STC Series 7 Chapter 5 Test

An investor purchases a 20-year 5.30% bond at par value that will yield 5.75% if called at the first call date in five years. The yield to maturity on the bond is: A. 5.30% B. More than 5.30% C. Between 5.30% and 5.75% D. 5.75%

A. 5.30% The bond has a coupon rate (nominal yield) of 5.30%. If the bond is purchased at its par value and is not called, but held to maturity, the bond's yield will be the same as the coupon rate, which is 5.30%.

Which of the following yields results in the highest real interest rate? A. A bond yields 8% when CPI is at 3% B. A bond yields 12% when CPI is at 8% C. A bond yields 10% when CPI is at 7% D. A bond yields 6% when CPI is at 4%

A. A bond yields 8% when CPI is at 3% The Consumer Price Index (CPI) is a measure of the rate of inflation. If the CPI goes up, the purchasing power of a fixed amount of investment income will go down. The real interest rate, also called the real rate of return, refers to yields adjusted for the CPI or inflation (yield minus the inflation rate). An 8% bond yield minus a 3% inflation rate equals a 5% real interest rate. This is higher than the real rate of return provided by the other three choices.

Which of the following bonds results in the highest real interest rate? A. A bond yields 8% when inflation is at 3%. B. A bond yields 12% when inflation is at 8%. C. A bond yields 10% when inflation is at 7%. D. A bond yields 6% when inflation is at 4%.

A. A bond yields 8% when inflation is at 3%. The real interest rate, also referred to as the real rate of return, refers to a bond's yield after its been adjusted for inflation (yield minus inflation rate). The highest real interest rate is realized on a bond that yields 8% when the rate of inflation is 3%. This bond provides a real interest rate of 5% (8% - 3%).

Which of the following description best defines the term duration? A. A measure of a fixed-income security's relative interest-rate risk B. A measure of a fixed-income portfolio's average yield C. The period before a fixed-income security will be called D. The measure of volatility that compares an equity security to the S&P 500 Index

A. A measure of a fixed-income security's relative interest-rate risk Duration measures price sensitivity for fixed-income securities given changes in interest rates. For example, a bond with a seven-year duration would experience a 7% change in price for every 1% change in market interest rates.

An issuer currently has an S&P AA rating. If the ratings service notifies the firm that it has been downgraded by one notch, its new rating would be: A. AA- B. A C. BBB D. BBB+

A. AA- Standard & Poor's highest rating is AAA and its lowest rating is D. The company also uses a (+) or (-) to further distinguish between ratings. Each upgrade or downgrade is referred to as a notch. If an issuer currently has a AA rating, one notch below would be AA- and two notches below would be an A+ rating.

All of the following statements are TRUE concerning a municipal bond issue having a serial maturity, EXCEPT: A. All of the bonds mature on one date in the future B. The bonds are priced on a yield-to-maturity basis C. The issue has a decreasing outstanding principal D. The issue has decreasing total interest payments

A. All of the bonds mature on one date in the future Serial bonds mature in successive years and are priced on a yield-to-maturity basis. As a serial issue nears its final maturity, the outstanding principal and total interest payments decrease. Term bonds mature at one date in the future and are priced at a dollar price (percentage of par).

Which of the following risks affects bonds primarily when interest rates decline? A. Call risk B. Credit risk C. Political risk D. Currency risk

A. Call risk When interest rates decline, bond issuers are more likely to call in existing, higher interest rate bonds and replace them by issuing bonds paying lower rates. Investors whose bonds are called are then faced with reinvesting their principal at lower rates.

Various tranches of a long-term speculative bond issue are called by the issuer. The effect on the remaining outstanding bonds is likely to be: A. Improved quality B. Decreased quality C. Making them eligible for investment by banks D. Increased interest payments

A. Improved quality When part of an issue of long-term speculative bonds is called, the effect on the remaining outstanding bonds will be an improvement in their quality. The issue will have less debt outstanding and there will be less interest charges to pay, which improves the quality of the issue.

A newly issued bond has a provision that it cannot be called for five years after the issue date. This call protection would be MOST valuable to a recent purchaser of the bond if: A. Interest rates are falling B. Interest rates are rising C. Interest rates are stable D. The yield curve slopes downward

A. Interest rates are falling The call protection provision of five years would be most valuable to a recent purchaser of the bond if interest rates are falling. If interest rates fall, outstanding bond prices will rise. Issuers of bonds will call or retire bonds when interest rates decline, and will issue new bonds with lower rates of interest. Bonds are usually callable at a small premium above par value. If the bonds are not callable, the investor can realize the full benefit of an increase in the market price of the bonds.

Your firm has completed an underwriting of Zylo Plastics subordinated debentures. The bond indenture contains a five-year call protection provision. This covenant would be most valuable to bond purchasers if, during the five years following issuance: A. Interest rates decline B. Interest rates increase C. Interest rates remain stable D. The yield curve slopes downward

A. Interest rates decline The call protection would be most valuable to a recent purchaser of the bond if interest rates are falling. If interest rates fall, bond prices rise. Corporations will call back bonds when interest rates decline and issue new bonds with lower rates of interest. Bonds are usually callable at a small premium above par value. If the bonds are not callable, the investor can realize the full benefit of an increase in the market price of the bonds.

A bond is selling at a discount and yields have remained constant. As the bond gets closer to its maturity, what happens to its price? A. It increases B. It decreases C. It remains the same D. It will experience significant price changes

A. It increases Although fixed income securities are subject to some degree of interest rate risk, that risk is of less concern if the bond is being held to maturity. Assuming there is no default by the issuer, the price of a bond that is selling at a discount will increase (move towards par value) as it gets closer to maturity.

