Series 6 Section 1 Debt Securities

The minimum face amount of a negotiable CD is: A) $100,000. B) $50,000. C) $10,000. D) $25,000.

A) $100,000. Negotiable CDs are issued in the minimum face amount of $100,000. These are called jumbo CDs and are typically traded in blocks of $1 million. Reference: 1.3.7.1.4 in the License Exam Manual

A customer purchases $50,000 worth of 10% corporate bonds at par. At the end of the day, the bonds close down a half point. The customer has a loss of: A) $250. B) $5,000. C) $25. D) $2,500.

A) $250 The customer holds 50, $1,000 bonds. One bond point equals $10. Therefore, if each bond decreases by a half-point, the loss is $5 per bond; multiplied by 50 bonds, this equals $250. Reference: 1.3.6 in the License Exam Manual

A 5% bond is trading at a premium. Which of the following would be the bond's highest yield? A) Coupon yield. B) Current yield. C) Yield to maturity. D) Dividend yield.

A) Coupon yield. If a bond is trading at a premium, its coupon rate will represent the highest of its yields. Bonds do not have a dividend yield. Reference: 1.3.2 in the License Exam Manual

Which of the following are NOT considered money market instruments? I. Newly issued debentures rated Aaa. II. Treasury notes. III. Commercial paper. IV. Treasury bonds maturing in six months. A) I and II. B) I and III. C) II and IV. D) III and IV.

A) I and II. The money market is made up of short-term, high-quality debt issues. Because the Treasury bond is maturing in less than a year, it is considered a money market instrument. The debenture and Treasury note must be considered intermediate or long-term instruments because their maturity is not stated. Reference: 1.3.7.1 in the License Exam Manual

An investor would like to make a long-term investment in a debt security whose duration is equal to its maturity. Which of the following AAA rated bonds should his registered representative recommend? A) XYZ zero-coupon bond maturing in five years. B) DEF ten-year 8% bond maturing in eight months. C) MNO zero-coupon bond maturing in eight months. D) ABC 8% ten-year bond maturing in five years.

A) XYZ zero-coupon bond maturing in five years. Because they make no interim payments, zero-coupon bonds have duration equal to maturity. Of the choices offered, only XYZ is both long term (over one year to maturity) and zero-coupon. Reference: 1.3.5.3 in the License Exam Manual

A railroad company pledges its railroad cars as collateral for a bond offering. This bond would be issued as; A) an equipment trust certificate B) a sale-leaseback bond C) a collateral trust certificate D) a unit secured trust

A) an equipment trust certificate As the name implies, equipment trust certificates are collateralized by the issuer's equipment. In most cases, this is rolling stock or some other transportation item. Reference: 1.3.5.1 in the License Exam Manual

An investor might expect to receive the greatest gain on an investment in a corporate bond by purchasing: A) long-term bonds when interest rates are high. B) long-term bonds when interest rates are low. C) short-term bonds when interest rates are high. D) short-term bonds when interest rates are low.

A) long-term bonds when interest rates are high. If an investor purchases bonds when market interest rates are high, a drop in interest rates will lead to a corresponding increase in bond value. Long-term debt instruments will fluctuate to a greater degree than those with short-term interest rates. Thus, long-term debt offers the greater chance at gain. Reference: 1.3.1.12 in the License Exam Manual

All of the following are money market instruments EXCEPT: A) newly issued Treasury bonds. B) commercial paper. C) Treasury bills. D) municipal notes.

A) newly issued Treasury bonds. Money market securities are high-quality debt instruments with a maximum maturity of one year. Treasury bonds are high quality but issued with maturities of more than ten years. All of the other securities listed are both high quality and issued with maturities of one year or less. Reference: 1.3.7.1 in the License Exam Manual

If an investor pays 95.08 for a Treasury bond, how much did the bond cost? A) $952.50. B) $95.08. C) $9,508. D) $950.80.

A) $952.50. Treasury bonds are quoted as a percentage of par plus 32nds. In this case, the price is $950 plus 8/32 (i.e., ¼) of $10, for a total of $952.50. Reference: 1.3.3.1.3 in the License Exam Manual

Corporations issue commercial paper with maturities ranging from as little as one day to as long as how many days? A) 270 days. B) 7 days. C) 90 days. D) 365 days.

A) 270 days. Commercial paper has a maximum maturity of 270 days. Reference: 1.3.7.1.3 in the License Exam Manual

Which of the following choices lists Treasury bills, Treasury bonds, and Treasury notes in ascending order of maturity? A) Bills, notes, bonds. B) Bonds, notes, bills. C) Bills, bonds, notes. D) Notes, bills, bonds.

A) Bills, notes, bonds. Treasury bills have a maturity of less than one year, Treasury notes mature in two to ten years, and Treasury bonds mature in ten years or more. Reference: 1.3.3.1 in the License Exam Manual

What taxes must CMO investors pay on income from their CMOs? A) Federal, state, and local taxes. B) Neither state nor local taxes. C) Federal taxes only. D) State taxes only.

A) Federal, state, and local taxes. CMOs are fully taxable. Reference: 1.3.3.5.1 in the License Exam Manual

If a customer has converted his convertible bond into stock, how has his relationship to the corporation changed? A) He is now an owner of the corporation. B) He is now both an owner and a creditor of the corporation. C) He is now a creditor of the corporation. D) It cannot be determined.

A) He is now an owner of the corporation. Once a bondholder converts his bonds into stock, he changes from a creditor to an owner of the corporation. Reference: 1.3.5.2.1 in the License Exam Manual

An investor is considering purchasing a bond. He has settled on either a 6% municipal bond offered by the state in which he lives or an 8% corporate bond offered by a company with headquarters in his state. He would like you to help him decide which bond will get him the greatest return for his investment. Which of the following items of information must you obtain before you can make a specific recommendation? A) His tax bracket. B) How long he has been a resident of his state. C) What other securities he owns. D) His county of residence.

A) His tax bracket. To make the recommendation, you must do a tax-equivalent yield or tax-free equivalent yield calculation, for which you need the investor's tax bracket. The other items listed do not have a bearing. Reference: 1.3.4.1.1 in the License Exam Manual

A customer purchases a 4% corporate bond yielding 5%. A year before the bond matures, new corporate bonds are issued at 3%, and the customer sells the 4% bond. Which of the following statements regarding the bond are TRUE? I. The customer bought it at a discount. II. The customer bought it at a premium. III. The customer sold it at a premium. IV. The customer sold it at a discount. A) I and III. B) I and IV. C) II and IV. D) II and III.

A) I and III. When the customer bought the bond, it was at a discount, since the YTM (5%) was higher than the nominal yield (4%). When he sold the bond, interest rates had declined to 3%, which was below his nominal yield. Therefore, since the bond has a higher coupon than current market rates, it would be sold at a premium. Reference: 1.3.1.8 in the License Exam Manual

A resident of Georgia purchases an Albany, New York general obligation bond. If the investor is in the 28% federal income tax bracket and the 6% state income tax bracket, which of the following statements relating to this bond's interest are TRUE? I. It is free of federal income tax. II. It is federally taxable as ordinary income. III. It is free of state income tax. IV. It is taxable as ordinary income on the state level. A) I and IV. B) II and IV. C) II and III. D) I and III.

A) I and IV. The interest paid to an investor on a municipal general obligation bond is always free of federal income tax. In most cases, there is no state income tax if the issuer is a political subdivision of the investor's state of residence. In this case, a Georgia resident will be liable for Georgia state income tax on the interest paid on a New York bond. Reference: 1.3.4.1 in the License Exam Manual

Which of the following municipal issues are NOT backed by municipal taxes? I. A stadium bond. II. A school bond. III. A county courthouse bond. IV. A toll-bridge bond. A) I and IV. B) I and II. C) II and III. D) III and IV.

A) I and IV. The stadium bond will be paid off from admissions to the stadium, not taxes. The toll-bridge bond will be paid off from bridge tolls, not taxes. Reference: 1.3.4.3.1 in the License Exam Manual

With regard to duration in bonds, which of the following statements are TRUE? I. The duration of a zero-coupon bond is shorter than its time to maturity. II. The duration of a zero-coupon bond is the same as its time to maturity. III. The duration of an interest-bearing bond is shorter than its time to maturity. IV. The duration of an interest-bearing bond is the same as its time to maturity. A) II and III. B) II and IV. C) I and IV. D) I and III.

A) II and III. Duration is a measure of the length of time it takes a bond to repay its cost through internal cash flows (basically the semi-annual interest). A zero-coupon bond pays nothing until it matures, which makes its duration and maturity of the same length. Interest-bearing bonds have a cash flow prior to maturity, which makes their duration shorter than their time to maturity. Reference: 1.3.5.3 in the License Exam Manual

With fluctuating interest rates, the price of which of the following will fluctuate most? A) Long-term bonds. B) Short-term bonds. C) Convertible debenture maturing in one year. D) Money-market instruments.

A) Long-term bonds. The longer the term to maturity, the greater the risk to the bondholder, resulting in greater price fluctuation for long-term bonds. Reference: 1.3.1.12 in the License Exam Manual

Which of the following statements about municipal bonds is NOT true? A) Municipal bonds are generally considered riskier than corporate bonds. B) The interest on municipal bonds is usually not subject to federal income tax. C) Municipal bonds generally carry lower coupon rates than corporate bonds of the same quality. D) Municipal bonds are bonds issued by governmental units at levels other than the federal.

A) Municipal bonds are generally considered riskier than corporate bonds. Municipal bonds are generally considered second only to treasury instruments in relative safety. Reference: 1.3.4 in the License Exam Manual

What happens to outstanding fixed-income securities when interest rates decline? A) Prices increase. B) No change. C) Yields increase. D) Coupon rates increase.

A) Prices increase. When interest rates drop, prices will rise, decreasing effective yield. Thus, there is an inverse relationship between interest rates and bond prices. Reference: 1.3.1.8 in the License Exam Manual

What happens to outstanding fixed-income securities when market interest rates drop? A) Prices increase. B) Short-term fixed-income securities are affected most. C) Yields increase. D) Coupon rates increase.

A) Prices increase. When interest rates drop, the price of outstanding bonds rises to adjust to the lower yields on bonds of comparable quality. Reference: 1.3.1.8 in the License Exam Manual

Ginnie Mae issues pass-through certificates. What does this mean? A) The investor receives principal and interest after the homeowner has made his monthly mortgage payment. B) The issuer receives principal and interest passed through from the Treasury. C) The investor receives principal and interest passed through after taxes and interest. D) The issuer will pass through all losses.

A) The investor receives principal and interest after the homeowner has made his monthly mortgage payment. The term pass-through means that Ginnie Mae has received money from the homeowner and passed it through to the investor. Reference: 1.3.3.3.1 in the License Exam Manual

A corporate bond with a nominal yield of 6% is currently trading at a yield to maturity (YTM) of 5.8%. It would be accurate to state that this bond is trading at: A) a premium. B) a discount. C) par. D) parity.

A) a premium. If YTM is less than the nominal or coupon yield, the bond is trading at a premium. Reference: 1.3.2.1.3 in the License Exam Manual

If the RST Corporation has issued several different debt securities, an investor would expect the lowest income stream from RST's: A) convertible debentures. B) subordinated debentures. C) speculative bonds. D) ordinary debentures.

A) convertible debentures. Although convertible debentures have many positive features for the investor, the major negative is that, in exchange for those benefits, the investor accepts a lower rate of interest.

