Chapter 2: Debt Securities

Question #64 of 250Question ID: 604880 The current yield on a bond with a coupon rate of 7.5% currently selling at 105-½ is approximately: A)7.1%. B)7.5%. C)8%. D)6.5%.

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 7.1%. Reference: 2.2.7.2 in the License Exam A

Question #5 of 250Question ID: 604915 A convertible corporate bond with a conversion price of $20 is trading at 115. The parity price of the common stock is: A)$20.00. B)$23.00. C)$17.00. D)$26.00.

A conversion price of $20 means the conversion ratio is 50 (i.e., each bond can be converted into 50 shares of common stock). $1,150/50 = $23 parity price. Reference: 2.5.2.5 in the License Exam B

Question #35 of 250Question ID: 901833 Debt normally issued by big corporations with reliable credit ratings who seek to finance short-term needs best describes: A)revenue anticipation notes. B)certificates of deposit (CDs) C)commercial paper. D)T-bills.

Also known as promissory notes this is the definition of commercial paper. They are short-term corporate issued instruments sold at a discount and maturing at par. Reference: 2.10.2.4 in the License Exam C

Question #33 of 250Question ID: 605045 Which of the following statements regarding CMOs is TRUE? A)CMOs are considered high yield bonds. B)CMO earnings are tax exempt. C)CMO returns are affected by interest rate changes. D)CMOs may not trade at a premium.

CMOs, like other mortgage-backed securities, respond to changes in interest rates. When interest rates decline, certain CMO tranches are subject to prepayment risk. CMOs are corporate instruments, and their interest is taxable at all levels. Reference: 2.8 in the License Exam C

Question #95 of 250Question ID: 605104 Which of the following does NOT issue commercial paper? A)Broker/dealer. B)Finance company. C)Corporation. D)Commercial bank.

Commercial banks do not issue commercial paper. The commercial paper market was developed to circumvent banks so that corporations could lend to, and borrow from, each other more economically. Commercial paper is unsecured, short-term corporate debt. Reference: 2.10.2.4 in the License Exam D

Question #94 of 250Question ID: 604893 Equipment trust certificates are commonly issued by: A)utilities. B)the U.S. government. C)political subdivisions. D)transportation companies.

Equipment trust certificates are corporate bonds commonly issued by transportation companies, such as railroads and airlines. These bonds are backed by equipment (e.g., aircraft) the issuer uses in their business. Reference: 2.3.1.3 in the License Exam D

Question #46 of 250Question ID: 604952 Which of the following usually does NOT pay interest semiannually? A)Public utility bonds. B)Treasury notes. C)Treasury bonds. D)GNMA.

GNMA pass-through certificates pay principal and the interest monthly. All other choices usually pay interest semiannually. Reference: 2.6.2.3.1 in the License Exam D

Question #81 of 250Question ID: 604921 If an investor is faced with converting a bond into 20 shares of common stock with a CMV of $57.75 or allowing the bond to be called at 102, the investor is experiencing: A)a hedge. B)an arbitrage. C)a forced conversion. D)a refunding call.

If the value of the stock to be received on conversion exceeds the call price, this is essentially forcing the bondholder to convert. Reference: 2.5.2.7 in the License Exam C

Question #63 of 250Question ID: 605051 Which of the following is TRUE of taxation of CMO interest? A)Taxed only on the federal level. B)Subject to federal, state, and local taxes. C)Exempt from all taxation. D)Taxed only on the state level.

Interest earned on all mortgage-backed securities is fully taxable. Reference: 2.8.2.2 in the License Exam B

Question #88 of 250Question ID: 605029 All of the following statements regarding PAC CMOs are true EXCEPT: A)PACs have companion tranches. B)PACs have higher yields than comparable TACs. C)PACs have a more certain maturity date than comparable TACs. D)PACs have a lower than average prepayment risk.

PACs have two companion tranches; one to absorb prepayments and one to buffer against extension risk. Because there is less risk and a more certain maturity date, PACs tend to have lower yields than comparable TACs. Reference: 2.8.1.3 in the License Exam B

Question #16 of 250Question ID: 901832 Which of the following is nonnegotiable (nonmarketable)? A)Treasury bills. B)Treasury notes. C)Series EE bonds. D)Ginnie Mae bonds.

Series EE bonds, usually known as savings bonds, are sold at face value to the purchaser and are redeemed by the issuer. Since ownership cannot be transferred, there is no secondary. This makes them nonnegotiable (nonmarketable) securities. Reference: 2.9 in the License Exam C

Question #62 of 250Question ID: 604945 T-bills are quoted: A)in 16ths. B)in 32nds. C)on an annualized discount yield basis. D)as a percentage of par.

T-bills do not bear interest. T-bills trade and are quoted on an annualized discount yield basis. Reference: 2.6.1.1.2 in the License Exam C

Question #2 of 250Question ID: 604993 Which of the following securities is sold at auction? A)Freddie Macs. B)T-bills. C)Corporate bonds. D)Ginnie Maes.

T-bills, T-notes, and T-bonds are sold through auction. These auctions award securities to the most competitive bids. Agency securities are sold through selling groups appointed by the agency. Reference: 2.6.3 in the License Exam B

Question #10 of 250Question ID: 604939 Securities issued by private lending institutions approved by which of the following are directly backed by the federal government? A)Government National Mortgage Association (GNMA). B)Federal National Mortgage Association (FNMA). C)Federal Intermediate Credit Bank (FICB). D)Federal Home Loan Mortgage Corporation (FHLMC).

The GNMA is a government agency backed by the full faith and credit of the federal government. The FNMA and FHLMC are government-sponsored corporations owned by public stockholders. FICB bonds are backed by the banks, not the U.S. government. Reference: 2.6.2.3 in the License Exam A

Question #56 of 250Question ID: 786000 The dated date on a municipal bond issue is the A)date on which the bonds are delivered to the buyer B)settlement date C)date on which the bonds begin accruing interest D)trade date

The dated date is the date on which newly issued bonds begin to accrue interest. Reference: 2.7.1 in the License Exam C

Question #71 of 250Question ID: 605076 Which of the following interest rates is NOT market driven? A)Federal funds rate. B)Discount rate. C)Prime rate. D)Broker call loan rate.