When interest rates are fluctuating, which of the following statements is TRUE regarding the movement of short-term rates compared to long-term rates? A. Short-term rates fluctuate more sharply than long-term rates. B. Long-term rates fluctuate more sharply than short-term rates. C. Both long- and short-term rates fluctuate equally. D. There is no relationship between the fluctuations in long-term and short-term rates.

A. Short-term rates fluctuate more sharply than long-term rates. When interest rates are fluctuating, short-term rates will fluctuate more sharply than long-term rates. However, in terms of prices, when interest rates are fluctuating, long-term bond prices are affected more than short-term bond prices

If a bond is currently selling at a premium, then: A. The current yield is lower than the nominal yield B. The current yield is equal to the nominal yield C. The current yield is higher than the nominal yield D. Interest rates are currently higher than when the bond was originally issued

A. The current yield is lower than the nominal yield Bond yields and prices have an inverse (opposite) relationship, meaning that as one increases, the other would decrease. Therefore, if a bond is selling at a premium (above par), its current yield would have to be lower than its nominal yield. For example, an investor owns an 8% bond trading at $1,100. The nominal yield is 8%. The current yield is found by dividing the annual interest by the market price. An 8% bond pays $80 per year assuming a par value of $1,000. Therefore, the current yield is 7.27%. $80 / $1,100 = 7.27%

When a bond is selling at a premium: A. The market price is greater than the par value B. The current yield is higher than the nominal yield C. It is a better quality bond than one selling at a discount D. The yield to maturity is greater than the current yield

A. The market price is greater than the par value The only true statement given is the market price is greater than the par value. The other choices are incorrect. When a bond is selling at a premium, the yield-to-maturity is lower than the current yield, and the current yield is lower than the coupon rate. Bonds that are selling at a premium are not necessarily of better quality than bonds selling at a discount.

If a bond is selling at a premium and is callable at a premium, the yield would be calculated based on: A. The yield-to-worst B. The current yield C. The type of bond D. The nominal yield

A. The yield-to-worst If a bond is selling at a premium and callable at a premium, the yield may be calculated to the final maturity or to the call date, whichever is less. Industry rules require broker-dealers to quote the lower estimate of the yield-to-call or the yield-to-maturity. In each case, the investor would receive a quote based on the most conservative scenario, which is referred to as the yield-to-worst. For a bond that is selling at a premium and is callable at par, the yield is calculated to the call date. The yield-to-call measures the yield that would be earned if the bonds were called at the call price, rather than being held to the maturity date. If a bond is selling at a discount and callable at par, it is quoted on a yield-to-maturity basis.

An individual purchases $100,000 face value of a 6% municipal bond at a dollar price of 101 1/2. The bond's maturity is 7-1-27, but the issue has been called for redemption on the first call date of 7-1-15 @ par. The customer's confirmation should show the: A. Yield to call B. Yield to maturity C. Taxable equivalent yield D. After-tax yield

A. Yield to call Since the bond has been called, the yield to the call must be shown because the maturity is no longer of importance. Taxable equivalent yield and after-tax yield are never shown since the investor's tax bracket and/or capital gains rate cannot be accurately predicted.

Which of the following bond has an interest payment which remains unchanged until maturity? A. Zero-coupon bond B. A floating rate bond C. A variable rate bond D. An adjustable rate bond

A. Zero-coupon bond For most bonds, the interest rate or payment is set at the time of issuance and generally remains fixed for the life of the bond. However, in some cases, as interest rates move up or down, the coupon rate will be adjusted to reflect market conditions. These adjustable rate bonds may be referred to as variable or floating rate bonds. A zero-coupon bond is one that makes no periodic interest payments during its life. In other words, the interest amount (zero) remains unchanged. (37036)

An investor owns $10,000 worth of XYZ Corporation convertible bonds that are callable at 102. The bonds are currently selling in the market at 103. If the corporation calls the bonds at the call price, the investor will receive: A. $10,000 B. $10,200 C. $10,300 D. $10,500

B. $10,200 When bonds are called for redemption, the owner receives the call price. The call price is 102 for a total of $10,200 ($1,020 per bond x 10 bonds). If the investor were able to sell the bonds at the current price, she would receive $10,300 ($1,030 x 10 bonds). However, the question states that the bonds are called, which means the market price of the bond will gravitate to the call value of $10,200.

A customer buys two bonds, both have a par value of $1,000, and she pays 103 5/8 for each bond. The bonds are callable at 105. If the customer's bonds are called, she will receive: A. $2,000 B. $2,100 C. $2,072.50 D. $1,050

B. $2,100 If the bonds are called the investor will receive 105% of the par value for each bond. $1,000 x 105% = $1,050; however, this is multiplied by two bonds for a total of $2,100.

A customer buys bonds with a $50,000 par value at 85 1/2. The bonds are callable at 110. If the customer holds the bonds to maturity, he will receive: A. $42,500 plus the last interest payment B. $50,000 plus the last interest payment C. $55,000 plus the last interest payment D. $85,000 plus the last interest payment

B. $50,000 plus the last interest payment At maturity, the holder of the bonds will receive the par value, which in this example is $50,000, plus the last interest payment.

A call premium is best described as the amount the: A. $66 B. $660 C. $91.88 D. $918.75

B. $660 A nominal yield of 6.6% for a corporate bond with a $1,000 par value equals $66 in interest payments. If an investor owns 10 bonds, he will receive an annual interest payment of $660.

The current yield on a municipal bond with a coupon rate of 4.50%, purchased at par and currently trading at $1,055, is: A. 4.15% B. 4.26% C. 4.46% D. 4.50%

B. 4.26% The current yield is found by dividing the yearly interest payment of $45 by the market price of $1, 055. This equals 4.26%. The fact that the bond was purchased at par is not relevant.