Annual interest payment divided by current dollar price of a bond is the: A) current yield. B) nominal yield. C) yield to maturity. D) tax equivalent yield.

A) current yield. The current yield is the annual interest (in dollars) divided by the bond's market price (in dollars). Reference: 1.3.2.1.2 in the License Exam Manual

An investor might expect to receive the greatest gain on an investment in a corporate bond by purchasing: A) long-term bonds when interest rates are high. B) short-term bonds when interest rates are high. C) long-term bonds when interest rates are low. D) short-term bonds when interest rates are low.

A) long-term bonds when interest rates are high. If an investor purchases bonds when market interest rates are high, a drop in interest rates will lead to a corresponding increase in bond value. Long-term debt instruments will fluctuate to a greater degree than those with short-term interest rates. Thus, long-term debt offers the greater chance at gain. Reference: 1.3.1.12 in the License Exam Manual

An investor purchased a corporate bond for 97 3/8. If the bond is sold for 99 3/8, the investor has a profit of: A) $200. B) $20.00 C) $0.20. D) $2.00

B) $20.00 This investor has a profit of two points, or $20. Remember, one bond point is worth $10. Reference: 1.3.1.8 in the License Exam Manual

If an investor purchases a U.S. Treasury note quoted at 101.24, the investor must pay: A)v$101.24 B) $1,017.50 C) $1,010.24 D) $1,012.40

B) $1,017.50 101 = $1,010 and 24/32 reduces to ¾ of a point or $7.50, added together, the answer is $1,017.50 ($1,010 + $7.50 = $1,017.50). Reference: 1.3.3.1.2 in the License Exam Manual

A bond is convertible at $25. The market value of the stock is $30. What is the parity price of the bond? A) $750. B) $1,200. C) $800. D) $1,100.

B) $1,200. If a bond is convertible at $25, each $1,000 bond will convert to 40 shares. 40 shares × $30 =$1,200 parity of the bond. Reference: 1.3.5.2.2 in the License Exam Manual

An investor purchased a corporate bond for 97. If the bond is sold for 99, the investor has a profit of A) $200 B) $20 C) $2 D) $0.20

B) $20 This investor has a profit of two points, or $20. Bond points are worth $10 each. The actual dollar prices of the bonds are computed as follows: 97 = 97 % of par (or 97 points) = $970, 99 = 99% of par (or 99 points) = $990. Reference: 1.3.1.8 in the License Exam Manual

Which of the following statements describing the federal taxation of municipal bond fund distributions is TRUE? A) Both dividend distributions and capital gains distributions are taxable. B) Dividend distributions are tax free; capital gains distributions are taxable. C) Dividend distributions are taxable; capital gains distributions are tax free. D) Both dividend distributions and capital gains distributions are tax free.

B) Dividend distributions are tax free; capital gains distributions are taxable. Interest income from municipal bonds is exempt from federal taxation and remains so when a bond fund distributes it as dividends. Capital gains on municipal bonds, however, are taxable. Therefore, capital gains distributions made by the fund to shareholders are taxable distributions. Reference: 1.3.4.1 in the License Exam Manual

Which of the following statements regarding corporate zero-coupon bonds are TRUE? I. Interest is paid semiannually. II. The discount is in lieu of periodic interest payments. III. The discount is taxed annually as phantom income. IV. The discount is not taxed until maturity. A) I and III. B) II and III. C) II and IV. D) I and IV.

B) II and III. The investor in a corporate zero-coupon bond receives the return in the form of growth of the principal amount over the bond's life. The bond is purchased at a deep discount and redeemed at par at maturity. The discount from par represents the interest that will be earned at the maturity date. However, the discount is accreted annually and the investor pays income taxes yearly on the imputed interest. Reference: 1.3.5.1.6 in the License Exam Manual

One of the most important functions of a banker's acceptance is its use as a means of: A) facilitating trades of foreign securities in the United States. B) assigning previously declared distributions by foreign corporations. C) facilitating trades in foreign goods. D) guaranteeing payment of an international bank's promissory note.

B) assigning previously declared distributions by foreign corporations. A banker's acceptance is a time draft typically used to facilitate an overseas trading venture. It is guaranteed by a bank on behalf of a corporation in payment for goods or services. Reference: 1.3.7.1.2 in the License Exam Manual

All of the following are characteristics of an investment in Treasury notes EXCEPT: A) they are issued with a variety of maturities. B) they are short-term issues. C) they are issued in a variety of denominations. D) interest is paid semiannually.

B) they are short-term issues. Treasury notes sell at par and pay semiannual interest. Their maturities vary from 2 to 10 years, and are therefore intermediate term, not short-term. Reference: 1.3.3.1.2 in the License Exam Manual

Which of the following bond prices would fluctuate the most if the interest rates fell? A) 15-year unsecured bond with duration of 12. B) 20-year mortgage bond with duration of 16. C) 30-year corporate bond with duration of 14. D) 10-year zero coupon with duration of 10.

B) 20-year mortgage bond with duration of 16. Generally speaking the rule of thumb is that bonds with long-term maturities will have greater fluctuations in price than will short-term maturities, given the same move in interest rates. What we need to pay attention to here is not the original maturity of the bond but how much time is left. The truest measure of sensitivity (volatility) is the bonds duration and the greater the duration, the greater the fluctuation in price when interest rates move. Reference: 1.3.5.3 in the License Exam Manual

A bond purchased at $900 with a 5% coupon and a five-year maturity has a current yield of: A) 5%. B) 5.6%. C) 7.4%. D) 7.8%.

B) 5.6%. Current yield is determined by dividing annual interest payment by the current market price of the bond ($50 / $900 = 5.6%). Years to maturity is not a factor in calculating current yield. Reference: 1.3.2.1.2 in the License Exam Manual

You have a client who is in the 30% tax bracket. She has an opportunity to purchase a 9% corporate bond. This would be tax-equivalent to a municipal bond with a coupon of: A) 12.9% B) 6.3% C) 6.9% D) 2.7%

B) 6.3% The corporate bond is fully taxable, while the municipal bond is tax-free. The formula to use is: Corporate yield × (1−tax bracket) = municipal equivalent. 9% × (1−.30) = 6.3%. Reference: 1.3.4.1.1 in the License Exam Manual

The current yield of a 6% bond offered at 95 is: A) 63%. B) 6.3%. C) 5.7%. D) 6%.

B) 6.3%. The current yield of 6.3% is computed by dividing the annual interest payment ($60) by the current market price ($950). A shortcut: only one logical answer is greater than 6%. Reference: 1.3.2.1.2 in the License Exam Manual

A client is in the 30% tax bracket. He owns a 10% XYZ, Inc., debenture due to mature shortly. What yield in a municipal will give him the same after-tax return that he now has with his debenture? A) 8%. B) 7%. C) 6%. D) 4%.

B) 7%. Investing in a 10% corporate bond would result in an annual taxable interest payment of $100 per bond. If the client paid taxes at the 30% rate, he would keep $70 after taxes; $70 annual income equals an after-tax rate of 7% (annual interest divided by par; $70 / $1000 = 7%). Reference: 1.3.4.1.1 in the License Exam Manual

Which of the following securities is associated with the term tranche? A) Treasury note. B) CMO. C) T-bond. D) Corporate bond.

B) CMO. Collateralized mortgage obligations are divided into maturity classes called tranches. The tranche determines the maturity schedule and level of risk associated with a particular CMO. Reference: 1.3.3.5 in the License Exam Manual

All of the following debt instruments pay interest semiannually EXCEPT: A) municipal revenue bonds. B) Ginnie Mae pass-through certificates. C) industrial development bonds. D) municipal General Obligation bonds

B) Ginnie Mae pass-through certificates. Ginnie Maes pay interest on a monthly basis, not semiannually. Reference: 1.3.3.3.1 in the License Exam Manual

All of the following entities may issue municipal bonds EXCEPT A) New York/New Jersey Port Authority B) Holy Name Cathedral Church, Chicago C) Territory of Puerto Rico D) City of Little Rock, Arkansas

B) Holy Name Cathedral Church, Chicago Only U.S. territorial possessions, legally constituted taxing authorities, and public authorities may issue municipal debt securities. Churches may issue bonds, but they are not municipal bonds. Reference: 1.3.4 in the License Exam Manual

Which of the corporate bonds listed below have a nominal yield in excess of its current yield? I. ABC 8s of 2015 at 110 II. DEF 6.3s of 2018 at 100 III. GHI 5s of 2020 at 96 IV. JKL cv 4s of 2015 at 125 A) I and II. B) I and IV. C) II and III. D) III and IV.

B) I and IV. Any bond selling at a price in excess of the par value, usually called a premium, will have a current yield that is lower than the stated or nominal yield. Reference: 1.3.2 in the License Exam Manual

From first to last, in what order would claimants receive payment in the event of bankruptcy? I. Holders of secured debt. II. Holders of subordinated debentures. III. General creditors. IV. Preferred stockholders. A) I, II, III, IV. B) I, III, II, IV. C) IV, I, II, III. D) III, I, II, IV.

B) I, III, II, IV. The liquidation order is as follows: wages, taxes, secured debt holders, unsecured debt holders (including general creditors), holders of subordinated bonds, preferred stockholders, and common stockholders. Reference: 1.3.1.7 in the License Exam Manual

Which of the following conditions could cause a reduction in the current yield of bonds? I. An increase in general interest rates. II. A decrease in general interest rates. III. An increase in the market prices of bonds. IV. A decrease in the market prices of bonds. A) I and IV. B) II and III. C) II and IV. D) I and III.

B) II and III. An increase in bond market prices caused by a decrease in general interest rates would reduce the current yield of any outstanding bonds. Reference: 1.3.2.1.2 in the License Exam Manual

A 45 year-old investor is in the highest tax-bracket and wants to save over the next 20 years for a retirement income. Which of the following recommendations is least appropriate? A) Maximize contributions to your 401(k). B) Open an IRA and fund it with municipal bonds. C) Purchase a variable annuity. D) Buy blue-chip stocks.

B) Open an IRA and fund it with municipal bonds. RAs are tax favored accounts. Funding tax favored accounts with municipal securities that already offer tax free interest negates the advantage of the tax free IRA account and therefore would not be considered an appropriate recommendation. Each of the remaining answer choices offer advantages to a high income individual with a long term retirement objective and are therefore more appropriate / suitable recommendations. Reference: 1.3.4.1 in the License Exam Manual

Which of the following is nonnegotiable? A) Treasury notes. B) Series EE bonds. C) Ginnie Mae bonds. D) Treasury bills.

B) Series EE bonds. Since EE bonds must be redeemed by the original purchaser, or his designee, ownership cannot be transferred, which makes them a nonmarketable, or nonnegotiable, security. Reference: 1.3.3.2 in the License Exam Manual

All of the following trade actively in the secondary market EXCEPT: A) options on stock. B) Series EE bonds. C) common stock. D) warrants.

B) Series EE bonds. Warrants, common stock, and options all have an active secondary market. Series EE bonds do not trade; they are redeemable. Reference: 1.3.3.2 in the License Exam Manual

Which of the following does NOT issue commercial paper? A) Finance company B) Sole proprietorship C) Service company D) Broker-dealer

B) Sole proprietorship Sole proprietorship's do not issue commercial paper. The commercial paper market was developed so that corporations could lend to, and borrow from, each other more economically. Reference: 1.3.7.1.3 in the License Exam Manua

Which of the following income investments would be most suitable if interest rates were expected to increase sharply within the next two years? A) Treasury bonds. B) Treasury bills. C) GNMAs. D) AAA corporate bonds.