The discount rate is set by vote of the Federal Reserve Board. The remaining interest rates are directly or indirectly set by their markets. Reference: 2.10.3.3 in the License Exam B

Question #24 of 250Question ID: 604924 XYZ Corporation has outstanding a 7% convertible bond currently trading at 102. The bond, which has a conversion price of $50, was issued with an antidilution covenant. If XYZ declares a 10% stock dividend, the new conversion price, as of the ex-date, will be: A)$55.55. B)$45.45. C)$45.00. D)$55.00.

To compute a new conversion price, divide the current conversion price by 100% plus the percent increase in shares. $50 / 110% = $45.45. Reference: 2.5.2.4.1 in the License Exam B

Question #70 of 250Question ID: 604956 All of the following statements are true regarding the federal Farm Credit System securities EXCEPT: A)the proceeds are used to make loans to farmers. B)they are direct obligations of the U.S. government. C)interest is tax exempt at the state and local levels. D)they issue short-term notes and long-term bonds.

With the exception of Ginnie Mae, all agency securities are indirect obligations of the U.S. government. Reference: 2.6.2.4 in the License Exam B

Question #9 of 250Question ID: 605123 A money market mutual fund would be least likely to invest in which of the following assets? A)U.S. Treasury bills. B)Bank certificates of deposit. C)U.S. Treasury notes. D)Repurchase agreements.

A money market mutual fund typically invests in money market instruments, or those with a maturity date not exceeding 397 days. Treasury notes have maturity dates of 2-10 years. Reference: 2.10.1.1 in the License Exam C

Question #18 of 250Question ID: 605016 Accrued interest for U.S. government bonds is computed on the basis of: A)31-day months. B)SEC accrued interest guidelines. C)30-day months. D)actual days elapsed.

Accrued interest for U.S. government bonds is calculated on the basis of actual days elapsed. Reference: 2.7.2.1.2 in the License Exam D

Question #42 of 250Question ID: 604799 Seventy-five basis points are equal to which of the following? .75%. 7.5%. $7.50. $75.00. A)II and III. B)II and IV. C)I and IV. D)I and III.

There are 100 basis points in each point. One point represents 1% of a bond's value therefore one basis point represents .01% and 75 basis points would represent .75%. Because each point is worth $10, 75 basis points represents $7.50. Reference: 2.1.5.1 in the License Exam D

Question #77 of 250Question ID: 604998 Treasury Inflation Protection Securities (TIPS) offer which of the following benefits to an investor? Semiannual adjustments to principal based on the CPI. A Guarantee of profit upon sale. The interest payments will keep pace with inflation. TIPS provide investors with an income they can't outlive. A)II and III B)III and IV C)I and III D)I and II

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). In times of inflation the interest payments increase and they decrease during times of deflation. No security guarantees a profit upon sale and only an annuity can guarantee an income for life. Reference: 2.6.1.5 in the License Exam C

Question #1 of 250Question ID: 604879 Which of the following statements regarding a $1,000 corporate 8.50% bond offered at 110 is TRUE? A)The bond's current yield is calculated by dividing its annual interest by its market price. B)To determine the bond's current yield, its stated rate must be compared against other fixed-rate investments in the client's portfolio. C)The bond's current yield is lower than its yield to maturity. D)The bond is a discount bond.

A bond's current yield is calculated by dividing its annual interest by its current (market) price. The current yield will be higher than its yield to maturity which will include the premium return. The determination of a bond's yield is unrelated to other bonds. In addition, this is a premium bond, not a discount bond. Reference: 2.2.7.2 in the License Exam A

Question #83 of 250Question ID: 604817 All of the following will affect the marketability of a block of corporate bonds EXCEPT: A)rating. B)bond denominations. C)block size. D)maturity.

Block size is a key factor. Maturity is also important-shorter maturities tend to be more marketable than longer maturities. Also, the higher the rating, the more marketable the block. Bond denominations are not relevant. Reference: 2.1.4.5 in the License Exam B

Question #86 of 250Question ID: 605089 All of the following statements are true regarding eurodollar bonds EXCEPT: A)they are issued in bearer form. B)they are not subject to withholding taxes. C)they are registered with the SEC. D)interest is paid once a year.

Eurodollar bonds are issued in bearer form, pay interest once a year, and are not subject to withholding taxes. They are issued outside the United States and are therefore not subject to SEC registration. Reference: 2.10.4.2 in the License Exam C

Question #26 of 250Question ID: 605141 Exchange-traded notes (ETNs) are unsecured debt securities are unsecured equity securities are issued by financial institutions such as banks have no credit risk associated with them A)I and IV B)I and III C)II and III D)II and IV

Exchange-traded notes (ETNs) are unsecured debt securities issued by financial institutions such as banks. Their prices can be impacted by changes in the credit rating of the issuer. Reference: 2.12.1 in the License Exam B

Question #49 of 250Question ID: 604942 An investor interested in monthly interest income should invest in: A)Treasury bonds. B)corporate bonds. C)utility company stock . D)GNMAs.

GNMAs pay monthly interest and principal, treasury bonds pay semiannual interest, utility stocks pay quarterly dividends, and corporate bonds pay semiannual interest. Reference: 2.6.2.3.1 in the License Exam D

Question #72 of 250Question ID: 604800 A city waterworks publishes a tombstone offering a $20 million new issue of bonds priced at 100.65%. The bonds are priced above par because the: A)municipality has applied the standard municipal bond servicing charge to the issue price. B)amount exceeding par includes accrued interest. C)amount exceeding par represents the underwriter's spread. D)price reflects the fact that the coupon rate for the bonds at issuance is more than the rates of similar newly issued bonds available in the market.

If a bond issue is priced above par, it is usually because the coupon rate at which the bonds were issued is more than the prevailing rate for other newly issued bonds. Reference: 2.1.5.1 in the License Exam D

Question #55 of 250Question ID: 604984 Interest on direct debt issued by the U.S. government is taxable at: A)the federal and state level. B)different levels in different states. C)the federal level and exempt at the state level. D)the state level only.