Four municipal bonds have the same maturity date. Which of the following bonds will cost an investor the greatest dollar amount when purchased? A. A 4 3/4% coupon bond offered on a 5.10 basis B. A 5 1/4% coupon bond offered on a 5.00 basis C. A 5 3/4% coupon bond offered on a 6.00 basis D. A 6 1/4% coupon bond offered on a 6.50 basis

B. A 5 1/4% coupon bond offered on a 5.00 basis When bonds are purchased at a discount (below the $1,000 par value) the yield to maturity (basis) will be greater than the coupon rate (nominal yield). This is the case in all of the choices listed except where the coupon rate of 5 1/4% is greater than the yield to maturity of 5%. This would mean that an investor purchased the bond at a premium (above the $1,000 par value) and paid the greatest dollar amount.

A bond has a 6% coupon and is trading with an 8.34% basis. The bond is trading at which of the following price levels? A. Par B. A discount C. A premium D. Cannot be determined

B. A discount Basis (or yield basis) is a different method of expressing yield to maturity. In this case, the yield to maturity is higher than the coupon rate. The only time a client's yield to maturity is above the coupon is when the bond has been purchased at a price less than par (lower price means higher yield). Therefore, the bond must be trading at a discount.

A bond has a 5% coupon and is trading at a 5.55% basis. The bond is trading at which of the following price levels? A. Par B. A discount C. A premium D. 101 3/4

B. A discount Basis is a different method of expressing yield-to-maturity. In this case, the yield-to-maturity is greater than the coupon rate. The only time a bond's yield-to-maturity is greater than its coupon is when the bond has been purchased at a price that's less than par (lower price means higher yield). Therefore, the bond must be trading at a discount.

An issuer currently has an S&P A- rating. If the ratings service notifies the firm that it has been upgraded by two notches, its new rating would be: A. A B. A+ C. AA D. BBB

B. A+ Standard & Poor's highest rating is AAA and its lowest rating is D. The company also uses a (+) or (-) to further distinguish between ratings. Each upgrade or downgrade is referred to as a notch. If an issuer currently has an A- rating, one notch above would be A and two notches above would be an A+ rating.

Which of the following is the lowest Moody's investment grade bond rating? A. BBB B. Baa C. Ba D. A

B. Baa Moody's investment grade bond ratings, from highest to lowest, are Aaa, Aa, A, Baa. BBB is Standard & Poor's lowest investment grade rating. Use the following memory aide to distinguish Moody's ratings from S&P ratings. The name Moody's is a capital letter followed by small letters, just like their ratings (e.g, Baa). S&P consists of all capital letters, just like their ratings (e.g., BBB).

Which of the following is the lowest Moody's investment-grade bond rating? A. BBB B. Baa C. Ba D. A

B. Baa Moody's investment-grade bond ratings, from highest to lowest, are Aaa, Aa, A, Baa. BBB is Standard & Poor's lowest investment-grade rating. Use the following memory aide to distinguish Moody's ratings from S&P ratings. The name Moody's is a capital letter followed by small letters, just like their ratings (e.g., Baa). S&P consists of all capital letters, just like their ratings (e.g., BBB).

If a municipal bond has a basis of 5.25, and its coupon rate is 4 3/4%, the bond is selling: A. Above par B. Below par C. At par value D. At the call price

B. Below par Some municipal bonds are quoted on a yield-to-maturity basis, which in this example is a 5.25 basis. This means the bond has a yield to maturity of 5 1/4%. Since the coupon rate (nominal yield) is 4 3/4%, this means that the bond is selling at a discount, i.e., below the par value ($1,000). If the yield to maturity is greater than the nominal yield (4 3/4%), the bond is selling at a discount.

When a bond is called, the bondholder receives the: A. Call price B. Call price plus accrued interest C. Market price D. Market price plus accrued interest

B. Call price plus accrued interest The bondholder receives the call price (either at par or at a premium) plus accrued interest earned up to the call date.

Relative to a municipal bond purchased at a discount that is callable at par, place the following yields in the proper order from lowest to highest yield. I. Current yield II. Nominal yield III. Yield to maturity IV. Yield to call A. I, II, III, IV B. II, I, III, IV C. IV, III, I, II D. II, I, IV, III

B. II, I, III, IV A bond trading at a discount, which is callable at par, has a nominal yield that is less than its yield to maturity. Current yield falls between the nominal yield and yield to maturity, and the yield to call is greater than the yield to maturity. A bond trading at a premium has a nominal yield, which is higher than the yield to maturity, with the current yield in between the other two yields. The yield to call is lower than the yield to maturity for a bond selling at a premium, which is callable at par.

Who derives the MOST benefit from a call provision attached to a bond offering? A. Bondholders B. Issuers C. Preferred stock holders D. Common stock holders

B. Issuers A call provision allows the bond issuer to redeem its outstanding bonds before they reach maturity. The benefit to the issuer is that, if the bond is called, it's no longer required to make periodic interest payments.

A bond is selling at a premium and yields have remained constant. As the bond gets closer to its maturity, what happens to its price? A. It increases B. It decreases C. It remains the same D. It will experience significant price changes

B. It decreases Although fixed income securities are subject to some degree of interest rate risk, that risk is of less concern if the security is being held to maturity. Assuming there is no default by the issuer, the price of a bond selling at a premium will decrease (move towards par value) as it gets closer to its maturity.

Which of the following statements is TRUE about the call premium of a bond? A. It's the amount that an investor must pay above par to buy a callable bond. B. It's the amount over par value that the issuer must pay to exercise the call privilege. C. It's the amount that the issuer must add to the semiannual interest payments to offset the call feature. D. It's the amount that's added to the price at issuance to compensate for the call privilege.

B. It's the amount over par value that the issuer must pay to exercise the call privilege. The call premium of a bond refers to the amount that the issuer must pay in excess of par value to exercise the call privilege. For example, if a bond is callable at 102, it has a 2 point ($20) call premium. The issuer must pay $1,020 ($20 more than par) if it wants to call in the bond.