B) Treasury bills. The recommendation of a short-term debt instrument is most suitable during a period of substantial interest rate risk, since they have the smallest price response. Of the instruments listed, Treasury bills would be the most suitable because of their maturity of less than one year. Reference: 1.3.3.1.1 in the License Exam Manual

A customer is interested in a mutual fund that specializes in mortgage-backed debt instruments such as CMOs. In discussing the characteristics of such a fund, you might make which of the following statements? A) A high prepayment frequency would tend to increase the number of mortgages underlying the fund. B) When interest rates fall, frequency of prepayments tends to increase. C) Interest rates have little or no effect on frequency of prepayments. D) When interest rates rise, frequency of prepayments tends to increase.

B) When interest rates fall, frequency of prepayments tends to increase. Falling interest rates encourage homeowners to refinance, paying off their old mortgage by taking out a new one at a lower interest rate. This would tend to reduce the number of mortgages underlying the fund until money is reinvested. Reference: 1.3.3.5.1 in the License Exam Manual

One of your clients is interested in purchasing a new issue convertible bond. Which of the following statements regarding convertible bonds is NOT true? A) Increased earnings by the issuer could lead to possible profit opportunities for convertible bondholders. B) You should expect a higher coupon rate than you would receive with a nonconvertible bond of the same maturity and rating. C) This security offers bondholders an option to trade their debt holding for equity in the issuer. D) This type of security offers possible downside protection during a period of falling stock prices.

B) You should expect a higher coupon rate than you would receive with a nonconvertible bond of the same maturity and rating. The conversion feature allows bondholders to convert their bonds into shares of stock. Increased earnings may have a positive effect on stock prices and bonds generally offer an investor some downside protection when stock prices are falling. These are all desirable to the bondholder. Adding the desirable conversion feature to the bond allows the issuer to pay a lower coupon rate than they would pay with a nonconvertible bond. Reference: 1.3.5.2 in the License Exam Manual

Bondholders are paid interest; A) at any time determined by the board of directors. B) before both the preferred and the common stockholders are paid dividends. C) after the common stockholders are paid, but before the preferred stockholders are paid. D) after the preferred stockholders receive their dividends, but before the common stockholders are paid.

B) before both the preferred and the common stockholders are paid dividends Dividends are paid to both preferred and common stockholders only after interest has been paid on all of the corporation's outstanding debts and debt securities. Reference: 1.3.1 in the License Exam Manual

All of the following statements about a bond's nominal yield are true EXCEPT that it: A) identifies the amount of interest that the bondholder will receive. B) increases when interest rates increase. C) is also known as the bond's coupon. D) is stated on the bond certificate

B) increases when interest rates increase. A bond's nominal yield is fixed as of the date of issue. It identifies the amount of interest an investor receives and, once the bond is issued, is not affected by changes in market interest rates. It is also known as the coupon rate of the bond and is stated on the bond certificate. Reference: 1.3.2.1.1 in the License Exam Manual

DMF Company has convertible bonds (convertible at $50) outstanding. The current market value of DMF's stock is $42. The bond indenture contains an antidilution feature. If DMF declares a 10% stock dividend, the new conversion price will be; A) $50 B) lower than $50 C) the stock's current market price D) higher than $50

B) lower than $50 With an antidilution feature, the issuer will increase the number of shares available upon conversion if the company declares a stock split or stock dividend. This is done to keep the bondholder whole. Originally, the bond converts to 20 shares ($1,000 ÷ 50), because of the 10% stock dividend, the bond needs to convert to 22 shares, which means the conversion price is reduced to $45.45 ($1,000 ÷ 22 = $45.45). Reference: 1.3.5.2.2 in the License Exam Manual

If a bond is nearing the end of its call protection, this will tend to; A) place a floor on how low the price will decline B) make the bond less attractive to investors because a call would terminate the interest payments C) make the bond more attractive to investors because most bonds are called at a premium D) have no effect on the price

B) make the bond less attractive to investors because a call would terminate the interest payments 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. Reference: 1.3.1.13.2 in the License Exam Manual

Commercial paper is a: A) promissory note issued by a broker-dealer. B) promissory note issued by a corporation. C) guaranteed note issued by a corporation. D) secured note issued by a corporation.

B) promissory note issued by a corporation. A corporation issues commercial paper as a short-term, unsecured promissory note. Reference: 1.3.7.1.3 in the License Exam Manual

All of the following events would have an upward effect on a corporate bond's market price EXCEPT; A) interest rates fall B) the bond's rating changes from A to BB C) inflation eases off D) the investing public loses confidence in the stock market

B) the bond's rating changes from A to BB A lower rating for the bond indicates the rating service thinks the company's ability to pay off its debts is less sure. The bond becomes a less desirable investment, and the price drops. Reference: 1.3.1.10.1 in the License Exam Manual

The best time to purchase shares in a long-term bond fund is: A) when long-term interest rates are rising after a period of low interest rates. B) when long-term interest rates are falling after a period of high interest rates. C) when short term interest rates are fluctuating. D) when short-term interest rates are stable

B) when long-term interest rates are falling after a period of high interest rates. The best time to purchase shares in a long-term bond fund is when interest rates are falling after a period of high rates. The bonds already in the fund will continue to pay a high rate of return, and if rates continue to fall, the market value of the fund's portfolio will rise. Reference: 1.3.2.1 in the License Exam Manual

A customer bought a bond that yields 6.5% with a 5% coupon. If the bond matures at this point, the customer will receive: A) $1,000 plus a call premium. B) $1,050. C) $1,025. D) $1,065.

C) $1,025. 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. Reference: 1.3.1.13.1 in the License Exam Manual

Which of the following bond prices would fluctuate the most if the interest rates fell? A) 15-year unsecured bond with duration of 12. B) 10-year zero coupon with duration of 10. C) 20-year mortgage bond with duration of 16. D) 30-year corporate bond with duration of 14.

C) 20-year mortgage bond with duration of 16. Generally speaking the rule of thumb is that bonds with long-term maturities will have greater fluctuations in price than will short-term maturities, given the same move in interest rates. What we need to pay attention to here is not the original maturity of the bond but how much time is left. The truest measure of sensitivity (volatility) is the bonds duration and the greater the duration, the greater the fluctuation in price when interest rates move. Reference: 1.3.5.3 in the License Exam Manual

A company has negative operating revenues for the year. It would NOT be required to make interest payments on which of its following issues? A) Collateralized debt. B) Subordinated convertible debentures. C) Adjustment bonds. D) Mortgage bonds.

C) Adjustment bonds. Adjustment bonds are sometimes called income bonds because they only pay interest when the company has sufficient income (as determined by the Board of Directors. Reference: 1.3.5.1.5 in the License Exam Manual

Baa bonds may yield more than Aaa bonds because A) Baa bonds are debentures, whereas Aaa bonds are secured by collateral B) Aaa bonds are less marketable C) Baa bonds carry more default risk than Aaa bonds D) Baa bonds are more secure than Aaa bonds

C) Baa bonds carry more default risk than Aaa bonds Baa bonds carry a greater default risk, so they will most likely pay greater interest to induce investors to purchase them. Reference: 1.3.1.10.1 in the License Exam Manual

All of the following concerning CMOs are true EXCEPT: A) Some CMOs provide investors with more prepayment protection than pass-through securities. B) most CMOs are highly rated. C) CMOs are issued by government agencies. D) CMOs are issued by broker-dealers.

C) CMOs are issued by government agencies. CMOs are created by broker-dealers, who buy pass-through securities from government agencies and government-sponsored corporations, place the certificates in trust, and issue participation interests in the trusts that are tied to specific maturity periods (tranches). Since they are backed by mortgages, they tend to be highly rated. Reference: 1.3.3.5.1 in the License Exam Manual

Which of the following statements regarding Treasury bills are TRUE? I. They are sold at auction. II. They pay a fixed rate of interest semiannually. III. They mature at par. IV. They mature in ten years or more. A) III and IV. B) II and IV. C) I and III. D) I and II.

C) I and III. T-bills are sold at a discount by auction and mature at par in less than one year. Reference: 1.3.3.1.1 in the License Exam Manual

U.S. government securities that are deposited with a trustee against which certificates are sold, representing principal payments only on the securities are; I. clipped bonds II. stripped bonds III. subject to annual taxation on the per year accreted amount IV. tax deferred until maturity A) I and IV B) II and IV C) II and III D) I and III

C) II and III U.S. government securities that are deposited with a trustee and against which certificates are sold representing principal payments only on the securities are referred to as Treasury STRIPS. These are zero-coupon bonds issued by the U.S. government and are subject to annual taxation on the per-year accreted amount. Reference: 1.3.3.1.4 in the License Exam Manual

A customer buys a long-term, 10% Treasury bond with a current yield of 12% and holds the bond until one year before maturity. She sells the bond when the short-term T-bill rate is 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) I and III. B) II and IV. C) II and III. D) I and IV.

C) II and III. When the yield is higher than the coupon, it means the bond was purchased at a discount. Since the question tells us the T-bills are now yielding 8% and she has a bond maturing within a year with a 10% coupon, she would be able to sell that bond at a premium. Reference: 1.3.1.8.1 in the License Exam Manual

All of the following are characteristics of convertible bonds EXCEPT: I. the price of the bond can be affected by the price of the underlying stock. II. the coupon is invariably lower than similar nonconvertible corporate bonds. III. the coupon is invariably higher than similar nonconvertible corporate bonds. IV. at issue, the conversion price is set lower than the market value of the underlying stock. A) I and II. B) II and III. C) III and IV. D) II and IV.

C) III and IV. The coupon on convertible bonds is invariably less than the coupon of similar nonconvertible bonds. This is because investors are willing to accept less interest income for the privilege of being able to convert the bond into stock. When convertible bonds are issued, the conversion price is set higher than the current market value of the stock; otherwise, the bonds would be instantly converted. Reference: 1.3.5.2 in the License Exam Manual

Which of the securities listed below is issued without a stated rate of return? 'A) Treasury note. B) Treasury bond. C) Treasury bill. D) Preferred stock.

C) Treasury bill. Treasury bills are not issued with a stated coupon rate. Instead, they are sold through auctions at a discount to their par value of $1,000. They mature at their face amount, and the discount represents the interest earned.

When a registered representative refers to a corporate bond using the term guaranteed, it means that the bond is; A) required to maintain a self-liquidating sinking fund B) a secured bond C) guaranteed as to payment of principal and interest by another corporation D) guaranteed as to payment of principal and interest by the U.S. government

C) guaranteed as to payment of principal and interest by another corporation A guaranteed corporate bond is one guaranteed by another corporation that typically has a higher credit rating than the issuing corporation, and is in a control relationship with it. An example would be a parent company guaranteeing a bond offering of one of its subsidiaries. A guaranteed bond is unsecured; there is no collateral backing the bond. Reference: 1.3.5.1.4 in the License Exam Manual

All of the following statements about a bond's nominal yield are true EXCEPT that it: A) is stated on the bond certificate. B) identifies the amount of interest that the bondholder will receive. C) increases when interest rates increase. D) is also known as the bond's coupon.

