usually structured as serial bonds under a level debt service arrangement to match yearly payments to expected tax revenues.

A customer residing in Connecticut that is in the 20% Federal tax bracket and the 5% State tax bracket wishes to make a bond investment with a minimum 10-year life. The customer also wants a high level of safety. The following 10-year bonds are available: Yield AAA Corporate Bond 5.50 U.S. Treasury Bond 4.00 AAA Federal Home Loan Bank Bond 4.50 AAA Connecticut Bond 3.50 The best recommendation for the customer is the:

The rules on taxation of interest income received, generally, are: Treasury/Agency Issues: Interest is subject to Federal Income tax, but is exempt from State and Local tax Municipal Issues: Interest is exempt from Federal Income tax, and exempt from State and Local tax when purchased by a resident of that state Corporate Issues: Interest is subject to Federal Income tax, and to State and Local tax

Yield curve analysis is useful for an investor in debt securities for all of the following reasons EXCEPT:

The yield curve is not used to compare the marketability risk of different issuers. This is the risk that the security will be difficult to sell. The yield curve shows market expectations for interest rates - depending on the shape of the curve. An ascending curve indicates that interest rates are likely to rise in the future; a descending curve indicates that interest rates are likely to fall in the future. Because the yield curve shows all the market interest rates for all maturities, investors can compare rates against differing maturities. The yield curve is an average for securities of a given risk class. An investor can compare the yield on a specific security to the curve for the risk class to evaluate the attractiveness of that investment. If there is a great demand for a specific maturity, the price will be pushed up and the yield lowered. One can pick this out in a yield curve since the curve would drop for that specific maturity.

Four revenue bonds have the same maturity. Which of the following will cost the greatest amount?

This choice is the only one where the nominal yield is higher than the basis. To lower the effective yield (basis) on the bond, the price must rise - this is the only premium bond of the 4 choices given. The other choices are either priced at par; or at a discount.

Four revenue bonds have the same maturity. Which of the following will cost the greatest amount?

This choice is the only one where the nominal yield is higher than the basis. To lower the effective yield (basis) on the bond, the price must rise - this is the only premium bond of the four choices given. The other choices are either priced at par; or at a discount.

Which of the following are money market instruments? I Tax Anticipation Notes II Certificates of Deposit III Treasury Bonds IV Commercial Paper

Treasury Bonds are issued in 10 to 30 year maturities, hence they are not a money market instrument (until they have a remaining life of 1 year or less). A money market instrument is issued with a maturity of 1 year or less. Tax Anticipation Notes, Certificates of Deposit, and Commercial Paper are all money market instruments.

Treasury bonds: I are issued in minimum $100 denominations II are issued in minimum $10,000 denominations III mature at par IV mature at par plus accrued interest

Treasury bonds are issued at par in minimum denominations of $100 each, and pay interest semi-annually. At maturity, the bondholder receives par.

Itsy Bitsy Water Authority "Flow of Funds" Statement 20XX Water Charges: $8,000,000 Interest on Reserve Funds: $1,000,000 Gross revenues: $9,000,000 Operation and Maint: $6,000,000 Net Revenues: $3,000,000 Debt Service: $2,000,000 Addition to Reserves: $1,000,000 If the bonds were issued under a net revenue pledge, how much in funds were available to pay the bondholders for this year?

Under a net revenue pledge, only the net revenues (after operations and maintenance are paid) are pledged to bondholders. This water authority has $3,000,000 of net revenues, which would be the amount pledged to the bondholders under a net revenue pledge.

A municipality is at its debt limit and wishes to sell additional bonds. Voter approval is required for the municipality to sell: I Limited tax general obligation bonds II Unlimited tax general obligation bonds III Self-supporting revenue bonds IV Self-supporting industrial revenue bonds

Voter approval is needed for a municipality to sell general obligation bonds (non-self supporting debt) in an amount that exceeds the municipality's constitutional limit. It makes no difference if the general obligation bonds are backed by limited or unlimited taxing power. Revenue bonds and industrial revenue bonds are not subject to debt limits because they are self-supporting and pay their own way from collected revenues. They are not paid from tax collections.