A customer buys a 6 3/4% bond at 101 3/4. The yield-to-maturity on the bond is: A. 6 3/4% B. Less than 6 3/4% C. More than 6 3/4% D. Par plus 1 3/4%

B. Less than 6 3/4% The customer bought the bond at 101 3/4, which is at a premium over the $1,000 par value of the bond. If she holds the bond to maturity, she will only receive $1,000. Therefore, her yield-to-maturity will be less than the nominal yield (coupon rate) of 6 3/4%. Remember, if a bond's price is high (above par), then its yield is low. (37059)

When interest rates are fluctuating, which of the following statements is TRUE regarding the movement of short-term bond prices compared to long-term bond prices? A. Short-term bonds are more volatile than long-term bonds. B. Long-term bonds are more volatile than short-term bonds. C. Both long- and short-term rates fluctuate equally. D. There is no relationship between the fluctuations in long-term and short-term bonds.

B. Long-term bonds are more volatile than short-term bonds. When interest rates are fluctuating, short-term rates will fluctuate more sharply than long-term rates. However, in terms of prices, when interest rates are fluctuating, long-term bond prices are affected more than short-term bond prices.

Which of the following bonds would increase most in price if interest rates decline? A. Short-term bonds selling at a discount B. Long-term bonds selling at a discount C. Short-term bonds selling at a premium D. Long-term bonds selling at a premium

B. Long-term bonds selling at a discount When interest rates decline, bond prices will rise. The longer maturities will rise more than the shorter maturities due to market risk. Bonds selling at a discount will rise more sharply than those selling at a premium.

The call premium of a bond refers to the amount: A. An investor must pay above par to buy a callable bond B. Over par value that the issuer must pay to exercise the call privilege C. The issuer must add to the semiannual interest payments to offset the call feature D. Added to the price at issuance to compensate for the call privilege

B. Over par value that the issuer must pay to exercise the call privilege The call premium of a bond refers to the amount the issuer must pay in excess of par value to exercise the call privilege. The call privilege is the issuer's right to buy the bond from the holder prior to maturity. For example, if a bond is callable at 102, it has a two-point ($20) call premium. The issuer must pay $1,020 ($20 more than par) if it wishes to call in the bond.

All of the following are TRUE of a bond selling above par, EXCEPT: A. The current yield is lower than the nominal yield B. The nominal yield is less than the current yield C. The yield to maturity is lower than the nominal yield D. The nominal yield always remains fixed

B. The nominal yield is less than the current yield Bond prices and yields have an inverse (opposite) relationship; as a bond's price increases, its yield decreases. Conversely, as prices decrease, yields increase. When a bond is selling above its par value, both the current yield and yield to maturity are below the nominal yield. The nominal yield is printed on the face of the bond and always remains fixed.

A bond on which a call notice has been issued is purchased by a customer. Which yield must be disclosed on the confirmation? A. None, since the bond is being called B. The yield to call C. The yield to maturity D. The lower of the yield to call or the yield to maturity

B. The yield to call When bonds are called, the yield to call must be disclosed on the confirmation. If a call notice has not been issued, the lower of the yield to call or the yield to maturity must be disclosed.

When comparing long-term bonds to short-term bonds, all of the following statements about long-term bonds are TRUE, EXCEPT: A. They usually have higher yields than short-term bonds B. They usually provide greater liquidity than short-term bonds C. They usually are more often callable than short-term bonds D. Their market prices are more sensitive to interest-rate changes than short-term bonds

B. They usually provide greater liquidity than short-term bonds All of the statements about long-term bonds compared to short-term bonds are true except that they usually provide greater liquidity than short-term bonds.

A type of bond in which the amount of interest paid to the investor may change is referred to as a: A. Convertible bond B. Variable rate bond C. Zero-coupon bond D. Callable bond

B. Variable rate bond For most bonds, the interest rate or payment is set at the time of issuance and generally remains fixed for the life of the bond. However, in some cases, as interest rates move up or down, the coupon rate will be adjusted to reflect market conditions. These adjustable rate bonds are sometimes referred to as variable or floating rate securities. A zero-coupon bond is one that makes no periodic interest payments during its life. A convertible bond gives an investor the ability to convert the par value of the bond into predetermined number of shares of the company's common stock; however, the bond's interest payment is fixed.

An investor sells ten 5% bonds and buys another 10 bonds with a 5 1/4% coupon rate. The investor's yearly cash flow from the bonds will have increased by: A. $1.25 per bond B. $1.50 per bond C. $2.50 per bond D. $5.00 per bond

C. $2.50 per bond The investor's yearly return will have increased by $2.50 per bond. The increase is 1/4% (5% to 5 1/4%), which is 1/4 of 1% of the par value of $1,000, or $2.50.

Wilsons Chemicals bonds have a nominal yield of 6.6%. They closed the previous day at 91 7/8. An owner of 10 bonds will receive a yearly interest payment of: A. $1.25 per bond B. $1.50 per bond C. $2.50 per bond D. $5.00 per bond

C. $2.50 per bond The investor's yearly return will have increased by $2.50 per bond. The increase is 1/4% (5% to 5 1/4%), which is 1/4 of 1% of the par value of $1,000, or $2.50.

Python Industries has previously issued 5.0% bonds ($1,000 par value). The bonds mature in 12 years and are selling at a 20% discount to par. What is the current yield on the Python bonds? A. 5.00% B. 5.60% C. 6.25% D. 8.50%

C. 6.25% The current yield is found by dividing the annual interest payment by the current market price. The bonds pay interest of $50 per year. The bonds are currently trading at a 20% discount to par; therefore, the bonds are priced at 80% of par, or $800 ($1,000 x .8). The current yield is 6.25% ($50 / $800). The fact that the bond will mature in 12 years is not necessary to find the current yield, although it is needed to find the yield to maturity.