Interest on direct debt (T-bills, T-notes, T-bonds, and STRIPS) is taxable by the federal government but not by state or local governments. Reference: 2.6 in the License Exam C

Question #80 of 250Question ID: 604798 All of the following statements regarding a 6% municipal bond that is puttable at par are true EXCEPT the: A)owner would likely put the bond to the issuer when interest rates are rising. B)owner will receive $1,000 from the issuer when the put option is exercised. C)bond may be put to the issuer at the owner's discretion. D)bond is likely to trade at a discount in the secondary market when it is puttable.

Once a bond becomes puttable, the holder has the right to put the bond to the issuer at par. As a result, the bond would not trade below par in the secondary market. This effectively insulates the holder from interest rate risk-the risk that rising rates will force prices down. Reference: 2.1.7.5 in the License Exam D

Question #51 of 250Question ID: 604832 Which of the following types of bonds would be characterized by decreasing interest costs to the issuer? A)Term bonds. B)Limited tax bonds. C)Revenue bonds. D)Serial bonds.

Periodically, serial bonds pay off part of the principal through serial maturities. This eliminates the interest costs on the matured bonds. Reference: 2.1.3.2 in the License Exam D

Question #15 of 250Question ID: 604969 Which of the following is a debt instrument that pays no periodic interest? A)STRIPS. B)Treasury bond. C)GNMA. D)Treasury note.

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: 2.6.1.4.1 in the License Exam A

Question #32 of 250Question ID: 765458 Of the following system characteristics which can be associated with TRACE (Trade Reporting and Compliance Engine)? Both sides of the transaction must report. Only the buyer is required to report. Money market securities are excluded from the reporting system. It is an execution and trade reporting system. A)II and III B)II and IV C)I and III D)I and IV

TRACE requires that both sides of the transaction report corporate bond trades that occur in the OTC secondary market. Money Market securities are one of the specific exclusions from the trade reporting system. Trace is not an execution system. Reference: 2.11.1.1 in the License Exam C

Question #50 of 250Question ID: 604805 A 7% bond is selling to yield 4-½%. The next time interest is paid, an investor who owns $10,000 face amount of the bonds will receive: A)$450. B)$350. C)$700. D)$225.

The bond is a 7% bond. The total amount paid each year on 10 bonds is $700. The amount paid for a 6 month's interest is $350. Reference: 2.1.2 in the License Exam B

Question #61 of 250Question ID: 605127 In a repurchase agreement between a broker/dealer and a large institutional customer, the broker/dealer: A)buys securities from the customer who, with prior agreement, repurchases the securities from an unrelated third party. B)buys securities from the customer with an agreement to sell them back. C)sells securities to the customer who, with prior agreement, resells the securities to an unrelated third party. D)sells securities to the customer with an agreement to buy them back.

The dealer agrees to buy back the securities at a specified date at a higher price than they were sold for. The difference represents interest to the party who bought the securities (the lender). Reference: 2.10.2.1 in the License Exam D

Question #58 of 250Question ID: 721388 If interest rates increase, the interest payable on outstanding corporate bonds will: A)increase. B)change according to the inverse payout theory. C)remain unchanged. D)decrease.

The interest payable is the nominal yield, which is stated on the face of the bond. It is the percentage of face value the bond will pay each year regardless of the prevailing interest rates in the market. It is the market price of bonds, not the interest payable, which responds inversely to changes in interest rates. Reference: 2.2.7.6 in the License Exam C

Question #30 of 250Question ID: 604926 A customer purchased 10 9% convertible debentures at 98. The bonds are callable at 101. The conversion ratio is 40. The bonds are called while the common is trading at $24 and the debenture is trading at 98. Which of the following options would be most beneficial to the customer? A)Sell the bonds. B)Convert the bonds and sell the common stock. C)Tender the bonds to the corporation. D)Wait for a better offer from the corporation.

The option most beneficial to the investor is tendering the bond to the corporation for $10,100. If the bond were sold on the market, the investor would receive $9,800. If the bond were converted into common, the investor would receive 400 common shares that could be sold for their current price of $24 for a total of $9,600. Reference: 2.5.2.4 in the License Exam C

Question #8 of 250Question ID: 604974 If an investor watches the latest T-bill auction fall to 4.71% from 4.82%, the best interpretation is that: A)the federal funds rate and other short-term interest rate indicators are probably rising. B)investors who purchased bills at this auction paid more for them than purchasers last week. C)investors who purchased T-bills 12 weeks ago paid less than subsequent purchasers. D)the decline in yields indicates the Federal Reserve Board has raised the discount rate.

The rates on the T-bills fell, so prices rose and the investor paid more for the bills this week than last week. The decline in yields indicates there was good demand for the securities because the price rose, driving the yields down. The question does not indicate the price of T-bills 12 weeks ago; it is unclear if the investor paid less for the T-bills then. The federal funds rate and other short-term interest rates would decline, not rise, in line with those of T-bills. Reference: 2.6.1.1.2 in the License Exam B

Question #65 of 250Question ID: 604973 A customer purchases ten 8% Treasury notes at 101-16. What is the dollar amount of this purchase? A)$10,812. B)$10,116. C)$10,150. D)$10,015.

Though the denomination of the T-notes purchased is not given, always assume par ($1,000) unless told differently in the question. Remember that government notes and bonds are quoted in 32nds. Therefore, a quote of 101-16 means 101 plus 16/32. 101 plus 1/2 = $1,015; $1,015 × 10 bonds = $10,150. Reference: 2.6.1.2.2 in the License Exam C

Question #52 of 250Question ID: 604996 Which of the following is NOT considered a short-term investment vehicle? A)Negotiable CDs. B)Repurchase agreements. C)Treasury bonds. D)Commercial paper.

Treasury bonds are long-term investment vehicles having maturities of ten years or more. Reference: 2.6.1.3 in the License Exam C

Question #48 of 250Question ID: 604989 Which of the following statements regarding Treasury receipts are TRUE? Interest is paid annually. Interest is paid at maturity. Interest is taxed annually. Interest is taxed at maturity. A)I and III. B)I and IV. C)II and III. D)II and IV.