C) increases when interest rates increase. A bond's nominal yield is fixed as of the date of issue. It identifies the amount of interest an investor receives and, once the bond is issued, is not affected by changes in market interest rates. It is also known as the coupon rate of the bond and is stated on the bond certificate. Reference: 1.3.2.1.1 in the License Exam Manual

All of the following statements regarding bonds registered as to principal only are true EXCEPT: A) such bonds can be purchased today in the secondary market. B) the registered owner may sell the bonds before maturity. C) interest payments are sent directly to the owner twice a year. D) coupons are attached.

C) interest payments are sent directly to the owner twice a year. A bond registered as to principal only has a certificate registered in the owner's name and has bearer coupons attached to the bond certificate. Only the person to whom the bond is registered may sell the securities. Interest is not sent directly to the owner but is paid only if the interest coupons are presented to the bond's paying agent. Reference: 1.3.1.6.2 in the License Exam Manual

An investor has secured bonds maturing in two weeks. He plans to purchase some unsecured bonds he has identified on the secondary market that have a 6% coupon rate. If interest rates decline before the investor can purchase the new bonds, he can expect the income he will receive from the new bonds to: A) decline to less than $60 per year. B) increase to more than $60 per year. C) remain at $60 per year. D) pay no interest.

C) remain at $60 per year Fluctuations in interest rates will affect a bond's price, but will not affect the bond's payable interest. The percentage interest payable for use of money is stated on the face of a bond and is part of the bond indenture, a legal obligation on the part of the issuing company. Reference: 1.3.2.1 in the License Exam Manual

If your customer holds ten KLP 6% bonds, how much money will he receive in total at the debenture's maturity? A) $10,600. B) $10,200. C) $10,300. D) $10,000.

C) $10,300. The holder of 10 bonds will receive $10,000 in principal at maturity. Each bond pays 6% annual interest, or $60. Thus, ten bonds pay a total of $600 per year in two semiannual payments of $300. At maturity, the bondholder will receive the $10,000 face amount plus the final semiannual payment ($10,000 + $300 = $10,300). Reference: 1.3.1.13.1 in the License Exam Manual

An investor sells ten 5% bonds at a profit and buys another ten bonds with a 5.25% coupon rate. The investor's yearly return will increase by: A) $1.50 per bond. B) $1.00 per bond. C) $2.50 per bond. D) $2.00 per bond.

C) $2.50 per bond. The second group of bonds have a yield that is larger than the first's by ¼ of 1%, or $2.50 per bond. Reference: 1.3.2.1.1 in the License Exam Manual

An electric company issued mortgage senior lien bonds, with an 8-7/8 coupon, priced at 96. Each bond pays annual interest of: A) $85. B) $96.35. C) $88.75. D) $85.51.

C) $88.75. A coupon of 8-7/8 represents an annual interest payment of 8-7/8% of $1,000, or $88.75. Because the interest rate always applies to par, which is $1,000, the issue price does not have an effect. Reference: 1.3.2.1.1 in the License Exam Manual

A customer in the 28% tax bracket wants to buy a municipal GO bond with a 7.5% yield maturing in six years. You should point out that the tax-equivalent yield of this bond is: A) 2.6%. B) 7.5%. C) 10.4%. D) 6%.

C) 10.4%. The municipal bond interest of 7.5% is received by the investor tax-free. To determine what pre-tax interest rate the investor would have to receive to equal a 7.5% after-tax yield, divide the municipal bond yield by the after-tax rate (100% − the investor's tax rate; 100% − 28% = 72%) 7.5% / 72% = 10.4%. Note: the answer has to be higher than 7.5% no matter what the investor's tax bracket may be, and only one answer qualifies. Reference: 1.3.4.1.1 in the License Exam Manual

Jack Smith, in the 35% tax bracket, has an opportunity to buy a 5.3% municipal bond. What corporate yield would provide an equivalent return? A) 3.5%. B) 15.2%. C) 8.15%. D) 5.3%.

C) 8.15%. To determine the taxable equivalent yield, divide the tax-free yield by the complement of the individual's tax bracket (1 − the tax bracket %). 5.3% / 65% = 8.153. Note: the corporate bond would have to yield more than the municipal bond to provide the same after-tax return, but not almost triple the return, as called for with the 15.2% corporate yield. Reference: 1.3.4.1.1 in the License Exam Manual

An investor would like to make a long-term investment in a debt security whose duration is shorter than its maturity. Which of the following AAA rated bonds should his registered representative recommend? A) DEF ten-year 8% bond maturing in eight months. B) XYZ zero coupon bond maturing in five years. C) ABC 8% ten-year bond maturing in five years. D) MNO zero-coupon bond maturing in eight months.

C) ABC 8% ten-year bond maturing in five years. Zero coupon bonds, since they make no interim payments, have duration equal to maturity. A bond that makes interim payments has a duration that is shorter than its maturity. Only the ABC bond is both long term and interest bearing. Reference: 1.3.5.3 in the License Exam Manual

Your customer feels overburdened with taxes and would like relief. After you discuss the ABC Municipal Bond Fund with her and advise her of the tax treatment of the distributions, which of the following statements would be the CORRECT advice? A) Both dividends and capital gains are taxable at favorable capital gains rates. B) Dividends and capital gains are federally tax exempt and may even be state exempt if issues in the portfolio are issues in her state of residence. C) Dividends are federally tax exempt, but capital gains are subject to taxation. D) Dividends and capital gains are federally tax exempt but only the dividends may qualify for state exemption.

C) Dividends are federally tax exempt, but capital gains are subject to taxation. Dividends from municipal bond funds are tax exempt because they represent tax-exempt interest paid to the portfolio; capital gains distributions are taxable. Reference: 1.3.4.1 in the License Exam Manual

An investor who desires minimal credit risk and monthly interest income should consider an investment in which of the following? A) AAA corporate bonds. B) Treasury bills. C) Ginnie Maes. D) STRIPS.

C) Ginnie Maes. Because Government National Mortgage Association (GNMA) pass-through certificates are guaranteed by the U.S. government, investors who purchase them face no credit risk. Income from GNMA is paid to the investor on a monthly basis. Reference: 1.3.3.3.1 in the License Exam Manual

TIPS offer which of the following benefits to an investor? I. Semiannual adjustments to principal based on the CPI. II. A Guarantee of profit upon sale. III. The interest payments will keep pace with inflation. IV. TIPS provide investors with an income they can't outlive. A) III and IV B) I and II C) I and III D) II and III

C) I and III Treasury Inflation Protection Securities (TIPS), are issued by the government and designed to offer investors inflation protection by adjusting the principal of the TIPS semiannually based on the Consumer Price Index (CPI). No security guarantees a profit upon sale and only an annuity can guarantee an income for life. Reference: 1.3.3.1.5 in the License Exam Manual

Which of the following securities trade in the money market? I. Bankers' acceptances. II. Common stock. III. Treasury bills. IV. Highly rated preferred stock. A) II and III. B) I and IV. C) I and III. D) II and IV.

C) I and III. Money market securities are high-quality debt issues with maturities of one year or less. BAs have a maximum maturity of 270 days, and Treasury bills have a maturity of less than one year. Both common and preferred stock are equity, not debt. Reference: 1.3.7.1 in the License Exam Manual

Your client calls you to inform you that he has recently sold his home and is in the process of constructing a new one. He has approximately $150,000 in proceeds from the sale on which he would like to earn a return. The funds must be available in about six months to pay the contractor. Which of the following might you suggest? I. ABC 8% preferred stock, callable at par in five months. II. U.S. 5% Treasury bond, maturing in six months. III. Banker's acceptance IV. XYZ common stock, listed on the NYSE. A) I and II. B) I and III. C) II and III. D) III and IV.

C) II and III. This client's needs are best met by placing the funds into the money market, defined as high-quality debt securities with one year or less to maturity. The banker's acceptance and the Treasury Bond meet those criteria. Reference: 1.3.7.1.1 in the License Exam Manual

T-bills are direct obligation of the US government and; I. are issued at par II. trade in the secondary market. III. are redeemable IV. are issued at a discount A) I and II B) III and IV C) II and IV D) I and III

C) II and IV T-bills are short-term obligations and, unlike most other debt securities, are issued at a discount from par. Once they are issued, T-bills trade in the secondary market. Reference: 1.3.3.1.1 in the License Exam Manual

A convertible bond of the KLP Corporation has a conversion ratio of 20. This means that: I. the conversion price of the bond is $20 per share. II. one bond can be exchanged for 50 shares of KLP common stock. III. one bond can be exchanged for 20 shares of KLP common stock. IV. the conversion price of the bond is $50 per share. A) I and II. B) I and III. C) III and IV. D) II and IV.

C) III and IV. A conversion ratio of 20 means that one bond can be exchanged for 20 shares of common stock. Since the par value of the bond is $1000, this corresponds to a conversion price of $50 per share. Reference: 1.3.5.2.2 in the License Exam Manual

If a customer's chief concern is to shelter as much of his portfolio earnings from tax as possible, which of the following securities would be most suitable? A) High-yield bonds B) Money market instruments C) Municipal GOs D) Treasury STRIPS

C) Municipal GOs The interest on municipal GOs is exempt from federal income tax and perhaps state income tax, depending on the investor's residency. Reference: 1.3.4.2 in the License Exam Manual

When discussing securities issued by the U.S. government, mention is made of both marketable and nonmarketable issues. All the following U.S. government securities would be defined as marketable EXCEPT: A) Treasury notes. B) Treasury bonds. C) Series EE bonds. D) Treasury bills.

C) Series EE bonds. Series EE bonds are nonnegotiable or nonmarketable securities. They may only be purchased from the government or a bank (acting as their agent) and they cannot be resold; only redeemed. Reference: 1.3.3.2 in the License Exam Manual

A 7% municipal bond has a yield to maturity of 7.5%. From this information, it can be determined that the municipal bond is trading: A) at a premium. B) flat. C) at a discount. D) at par.

C) at a discount. Since the YTM is greater than the nominal yield, the price must be less than par. The bond is selling at a discount. Reference: 1.3.2.1 in the License Exam Manual

An investor has purchased convertible bonds issued by ABC. The common stock of ABC has risen dramatically in recent months. The price of the bonds will most likely reflect the current market value of the company's: A) pre-emptive rights. B) preferred stock. C) common stock. D) warrants.

C) common stock. A convertible bond is converted into common stock issued by the company. If the stock's current price is above parity, it will tend to have an upward effect on the price of the bond. Reference: 1.3.5.2 in the License Exam Manual

Moody's bond ratings are based primarily on an issuer's: A) marketability. B) trading volume. C) financial strength. D) capitalization.

C) financial strength. Bond ratings are credit ratings for an issuer and measure the issuer's ability to repay principal and interest and, thus, its financial strength. Reference: 1.3.1.9 in the License Exam Manual

A CMO makes an interest-only payment to an investor. This payment will be: A) tax free. B) taxed as a capital gain if the underlying mortgage is prepaid. C) taxed as ordinary income. D) treated partly as ordinary income and partly as a tax-free return of principal

C) taxed as ordinary income Interest-only payments made by CMOs are taxed as ordinary income. Reference: 1.3.3.5.1 in the License Exam Manual

In describing GNMAs to a potential investor, you could correctly tell him that: A) a GNMA can be purchased for as little as $10,000. B) interest payments the investor receives are exempt from both local and federal income taxes. C) the certificates are backed by the full faith and credit of the U.S. government. D) each bond is backed by a pool of uninsured mortgages.

