Unit 2

The current yield of a callable bond selling at a premium is calculated A) as a percentage of its market value. B) as a percentage of its par value. C) to its maturity date. D) as a percentage of its call price.

A) as a percentage of its market value. Current yield for any security is always computed on the basis of the current market value.

A bond of standard size has a nominal yield of 6%, paid in the customary fashion. The bond matures in 10 years, is callable at $105 in 5 years, and is currently priced at $110. An investor calculating the bond's yield to call would include A) the semiannual interest payments of $30. B) the loss of $100 at maturity. C) the gain of $50 when called. D) 20 payment periods.

A) the semiannual interest payments of $30. The yield to call 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 (nominal yield) will make $30 interest payments twice each year. Remember, unless otherwise stated, bonds have a par value of $1,000 and customarily pay interest semiannually. With a 5-year call, there are only 10 payment periods, not 20. The loss at call is $50 ($1,100 - $1,050); there is no gain, and the loss at maturity of $100 is only relevant for YTM, not YTC.

An investor purchases a Treasury note and the confirmation shows a price of $102.21. Rounded to the nearest cent, the investor's cost, excluding commissions, is A) $102.21. B) $1,026.56. C) $1,022.10. D) $1,022.21.

B) $1,026.56. Treasury notes are quoted in 32nds, where each 32nd equals $0.3125. The 102 in the quote equals $1,020 and the 21/32 is an additional $6.56, bringing the total to $1,026.56.

Many fixed-income investors are looking to avoid loss of principal. Which of the following would likely have the lowest degree of exposure to credit risk? A) Baa-rated municipal revenue bond B) Aa-rated corporate debenture C) A-rated general obligation municipal bond D) Ba-rated corporate mortgage bond

B) Aa-rated corporate debenture A bond's rating takes into consideration all factors, including collateral and tax base. The higher the rating, the lower the credit risk.

An 8% corporate bond is offered on an 8.25 basis. Which of the following statements are true? 1. Nominal yield is higher than YTM. 2. Current yield is higher than nominal yield. 3. Nominal yield is lower than YTM. 4. Current yield is lower than nominal yield. A) I and IV B) II and III C) I and III D) II and IV

B) II and III A bond offered on an 8.25 basis is the same as at a YTM of 8.25%. Because the yield quoted is higher than the 8% coupon, the bond is trading at a discount to par. For discount bonds, the nominal yield is lower than both the current yield and the yield to maturity.

A bond with a par value of $1,000 and a coupon rate of 5%, paid semiannually, is currently selling for $1,200. The bond matures in 10 years and is callable in six years at 103. In the computation of the bond's yield to call, which of the following would be a factor? A) Future value of $1,200 B) Interest payments of $25 C) 20 payment periods D) Present value of $1,030

B) Interest payments of $25 The 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 5% coupon will make $25 semiannual interest payments. With a six-year call, there are only 12 payment periods, not 20. The present value is $1,200 and the future value is $1,030, the reverse of the numbers indicated in the answer choices.

A European corporation seeking a short-term loan would probably be most concerned about an increase to A) the eurobond rate. B) the SOFR. C) the Fed funds rate. D) the U.S. Treasury bill rate.

B) the SOFR. For more than 40 years, the London Interbank Offered Rate—commonly known as LIBOR—was a key benchmark for setting the interest rates charged on adjustable-rate loans, mortgages, and corporate debt. Over the last decade, LIBOR has been burdened by scandals and crises. Effective January 2022, LIBOR is no longer being used to issue new short-term loans in the U.S. It was replaced by the Secured Overnight Financing Rate (SOFR) which many experts consider a more accurate and more secure pricing benchmark. As is always the case with NASAA, we do not know when the exam questions will be updated. One thing we can promise you is that any question relating to this topic will not have both LIBOR and SOFR as choices, so you should choose whichever one appears.

An investor is trying to decide whether to purchase $10,000 face amount of a U.S. Treasury bond or a highly rated corporate bond. The price of the Treasury bond is 102.20 while the price of the corporate bond is 99 3/8. If the investor decides to purchase the Treasuries, disregarding commissions, the price difference is A) $32.50. B) $28.25. C) $325.00. D) $282.50.

C) $325.00. The first step is remembering that Treasuries are quoted in 32nds. That means that 102.20 is 102 and 20/32 which is 102 5/8. Subtract 99 3/8 from 102 5/8 to get 3 2/8 or 3 1/4. On a $1,000 bond, that is $32.50. Then, note that this investor is purchasing 10 bonds, so the difference in price is $32.50 times 10 or $325.

A customer buys a 5% bond at par. The bond is callable in 5 years at par and matures in 10 years. Which of the following statements is true? A) YTC is higher than YTM. B) Nominal yield is higher than either YTM or YTC. C) YTC is the same as YTM. D) YTC is lower than YTM.

C) YTC is the same as YTM. If a bond is trading at par, the nominal yield (coupon rate) = current yield = yield to maturity = yield to call (unless the call price is at a premium, in which case the YTC would be higher). YTC is higher than YTM if the bond is trading at a discount to par. YTC is lower than YTM if the bond is trading at a premium over par. Nominal yield is higher than either YTM or YTC if the bond is trading at a premium over par.

A bond is selling at a premium over par value. Therefore, A) its nominal yield is less than its current yield. B) none of these are correct. C) its current yield is less than its nominal yield. D) its yield to maturity is greater than its current yield.

C) its current yield is less than its nominal yield. Any bond selling at a premium will yield less than the coupon rate (nominal yield). Conversely, of course, a bond trading at a discount will certainly yield more. Remember, there is an inverse relationship between bond prices and bond yields.

All of the following are true of negotiable, jumbo certificates of deposit except A) they are usually issued in denominations of $100,000 to $1 million or more. B) they are readily marketable. C) they are secured obligations of the issuing bank. D) they usually have maturities of one year or less.

C) they are secured obligations of the issuing bank. Negotiable CDs are general obligations of the issuing bank; they are not secured by any specific asset. They do qualify for FDIC insurance (up to $250,000), but that is not the same as stating that the bank has pledged specific assets as collateral for the loan.

If investors hold bonds until maturity, their realized rate of return, assuming all interim cash flows are reinvested at that same rate, would be equal to A) the coupon return. B) the price return. C) the income return. D) the yield to maturity.

D) the yield to maturity. The yield to maturity is an investor's total return if they purchase the bond at any point and then hold it until maturity, assuming all interim cash flows are reinvested at that same YTM. This takes into consideration any capital gain or loss; therefore, the yield to maturity will fluctuate with the bond's price.