Treasury receipts are zero-coupon bonds issued by broker/dealers. Zero coupon bonds pay all of their interest at maturity. They are issued at a discount and redeemed at par, and the difference represents the interest earned. For zeroes with a maturity of more than one year, the interest (or discount) must be accreted each year-and is taxable that year as income. This is termed imputed interest. Reference: 2.6.1.4 in the License Exam C

Question #7 of 250Question ID: 604878 Which of the statements below best describes why a normal yield curve is positively sloped? A)Investors logically demand higher returns from government securities than they do from corporate securities. B)Stocks generally have lower yields than bonds, although their total returns may be higher. C)Investors demand higher interest when lending their money for longer periods. D)Short-term bonds generally fluctuate in price more than long-term bonds.

When the yield curve is positively sloped (and thus normal), long-term bonds carry higher interest rates than short-term bonds of the same quality. Reference: 2.2.7.5 in the License Exam C

Question #66 of 250Question ID: 604909 If a customer sells a zero-coupon bond before maturity, gain or loss will be the difference between sales proceeds and: A)discounted value. B)original cost. C)par value. D)accreted value.

Zero-coupon bonds must be accreted for tax purposes. Each year, the annual accretion is taxable to the holder. In addition, the customer may adjust the cost basis of the zero upward by the amount of the annual accretion. Reference: 2.3.5.2 in the License Exam D

Question #43 of 250Question ID: 604887 Two $1,000 par bonds are issued with coupons of 5.2% and 5.4%, respectively. The 20-basis-point difference is: A)$10.00. B)$100.00. C)$2.00. D)$20.00.

One basis point is .01%. The difference between 5.20% and 5.40% is .20%, which is equal to 20 basis points. The bond with a 5.2% coupon rate pays interest of $52. The bond with a 5.4% coupon rate pays interest of $54. The difference is $2. Reference: 2.2.7.1 in the License Exam C

Question #11 of 250Question ID: 604941 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 considered safer than corporate debt securities. C)they are always directly backed by the federal government. D)they are authorized by Congress.

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. All are subject to federal taxation, and all were authorized by Congress. Reference: 2.6.2 in the License Exam C

Question #76 of 250Question ID: 604883 In which of the following will a change in interest rates cause the greatest price fluctuation? A)7% AA rated 1-year municipal note. B)Series EE bond. C)7% 30-year U.S. Treasury bond. D)7% AAA rated corporate bond with 8 years until maturity.

Price fluctuations are the greatest in bonds with the longest terms to maturity. The more risky the instrument, the more price volatility. Long-term bonds have greater risk than short-term bonds. Reference: 2.2.7.6 in the License Exam C

Question #68 of 250Question ID: 604946 Which of the following securities is an original issue discount obligation? A)GNMA certificates. B)13-week U.S. Treasury bills. C)FNMA bonds. D)Corporate bonds.

U.S. Treasury bills are always originally issued at a discount and mature at par, with the investor making the appreciation between the original discounted amount and the par value at maturity. This appreciation is treated as interest, however, as opposed to a capital gain. Reference: 2.6.1.1 in the License Exam B

Question #90 of 250Question ID: 604845 What happens to outstanding fixed-income securities when market interest rates drop? A)Prices increase. B)Yields increase. C)Short-term fixed-income securities are affected most. D)Coupon rates increase.

When interest rates drop, the price of outstanding bonds rises to adjust to the lower yields on bonds of comparable quality. Reference: 2.2.7.6 in the License Exam A

Question #59 of 250Question ID: 604908 Which one of the following best describes a debenture? A)An investment in the debt of another corporate party. B)Unsecured corporate debt. C)A long-term corporate debt obligation with a claim against securities rather than against physical assets. D)A corporate debt obligation that allows the holder to purchase shares of the company's common stock at specified dates before maturity.

A debenture is unsecured corporate debt. Reference: 2.3.2.1 in the License Exam B

Question #57 of 250Question ID: 605015 The computation for accrued interest on corporate and municipal debt obligations is based on a(n): A)actual-day month and a 360-day year. B)30-day month and a 360-day year. C)30-day month and an actual-day year. D)actual-day month and an actual-day year.

Accrued interest on corporate and municipal bonds is computed on a 30-day month and a 360-day year. Reference: 2.7.2 in the License Exam B

Question #13 of 250Question ID: 605133 Your customer, a US corporate manufacturer, is selling goods overseas and is, therefore, exposed to currency risk. You advise that in order to lessen the risk exposure, aside from utilizing listed currency options, the corporation might also A)trade the foreign currencies on regional US exchanges B)trade the foreign currencies in the interbank spot market C)trade the foreign currencies on the NYSE D)restrict its overseas sales to a minimum

Aside from trading listed foreign currency options on US exchanges to lesson risk, trades of the foreign currency can be accommodated in the interbank spot market. Spot trades that settle in 1 or 2 business days and forward delivery contracts can both be done there. Currencies do not trade on US exchanges. Reference: 2.10.4.3 in the License Exam B

Question #36 of 250Question ID: 604816 All of the following statements regarding discount bonds are correct EXCEPT: A)at maturity they will be valued at par. B)they are more likely to be called than comparable premium bonds. C)their discounted price can indicate that interest rates have risen. D)their discounted price can indicate that the issuer's credit rating has fallen.

Bonds trading at a premium have higher coupons than current interest rates and therefore are more likely to be called. Bonds trading at a discount have coupons that are lower than current interest rates and therefore less likely to be called. If rates rise, prices fall. If a bond's rating falls, it will be less attractive to investors and its price will fall as well. All bonds move toward par value as they get closer to maturity. Reference: 2.1.5.1 in the License Exam B

Question #17 of 250Question ID: 605058 A client of your broker/dealer is interested in collateralized mortgage obligations (CMOs). While determining suitability for the client all of the following should be discussed EXCEPT A)the tax consequences of CMOs B)the relationship between mortgage loans and mortgage securities C)how currency exchange rates may affect the value of the securities D)how changing interest rates may affect the prepayment rates

Currency exchange rates are not applicable to the risks associated with CMOs. However, when determining suitability, a discussion of all of the characteristics and risks of CMOs, should occur. This would include how changing interest rates may affect prepayment rates and therefore the average life of the security, tax considerations (CMOs are taxable at all levels), and the relationship between actual mortgage loans and mortgage-backed securities. Reference: 2.8.2 in the License Exam C

Question #44 of 250Question ID: 605074 The overnight repo interest rate is usually lower than bank rates and just below or comparable to the: A)Fed funds rate. B)prime rate. C)T-bill rate. D)discount rate.

