Chapter 2: Securities & Exchanges - Multiple Choice
A change of control put requires the issuer to repurchase the bond issue at what percent of par? A) 95% B) 101% C) 105% D) 110%
B) 101%
What is the approximate compound annual growth rate (CAGR) of a stock whose value (with all dividends reinvested) doubles over a period of 9 years? A) 5.40% B) 8.00% C) 9.20% D) 10.40%
B) 8.00% Rule of 72, take 72/9=8%
Guaranteed bonds are frequently used in which of the following situations? A) An airline using its airplane as collateral for bondholders B) A parent company backing the bonds issued by one of its subsidiaries C) A corporation backing its bonds with other securities it owns D) A corporation backing its bonds with real estate that it owns
B) A parent company backing the bonds issued by one of its subsidiaries
Guaranteed bonds are frequently used in which of the following situations? A) An airline using its airplane as collateral for bondholders B) A parent company backing the bonds issued by one of its subsidiaries C) A corporation backing its bonds with other securities it owns D) An issuer backing its bonds with real estate that it owns
B) A parent company backing the bonds issued by one of its subsidiaries
The individual shares of non-U.S. companies that are listed on U.S. stock exchanges are known as A) American Depository Receipts B) American Depository Shares C) Global Depository Receipts D) Global Depository Shares
B) American Depository Shares
Corporate debt instruments are issued by corporations in exchange for which of the following? A) Common stock B) Borrowed funds C) Exchange notes D) Options and warrants
B) Borrowed funds
As interest rates increase, a bond's price does which of the following? A) Increases B) Decreases C) Remains neutral D) Defaults
B) Decreases
Common stock is most often purchased to satisfy which of the following investment objectives? A) Income B) Growth C) Principal protection D) Tax minimization
B) Growth
Which of the following statements regarding short- and long-term bonds and their relationship to interest rates are TRUE? I. Short-term bonds usually have a lower yield than long-term bonds II. Short-term bonds usually have a higher yield than long-term bonds III. Short-term bonds are usually more sensitive to interest rate changes than long-term bonds IV. Short-term bonds are usually less sensitive to interest rate changes than long-term bonds A) I and III B) I and IV C) II and III D) II and IV
B) I and IV
Which of the statements below are correct following a 2 for 1 stock split of ABC stock which is currently trading a $50 per share? I. After the split an investor who owned 100 shares will own 200 shares of ABC stock II. After the split an investor who owned 100 shares will own 50 shares of ABC stock III. After the split the value of each share of ABC will be $100 IV. After the split the value of each share of ABC will be $25 A) I and III B) I and IV C) II and III D) II and IV
B) I and IV
Rank the following in order of their yields, lowest to highest I. U.S. Treasury Bonds II. XYZ Corp. AAA-rated Corporate Bond III. XYZ Corp. AAA-rated Callable Corporate Bond IV. Agency debt securities A) I, II, III, IV B) I, IV, II, III C) III, II, IV, I D) II, III, IV, I
B) I, IV, II, III
Investors that purchase Ginnie Mae, Fannie Mae or Freddie Mac mortgage-backed securities will benefit from which of the following? A) Full backing by the U.S. Government B) Income that is slightly higher than income from U.S. Treasury securities C) Exemptions from interest taxation at the federal, state and local levels D) Interest payments every six months
B) Income that is slightly higher than income from U.S. Treasury securities
In the event a company fails to meet all of the listing requirements for Nasdaq, which of the following actions occurs A) Nasdaq will temporarily approve the application if two requirements are met B) Nasdaq will not approve the application C) Nasdaq will grant approval only for seasoned companies D) Nasdaq will grant approval if the issuer is emerging from bankruptcy
B) Nasdaq will not approve the application
The risk of trading structured products is most similar to the risk of trading which of the following securities? A) Common stock B) Options C) Convertible bonds D) Closed end funds
B) Options
Which of the following is a characteristic of a corporate zero coupon bond? A) Imputed interest is not taxable at the federal level B) Prices generally fluctuate more than other bonds in the secondary market C) They generally have short-term maturities D) They pay interest semi-monthly
B) Prices generally fluctuate more than other bonds in the secondary market