C) the certificates are backed by the full faith and credit of the U.S. government. The certificates issued by the GNMA represent interests in government-insured mortgages pooled by mortgage brokers who guarantee the monthly cash flow, but it is the U.S. government that actually backs GNMA pass-through certificates. GNMA pass-throughs are issued in minimum denominations of $25,000, and all interest earned is subject to federal income tax, as well as state and local taxes. Reference: 1.3.3.3.1 in the License Exam Manual

U.S. Treasury bills are issued for all of the following maturities EXCEPT: A) 26 weeks. B) 4 weeks. C) 13 weeks. D) 39 weeks.

D) 39 weeks. U.S. Treasury bills are issued with 4, 13, 26, and 52-week maturities. There are no 39-week T-bills. Reference: 1.3.3.1.1 in the License Exam Manual

Duration would be considered in evaluating which of the following investments? A) Growth funds B) Equities C) Variable annuities D) Bonds

D) Bonds Duration measures the time in years it takes for a bond or other debt instrument to repay its cost through internal cash flows (basically the interest). Reference: 1.3.5.3 in the License Exam Manual

All of the following statements regarding Government National Mortgage Association (GNMA) pass-through securities are true EXCEPT; A) investors receive a monthly check representing both interest and a return of principal. B) interest is taxed at all levels—federal, state, and local. C) investors own an undivided interest in a pool of mortgages. D) GNMAs are considered to be the riskiest of the agency issues.

D) GNMAs are considered to be the riskiest of the agency issues. GNMA securities, which are backed by the full faith and credit of the U.S. government, are considered to be the safest of the agency issues. Reference: 1.3.3.3.1 in the License Exam Manual

A client could be assured of federal government backing for an investment issued by which of the following entities? A) Federal Home Loan Bank. B) Federal National Mortgage Association. C) Federal Intermediate Credit Banks. D) Government National Mortgage Association.

D) Government National Mortgage Association. Only the Government National Mortgage Association issues securities that are backed by the full faith and credit of the U.S. government. The other entities listed are agency organizations, and although their securities are considered low risk, they do not have direct U.S. government backing. Reference: 1.3.3.3.1 in the License Exam Manual

Money market instruments would include which of the following? I. Banker's acceptances. II. Commercial paper. III. Nonnegotiable certificates of deposit. IV. Treasury STRIPS. A) III and IV. B) II and III. C) I and IV. D) I and II.

D) I and II. Money market instruments are high-quality debt securities issued with a maturity of one year or less. Negotiable CDs and Treasury Bills are money market instruments, but nonnegotiable CDs and Treasury STRIPS are not. Reference: 1.3.7.1 in the License Exam Manual

Which of the following are general characteristics of municipal revenue bonds? I. They are backed by the taxing power of the issuer. II. They have a degree of safety above U.S. Treasury issues. III. They may be issued without voter approval. IV. They are backed by the revenue generated from the facility that was built with the proceeds of the bond issue. A) II and IV. B) I and III. C) I and II. D) III and IV.

D) III and IV. III. They may be issued without voter approval. IV. They are backed by the revenue generated from the facility that was built with the proceeds of the bond issue Municipal revenue bonds are backed by revenues generated from the use of the facility that was built with the bond proceeds. General obligation (GO) bonds are backed by the full faith and credit (taxing authority) of the issuing municipality. Because tax dollars are used to pay the debt of GO bonds, municipalities need voter approval to issue them. Revenue bonds do not need voter approval. Finally, municipal issues cannot be deemed safer than U.S. Treasury issues which are backed by the full faith and credit of the federal government. Reference: 1.3.4 in the License Exam Manual

Which of the following is NOT a money market instrument? A) Banker's acceptances. B) Commercial paper. C) Treasury bills. D) Newly issued Treasury notes.

D) Newly issued Treasury notes. Commercial paper, Treasury bills, and banker's acceptances are debt instruments with maturities of one year or less and are therefore money market instruments. A newly issued Treasury note would have a maturity of two to ten years and therefore would not be a money market instrument. Reference: 1.3.7.1 in the License Exam Manual

All of the following municipal securities are AA rated 20-year bonds with eight years to maturity. Which would you expect to have the highest yield? A) Kneisewell County Courthouse Bond. B) Fairfield Borough School Bond. C) Nevada State GO Bond. D) Northern Wyoming Industrial Development Bond.

D) Northern Wyoming Industrial Development Bond. The school bond, the state bond, and the courthouse bond are all general obligation (GO) bonds, to be funded with tax revenues. The industrial development bond (IDB) must pay for itself through rental or other fees generated by the facility to be built with the proceeds. This involves greater risk for the investor, which necessitates a higher yield. Reference: 1.3.4.3.2 in the License Exam Manual

Which of the following is a debt instrument that pays no periodic interest? A) Treasury note. B) Treasury bond. C) GNMA. D) STRIPS

D) STRIPS STRIPS are Treasury bonds with the coupons removed. STRIPS do not make regular interest payments. Instead, they are sold at a deep discount and mature at par value. Reference: 1.3.3.1.4 in the License Exam Manual

If the current market value of a 5% callable corporate bond goes up, which of the following is true? A) The bond will pay less interest. B) Interest rates in the bond market have increased. C) The current yield will increase. D) The current yield will decrease.

D) The current yield will decrease. Rationale: Current yield is calculated by taking the annual interest of the bond and dividing it by current market value. In this example the 5% coupon will pay $50.00 of interest each year. If we start with a current yield calculation of $50.00 divided by $1000, the current yield is 5%. If we increase the current market value to $1050, the current yield calculation is $50.00 divided by $1050 and the current yield has decreased 4.76%.

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 only on the books of the buyer. C) The transfer of ownership is entered on the books of the clearing agency. D) The transfer of ownership is entered on the books of the issuer or the issuer's transfer agent.

D) 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, since it is the issuer, not the SRO or the clearing agency, that must pay the interest and eventually the bond's principal. Reference: 1.3.1.6.3 in the License Exam Manual

Which of the following is a characteristic of bearer bonds? A) They come in registered form. B) They pay interest quarterly. C) They have interest coupons in a separate envelope. D) They have interest coupons attached to the bond certificate.

D) They have interest coupons attached to the bond certificate Bearer bonds, which are not registered to a specific holder, must have the interest coupons attached to the bonds. Reference: 1.3.1.6.1 in the License Exam Manual

An investor's portfolio includes ten bonds and 200 shares of common stock. If both positions increase by one point, what is the appreciation? A) $100. B) $220. C) $210. D) $300.

D) $300. 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. Reference: 1.3.1.8.1 in the License Exam Manual

6s 2020 93:20 - 94:16 An investor reads this typical newspaper listing quote on a U.S. Treasury bond with a par value of $1,000. Disregarding transaction costs, if purchasing this bond, the investor would expect to pay: A) $936.25 B) $941.60 C) $932 D) $945

D) $945 A buyer would expect to pay the offering price, in this quote, 94.16. Since Treasury bonds are quoted in points and 1/32's, where a point is $10, the price would be $940 plus 16/32 of $10, or $945. Reference: 1.3.3.1 in the License Exam Manual

An investor owns a 9% convertible bond issued by the XYZ Corporation, a subsidiary of the ABC Corporation. The bond is convertible at $25. This investor may convert the bond into A) 4 shares of common stock of the ABC Corporation B) 4 shares of common stock of the XYZ Corporation C) 40 shares of common stock of the ABC Corporation D) 40 shares of common stock of the XYZ Corporation

D) 40 shares of common stock of the XYZ Corporation To calculate the number of shares that a bond is convertible into, divide the bond's par value ($1,000) by the conversion price ($25). Because the bond was issued by the XYZ Corporation, this bond is convertible into 40 shares of XYZ Corporation's common stock. Reference: 1.3.5.2 in the License Exam Manual

Which of the following secures an industrial development revenue bond? A) State tax B) Municipal tax C) Trustee D) A corporation

D) A corporation Municipalities issue industrial development revenue bonds to construct a facility that will be used by a corporation. When this occurs, the corporation must sign a long-term lease. Although classified as municipal securities, IDRs are backed by the lease payments of the corporation participating in the project. Reference: 1.3.4.3.2 in the License Exam Manual

Which of the following is the safest from default risk? A) Industrial Development Revenue bond B) AA secured bond C) High-yield bond D) AAA unsecured bond

D) AAA unsecured bond The more As the better! AAA-rated bonds are safer than AA-rated bonds, whether secured or not. High-yield bonds are very susceptible to default and although the IDR bond is a type of municipal bond, it is backed by the creditworthiness of a corporation, not the municipality. Reference: 1.3.1.9 in the License Exam Manual

A company has negative operating revenues for the year. It would NOT be required to make interest payments on which of its following issues? A) Mortgage bonds. B) Collateralized debt. C) Subordinated convertible debentures. D) Adjustment bonds.

D) Adjustment bonds. Adjustment bonds are sometimes called income bonds because they only pay interest when the company has sufficient income (as determined by the Board of Directors. Reference: 1.3.5.1.5 in the License Exam Manual

Which of the following is NOT a characteristic of GNMA securities? A) The usual minimum purchase amount is $25,000. B) Interest income received on GNMA's is fully taxable at both the state and federal level. C) These securities are directly backed by the U.S. Treasury. D) Distributions are made annually.

D) Distributions are made annually. GNMA securities (Ginnie Mae's) make interest-plus-principal payments monthly. Reference: 1.3.3.3.1 in the License Exam Manual

Given the following choices, the most suitable investment recommendation for a customer that wants monthly income is; A) T-bills B) income bonds C) utility stocks D) GNMAs

D) GNMAs Government National Mortgage Association (GNMA) securities pay a monthly check. Utility stocks may pay a quarterly dividend; income bonds are issued by companies coming out of bankruptcy and are never recommended to investors looking for income, and T-bills do not pay interest (they are issued at a discount). Reference: 1.3.3.3.1 in the License Exam Manual

Securities issued by which of the following agencies offer direct government backing? A) Student Loan Marketing Association (Sallie Mae). B) Federal National Mortgage Association. C) Federal Intermediate Credit Bank. D) Government National Mortgage Association.

D) Government National Mortgage Association. FNMA and FICB are considered GSEs (government-sponsored enterprises) and, although their securities are quite safe, they do not have the direct backing of the Treasury. Reference: 1.3.3.3.1 in the License Exam Manual

U.S. government securities that are deposited with a trustee against which certificates are sold, representing principal payments only on the securities are I. clipped bonds II. stripped bonds III. subject to annual taxation on the per year accreted amount IV. tax deferred until maturity A) I and IV B) II and IV C) I and III D) II and III

D) II and III U.S. government securities that are deposited with a trustee and against which certificates are sold representing principal payments only on the securities are referred to as Treasury STRIPS. These are zero-coupon bonds issued by the U.S. government and are subject to annual taxation on the per-year accreted amount. Reference: 1.3.3.1.4 in the License Exam Manual

Rank the following in ascending order (from low to high) of their claims against a corporation's assets when it is forced to liquidate. I. Debentures. II. Preferred stockholders. III. Secured bondholders. IV. Common stockholders. A) II, III, IV, I. B) III, I, II, IV. C) IV, I, III, II. D) IV, II, I, III.