From a duration standpoint, usually overnight, the repo rate is closest to the Fed funds rate, which is also overnight. Reference: 2.10.2.1 in the License Exam A

Question #82 of 250Question ID: 721395 The longest initial maturity for U.S. T-bills is: A)13 weeks. B)26 weeks. C)2 years. D)39 weeks.

Maximum initial maturity for T-bills is subject to change. Though T-bills have been issued in 1 year (52 weeks) maturities, historically the longest initial maturity of T-bills has been 6 months (26 weeks); the shortest initial maturity is 4 weeks. Reference: 2.6.1.1.1 in the License Exam B

Question #97 of 250Question ID: 605125 Which of the following investments is the most liquid? A)Money market funds. B)Common stock. C)Variable annuities. D)Foreign stock funds.

Money market funds are the most liquid investment. Reference: 2.10.1.1 in the License Exam A

Question #99 of 250Question ID: 604830 Which of the following rate commercial paper issued by corporations? Moody's Standard & Poor's MSRB SEC A)II and III. B)I and III. C)I and II. D)II and IV.

Moody's, Standard & Poor's and Fitch's as well are all recognized as rating companies that would rate commercial paper issued by corporations. The Securities Exchange Commission (SEC) is a federal government regulatory body. Reference: 2.1.6.1 in the License Exam C

Question #79 of 250Question ID: 604835 Your customer is interested in long-term corporate bonds. Which of the following interest-rate environments makes a call protection feature most valuable to your customer? A)Stable interest rates B)Rising interest rates C)Declining interest rates D)Volatile interest rates

A call protection feature is an advantage to bondholders in periods of declining interest rates. When interest rates are falling, issuers are more likely to call in bonds previously issued at higher interest rates. For bondholders this creates reinvestment risk for them when the bonds are called as they are unlikely to be able to reinvest at the rate they had been earning. Call protection gives the bond holder a specified length of time during which the bond cannot be called. Reference: 2.1.7.1.5 in the License Exam C

Question #100 of 250Question ID: 901829 With a bearish outlook on the market, an investor would like to purchase something that will generate income now, during current bearish conditions, but would also be able to take advantage of capital appreciation should market sentiment turn bullish. Which of the following would be a suitable purchase recommendation that puts the investor in a position to do both? A)Common stock B)Convertible bonds C)Nonconvertible bonds D)Cumulative preferred stocks

A convertible bond would generate income from interest payments during the bear market, but if market sentiment becomes bullish, the bond can be converted into common stock, taking advantage of the change in market conditions. None of the remaining choices could fulfill both of these investment objectives. Reference: 2.5.2.1 in the License Exam B

Question #27 of 250Question ID: 604795 All of the following statements regarding bonds with both a convertible and callable feature are correct EXCEPT: A)after the call redemption date, interest payments will cease. B)the coupon rate on a convertible bond would be less than the rate for comparable nonconvertible debt. C)dilution of company stock will occur on conversion of the bonds. D)if called, the owners have the option of retaining the bonds and will continue to receive interest.

After bonds are called, the issuer no longer pays interest. Conversion of convertible bonds causes more shares outstanding, resulting in a reduced proportionate ownership interest (dilution) for current shareholders. The coupon rate paid on convertible bonds is lower than the coupon for nonconvertible bonds. There is a trade-off in the amount of interest for the ability to convert the bonds into common stock. Reference: 2.1.7.1.6 in the License Exam D

Question #29 of 250Question ID: 604914 An investor interested in acquiring a convertible bond as part of his investment portfolio would: A)seek to minimize changes in the bond price during periods of steady interest rates. B)want the assurance of a guaranteed dividend on the underlying common stock. C)be interested in tax advantages available to convertible debt securities. D)want the safety of a fixed-income investment along with potential capital appreciation.

An investor who wants the safety of a fixed-income investment with the potential for capital gains would be most interested in purchasing a convertible bond. However, because convertible bonds can be exchanged for common stock, their market price tends to be more volatile during times of steady interest rates than other fixed-income securities. Reference: 2.5.2.3 in the License Exam D

Question #74 of 250Question ID: 604791 If interest rates are falling, issuers will likely call which of the following bonds? Bonds with low coupons. Bonds with high coupons. Bonds trading at a discount. Bonds trading at a premium. A)II and III. B)I and IV. C)II and IV. D)I and III.

An issuer will call higher coupon bonds first because the interest payments on them are more costly to the issuer than those for lower coupon bonds. Bonds with higher coupons are the ones trading at a premium (above par) as they are more desirable to investors and demand for them pushes their prices up. Reference: 2.1.7.1.4 in the License Exam C

Question #53 of 250Question ID: 604980 Which of the following statements are TRUE regarding Sallie Mae debentures? Interest is generally paid monthly. Interest is generally paid semiannually. Interest is exempt from state and local taxation. Interest is not exempt from state and local taxation. A)II and IV. B)I and IV. C)II and III. D)I and III.

As a general rule, debentures pay interest every six months. Further, interest on nonmortgage-backed government securities is taxable at the federal level and exempt from state and local taxation. Reference: 2.6.2.7 in the License Exam C

Question #60 of 250Question ID: 605056 When assets are pooled into financial instruments such as Collateralized Mortgage Obligations (CMOs) to better facilitate selling them to the general public, the process is known as: A)best efforts. B)securitization. C)structuring. D)diversification.

Asset backed securities represent a pool of assets that were combined into a financial instrument such as a CMO for the purpose of better facilitating sales to the general investing public. The process of pooling assets into a single financial instrument for this purpose is known as securitization. Reference: 2.8 in the License Exam B

Question #54 of 250Question ID: 605116 Money market instruments guaranteed by a bank that are used to provide capital for exporters to foreign countries are called: A)banker's acceptances. B)ADRs. C)eurodollars. D)foreign bills.