The current yield on a $1,000 par value 5% bond selling at $800 maturing in 10 years is: A. 5.00% B. 5.60% C. 6.25% D. 8.50%

C. 6.25% The current yield is found by dividing the yearly interest payment of $50 by the market price of $800. This equals 6.25%. The fact that the bond will mature in 10 years is not necessary to find the current yield (but it is needed to find the yield to maturity).

A bond with a 6% coupon is priced at a 7.20 basis. If the bond's yield-to-maturity increases by 40 basis points, the yield would be: A. 5.6% B. 6.4% C. 7.6% D. 6.8%

C. 7.6% If a bond is priced at a 7.20 basis, this means that it is priced to yield 7.20 or has a YTM of 7.20%. If the bond's basis increased by 40 basis points, the new yield-to-maturity is 7.60%. The fact that the bond has a 6% coupon rate is relevant for determining whether the bond is trading at a premium or discount to par value. Since the YTM is greater than 6%, the bond is trading at a discount.

A bond has a 6% coupon and is trading at a 5.78% basis. The bond is trading at which of the following price levels? A. Par B. A discount C. A premium D. Flat

C. A premium Basis (or yield basis) is a different method of expressing yield-to-maturity. In this case, the yield to maturity is lower than the coupon rate. The only time a bond's yield-to-maturity is below its coupon is when the bond has been purchased at a price that's greater than par (higher price means lower yield). Therefore, the bond must be trading at a premium.

A bond has a 5.5% coupon and is trading at a 4.65% basis. The bond is trading at which of the following price levels? A. Par B. A discount C. A premium D. 105 7/8

C. A premium Basis (or yield basis) is a different method of expressing yield-to-maturity. In this case, the yield-to-maturity is lower than the coupon rate. The only time a bond's yield-to-maturity is below its coupon is when the bond has been purchased at a price that's greater than par (higher price means lower yield). Therefore, the bond must be trading at a premium.

The State of North Carolina is offering $100,000,000 of general obligation bonds with serial maturities. The bonds maturing in 2029 have an interest rate of 5 1/2% and a yield to maturity of 5.60%. This means the bonds are being offered: A. At par B. At a premium C. At a discount D. To yield 5 1/2%

C. At a discount Since the bonds have a yield to maturity of 5.60% (that is greater than the 5 1/2% coupon rate), the bonds are being offered at less than their face (par) value. These bonds were, therefore, issued at a discount.

Which of the following Moody's ratings is the most speculative in the investment-grade category? A. Aa B. A C. Baa D. Ba

C. Baa The top-4 ratings in both Moody's and S&P are investment grade. The top-4 ratings are: Moody's S&P Aaa AAA Aa AA A A Baa BBB If the question had asked for the most speculative, then Ba would be the answer.

Who derives the MOST benefit from a put provision attached to a bond offering? A. Preferred stock holders B. Issuers C. Bondholders D. Common stock holders

C. Bondholders A put provision allows the bondholder to redeem the bond on a specified date (or dates) prior to maturity. This provision is most likely to be utilized if market interest rates rise.

During an inflationary period when interest rates are rising, the market value of existing bonds would: A. Remain stable B. Increase C. Decrease D. Fluctuate

C. Decrease Interest rates and bond prices have an inverse (opposite) relationship. As interest rates rise, bond prices decrease. Therefore, in an inflationary period where interest rates are rising, the market value of existing bonds will decrease.

Municipal bond rating organizations are concerned primarily with the risk of: A. Declining purchasing power B. Market price fluctuations C. Default D. Illiquidity

C. Default Municipal bond rating organizations, such as S&P and Moody's, are concerned primarily with the risk of default or the risk of the issuer not being able to pay interest and/or principal.

An outstanding municipal bond would most likely be called when interest rates: A. Rise above the bond's nominal yield B. Rise above the bond's yield to maturity C. Fall below the bond's nominal yield D. Fall below the bond's yield to maturity

C. Fall below the bond's nominal yield Bonds may contain a provision that allows the issuer, at its option, to redeem the bonds before they mature. Call provisions usually benefit the issuer, which has the option of calling in the bonds when interest rates decline. The issuer may then refinance the debt at a lower rate of interest. For instance, if an issuer's outstanding bond is paying a coupon rate (nominal yield) of 9% at a time when similar bonds are paying only 5%, the issuer can reduce its interest costs by calling in the 9% bonds and issuing new ones at 5%. As interest rates decline, a bond's yield to maturity or yield to call would also decline.

A bond is selling at a premium. This indicates that: A. The yield to maturity is greater than the nominal yield B. The market price is less than the par value C. Interest rates have decreased since the bond was issued D. The nominal yield is less than the current yield

C. Interest rates have decreased since the bond was issued The amount that the market price exceeds the par value is known as a premium. One reason for selling at a premium is a decrease in interest rates after the bonds were issued. When looking at the yields for premium bonds, the nominal yield is the highest, followed by the current yield, with the yield to maturity being the lowest yield of the three.

Which of the following statements is NOT TRUE as it relates to a bond selling at a discount? A. The yield to maturity is greater than the nominal yield. B. The nominal yield is less than the current yield. C. Interest rates most likely decreased after the bonds were issued. D. The par value exceeds the market price.

C. Interest rates most likely decreased after the bonds were issued. If the par value of a bond is greater than the bond's market price, it is selling at a discount. A bond sells at a discount because of an increase in interest rates since the bond was issued. For a discount bond, the yield to maturity is highest, followed by the current yield, with the nominal yield being lowest.

If interest rates decline, which of the following securities would probably have the greatest increase in market value? A. Short-term bonds B. Intermediate-term bonds C. Long-term bonds D. Treasury bills

C. Long-term bonds When interest rates decline, the securities with the longest maturities will have the greatest price increase.