D) IV, II, I, III. Common stock has the lowest claim on assets, preceded by preferred stock and debentures. Secured bondholders have the greatest claim among those given to company assets in the event of dissolution. Reference: 1.3.1.7 in the License Exam Manual

Which of the following, though issued by a municipality, is NOT backed by its taxing authority? A) Courthouse bond. B) General obligation bond. C) School bond. D) Industrial development bond.

D) Industrial development bond. An industrial development bond is issued by a municipality to provide funding for a business or commercial facility, which is then leased to a business enterprise. The interest and principal of the bond are then paid off by the business enterprise, not the municipality. Reference: 1.3.4.3.2 in the License Exam Manual

Regarding U.S. Government securities, the term intermediate maturity best describes: A) T-bills. B) T-STRIPS. C) T-bonds. c

D) T-notes. Treasury notes mature in two to ten years; they are considered intermediate-term bonds. Reference: 1.3.3.1.2 in the License Exam Manual

Which type of marketable security pays semiannual interest? A) Treasury bill. B) Series EE bond. C) Series HH bond. D) Treasury bond.

D) Treasury bond. Marketable securities are traded in the secondary market. T-bonds are marketable debt and pay interest semiannually. Series HH and EE bonds are not marketable. Treasury bills issue at a discount and mature at par. Reference: 1.3.3.1.3 in the License Exam Manual

An investor would like to make a long-term investment in a debt security whose duration is equal to its maturity. Which of the following AAA rated bonds should his registered representative recommend? A) MNO zero-coupon bond maturing in 8 months. B) ABC 8% bond maturing in 15 years, callable in 10 years. C) DEF 10-year 8% bond maturing in 8 months. D) XYZ zero coupon bond maturing in 15 years.

D) XYZ zero coupon bond maturing in 15 years. The simplest definition of duration is that it is the time it takes for a bond's cash flow (interest payments) to equal the maturity value. Since there is no cash flow from a zero coupon bond, its duration is equal to its maturity. Since the question says, "long-term", we're not going to choose an 8 month maturity over a 15 year one. Reference: 1.3.5.3 in the License Exam Manual

A popular asset found in the portfolio of money market mutual funds is commercial paper. The most common issuer of commercial paper is: A) money market mutual funds. B) banks. C) governments. D) corporations.

D) corporations. Commercial paper, a money market instrument, is issued by corporations. Reference: 1.3.7.1.3 in the License Exam Manual

If interest rates in general are rising, the price of T-bills should: A) remain steady. B) fluctuate. C) rise. D) fall.

D) fall. Like the price of other debt instruments, the price of outstanding T-bills decreases as interest rates rise. Reference: 1.3.1.8 in the License Exam Manual

T-bills are quoted: A) in 16ths. B) as a percentage of par. C) in 32nds. D) on an annualized discount yield basis

D) on an annualized discount yield basis T-bills do not bear interest. T-bills trade and are quoted on an annualized discount yield basis. Reference: 1.3.3.1.1 in the License Exam Manual

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) simply buys back the bonds, at par, from the bondholders, using corporate profits. C) issues stock to replace the bonds. D) replaces one debt with another.

D) 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. Refunding is associated with callable bonds, callable at a premium. Reference: 1.3.1.13.3 in the License Exam Manual

The market price of a convertible bond depends on all of the following EXCEPT: A) current interest rates. B) the rating of the bond. C) the value of the underlying stock into which the bond can be converted. D) the conversion prices of bonds from similar companies.

D) the conversion prices of bonds from similar companies. Conversion prices are not set in competition but are simply set higher than the current market price of a company's stock. Reference: 1.3.5.2.1 in the License Exam Manual

The most comprehensive measure for comparison of bond yields is the: A) current yield. B) coupon yield. C) nominal yield. D) yield-to-maturity.

D) yield-to-maturity. Bond yields are most accurately compared by their yield-to-maturity. The yield-to-maturity reflects annualized gains and losses based on both interest and the average price of the bond from time of purchase until maturity. Reference: 1.3.2.1.3 in the License Exam Manual

If your client wants to accumulate $50,000 over the next ten years for her daughter's college education, to achieve this investment objective you would recommend a(n): A) large-cap fund. B) high-yield corporate bond fund. C) aggressive growth fund. D) zero-coupon bonds maturing in ten years.

D) zero-coupon bonds maturing in ten years. Zero-coupon bonds are well-suited for achieving investment goals of a stated sum within a fixed period of time. They are purchased at a discount and mature to their face value. Investors do not receive current income. Reference: 1.3.5.1.6 in the License Exam Manual

How often do Treasury notes pay interest? A)Once a month. B)With the same frequency as Treasury bills. C)Once a year. D)Every six months.

D)Every six months. Unlike Treasury bills, T-notes pay interest every six months. Reference: 1.3.3.1.2 in the License Exam Manual

Which of the following statements is TRUE for an individual calculating taxes on distributions she received from a municipal bond fund for this year? A) Any capital gains distributions she received from the fund are taxable at capital gains rates. B) All of the income distribution she received as a dividend is taxable at federal income tax rates. C) All distributions she received from the fund, both income and gains, are exempt from federal income tax. D) Part of the income distribution she received as a dividend is taxable at federal income tax rates.

A) Any capital gains distributions she received from the fund are taxable at capital gains rates. Interest in the form of dividends paid from a municipal bond fund would be exempt from federal income tax. Capital gains distributions from the sale of portfolio securities would be subject to capital gains taxes. Reference: 1.3.4.1 in the License Exam Manual

A 5% bond is trading at a premium. Which of the following would be the bond's highest yield? A) Coupon yield. B) Dividend yield. C) Current yield. D) Yield to maturity.

A) Coupon yield. If a bond is trading at a premium, its coupon rate will represent the highest of its yields. Bonds do not have a dividend yield. Reference: 1.3.2 in the License Exam Manual

Which of the following statements regarding GNMA securities are TRUE? I. Interest is subject to federal income tax. II. Interest is exempt from federal income tax. III. They are backed by farm mortgages. IV. They are backed by residential mortgages. A) I and IV. B) II and IV. C) I and III. D) II and III.

A) I and IV. Government National Mortgage Association (GNMA) securities are subject to both state and federal income tax and are backed by residential mortgages. Reference: 1.3.3.3.1 in the License Exam Manual

In the liquidation of the assets of XYZ, Inc., in what order, first to last, would the following organizations and individuals receive payment? I. Internal Revenue Service. II. Holders of subordinated debentures. III. Holders of secured bonds. IV. Common stockholders. A) I, III, II, IV. B) IV, III, II, I. C) I, II, III, IV. D) III, I, II, IV.

A) I, III, II, IV. The order in a liquidation is as follows: wages, taxes, secured debt holders, debentures and general creditors, holders of subordinated debt, preferred stockholders, common stockholders. Reference: 1.3.1.7 in the License Exam Manual

Which of the following are characteristics of commercial paper? A type of secured debt. Maximum maturity is 270 days. Issued by municipalities. Exempt from registration. A) II and IV. B) III and IV. C) I and III. D) I and II.

A) II and IV. Commercial paper represents the unsecured debt obligations of corporations in need of short-term financing. Both yield and maturity are open to negotiation. Because commercial paper is issued with maturities of 270 days or less, it is exempt from registration under the Act of 1933. Reference: 1.3.7.1.3 in the License Exam Manual

The interest from which of the following bonds is subject to federal income tax? I. State of Nebraska. II. City of Duluth. III. Treasury notes. IV. FNMA. A) III and IV. B) II and IV. C) I and II. D) I and III.

A) III and IV. Direct federal debt, such as a Treasury note, is subject to federal income tax but exempt from state tax. FNMA bonds are subject to federal, state, and local taxes. State and city bonds, being municipals, are exempt from federal income tax. Reference: 1.3.4.1 in the License Exam Manual

Rank the following from first to last in order of payment at liquidation of a corporation. I. General creditors. II. Preferred stock. III. Subordinated debentures. IV. Accrued taxes. A) IV, I, III, and II. B) IV, III, I, and II. C) III, IV, I, and II. D) III, IV, II, and I.

A) IV, I, III, and II. The complete order of liquidation is as follows: wages, taxes, secured debt, debentures and general creditors, subordinated debentures, preferred stock, common stock.

A 55-year-old customer in the 18% tax bracket wants to maximize current return with a moderate degree of risk. He has just inherited $25,000 and seeks a bond investment. A suitable bond would have which of the following features? A) Relatively high rating. B) Rating below Ba but above D. C) Little or no call protection. D) Tax-exempt status.

A) Relatively high rating. The investor's tax bracket is not high enough to take advantage of a bond's tax-exempt status, but a bond with a low rating is not suitable because the investor is willing to bear only moderate risk. A bond with call protection and a relatively high rating would meet this customer's needs. Reference: 1.3.1.9 in the License Exam Manual

Which of the following debt instruments pays no current interest? A) Series EE B) Treasury notes. C) Treasury bonds. D) Series HH bonds.

A) Series EE Series EE bonds accrue interest, which is paid only at maturity or redemption. Reference: 1.3.3.2 in the License Exam Manual

Which of the following statements regarding a corporate bond quoted as QRS Zr 20 is TRUE? A) The bond pays no interest until maturity. B) The bond pays $200 interest annually. C) The interest payable is tax free. D) The bond pays $20 interest annually.

A) The bond pays no interest until maturity. QRS Zr 20 represents a zero-coupon bond issued by the QRS Company maturing in 2020. Zero-coupon bonds are bought at a discount and mature at face value. If a bond is held to maturity, the difference between the purchase price and the maturity price is considered interest, though it is taxed on a yearly basis. Reference: 1.3.6 in the License Exam Manual

What would happen to the market value of existing bonds during an inflationary period coupled with rising interest rates? A) The price of the bonds would decrease. B) The price of the bonds would stay the same. C) The price of the bonds would increase. D) The nominal yield of the bonds would increase.

A) The price of the bonds would decrease. Bond prices fall when interest rates rise because bond prices have an inverse relationship with interest rates. Reference: 1.3.2 in the License Exam Manualv

Which of the following choices CORRECTLY ranks investment risk from lowest to highest? A) Treasury bonds, municipal bonds, corporate bonds, common stock. B) Common stock, corporate bonds, municipal bonds, Treasury bonds. C) Treasury bonds, corporate bonds, municipal bonds, common stock. D) Common stock, municipal bonds, corporate bonds, Treasury bonds.

A) Treasury bonds, municipal bonds, corporate bonds, common stock. Treasury bonds carry the lowest investment risk because they are backed in full by the U.S. government. Municipal bonds are next lowest because they are backed by the taxing authority and general revenues of issuing municipalities. Corporate bonds are the most risky debt instruments but are still backed by the full faith and credit of the issuer. Common stock has no promises associated with it, is junior in claim to all debt securities, and is, therefore, the riskiest investment. Reference: 1.3.2.2 in the License Exam Manual

An investor desiring safety of principal, modest returns, and having a 5-year investment horizon should choose which of the following? A) Treasury notes B) Treasury bills C) A 10-year municipal bond rated AA D) A money market fund

A) Treasury notes Treasury notes best suit the investor's objective of safety and expectation of modest returns. They have two-to-ten year maturities suitable to his investment time horizon as well. Reference: 1.3.3.1.2 in the License Exam Manual

A corporation is likely to call eligible debt when interest rates are: A) declining. B) rising. C) stable. D) volatile.