BAs provide short-term financing for importers and exporters. Reference: 2.10.2.3 in the License Exam A

Question #39 of 250Question ID: 605090 If a U.S. corporation wishes to issue eurodollar bonds, which of the following statements are TRUE? The corporation will be subject to currency risk. The corporation will not be subject to currency risk. The issue must be filed with the SEC. The issue need not be filed with the SEC. A)I and III. B)II and III. C)I and IV. D)II and IV.

Because eurodollar bonds are denominated in U.S. dollars, a U.S. corporate issuer will not be subject to foreign exchange risk, regardless of the country of issuance. In addition, because the bonds are issued outside the U.S., the issue is not registered with the SEC. Reference: 2.10.4.2 in the License Exam D

Question #25 of 250Question ID: 604918 KLM Company has 10 million convertible bonds outstanding that are convertible at $25. The bonds contain an anti-dilution feature. If KLM declares a 10% stock dividend, the new conversion price will be: A)$50.00. B)$22.73. C)$45.45. D)$22.50.

Before the stock dividend, an investor would have received 40 shares of stock for each $1,000 bond ($1,000 / $25). A 10% stock dividend would now give an investor 44 shares on conversion (40 shares + 10% = 4 shares more). $1,000 / 44 shares = $22.73 per share for the new conversion price. Reference: 2.5.2.4 in the License Exam B

Question #23 of 250Question ID: 605046 Which of the following should a registered representative disclose when discussing CMOs with a customer? A)The federal government guarantees return of principal. B)Rate of return may vary because of early repayment. C)All CMOs have similar risk. D)CMOs offer the same tax advantages as Treasury securities.

CMOs are corporate mortgage-backed bonds that separate mortgage pools into different maturity classes called tranches. Like other mortgage-backed securities, CMOs subject investors to the risk of early repayment when interest rates fall; registered representatives should disclose this risk to CMO customers. CMO interest is taxed at all levels, and there is no government backing on CMOs. Different CMO tranches have differing levels of investment risk. Reference: 2.8.2.5 in the License Exam B

Question #28 of 250Question ID: 605033 All of the following concerning CMOs are true EXCEPT: A)most CMOs are backed by government agency pass-through securities held in a trust account. B)CMOs are not backed by the federal government. C)CMOs are issued by government agencies. D)CMOs can be purchased and sold OTC.

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). Reference: 2.8.2.5 in the License Exam C

Question #69 of 250Question ID: 605102 Which of the following are characteristics of commercial paper? Registered with the SEC Short-term debt instrument. Issued by commercial banks. Unsecured debt. A)II and IV. B)III and IV. C)I and II. D)I and III.

Commercial paper represents the unsecured debt obligations of corporations needing short-term financing. Because commercial paper is issued with maturities of less than 270 days, it is exempt from SEC registration under the Act of 1933. Reference: 2.10.2.4 in the License Exam A

Question #93 of 250Question ID: 604855 The current yield of a callable bond selling at a premium is calculated: A)as a percentage of its call price. B)to its maturity date. C)as a percentage of its par value. D)as a percentage of its market value.

Current yield for any security is always computed on the basis of the current market value. Reference: 2.2.7.2 in the License Exam D

Question #45 of 250Question ID: 604899 Which of the following regarding corporate debentures are TRUE? They are certificates of indebtedness. They give the bondholder ownership in the corporation. They are unsecured bonds issued to finance capital expenditures or to raise working capital. They are the most senior security a corporation can issue. A)I and II. B)III and IV. C)I and III. D)II and IV.

Debentures are debt securities that represent unsecured loans of the issuer. They are senior to common and preferred stock in claims against an issuer. They are issued to finance capital expenditures or raise working capital. Reference: 2.3.2.1 in the License Exam C

Question #40 of 250Question ID: 604955 Which of the following are issued by the Federal Intermediate Credit Banks (FICB)? Discount notes. Debentures. Mortgage-backed securities. Equity securities. A)II and IV. B)I and II. C)II and III. D)I and III.

FICB (Federal Intermediate Credit Banks) is one of the associations in the Federal Farm Credit Bank system that issues notes and bonds. Since the bonds are not backed by the government or by any specific assets, they are considered debentures backed only by the faith and credit of the bank issuer or issuers. Reference: 2.6.2.4 in the License Exam B

Question #19 of 250Question ID: 604920 A convertible bond callable at 101 is trading at 105. The bond is a 4% bond convertible at $25. The common stock is trading at $27. If an investor bought the bond and converted, his profit would be: A)$40. B)$20. C)$75. D)$30.

First, calculate the number of shares each bond will convert to: $1,000 (par) / $25 per share = 40 shares per bond. With market value at 105, each bond costs $1,050. What is the stock parity price? $1,050 / 40 shares = $26.25 per share stock parity price. CMV of the stock minus stock parity price equals profit (or loss). $27.00 − $26.25 = $.75 per share × 40 shares = $30. Reference: 2.5.2.5 in the License Exam D

Question #14 of 250Question ID: 604827 Which of the following would be considered funded debt? A)Municipal revenue bonds maturing in 10 years. B)U.S. Treasury bonds maturing in 20 years. C)Corporate debt maturing in 10 years. D)Commercial paper maturing in 270 days.

Funded debt is simply another name for medium- to long-term corporate debt. If a corporate bond has 5 or more years to maturity, it is said to be funded debt of the issuer. Reference: 2.1.1 in the License Exam C

Question #20 of 250Question ID: 604954 Which of the following statements regarding GNMA securities are TRUE? Interest is subject to federal income tax. Interest is exempt from federal income tax. They are backed by farm mortgages. They are backed by residential mortgages. A)II and III. B)I and IV. C)I and III. D)II and IV.

Government National Mortgage Association (GNMA) securities are subject to both state and federal income tax and are backed by residential mortgages. Reference: 2.6.2.3.2 in the License Exam B

Question #31 of 250Question ID: 604790 A customer has 10 municipal bonds which each increased in yield by 1 basis point. For the 10 bond position this increase is equal to: A)$0.50. B)$10.00. C)$1.00. D)$5.00.

