Series 66 Checkpoint exam 2

An investor purchasing 10 corporate bonds at a price of 102¼ each will pay A) $1,020.25. B) $10,225.00. C) $1,022.50. D) $10,202.50.

$10,225.00. At 102¼, each bond costs $1,022.50 (102 = 1,020 and ¼ of $10 = $2.50). There are 10 bonds, so the total is $1,022.50 × 10 = $10,225.

The DERP Corporation has an outstanding convertible bond issue with a conversion price of $125 per share. If the current market price of the bond is 80, the parity price of the stock is A) $100.00 per share. B) $125.00 per share. C) $156.25 per share. D) $64.00 per share.

$100.00 per share. What does parity mean? It means that two things have equal value. What two things do we have here? We have the convertible bond, and because it is convertible, it can be converted into common stock. There is a number where the value of the bond and the value of the stock are the same; this price is the parity price. The bond is currently valued at $800 (80% of par). Anytime the investor wishes, he can exchange (convert) that bond into DERP's stock at $125 per share. However, that conversion is not based on a market price, which can fluctuate every day; it is based on the amount of money initially borrowed—the $1,000 par value of the bond. DERP is saying that it will allow you to exchange the $1,000 they owe you for stock at $125 per share. Simple division results in the ability to convert into 8 shares. Now we have everything we need to compute the parity (equal) price. If the bond is currently valued at $800 and we can convert it into 8 shares, what does each of those shares have to be worth so that the stock is also valued at $800? Dividing 800 ÷ 8 = $100 per share. That means that if the stock is selling for $100 per share and we decide to convert the bond, we'll have the same $800 in value. Some students find the answer a quicker way. If the bond is selling at 80% of its par value, then to be equal, the stock must be selling at 80% of the conversion value (80% × $125 = $100).

If an investor pays 95.28 for a Treasury bond, how much did the bond cost? A) $9,528.00 B) $958.75 C) $95.28 D) $950.28

$958.75 Treasury bonds are quoted as a percentage of par ($1,000) plus 32nds. In this case, the price is $950 plus 28/32 (i.e., ⅞) of $10, for a total of $958.75.

A bond with a par value of $1,000 and a coupon rate of 6% paid semiannually is currently selling for $1,200. The bond is callable in 15 years at 105. In the computation of the bond's yield to call, which of these would be a factor? A) 15 payment periods B) Interest payments of $30 C) Future value of $1,200 D) Present value of $1,050

Interest payments of $30 The yield to call (YTC) computation involves knowing the amount of interest payments to be received, the length of time to the call, the current price, and the call price. A bond with a 6% coupon will make $30 semiannual interest payments. With a 15-year call, there are 30 semiannual payment periods, not 15. The present value is $1,200 and the future value is $1,050, which is the reverse of the numbers indicated in the answer choices.

A bond issued by the GEMCO Corporation has been rated BBB by a major bond-rating organization. This bond would be considered A) callable. B) secured. C) an investment-grade corporate bond. D) a high-yield corporate bond.

an investment-grade corporate bond. An investment-grade bond has a bond rating between AAA and BBB. Lower-rated bonds are considered high-yield bonds and are often referred to as junk bonds. The bond may or may not be secured; the rating does not indicate that fact.

Your client is interested in investing in preferred stocks in an effort to receive dividend income. The client's target goal is a 6% current return on investment (ROI). If the RIF Series B preferred stock is paying a quarterly dividend of $0.53, your client's goal will be achieved if the RIF can be purchased at A) $35.33. B) $50.00. C) $22.55. D) $8.83.

$35.33. First, take the quarterly dividend and annualize it (4 × $0.53 = $2.12). Dividing that number by 6% gets you $35.3333, which rounds down to $35.33. Alternatively if you wish (but which takes more time), multiply each of the choices by 6% to see which of them equals $2.12.

The current yield on a bond with a coupon rate of 7.5% currently selling at 105½ is approximately A) 7.11%. B) 6.50%. C) 7.50%. D) 8.00%.

7.11%. 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%, or approximately 7.11%.

The GHIJ Corporation has a 3% convertible debenture outstanding with a conversion price of $40. The bond's current market price is 126. The most probable reason for this is A) GHIJ's earnings have risen since the debenture was issued. B) the current market price of the GHIJ common stock is approximately $35 per share. C) the current market price of the GHIJ common stock is approximately $50 per share. D) interest rates have risen since the debenture was issued.

the current market price of the GHIJ common stock is approximately $50 per share. With a conversion price of $40, the bond is convertible into 25 shares. Convertible securities generally sell at a slight premium to their parity price, which—at $1,260—would be $50.40 per share.

A client has indicated that his primary objective is maximizing current income regardless of the risk. Which of the following mutual funds would probably be most suitable for achieving that goal? A) GHI Index Fund B) DEF High-Yield Bond Fund C) JKL Municipal Bond Fund D) ABC Growth and Income Fund

DEF High-Yield Bond Fund High-yield (junk) bonds, although carrying more risk, produce higher current income than other funds.

Which of the following would be most likely to increase a bond's liquidity? A) A longer maturity B) A lower rating C) A higher rating D) No call protection

A higher rating Liquidity risk is the risk that when an investor wishes to dispose of an investment, no one will be willing to buy it or that a very large purchase or sale would not be possible at the current price. The available pool of purchasers for bonds with a low credit rating is much smaller than for those with investment-grade ratings. (Many institutions are only able to purchase bonds with higher credit ratings.) As a result, the lower the credit rating is, the greater the chance is of the bond having liquidity issues. Similarly, bonds with short-term maturities attract many more investors than those with long-term maturities, causing the long-term bonds to be less liquid. The absence of call protection is negative to many investors, thus limiting the number of potential investors.