Investors who purchase Ginnie Mae securities benefit from which of the following? A) A steady stream of income paid every six months B) Protection from default of the underlying mortgages C) An exemption from taxation at the federal level D) Protection from interest rate risk
B) Protection from default of the underlying mortgages
A corporate bond that has a sinking fund provision A) has greater default risk than other corporate bond issues without this provision B) can be offered at a lower interest rate than other bonds C) is usually retired in whole at the discretion of the trustee D) is except from the Trust Indenture Act of 1939
B) can be offered at a lower interest rate than other bonds
All of the following are classified as equity instruments EXCEPT A) preferred stock B) convertible bonds C) warrants D) common stock
B) convertible bonds
The risk that a bondholder may lose money due to the insolvency of the issuing corporation is A) marketability risk B) credit risk C) reinvestment risk D) liquidity risk
B) credit risk
The Pink Sheets are compiled by the National Quotations Bureau A) hourly B) daily C) weekly D) monthly
B) daily
In calculating the yield to worst, all of the following factors are considered EXCEPT A) all possible call dates B) default of the issuer C) prepayment D) sinking fund payments
B) default of the issuer
A bond that is trading flat A) includes accrued interest in its trading price B) does not include accrued interest in its trading price C) trades at par value D) does not pay semi-annual interest
B) does not include accrued interest in its trading price
Unlike debt securities, shares of preferred stock A) cannot be called by the issuer B) have no maturity C) are never convertible into shares of common D) do not have voting rights
B) have no maturity
Unlike debt securities, shares of preferred stock A) cannot be called by the issuer B) have no maturity C) are never convertible in to shares of common D) have voting rights
B) have no maturity
As compared to U.S. Treasury securities, U.S. Agency securities A) pay interest to investors less frequently B) have slightly higher yields C) benefit from tax exemptions on interest payments D) trade actively in the secondary market
B) have slightly higher yields
In the event a company liquidates, the provision providing that preferred shareholders are paid before common shareholders is known as which of the following? A) conversion rights B) liquidation preference C) antidilution provisions D) redemption rights
B) liquidation preference
In order to trade on a particular U.S. stock exchange a security must be A) approved by the SEC B) listed by the exchange C) issued on that exchange D) issued by a U.S. company
B) listed by the exchange
The process by which an issuer calls bonds with a high coupon and reissues new bonds with a lower coupon is referred to as A) refinancing B) refunding C) reissuing D) redeeming
B) refunding
The term "security" refers to which of the following? A) the priority status of a creditor's claims against the borrower/issuer relative to those of other creditors B) the pledge of, or lien on, collateral that is granted by the borrower to the holders of a given debt instrument C) the length of time the instrument remains outstanding until the full principal amount must be repaid D) the annual interest rate paid on a debt obligation's principal amount outstanding
B) the pledge of, or lien on, collateral that is granted by the borrower to the holders of a given debt instrument
Ginnie Mae Securities are characterized by all of the following EXCEPT A) they are primarily pass through securities B) they are not backed by the U.S. government C) they are subject to prepayment risk D) they do not offer exemptions from taxation at the federal, state or local levels
B) they are not backed by the U.S. government
All of the following are private, independent rating agencies that provide evaluations of a bond issuer's financial condition EXCEPT A) Standard & Poor's B) Fitch C) A.M. Best D) Moody's
C) A.M. Best
Which of the following are characteristics of Stock Appreciation Rights? I. Employees are not required to pay an exercise price to exercise the rights II. They are granted to employees as a form of non-cash compensation III. They are subject to a vesting schedule IV. The provide the right to buy shares of the company's common stock A) I only B) I and II only C) I, II, and III only D) I, II, III, and IV
C) I, II, and III only
A make-whole provision as found in a bond indenture permits I. Bondholders to force redemption of bonds prior to maturity II. Issuers to pay bondholders in advance of the maturity date III. Issuers to reduce the amount of debt on their balance sheet if necessary IV. Bondholders to receive continuing payments after a bond has been called A) I and III B) I and IV C) II and III D) II and IV