A) declining. 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. Reference: 1.3.1.13.2 in the License Exam Manual

An investor purchasing a convertible debenture would most likely NOT be seeking to: A) maximize current income. B) have the safety of a debt security. C) take advantage of a possible increase in stock prices. D) diversify an equity portfolio.

A) maximize current income. Convertible bonds are more marketable to the public and as such, the issuer is able to offer a lower coupon. Therefore, if looking to maximize income, investors should purchase a nonconvertible bond (with a higher coupon). Reference: 1.3.5.2.1 in the License Exam Manual

Ginnie Mae pass-throughs will pay back both principal and interest: A) monthly. B) semiannually. C) annually. D) quarterly.

A) monthly. Ginnie Mae (GNMA) securities are called pass-through certificates because the monthly home mortgage payments, which consist of both principal and interest, pass through to the GNMA investor monthly. Reference: 1.3.3.3.1 in the License Exam Manual

Transactions in all of the following are affected in the money market, as opposed to the capital market, EXCEPT A) municipal revenue bonds B) bankers acceptances C) commercial paper D) U.S. Treasury bills

A) municipal revenue bonds The money market is the marketplace for short-term (one year or less) debt obligations. The capital market is where long-term capital is raised. Municipal bonds, being long term, are a part of the capital market. Reference: 1.3.7.1 in the License Exam Manual

If interest rates increase, the interest payable on outstanding corporate bonds will: A) remain unchanged. B) increase. C) change according to the inverse payout theory. D) decrease.

A) remain unchanged.

All of the following statements regarding Treasury STRIPs are true EXCEPT: A) the interest is taxed as a capital gain. B) the rate of return is locked in. C) the interest is realized at maturity. D) there are no semiannual interest payments.

A) the interest is taxed as a capital gain. The interest on the bond is paid at maturity but it is taxed as interest income over the life of the bond, not as a capital gain. Reference: 1.3.3.1.4 in the License Exam Manual

All of the following are true of negotiable, jumbo certificates of deposit EXCEPT: A) they are fully insured in any denomination by the FDIC. B) they usually have maturities of less than one year. C) they are readily marketable. D) they are usually issued in denominations of $100,000 to $1 million.

A) they are fully insured in any denomination by the FDIC. The FDIC insures only up to $250,000, any issue greater than that amount is an unsecured promissory note of the bank. Reference: 1.3.7.1.4 in the License Exam Manual

If the newspaper indicates that T-bill yields have gone down, this means that T-bill prices are: A) up. B) impossible to determine. C) down. D) mixed.

A) up. If the yields have gone down, the discount has been reduced. Therefore, the dollar cost of T-bills has gone up. Reference: 1.3.1.8 in the License Exam Manual

The interest on Series EE bonds is paid A) upon redemption. B) quarterly. C) monthly. D) annually.

A) upon redemption. Series EE bonds are designed for individual investors, sold at a face amount, and redeemed at an amount that includes the interest income. Reference: 1.3.3.2 in the License Exam Manual

Which of the following are true of Ginnie Maes but NOT of CMOs? A) Yield more than T-bonds. B) Backed by the full faith and credit of the U.S. government. C) Collateralized by mortgages. D) Are pass-through securities.

B) Backed by the full faith and credit of the U.S. government. CMOs are not backed by the full faith and credit of the U.S. government. However, both Ginnie Maes and CMOs are collateralized by mortgages, yield more than T-bonds, and are pass-through securities. Reference: 1.3.3.3.1 in the License Exam Manual

The interest on which of the following instruments is subject to taxation at the federal, state, and local levels? A) Public Housing Authority bonds. B) Collateralized mortgage obligations. C) Treasury notes. D) Revenue bonds.

B) Collateralized mortgage obligations. The interest on corporate debt securities is subject to taxation at the federal, state, and local levels, and collateralized mortgage obligation (CMOs) are issued by corporations. Interest on Treasury instruments is taxable at the federal level only. Interest on municipal instruments is exempt from taxation at the federal level and possibly the state level if the holder is a resident of the state of issue. Public Housing Authority bonds and revenue bonds are types of municipal issues, which are tax free at the federal level. Reference: 1.3.3.5.1 in the License Exam Manual

A corporation has a 9% bond issue outstanding. The bondholder may exchange the bond for 50 shares of the corporation's stock. Which of the following types of bonds is this? A) Subordinated. B) Convertible. C) Income. D) Callable.

B) Convertible. A bond is convertible if the holder has the right to convert the bond into shares of common stock of the corporation. Reference: 1.3.5.2 in the License Exam Manual

Which of the following regarding T-bills are TRUE? I. T-bills trade at a discount to par. II. T-bills have maturities of one to ten years. III. Most T-bill issues are callable. IV. T-bills are a direct obligation of the U.S. government. A) II and IV. B) I and IV. C) II and III. D) I and III.

B) I and IV. T-bills trade at a discount to par, are 52 weeks or less to maturity, and are a direct obligation of the U.S. government. T-bills are also noncallable. Reference: 1.3.3.1.1 in the License Exam Manual

Which of the following statements about collateralized mortgage obligations (CMOs) are TRUE? I. CMOs are backed by the US government. II. CMOs are financial institution-sponsored pools of mortgages. III. CMOs are exempt from taxation at the federal level. IV. The issuer collateralizes a pool of various class mortgage loans and creates a tranche. A) I and IV B) II and IV C) II and III D) I and III

B) II and IV CMOs are financial institution-sponsored mortgage pools and are not backed by the US government. Like other corporate instruments, they are subject to taxation at all levels.

Which of the following statements regarding industrial revenue bonds are TRUE? I. They are a primary obligation of the city issuing the bond. II. They are issued by municipalities to provide funds for local industries. III. The bonds' credit rating is the same as the municipality's credit rating. IV. The debt will be paid off by the corporation leasing the facility. A) I and IV. B) II and IV. C) I and III. D) II and III.

B) II and IV. Although municipalities issue IRBs to provide funds for local industries, IRBs are a primary obligation of the corporation, not the issuing municipality. The municipality merely acts as a conduit in issuing the bonds. Thus, the bonds' credit rating depends on the corporation's credit rating, not the municipality's. Reference: 1.3.4.3.2 in the License Exam Manual

Which of the following statements about corporate bonds are TRUE? I. They represent ownership in the corporation. II. They generally involve less investment risk than common stock. III. They pay a variable rate of income. IV. They are long-term instruments. A) I and IV. B) II and IV. C) I and III. D) II and III.

B) II and IV. Bonds represent a creditor relationship; stock represents an ownership interest. Normally, corporate bonds are issued with a stated rate of interest and mature in ten or more years. Because of their steady interest payments, bond prices tend to be less volatile than stock prices. Reference: 1.3.1 in the License Exam Manual

Which type of nonmarketable security pays semiannual interest? A) Series EE bonds. B) Series HH bonds. C) Agency issues. D) Treasury bonds.

B) Series HH bonds. The key word is nonmarketable, which means does not trade in the secondary market. Only the savings bonds are nonmarketable (EEs and HHs). T-bonds and agency issues are marketable debt. Series EE bonds are sold at face amount and interest is credited monthly. HH bonds are nonmarketable and pay interest semiannually. Note: HH bonds are no longer issued, but many have not yet matured. Reference: 1.3.3.2 in the License Exam Manual

An income-seeking investor is concerned with the possibility of rising interest rates over the next few years. Of the choices listed, his best investment selection would be: A) Treasury bonds. B) Treasury bills. C) municipal bonds. D) collateralized mortgage obligations.

B) Treasury bills. Long-term maturities have a high degree of interest rate risk. An investor who is looking for income but is concerned with rising rates should invest in short-term instruments such as Treasury bills. Reference: 1.3.3.1.1 in the License Exam Manual

Which of the following securities is issued at par? A) Treasury STRIPS B) Treasury notes C) Treasury bills D) Zero coupon bond

B) Treasury notes Of the securities shown, only treasury notes issue at par and pay semiannual interest. The others issue at a discount, pay no interim interest, and are redeemed at par. Reference: 1.3.3.1.2 in the License Exam Manual

All of the following statements about a bond selling above par value are true EXCEPT: A) the nominal yield always stays the same. B) the nominal yield is lower than the current yield. C) the current yield is higher than the yield to maturity. D) the yield to maturity is lower than the nominal yield.

B) the nominal yield is lower than the current yield. Nominal (i.e., coupon) yield is fixed and stays the same with all bonds. A bond selling above par is selling at a premium, so the yield to maturity is lower than the current yield, which, in turn, is lower than the nominal yield. Reference: 1.3.1.8.1 in the License Exam Manual

All of the following statements regarding government and agency securities are true EXCEPT: A) interest paid is always subject to federal income tax. B) they are always directly backed by the federal government. C) they are considered safer than corporate debt securities. D) they are authorized by Congress.

B) they are always directly backed by the federal government. Only GNMAs are directly backed by the federal government. FNMAs and FHLMCs are only indirectly backed but are still considered less risky than corporate debt. Income from all three are taxable at federal, state, and local levels, and all were authorized by Congress. Reference: 1.3.3.3 in the License Exam Manual

If your customer has two bonds, and one has a coupon of 5.1% and the other has a coupon of 5.3%, what is the difference in annual interest payments between the bonds? A) $1 B) $20 C) $2 D) $10

C) $2 $1,000 × .053 = $53 $1,000 × .051 = $51 $53 − $51 = $2 Reference: 1.3.2.1 in the License Exam Manual

The current yield on a bond with a coupon rate of 7.5% currently selling at 105½ is approximately: A) 8%. B) 7.5%. C) 7.1%. D) 8.5%

C) 7.1%. A bond with a coupon rate of 7.5% pays $75 of interest annually. Current yield equals annual interest amount divided by bond market price, or $75 / $1,055 = 7.109%. Note that the answer must be lower than the coupon rate, and only one answer fits. Reference: 1.3.2.1.2 in the License Exam Manual

A prospect is 50 years old and has just inherited $50,000. He wants to invest the money but is very risk averse and fears losing principal. Which of the following recommendations would be most suitable? A) A preferred stock fund with low duration B) A preferred stock fund with high duration C) A bond fund with low duration D) A bond fund with high duration

C) A bond fund with low duration Duration is often used to assess the sensitivity of a bond or bond fund in response to interest rate changes—the longer the duration, the greater the sensitivity, and thus greater interest rate risk in an environment of changing interest rates. A bond fund with low duration, therefore, is less volatile when interest rates change. Equity securities do not have duration ratings (they have beta ratings). Reference: 1.3.5.3 in the License Exam Manual

Which of the following factors is least important in rating a bond? A) Asset protection available to the issuer. B) Stability of the issuer's cash flows. C) Bond's coupon. D) Amount and composition of issuer's existing debt.

C) Bond's coupon. A bond's coupon rate tends to be dictated by market factors and is not a factor in rating the bond. Reference: 1.3.1.9 in the License Exam Manual

Duration would be considered in evaluating which of the following investments? A) Growth funds B) Equities C) Bonds D) Variable annuities

C) Bonds Duration measures the time in years it takes for a bond or other debt instrument to repay its cost through internal cash flows (basically the interest). Reference: 1.3.5.3 in the License Exam Manual

Which of the following is NOT a money market instrument? A) Commercial paper issued by a finance corporation of a major automobile manufacturer. B) Federal Farm Credit Bank note maturing in one year. C) Newly issued Treasury notes issued to meet a specific government-funding requirement. D) Municipal Construction Loan Note (CLN).

