SIE Unit 2
Regarding corporate bond issues, which of the following statements best describes secured debt and unsecured debt?
Corporations can issue both secured and unsecured debt securities. Secured debt issues are backed by real assets, while those that are unsecured are simply backed by the issuer's full faith and credit.
An unsecured promissory note issued by a bank that can be traded in the secondary market is known as
Corporations issue unsecured promissory notes known as commercial or prime paper. When a bank issues an unsecured promissory note, it is known as a negotiable CD.
Which of the following obligations is backed by the full faith and credit of the United States Government?
GNMA is a government-owned corporation that supports the Department of Housing and Urban Development. Ginnie Maes are the only agency securities backed by the full faith and credit of the federal government.
A broker-dealer has engaged in a reverse repurchase (repo) agreement. How was this done
In a reverse repurchase (repo) agreement a dealer agrees to buy securities from an investor and sell them back later at a higher price. In other words, the reverse of a repo agreement.
Regarding municipal general obligation (GO) bonds, which of the following is true?
Municipal debt limits, known as statutory debt limits, can make a bond safer for investors. These limit the amounts of debt that the municipality can incur. The lower the debt limit, the less risk of excessive borrowing and default by the municipality, and thus the issuer's securities are safer for investors.
For collateral trust bonds, all of the following are true
Securities backing the debt can be securities of either fully or partially owned subsidiaries. serves as a depository holding the securities to serve as collateral. the issuer deposits securities it owns into a trust.
Which of the following earn interest but don't pay interest?
T-bills are sold at a discount and pay par at maturity. The difference between the discounted price and par is considered interest, but T-bills don't make interest payments.
The CY measures a bond's annual coupon payment (interest) relative to its market price, as shown in the following equation: annual coupon payment ÷ market price = current yield.
The CY measures a bond's annual coupon payment (interest) relative to its market price, as shown in the following equation: annual coupon payment ÷ market price = current yield.
Federal funds represent
The FRB mandates how much money its member banks must keep on reserve at the Federal Reserve. Any deposits in excess of the required amount are known as federal funds.
Which of the following expressions describes the current yield of a bond?
The current yield on a bond is calculated by dividing the annual interest (coupon) payment by the current market price of the bond: Annual coupon payment ÷ market price = current yield.
If a bond is trading at a premium, which of the following rates is correctly ranked from high to low?
The order from high to low is coupon rate, current yield, yield to maturity, yield to call.
XYZ Corporation is guaranteeing a debt issue for the IHG Company. Regarding these bonds, which of the following is true?
These are guaranteed bonds where the value of the guarantee is only as good as the financial strength (good faith and credit) of the company making the guarantee—in this case, XYZ Corporation. Because these bonds are backed by the good faith and credit of XYZ and not by any tangible asset, they are unsecured debt instruments. Always remember that even though the word "guaranteed" is used to describe such issues, the bonds are unsecured debt.
Treasury STRIPS have the coupons removed and therefore do not make regular interest payments. Each of the remaining answer choices pays interest on a semiannual basis.
Treasury STRIPS have the coupons removed and therefore do not make regular interest payments. Each of the remaining answer choices pays interest on a semiannual basis.
When purchasing a bond, the investor is taking on
When an investor is purchasing a bond, he is lending money to the issuer and becomes a creditor of the issuer.
A customer buys a callable 5% coupon bond at par that will mature in 10 years. Which of the following statements is true?
Yield to call (YTC) is the same as yield to maturity (YTM).
Income from an investment in debt securities is known as
interest.Income from debt securities is known as interest. Income from common stock is known as dividends. Sale of a security for a price different from that originally paid is known as a capital gain or loss. The total return on an investment is the sum of income received and capital gain or loss upon sale. LO 2.g