C) II and III
The letters OTCBB stand for A) Over-The-Counter Bank and Bond B) Options-To-Call Bulletin Board C) Over-The-Counter Bulletin Board D) Outstanding-Total-Count Bulletin Board
C) Over-The-Counter Bulletin Board
Benefits of common stock ownership include all of the following EXCEPT A) The opportunity for capital appreciation B) The right to elect the company's board of directors C) Preferred status in a corporate liquidation D) The right to receive dividends when declared
C) Preferred status in a corporate liquidation
When a bond is trading at a discount to par, which of the following will be TRUE? A) Its nominal yield, current yield, and yield-to-maturity will all be equal B) The current yield will be lower than the nominal yield, and the yield-to-maturity will be lower than the current yield C) The nominal yield will be lower than the current yield and yield-to-maturity D) The yield-to-maturity will be higher than the nominal yield, but lower than the current yield
C) The nominal yield will be lower than the current yield and yield-to-maturity
Which of the following statements are true of Treasury notes and bonds, but not of Treasury bills? A) They are traded actively in the secondary market B) Their interest is exempt from taxation at the state and local levels C) They make coupon payments every 6 months D) They are direct obligations of the U.S. Government
C) They make coupon payments every 6 months
The right of shareholders to maintain their proportionate ownership interest in a corporation is known as A) subscription rights B) liquidation rights C) pre-emptive rights D) conversion rights
C) pre-emptive rights
The rights of shareholders to maintain their proportionate ownership interest in a corporation are known as A) subscription rights B) anti-dilution rights C) pre-emptive rights D) conversion rights
C) pre-emptive rights
An investor holds a callable bond that has been called by the issuer. This investor now faces A) call risk B) interest rate risk C) reinvestment risk D) credit risk
C) reinvestment risk
Ginnie Mae, Freddie Mac, & Fannie Mae share all of the following characteristics EXCEPT A) They issue mortgage backed securities B) investors in their products are subject to prepayment risk C) their securities are explicitly back by the U.S. Government D) investors often purchase their products because of high credit ratings
C) their securities are explicitly back by the U.S. Government
All of the following statements are true about non-investment grade bonds EXCEPT A) they are also called junk bonds B) they are frequently classified as high yield bonds C) they are typically more liquid than investment grade bonds D) costs of trading are often higher than costs associated with trading investment grade bonds
C) they are typically more liquid than investment grade bonds
Given the capital structure and coupon information in Exhibit 30, determine the company's annual interest expense, assuming LIBOR of 1%. A) $36.9 million B) $40.1 million C) $34.4 million D) $37.6 million
D) $37.6 million As LIBOR is assumed to be 1%, the all-in interest rate of the revolver and term loan is 4% and 4.5%, respectively. The coupon on the senior notes and senior subordinated notes is fixed at 8.5% and 10%, respectively. As such, by multiplying these interest rates times the principal of each loan and then adding them up, an annual interest expense of $37.6 million is determined.
According to SEC rules, an issuer must give advance notice of a dividend distribution to the exchange where the security trades A) 5 business days prior to the payable date B) 5 business days prior to the record date C) 10 business days prior to the payable date D) 10 business days prior to the record date
D) 10 business days prior to the record date
A corporate bond that is currently trading at 95 pays semi-annual interest of $25. What is the current yield? A) 2.50% B) 2.63% C) 5.00% D) 5.26%
D) 5.26%
A 5% bond is purchased at $850 and the maturity is 15 years. It is first callable in 10 years. The bond's yield-to-call is closest to A) 3.79% B) 6.49% C) 6.70% D) 7.03%
D) 7.03% Following the "rule of thumb method" you can calculate yield to call of a bond trading at a discount as (annual interest + annualized discount) / avg price of the bond. The formula is the same as the formula for YTM, but the years to the call are substituted for the years to maturity in the formula. Note that the annual interest is $50 (5% of $1000); the annualized discount is $15 ($150 discount divided by 10 years to the first possible call); the average price of the bond is $925 ($1000 par value + $850 purchase price / 2). Therefore, the YTC can be estimated as ($50 + $15) / $925 = 7.03%.