C) Newly issued Treasury notes issued to meet a specific government-funding requirement. A newly issued Treasury note would have a maturity of at least two years and would not be considered a money market instrument. Reference: 1.3.7.1 in the License Exam Manual

Your client invests in an open-end investment company whose portfolio consists of insured municipal bonds issued within his state. Which of the following statements is CORRECT regarding the taxation of distributions from this fund? A) There is no federal income tax due on any capital gains distributions, but the dividends would be subject to tax. B) There is no federal income tax due on distributions, whether dividends or gains, from a municipal bond mutual fund. C) There is no federal income tax due on any dividend distributions, but the capital gains distribution would be subject to tax. D) There is no federal income tax due on distributions from a municipal bond mutual fund if they are all reinvested rather than taken in cash.

C) There is no federal income tax due on any dividend distributions, but the capital gains distribution would be subject to tax. The dividends paid from the net investment income of a municipal bond mutual fund are free from federal taxation. However, a capital gains distribution is always taxable regardless of the source. Reinvesting has no impact on taxability. Reference: 1.3.4.1 in the License Exam Manual

If your customer wants to set aside $40,000 for when his child starts college, but does not want to endanger the principal, you should recommend: A) municipal bonds for their tax benefits. B) common stock. C) Treasury STRIPS. D) corporate bonds with high rates of interest.

C) Treasury STRIPS. Treasury STRIPS are guaranteed by the U.S. government so there is no chance of default. They are zero-coupon bonds and offer no current income, which is appropriate for a client who wants 100% return paid at a future date for college expenses. Reference: 1.3.3.1.4 in the License Exam Manual

An investor is looking into the purchase of Series EE bonds through payroll deduction at his place of employment. If the investor decides to purchase the bonds, he would receive the earned interest: A) semiannually. B) annually. C) at redemption. D) monthly.

C) at redemption. Interest on Series EE bonds is received at redemption of the bonds. Series EE bonds are purchased at face amount, and interest is credited monthly and paid at redemption (or maturity). Reference: 1.3.3.2 in the License Exam Manual

The difference between par and a lower market price on a bond is called the: A) spread. B) reallowance. C) discount. D) premium.

C) discount. The difference between a bond's par (or face) value and a market price lower than par is known as the bond's discount from par. Reference: 1.3.1.8.1 in the License Exam Manual

A bond offered at par has a coupon rate: A) greater than its yield to maturity. B) less than its yield to maturity. C) equal to its current yield. D) less than its current yield.

C) equal to its current yield. When a bond is selling at par, its coupon or nominal rate, current yield, and yield to maturity are all the same. Reference: 1.3.1.8.1 in the License Exam Manual

An investor who has purchased a CMO: A) receives semiannual interest. B) should expect a yield slightly lower than that of Treasury securities. C) is subject to federal, state, and local taxation. D) owns a security that is fully backed by the U.S. government.

C) is subject to federal, state, and local taxation. Interest on CMOs is subject to federal, state, and local taxation. CMOs pay interest monthly and yield more than Treasury securities. They are issued by financial institutions, including banks and governmental agencies like FNMA, and are considered a type of corporate bond not directly backed by the U.S. government. Reference: 1.3.3.5.1 in the License Exam Manual

All of the following would be sources of revenue for debt service payment to revenue bond holders EXCEPT: A) tolls paid to use the turnpike. B) water and sewer usage fees. C) real estate taxes. D) airport parking lot charges

C) real estate taxes. Real estate taxes are used to pay debt service to general obligation (GO) bond holders. The other answer choices describe user fees which are used to make principal and interest payments to revenue bond holders. Reference: 1.3.4.3.1 in the License Exam Manual

An investor's portfolio includes an ABC 6% bond maturing in 2020 and 100 Shares of XYZ common stock. At market close, if the stock closed at $45.45 compared to yesterday's $44.95, and the bond moved from 95 to 95½ , the portfolio increased in value by: A) $110 B) $50 C) $100 D) $55

D) $55 The gain would be $5 for the bonds, (½ point for one bond is $5), and $50 for the stock, ($.50 × 100 shares) for a total of $55 Reference: 1.3.1.8.1 in the License Exam Manual

What is the conversion ratio of a convertible bond purchased at par value and convertible at $50? A) 50:1:0 B) 5:1 C) 2:1 D) 20:1

D) 20:1 The $1,000 par value divided by the $50 conversion price equals 20 shares per bond. Reference: 1.3.5.2.2 in the License Exam Manual

Which of the following statements are NOT true concerning revenue bonds? I. They are secured by a specific pledge of property. II. They are a type of general obligation bond. III. Generally, their interest is tax-exempt at the federal level. IV. They are analyzed primarily on the project's ability to generate earnings. A) I and III. B) III and IV. C) II and IV. D) I and II.

D) I and II. Revenue bonds are not secured by a specific pledge of property and are not a type of general obligation bond. They are secured by user fees, such as tolls. Reference: 1.3.4.3 in the License Exam Manual

Which of the following statements regarding Treasury bills are TRUE? I. They are sold at a discount. II. They pay a fixed rate of interest semiannually. III. They mature in less than one year. IV. They mature in ten years or more. A) III and IV. B) I and IV. C) II and IV. D) I and III.

D) I and III. T-bills are sold at a discount and mature in 4, 13, 26, or 52 weeks. Although they mature at face value, they do not make interim interest payments. Reference: 1.3.3.1.1 in the License Exam Manual

Which of the following bonds qualify as municipal bonds? I. General obligation bond of the City of Denver. II. Building loan issued by the Bank of Phoenix. III. Government National Mortgage Association Certificate. IV. Highway bond issued by the State of New Mexico. A) II and III. B) II and IV. C) I and III. D) I and IV.

D) I and IV. Any bond issued by a state, municipality, or governmental unit other than the federal government or one of its agencies is categorized as a municipal issue. Reference: 1.3.4 in the License Exam Manual

Which of the following would be considered money market instruments? I. A Treasury bond with 11 months to maturity. II. Ten shares of preferred stock sold within 270 days. III. An American depositary receipt (ADR) held for less than one year. IV. A $200,000 negotiable certificate of deposit. A) II and III. B) III and IV. C) I and III. D) I and IV.

D) I and IV. Money market securities are high-grade debt securities with one year or less to maturity. Preferred stock and ADRs are equity securities. Reference: 1.3.7.1 in the License Exam Manual

Which of the following are characteristics of negotiable jumbo CDs? I. Issued in amounts of $100,000 to $1 million or more. II. Always FDIC insured to face value. III. Always mature in one to two years. IV. Trade in the secondary market. A) II and IV. B) II and III. C) I and III. D) I and IV.

D) I and IV. Negotiable jumbo CDs are issued for $100,000 to $1 million or more and trade in the secondary market. Most jumbo CDs are issued with maturities of less than a year. The FDIC insures only up to $250,000. Reference: 1.3.7.1.4 in the License Exam Manual

Which of the following entities are issuers of municipal bonds? I. U.S. government. II. States. III. Cities. IV. Corporations. A) II and IV. B) I and II. C) I and III. D) II and III.

D) II and III. Municipal securities are issued by governments other than the federal government. States, counties, cities, school districts, agencies, and authorities are all examples of municipal issuers. Reference: 1.3.4 in the License Exam Manual

A debt security issued by the City of Chicago that is backed by the rents received from a corporation leasing industrial park facilities is likely to be what kind of bond? A) Collateral trust. B) Convertible. C) General obligation. D) Industrial development revenue.

D) Industrial development revenue. Industrial Development Revenue bonds (IDRs) are used to finance municipal projects, such as industrial parks, that are in turn leased to private corporations. The lease payments serve as security for the bond. Reference: 1.3.4.3.2 in the License Exam Manual

Which of the following risk factors would be least important to disclose in recommending CMO securities with an active secondary market to public customers? A) Extension risk. B) Interest rate risk. C) Prepayment risk. D) Liquidity risk.

D) Liquidity risk. If there is an active secondary market for the CMO, investors won't have a difficult time turning their investment back into cash (CMO's with complex characteristics may have limited or nonexistent liquidity). The other risks are inherent to mortgage-backed securities like CMOs. Reference: 1.3.3.5 in the License Exam Manual

Your customer is in the 36% tax bracket and is earning 6.5% interest on a municipal bond. What rate of interest would he have to earn on a corporate bond to realize the same return? A) 6.5%. B) It would depend on current interest rates. C) Less than 6.5%. D) More than 6.5%.

D) More than 6.5%. The municipal bond interest of 6.5% is received by the investor tax free. Since the return from a corporate bond would be subject to federal tax, it would clearly have to be higher to provide the same return to the investor. This is true whatever current interest rates happen to be. Reference: 1.3.4.1.1 in the License Exam Manual

Each of the following sources of funds back revenue bonds EXCEPT: A) User fees. B) Rental payments under leaseback arrangements. C) Tolls and fees. D) Property taxes.

D) Property taxes. Typical sources of funds for revenue bonds include user charges, payments under leaseback arrangements, lease revenues, and tolls and other fees from the facility's operation. Property taxes are used to back general obligation bonds. Reference: 1.3.4.3.1 in the License Exam Manual

When selling a CMO to a customer, the registered representative must make which of the following disclosures? A) Federal government guarantees repayment of principal. B) Minimum investment is $15,000. C) Income is in the form of quarterly payments. D) Rate of return may vary as a result of early repayment.

D) Rate of return may vary as a result of early repayment. Prepayment risk is one of the major risks associated with CMOs and must be disclosed to prospective investors. Reference: 1.3.3.5.1 in the License Exam Manual

Which of the following statements is true of Treasury STRIPS? A) Investors may purchase it at its face amount. B) STRIPS may be stripped and issued by a securities broker-dealer. C) Its stripped-off interest coupons are retained by the federal government. D) STRIPS are backed by the full faith and credit of the federal government.

D) STRIPS are backed by the full faith and credit of the federal government. Treasury STRIPS are stripped treasuries (discounted principal and interest sold separately). STRIPS are direct issues of the U.S. government are backed by its full faith and credit. Reference: 1.3.3.1.4 in the License Exam Manual

Your customer is a 66-year-old retired widower. He is seeking an investment of $50,000 that will keep pace with inflation. He currently survives on Social security and a pension and is very risk averse. Which of the following do you recommend? A) Gold fund B) High-yield bond fund C) Fixed annuity D) TIPS

D) TIPS TIPS is the only choice that keeps pace with inflation and also has the lowest default risk of the choices given. The biggest risk associated with a fixed annuity is that over time it won't keep pace with inflation and both the high-yield bond fund and the gold fund are too volatile for this risk averse client.

Money market instruments guaranteed by a bank that are used to provide capital for exporters to foreign countries are called: A) ADRs. B) eurodollars. C) foreign bills. D) banker's acceptances.

D) banker's acceptances. BAs provide short-term financing for importers and exporters. Reference: 1.3.7.1.2 in the License Exam Manual

Corporate bonds are considered safer than common stock issued by the same company because: A) the par value of bonds is generally higher than that of stock. B) bonds and similar fixed-rate securities are guaranteed by SIPC. C) if there is a shortage of cash, dividends are paid before interest. D) bonds place the issuer under an obligation but stock does not.

D) bonds place the issuer under an obligation but stock does not. A bond represents a legal obligation to repay principal and interest by the company. Common stock carries no such obligation, and is therefore considered riskier. Reference: 1.3.1 in the License Exam Manual