When comparing long-term bonds and short-term bonds, all of the following statements are TRUE, EXCEPT: A. Long-term bonds generally have higher yields B. Fluctuations in the dollar price of long-term bonds are usually greater than for short-term bonds when the general level of interest rates change C. Long-term bonds generally provide greater liquidity than short-term bonds D. There is more purchasing power risk with long-term bonds when compared to short-term bonds

C. Long-term bonds generally provide greater liquidity than short-term bonds When comparing long-term bonds and short-term bonds, all of the choices listed are true except long-term bonds generally provide greater liquidity than short-term bonds. Short-term bonds do not suffer from as large a price movement as long-term bonds when interest rates are changing. Long-term bonds are open to greater market risk, interest-rate risk, and purchasing-power risk. Both individual and institutional investors alike are more willing to accept a lower return (yield) in favor of more stable principal (less severe price swings).

When a client buys a bond above par, the confirmations must indicate the: A. Rating B. Contraparty C. Lower of yield to call or yield to maturity D. Catastrophe call provisions

C. Lower of yield to call or yield to maturity A bond's confirmation must disclose the lower of the yield to maturity or the yield to call. This is sometimes referred to as the yield to worst.

In a discussion with a client, a registered representative refers to a bond yield that has been reduced by the inflation rate. This yield is known as the: A. After-tax yield B. Discount rate C. Real interest rate D. LIBOR

C. Real interest rate The real interest rate is the yield of a security reduced by the inflation rate. While it represents earnings remaining once inflation is taken into account, the real interest rate does not factor in the tax consequences. The discount rate is the rate of interest that the Federal Reserve charges member banks for loans. LIBOR (the London Interbank Offered Rate) is the rate of interest that banks in London charge each other for short-term loans.

A municipality will refund a revenue bond issue for all of the following reasons, EXCEPT to: A. Reduce interest charges B. Issue new bonds at lower interest rates C. Reduce the market value of outstanding bonds that are not refunded D. Eliminate restrictions in the bond resolution

C. Reduce the market value of outstanding bonds that are not refunded A municipality will refund a revenue bond issue if interest rates declined to reduce interest charges, to issue new bonds at lower interest rates, and to eliminate restrictions in the bond resolution. The municipality would not refund an issue to reduce the market value of the outstanding bonds. The market value of the outstanding bonds is determined by supply and demand and by the general level of interest rates.

What type of risk do zero-coupon bonds eliminate? A. Credit risk B. Purchasing power risk C. Reinvestment risk D. Market risk

C. Reinvestment risk Zero-coupon bonds are issued at a discount and do not pay semiannual interest. Therefore, there are no interest payments to reinvest, eliminating reinvestment risk. When investing in fixed-income investments, one of the uncertainties is whether interest rates will allow an investor to realize the total return that was calculated at the time of the investment (yield to maturity). Zero-coupon bonds do not have reinvestment risk, but they do have extreme interest-rate risk because the bonds' duration will equal the years to maturity.

Bond issues with staggered maturity dates are known as: A. Adjustment bonds B. Sinking fund bonds C. Serial bonds D. Purchase money bonds

C. Serial bonds Bonds with staggered maturity dates are known as serial bonds. The principal amount outstanding is reduced over time. Term bonds mature on one single maturity date.

When bond issues have staggered maturity dates, they're referred to as: A. Term bonds B. Sinking fund bonds C. Serial bonds D. Zero-coupon bonds

C. Serial bonds Bonds with staggered maturity dates are referred to as serial bonds. For serial bonds, the principal amount outstanding is reduced over time. On the other hand, term bonds have one maturity date.

Which of the following issues will most likely have a mandatory sinking fund? A. Serial issues B. Balloon issues C. Term issues D. Convertible issues

C. Term issues A term bond issue is one in which all of the bonds mature in one specific year. In order to accumulate the funds that may be used to help retire the bonds, the issuer will deposit funds (above the amount that is used to pay interest) in a sinking fund. These funds will generally be used to retire some (if not all) of the bonds prior to maturity. A serial bond issue is one in which a portion of the bond offering is paid off each year.

If a bond is currently selling for less than par value, then: A. The current yield is lower than the nominal yield B. The current yield is equal to the nominal yield C. The current yield is higher than the nominal yield D. Interest rates are currently lower than when the bond was originally issued

C. The current yield is higher than the nominal yield Bond yields and prices have an inverse (opposite) relationship, meaning that as one increases, the other would decrease. Therefore, if a bond is selling at a premium (above par), its current yield would have to be lower than its nominal yield. For example, an investor owns an 8% bond trading at $850. The nominal yield is 8%. The current yield is found by dividing the annual interest by the market price. An 8% bond pays $80 per year assuming a par value of $1,000. Therefore, the current yield is 9.41% ($80 / $850 = 9.41%).

XYZ Corporation has issued $50 million 7% bonds at a premium. The bonds have a current yield of 6% and a yield to maturity of 5%. An investor purchasing $1,000,000 face value of bonds at the offering will receive a yearly income of: A. $35,000 B. $50,000 C. $60,000 D. $70,000

D. $70,000 An owner of the bonds will receive 7% of the par value yearly regardless of the cost. In this example, the investor purchased $1,000,000 face value of bonds and will, therefore, receive $70,000 (7% of $1,000,000 = $70,000) in yearly income.

A .05 change in basis would have the greatest effect on which of the following 6.00% coupon bonds? A. 2-year maturity at a 7.00 yield B. 2 1/4-year maturity at a 7.05 yield C. 2 1/2-year maturity at a 7.10 yield D. 2 3/4-year maturity at a 7.15 yield

D. 2 3/4-year maturity at a 7.15 yield A change in basis (yield) has the greatest effect on the price of longer maturity bonds. Therefore, the longest maturity bond would be affected the most.