Which type of preferred stock has a claim to prior years' dividends if they were not previously paid A) Participating B) Prior preferred C) Convertible D) Cumulative
D) Cumulative
Which of the following securities may be traded on a stock exchange? I. Common stock II. Derivatives III. Mutual Funds IV. Bonds A) I only B) I and IV only C) I, II and III only D) I, II and IV only
D) I, II and IV only
A company's stock is listed on the NYSE. Which of the following could result in the company being delisted? I. The company files for bankruptcy under Chapter 11. II. The company issues only nonvoting common stock. III. Public interest in the stock declines considerably. IV. The company does not mail out proxy statements. A) I and III only B) I and IV only C) II and IV only D) I, II, III and IV
D) I, II, III and IV
Which of the following securities are traded on an exchange? I. Preferred Stock II. Closed End Shares III. Unit Trusts IV. REITs A) I only B) I and II only C) I, II and III only D) I, II, III and IV
D) I, II, III and IV
Which of the following factors affect a debt obligation's coupon? I. Ratings II. Maturity III. Covenants IV. Security A) I only B) I and II only C) I, II, and III only D) I, II, III, and IV
D) I, II, III, and IV
A corporate issuer has 1,000,000 shares of common stock outstanding to 100,000 shareholders. The issuer plans a rights offering to sell an additional 500,000 shares of stock. Which TWO of the following statements are TRUE? I. The corporation will issue 100,000 rights II. The corporation will issue 1,000,000 rights III. Each right will enable a shareholder to purchase 5 shares IV. It will take two rights to purchase one share of stock A) I & III B) I & IV C) II & III D) II & IV
D) II & IV
A corporate issuer has 1,000,000 shares of common stock outstanding to 100,000 shareholders. The issuer plans a rights offering to sell an additional 500,000 shares of stock. Which of the following statements are true? I. The corporation will issue 100,000 rights II. The corporation will issue 1,000,000 rights III. Each right will enable a shareholder to purchase 5 shares IV. It will take 2 rights to purchase 1 share of stock A) I and III B) I and IV C) II and III D) II and IV
D) II and IV
An investor who purchases Treasury Bills can expect which of the following? I. Interest that is paid on a monthly basis II. The face value of the bill paid at maturity III. A minimum investment of $1,000 IV. A minimum investment of $100 A) I and III B) I and IV C) II and III D) II and IV
D) II and IV
An investor purchases a 5% bond for 90. Rank the yields for this bond from lowest to highest I. Current Yield II. Coupon III. Yield to call IV. Yield to maturity A) I, II, III, IV B) I, II, IV, III C) II, I, III, IV D) II, I, IV, III
D) II, I, IV, III
An analyst is estimating the volatility of a company's stock. She calculates a beta of .80 for the stock and a standard deviation for the stock of 18, while the standard deviation for the S&P 500 as a whole is 15. What conclusion can be drawn from this data about the volatility of the stock? A) It is greater than the S&P 500's volatility B) It is less than the S&P 500's volatility C) It is approximately the same as the S&P D) No clear conclusion can be drawn
D) No clear conclusion can be drawn
Dividends are typically paid on a(n) A) Annual basis B) Semi-Annual basis C) Monthly basis D) Quarterly basis
D) Quarterly basis
The preferred shareholders' right to force the issuer to buy back the issue at some point in the future is known as which of the following? A) Conversion rights B) Liquidation preference C) Antidilution provision D) Redemption rights
D) Redemption rights