In terms of bonds, a basis point is an increment of yield equal to $.10 per $1,000 face value. This equals .01% or 1/100%. A movement of 1 basis point is a movement of $.10 per bond × 10 bonds = $1. Reference: 2.1.5.1 in the License Exam C

Question #4 of 250Question ID: 605095 Which of the following statements regarding the international currency spot market is TRUE? A)Regular way settlement is three business days following execution of the trade. B)Currencies traded in the spot market settle in one or two business days. C)It is regulated by the central banks of the participating countries. D)It is centrally located.

In the interbank spot market currency trades generally settle in one or two business days. The interbank market is not subject to the regulations of individual countries, nor does it have a central location. Reference: 2.10.4.3 in the License Exam B

Question #96 of 250Question ID: 604902 You have a client who is about to retire and wants to rearrange his portfolio in order to have predictable income. Which of the following would NOT be a good investment vehicle? A)U.S. Treasury note. B)AA rated debenture. C)AA rated IDB. D)Income bonds.

Income bonds, also known as adjustment bonds, are issued when a company is reorganizing and coming out of bankruptcy. Income bonds pay interest only if the company has enough income to meet the interest payment. As a result, these bonds normally trade flat, without accrued interest. Therefore, they are not suitable for customers seeking income. Reference: 2.3.4 in the License Exam D

Question #89 of 250Question ID: 785995 For both U.S. Treasury notes and Ginnie Maes A)interest is computed on an actual-day basis B)quotes are as a percentage of par, in 32nds C)interest income is taxed at the federal level only D)settlement is next business day

Interest from U.S. T-notes is taxed at the federal level only, while interest on Ginnie Maes is taxed at all levels. GNMA bonds are treated like corporate bonds in many ways. T-notes settle next day; Ginnie Maes normally settle T+2. Interest on T-notes is computed on an actual day basis; Ginnie Mae interest is computed on a 30 day month/360 day year basis. Both Ginnie Maes and T-notes are quoted in 32nds. Reference: 2.6.2.3.1 in the License Exam B

Question #21 of 250Question ID: 604972 An investor purchases $10,000 worth of Treasury bills on November 27 and holds them until they mature on March 30 of the following year. For purposes of taxation, the interest from those Treasury bills is treated as: A)ordinary income subject to federal income tax. B)a short-term gain. C)tax-free income. D)partially ordinary income and partially capital gain.

Interest on Treasury bills, notes, and bonds is taxable as ordinary income at the federal level. It is exempt from state and local taxation. Reference: 2.6 in the License Exam A

Question #6 of 250Question ID: 786002 One of your customers buys a new issue municipal revenue bond on March 19. The trade settles on March 21, and the bond pays interest on February 1 and August 1. If the dated date of the bond is March 1, how many days of accrued interest are due? A)24 B)20 C)19 D)55

Interest started accruing from the dated date of the bond (March 1). Interest accrues up to, but not including, settlement. Therefore, 20 days of accrued interest are due. The customer's first interest payment, the following August, will represent interest that has accrued from the dated date. Reference: 2.7.1 in the License Exam B

Question #12 of 250Question ID: 604961 Which of the following statements are TRUE of Ginnie Maes? They are quoted in 1/8ths. They are quoted in 1/32nds. They are traded with an accrued interest computed on an actual day basis. They are traded with an accrued interest computed on a 30/360 basis. A)I and IV. B)II and IV. C)II and III. D)I and III.

Like governments, Ginnie Maes are quoted in 32nds, but, like corporates, Ginnie Maes compute accrued interest on a 30/360 day basis. Reference: 2.6.2.3.1 in the License Exam B

Question #84 of 250Question ID: 604811 The price of which of the following will fluctuate most with a change in interest rates? A)Long-term bonds. B)Short-term bonds. C)Money-market instruments. D)Common stock.

Long-term debt prices fluctuate more than short-term debt prices as interest rates rise and fall. Reference: 2.1.3 in the License Exam A

Question #73 of 250Question ID: 604846 The price of which of the following will fluctuate most with fluctuating interest rates? A)Long-term bonds. B)Short-term bonds. C)Money market instruments. D)Common stock.

Long-term debt prices will fluctuate more than short-term debt prices as interest rates rise and fall. When buying a debt instrument, one is really buying the interest payments and final principal payment. Money has a time value: the longer it takes to receive the money, the less it is worth today. Reference: 2.2.7.6 in the License Exam A

Question #87 of 250Question ID: 605035 Planned amortization class (PAC) CMOs were designed to provide which of the following benefits compared to plain vanilla tranches? A)Increase prepayments to tranche holders. B)Match the prepayment risk of plain vanilla tranches. C)Reduce prepayment risk for tranche holders. D)Eliminate prepayment risk for tranche holders.

PACs reduce but cannot eliminate prepayment risk for tranche holders. The companion tranches will have higher prepayment risk than the PAC, as they were designed to absorb the bulk of the prepayment risk. Reference: 2.8.1.3 in the License Exam C

Question #85 of 250Question ID: 605059 In a rising interest-rate environment which of the following risks associated with mortgage-backed securities such as a collateralized mortgage obligation (CMO) is of least consequence to a potential investor? A)Interest rate risk B)Credit risk C)Prepayment risk D)Extension risk

Prepayment risk is the risk that mortgage holders will refinance or repay their mortgages early as a result of falling interest rates. Therefore in a rising interest rate environment it would be less of a concern for a CMO investor. Extension risk is the risk that mortgage payments will be missed or slower than anticipated in a faltering economic environment. Credit and interest rate risks are always of concern with CMOs. Reference: 2.8.2.5 in the License Exam C

Question #37 of 250Question ID: 604898 Which of the following statements regarding a bond quoted as QRS Zr 12 is TRUE? A)The bond pays no interest until maturity. B)The bond pays $120 interest annually. C)The interest payable is tax free. D)The bond pays $12 interest annually.

QRS Zr 12 represents a zero-coupon bond issued by the QRS Company maturing in 2012. 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: 2.3.5 in the License Exam A

Question #41 of 250Question ID: 605107 A U.S. government bond dealer sells bonds to another dealer with an agreement to buy back the securities within a specified period of time. This is a: A)banker's acceptance. B)reverse repurchase agreement. C)repurchase agreement. D)commercial paper.