Four municipal bonds maturing in 2039 are all selling at a 7.00 basis. Which of the following bonds is most likely to be refunded? A. 5 1/2% callable in 2024 @ 103 B. 6 1/2% callable in 2023 @ 100 C. 7% callable in 2024 @ 103 D. 7 1/2% callable in 2023 @ 100

D. 7 1/2% callable in 2023 @ 100 The most common reason for a municipality to refund an outstanding issue is to save interest costs. If a municipality can borrow money at a lower rate than the outstanding issue, it can use this money to refund the outstanding issue and thus save interest cost. The bonds are selling at a 7.00% yield. The municipality can then expect to borrow new monies at a 7.00% interest rate. The municipality can only save money by refunding an issue with a higher interest rate, 7 1/2%.

A municipal bond with a 6% coupon is priced at a 7.20 basis. If the bond's yield to maturity increases by 40 basis points, the yield to maturity is: A. 5.60% B. 6.40% C. 6.80% D. 7.60%

D. 7.60% The term priced at a 7.20 basis refers to a serial bond that is priced to yield 7.20 or a YTM of 7.20%. If the bond's basis increased by 40 basis points, the new yield to maturity is 7.60%. The 6% coupon rate is relevant if the question asked about whether the bond was trading at a discount or a premium. Since the YTM is greater than 6%, the bond is trading at a discount.

A company has $50,000,000 par value convertible bonds outstanding. The coupon rate is 8%. The bonds are currently selling at 96. What is the current yield? A. 7.0% B. 7.5% C. 8.0% D. 8.3%

D. 8.3% To find the current yield of the bonds, divide the yearly interest paid on the bonds by the current market value of the bonds. Since each bond has a par value of $1,000 the yearly interest is $80 ( $1,000 x 8%). The market value of a bond is $960. Therefore, the current yield equals 8.3% ($80 divided by $960 equals 8.3%).

Which of the following choices would have the LEAST amount of interest-rate risk? A. A Treasury bond maturing in 30 years B. A newly-issued GNMA backed by 15-year mortgages C. A Treasury STRIP maturing in eight years D. A BB-rated corporate debenture that matures in two years

D. A BB-rated corporate debenture that matures in two years Interest-rate risk is primarily related to the maturity of a bond. The longer the bond's maturity, the more interest-rate risk it has. In this case, the two-year debenture has the least interest-rate risk because it has the shortest maturity. Note, however, that its below-investment-grade rating translates into the greatest amount of credit risk of the securities listed.

If a bond has a basis of 4.33 and a coupon rate of 5.77%, the bond is selling at: A. A price that cannot be determined from the information given B. Par value C. A discount D. A premium

D. A premium Bonds may be quoted based on their yield-to-maturity, which in this example is 4.33 (basis and YTM are synonymous). Since the bond has a yield-to-maturity (basis) of 4.33%, which is lower than the 5.77% nominal yield (coupon rate), the bond is selling at a price that is above the par value of $1,000 (i.e., a premium). On the other hand, if the yield-to-maturity was higher than the nominal yield, the bond would be selling at a discount.

If a municipal bond has a basis of 4.33 and a coupon rate of 5.77%, the bond is selling at: A. A price that cannot be determined from the information given B. Par value C. A discount D. A premium

D. A premium Municipal bonds may be quoted on a yield to maturity basis, which in this example is a 4.33 basis. This means the bond has a yield to maturity of 4.33%. If the nominal yield (coupon rate) is 5.77%, this means that the bond is selling at a premium, above the par value ($1,000). If the yield to maturity (4.33%) is less than the nominal yield (5.77%), the bond is selling at a premium.

Which of the following formulas is used to calculate the current yield on a bond? A. Annual dividend / Investor's cost B. Semiannual interest / Current market value C. Semiannual interest / Investor's cost D. Annual interest / Current market value

D. Annual interest / Current market value The current yield on a bond is determined by dividing the annual interest by the current market value. If an investor owns a bond, his current yield is the annual interest divided by the investor's cost.

Which of the following Moody's ratings is the most speculative? A. Aa B. A C. Baa D. Ba

D. Ba Of the choices given, Ba is the most speculative. The highest Moody's rating is Aaa.

The purpose of a sinking fund is to redeem a corporation's: A. Common stock B. Warrants C. Rights D. Bonds

D. Bonds A sinking fund is used by an issuer to set aside funds that will be used for the purpose of redeeming a corporation's bonds prior to or at maturity.

Which of the following interest-rate environments makes call protection MOST valuable to a purchaser of bonds? A. Increasing interest rates B. Stable interest rates C. Volatile interest rates D. Decreasing interest rates

D. Decreasing interest rates Call protection would be most valuable to a purchaser of bonds when interest rates decline. If interest rates fall, existing bond prices rise. A municipality or any issuer would likely call bonds when interest rates decline so it can issue new bonds with lower rates of interest. Although bonds may be callable at a small premium above par value, if the bonds are not callable, the investor may realize the full benefit of an increase in the market price of the bonds.

Which of the following statements concerning duration is TRUE? A. A well-diversified index stock fund will have duration of approximately 1.0. B. Due to their extended holding period, long-duration funds are right only for young investors with a suitable time horizon. C. Duration is the measurement of the period in which a CDSC will be assessed on a Class B share. D. Duration is a measurement of a given bond's sensitivity to interest-rate swings.

D. Duration is a measurement of a given bond's sensitivity to interest-rate swings. Duration is a measurement of a given bond's sensitivity to interest-rate swings. Factors affecting a given bond's duration include maturity and coupon. It is important to remember that a long-duration bond portfolio is much more price sensitive to interest-rate swings.