An award, typically given to employees of a company, which allows the holder to profit from any appreciation in a company's common stock over a set period of time but never result in actual ownership of the securities refers to which of the following? A) Equipment Trust Certificates B) Warrants C) Stock options D) Stock Appreciation Rights
D) Stock Appreciation Rights
A debt instrument's coupon refers to which of the following? A) The priority status of a creditor's claims against the borrower/issuer relative to those of other creditors B) The pledge of, or lien on, collateral that is granted by the borrower to the holders of a given debt instrument C) The length of time the instrument remains outstanding until the full principal amount must be repaid D) The annual interest rate paid on a debt obligation's principal amount outstanding
D) The annual interest rate paid on a debt obligation's principal amount outstanding
An issuer is most likely to call a bond which has A) a low coupon and a call premium when interest rates are rising B) a low coupon and no call premium when interest rates are rising C) a high coupon and a call premium when interest rates are falling D) a high coupon and no call premium when interest rates are falling
D) a high coupon and no call premium when interest rates are falling
The measure of how a bond's duration changes as interest rates change best describes its A) yield curve B) sensitivity C) structure D) convexity
D) convexity
The measure of how a bond's duration changes as interest rates change is its A) yield curve B) sensitivity C) structure D) convexity
D) convexity
Securities that are exchangeable into a defined number of shares of common stock at the holder's option are known as A) treasury inflation-protected securities B) high yield securities C) secondary securities D) equity-linked securities
D) equity-linked securities
This risk that a security cannot be sold easily or promptly is known as A) systemic risk B) market risk C) financial risk D) marketability risk
D) marketability risk
Which of the following investment risks would have the LEAST impact on owners of sponsored ADRs? A) inflationary risk B) political risk C) exchange rate risk D) marketability risk
D) marketability risk
Yield-to-maturity refers to the yield that a bondholder will receive if the bond is held until A) Default B) the tender date C) the 1st call date D) maturity
D) maturity
All of the following statements regarding variable rate bonds are true EXCEPT A) the amount of interest paid varies over the life of the loan B) an index or other common base rate such as LIBOR is usually used to determine the rate payable for each period C) the lender assumes interest rate risk D) they typically have greater price volatility than fixed rate bonds
D) they typically have greater price volatility than fixed rate bonds
All of the following are classified as equity instruments EXCEPT A) Preferred Stock B) Convertible bonds C) Warrants D) Common Stock
B) Convertible bonds
A trade that is made between investors on an exchange is a(n) A) Primary transaction B) Secondary transaction C) Over-the-counter transaction D) Auction transaction
B) Secondary transaction
Which of the following types of bonds do not offer periodic interest payments? A) Fixed-rate bonds B) Floating-rate bonds C) Zero-coupon bonds D) Corporate notes
C) Zero-coupon bonds
All of the following are characteristics of American Depositary Receipts EXCEPT A) They represent ownership in shares of a non-U.S. Company B) They trade on exchanges outside of the U.S. C) They pay dividends in U.S. Dollars D) They may be sponsored or unsponsored
B) They trade on exchanges outside of the U.S.