Repurchase agreements are used to borrow (or loan) money through the sale of securities (usually U.S. government securities) with an agreement to buy them back at stated time for an agreed-on price. They are widely used as both a money market vehicle and an instrument of the Federal Reserve Board's monetary policy. Reference: 2.10.2.1 in the License Exam C

Question #47 of 250Question ID: 605115 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 1 year. C)they are readily marketable. D)they are usually issued in denominations of $100,000 to $1 million.

The FDIC insures only up to $250,000. Reference: 2.10.2.5.2 in the License Exam A

Question #3 of 250Question ID: 605077 Which of the following money rates are set by banks in competition with one another for borrowers? Federal Funds Rate. Discount Rate. Broker Call Loan Rate. Prime Rate. A)III and IV. B)I and II. C)I and III. D)II and III.

The Federal Funds Rate is charged by banks to one another. The Discount Rate is set by the Federal Reserve Board. The remaining two rates are charged by banks competing for borrowers. Reference: 2.10.3.2 in the License Exam A

Question #78 of 250Question ID: 604951 All of the following issue securities under the Federal Farm Credit System EXCEPT: A)Federal Land Bank. B)Bank for Cooperatives. C)Federal Intermediate Credit Bank. D)Federal Home Loan Mortgage Corporation.

The Federal Home Loan Mortgage Corporation issues securities backed by residential mortgages. The Farm Credit System is made up of Federal Intermediate Credit Banks, Cooperative Banks, and Federal Land Banks. Reference: 2.6.2.4 in the License Exam D

Question #67 of 250Question ID: 605031 A customer interested in a collateralized mortgage obligation (CMO) might look to which of the following for historical data or projections regarding mortgage prepayments? A)FINRA. B)PSA. C)Daily Bond Buyer. D)DEA.

The Public Securities Association (PSA) uses historical data and projections of mortgage prepayments to estimate yield and maturity of different CMO tranches. Reference: 2.8 in the License Exam B

Question #38 of 250Question ID: 604925 A convertible corporate bond has been issued with an antidilution covenant. If the issuer declares a 5% stock dividend, which of the following are TRUE as of the ex-date? Conversion ratio increases. Conversion ratio decreases. Conversion price increases. Conversion price decreases. A)II and III. B)II and IV. C)I and IV. D)I and III.

The bond will be convertible into 5% more shares, so the conversion price will decrease in proportion. If the conversion price is lowered, the conversion ratio must increase. Reference: 2.5.2.6 in the License Exam C

Question #98 of 250Question ID: 604957 Which of the following statements regarding U.S. government agency obligations are TRUE? They are direct obligations of the U.S. government. They generally have higher yields than direct U.S. obligations. The Federal National Mortgage Association (FNMA) is a publicly traded corporation. Securities issued by the Government National Mortgage Association (GNMA) trade on the NYSE floor. A)II and III. B)II and IV. C)I and II. D)I and III.

U.S. government agency debt is an obligation of the issuing agency. This obligation causes agency debt to trade at slightly higher yields that reflect this greater risk. FNMA securities and GNMA pass-through certificates trade OTC. GNMA is the only agency whose securities are direct U.S. government obligations. Reference: 2.6.2 in the License Exam A

Question #92 of 250Question ID: 604947 U.S. government securities that are deposited with a trustee against which certificates are sold representing principal payments only on the securities are: clipped bonds. stripped bonds. subject to annual taxation on the per year accreted amount. subject to taxation at maturity. A)I and IV. B)II and IV. C)I 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: 2.6.1.4.1 in the License Exam D

Question #75 of 250Question ID: 604963 Which of the following is NOT true regarding Treasury Receipts? A)Treasury securities held in trust collateralize the Receipts. B)They pay interest at maturity. C)They are not backed by the faith and credit of the U.S. government. D)Interest income is taxed at maturity.

Unlike Treasury STRIPS, which are issued directly by the U.S. government, Treasury Receipts are indirect obligations of the government. Treasury Receipts are issued by investment bankers who buy Treasury securities, place them in trust at a bank, and sell separate receipts against the principal and interest payments. Like most zeroes, interest must be accreted and taxed annually even though it is not received until maturity. Reference: 2.6.1.4 in the License Exam D

Question #34 of 250Question ID: 604992 Which of the following statements regarding auctions of U.S. Treasury bonds are TRUE? Bids are submitted on a percentage of par basis. Bids are submitted on a yield basis. Competitive bids are always filled. Noncompetitive bids are always filled. A)II and IV. B)I and IV. C)I and III. D)II and III.

When U.S. Treasury bonds are sold at auction, the competitive bids filled are the most favorable bids (lowest yield) submitted by the primary dealers. These bids are submitted on a yield basis and the winning bids establish the "stop out price". Noncompetitive bids, which are made by nonprimary dealers, are guaranteed to be filled at the stop out price. Reference: 2.6.3 in the License Exam A

Question #22 of 250Question ID: 604876 A bond offered at par has a coupon rate: A)less than its current yield. B)equal to its current yield. C)less than its yield to maturity. D)greater than its yield to maturity.

When a bond is selling at par, its coupon or nominal rate, current yield, and yield to maturity are all the same. Reference: 2.2.7.2 in the License Exam B

Question #91 of 250Question ID: 604923 ABC Corporation has outstanding a 7-¾% convertible debenture currently trading at 102. The bond is convertible into common stock at $40. ABC stock is trading $45 per share. Which of the following statements is TRUE? A)The bond is at parity with the stock. B)To profit in this situation, the investor should buy the stock and short the bonds. C)To profit in this situation, the investor should buy the bonds and short the stock. D)An arbitrage opportunity does not exist in this situation.

With a conversion price of $40, the bond is convertible into 25 shares of ABC common stock ($1,000 / $40 = 25 shares). As the common stock is currently trading at $45 per share, the value of the stock as converted would be $1,125 (25 shares × $45 = $1,125), which is greater than the current price of the bond ($1,020). Therefore, the bond and the stock are not at parity. An investor could profit in this situation by shorting the stock and buying an equivalent number of bonds. A bond could be purchased for $1,020 and immediately converted into stock worth $1,125, a risk-free profit opportunity. Reference: 2.5.2.5 in the License Exam C