A tombstone ad states that the McGee Oil Company is offering $200,000,000 of 8 1/2% bonds due July 1, 2038 at 99 1/2% of par value. The yield to maturity on the bonds is: A. 8% B. Less than 8 1/2% C. 8 1/2% D. Greater than 8 1/2%

D. Greater than 8 1/2% The 8 1/2% bonds are being offered at a discount at 99 1/2% of their $1,000 par value. An investor who purchased the bonds at the offering (at $995) and held the bonds to maturity will receive the par value of $1,000. The investor will, therefore, have a yield to maturity that is greater than the coupon rate (nominal yield) of 8 1/2%.

Which of the following terms is used when pricing an entire issue of municipal bonds on a yield-to-call basis? A. Sinking fund B. Catastrophe C. Optional D. Mandatory in-whole

D. Mandatory in-whole Municipal bonds may be called based on various scenarios. They may be called based on funds being held in a sinking fund, as a result of an extraordinary or catastrophe situation, as an optional decision made by the issuer for all or part of an offering, or due to mandatory, in-whole call provisions in the offering. Yield-to-call will be used when bonds are subject to mandatory in-whole calls and are priced at a premium.

The proceeds of the sale of a municipal bond issue are invested in U.S. government securities that are sufficient to cover interest, principal, and call premiums on an outstanding bond issue. The outstanding bonds are called: A. Structured notes B. Double-barreled bonds C. Guaranteed bonds D. Prerefunded bonds

D. Prerefunded bonds The outstanding bonds are called prerefunded or advance-refunded bonds. The new issue is called a refunding issue. This is usually done when the issuer can borrow funds at lower rates, thereby reducing its interest costs.

The major risk of investing in long-term, high-grade bonds is: A. Not being able to pay interest when due B. Not being able to pay principal upon maturity C. Limited marketability D. Purchasing-power risk

D. Purchasing-power risk Long-term, high-grade bonds are relatively safe investments since interest payments and repayment of principal are relatively secure. However, long-term bonds, even T-bonds, have a significant amount of purchasing-power risk. This is because the amount of interest is fixed. The purchasing-power of the interest income may decline over the long term because of inflation, which would reduce the amount that could be purchased with the fixed amount of dollars.

A term bond has a mandatory sinking fund call feature. What method will be used to determine which specific bonds will be called? A. Investors with the largest position B. Investors with the largest coupon C. Investors with the longest maturity D. Random selection

D. Random selection Random selection is the method used to call term bonds.

A decrease in which of the following would cause the price of a bond to increase? A. The bond's rating B. The bond's liquidity C. The issuer's financial strength D. The general level of interest rates

D. The general level of interest rates Interest rates and bond prices are inversely related. When interest rates increase, bond prices will fall. When interest rates decrease, bond prices will rise. A decrease in a bond's rating choice (a), a bond's liquidity choice(b), or an issuer's financial strength choice (c), would usually have a negative effect on a bond's price.

An increase in which of the following will cause the price of an existing bond to decline? A. The bond's rating B. The bond's liquidity C. The issuer's financial strength D. The general level of interest rates

D. The general level of interest rates Interest rates and existing bond prices are inversely related. When interest rates rise, bond prices will fall. Conversely, when interest rates fall, bond prices will rise. All other choices will usually have a positive effect on a bond's price. (31634)

A 4.65% New York City GO bond matures in 20 years. The bond is callable in 8 years at 103. Which of the following statements is TRUE? A. The investor has 3 years of call protection B. The issuer must pay investors an 8-point call premium to exercise the call privilege on the bonds C. The investor will receive less for the bond if it is called versus holding the bond to maturity D. The issuer may exercise the call provision anytime after the 8th year

D. The issuer may exercise the call provision anytime after the 8th year The call premium of 3 points ($30 per bond) refers to the amount above par value which the issuer must pay the owner of the bond when the bond is called. Issuers usually call outstanding bonds when interest rates decline, and they are able to issue new bonds at lower rates of interest. The bond has 8 years of call protection. The issuer would need to make an outlay of cash to call back the bonds, but would save money because of the lower rate of interest the issuer would pay on the new bonds. A call provision is exercised by an issuer and not the bondholder.

If a bond is selling at a premium and is callable at par, how is the yield calculated? A. As a percentage of the par value B. By dividing the annual income by the current price C. To the final maturity date D. To the call date

D. To the call date The yield for a bond that is selling at a premium and is callable at par is calculated to the call date. The yield to call measures the yield that would be earned if the bonds were called at the call price, rather than held to the maturity date. Industry rules require broker-dealers to quote the lower estimate of the yield to call or the yield to maturity. If the bond had been selling at a discount, it would have been quoted on a yield to maturity basis. If a bond is selling at a premium and callable at a premium, the yield may be to the final maturity or the call date, whichever is less. In each case, the investor would receive a quote based on the most conservative scenario. This is referred to as the yield to worst.

When a municipal bond is to be advance-refunded (prerefunded), an escrow account is set up to insure that the money will be available. Securities are deposited in the escrow account. The securities that are deposited in the escrow account are: A. Revenue bonds B. General obligation bonds C. Federal agency bonds D. Treasury bonds

D. Treasury bonds Only Treasury obligations are acceptable securities as escrow when a bond is advance-refunded.

The securities that are deposited in an escrow account for an advance refunding of a municipal bond are: A. Revenue bonds B. General obligation bonds C. Federal agency bonds D. Treasury bonds

D. Treasury bonds Only Treasury obligations are acceptable securities as escrow when a municipal bond is being advance refunded.

A bond's nominal yield: I. Does not change II. Indicates the amount per thousand that bondholders will receive as income III. Needs to be approved by the board of directors IV. Will go up if interest rates go down A. I and II only B. I and III only C. II and III only D. III and IV only

The nominal yield is set at the time of issuance and does not change. It indicates the dollar amount of income the bondholder will earn on each $1,000 of principal invested. For example, a 6% nominal yield indicates a return of $60 per year. Prices of bonds go up if interest rates go down. However, the nominal yield will remain the same.