All of the following are non-marketable U.S. Government securities EXCEPT A) SLGS B) Treasury Bills C) Series EE Bonds D) Series HH Bonds
B) Treasury Bills
The process of a shareholder assigning voting rights to a third party is A) Voter assignment B) Voting by proxy C) Absentee ballot D) Surrogate voting
B) Voting by proxy
All of the following are listing requirements of the NYSE EXCEPT A) minimum number of publicly traded shares B) minimum market value C) approval by the SEC D) minimum stock price
C) approval by the SEC
A 6% bond is purchased at $1200 and the maturity is 10 years. It is first callable in 5 years. The bond's yield-to-call is closest to A) 1.82% B) 3.33% C) 363.00% D) 4.00%
A) 1.82%
An acceptable rate of return on a money market fund would be A) 3.00% B) 7.00% C) 10.00% D) 15.00%
A) 3.00%
A 5% bond is purchased at $1150 and the maturity is 15 years. The bond's yield-to-maturity is closest to A) 3.72% B) 4.00% C) 5.58% D) 6.00%
A) 3.72%
The ownership of shares of non-U.S. companies that are listed on U.S. stock exchanges are known as A) American Depository Receipts B) American Depository Shares C) Global Depository Receipts D) Global Depository Shares
A) American Depository Receipts
The acronym CAGR stands for which of the following? A) Compound annual growth rate B) Covariance and growth return C) Compound annual geometric rate D) Company annuitized growth rate
A) Compound annual growth rate
A contract in which a buyer makes payments to the seller in exchange for a repayment of principal in the event of a credit event is known as which of the following? A) Credit default swap B) Duration C) American Depository Receipt D) Security
A) Credit default swap
Guarantees provide which of the following benefits? A) Credit support by one party for a debt obligation of a third party B) Priority status of debt instruments at different legal entities within a company. C) The right to exercise remedies to foreclose and sell collateral of the borrower/issuer D) Priority status of debt instruments at the same legal entity
A) Credit support by one party for a debt obligation of a third party
Issuing stock is advantageous to a company for which TWO of the following reasons? I. It does not require the company to pay back the money II. Shareholders are not permitted to influence the operations of the corporation III. It does not require the company to make periodic interest payments IV. It is less expensive to issue A) I & III B) I & IV C) II & III D) II & IV
A) I & III
Which TWO of the following statements about warrants are TRUE? I. They must be sold with a bond as a sweetener II. They have shorter expiration periods than options III. They function very much like call options IV. They cannot trade in the secondary market A) I & III B) I & IV C) II & III D) II & IV
A) I & III
Which TWO of the following statements are TRUE of mortgage bonds compared to corporate debentures? I. Mortgage bonds tend to yield a lower rate of return II. Mortgage bonds tend to yield a higher rate of return III. Mortgage bonds have higher priority in a corporate liquidation IV. Mortgage bonds have lower priority in a corporate liquidation A) I & III B) I & IV C) II & III D) II & IV
A) I & III
The liquidity requirements for initial listing for initial public offerings on Nasdaq include which of the following? I. Round lot shareholders of 450 or total shareholders of 2,200 II. $700 million market value of publicly held shares III. $70 million market value of publicly held shares IV. Net income of $25 million in two consecutive quarters A) I and III B) I and IV C) II and III D) II and IV
A) I and III
Which of the following are TRUE of equipment trust certificates? I. The corporate trustee has legal title to equipment II. They are unsecured III. They are common for railroad companies IV. They are perpetual A) I and III B) I and IV C) II and III D) II and IV
A) I and III
Which of the following are financial criteria for NYSE listing standards? I. aggregate pre-tax income for the last three years of $10 million, minimum of $2 million in each of the two most recent years, with the third year being positive II. total assets of $25 million III. global market capitalization of $750 million and revenues in the most fiscal year of $75 million IV. operating history of 12 months A) I and III B) I and IV C) II, and III D) II and IV
A) I and III
Which of the following statements about warrants are TRUE? I. They may be sold with a bond as a sweetener II. They have shorter expiration periods than options III. They function very much like call options IV. They trade exclusively on exchanges A) I and III B) I and IV C) II and III D) II and IV
A) I and III
All of the following entities issue mortgage backed securities EXCEPT A) Sallie Mae B) Freddie Mac C) Ginnie Mae D) Fannie Mae
A) Sallie Mae
Which of the following provides the right to buy shares of the company's common stock at a set price? A) Stock options B) CDS C) Hybrids D) Preferred Stock
A) Stock options
In a traditional LBO financing structure, which of the following types of debt will have the lowest cost of capital? A) bank debt B) preferred stock C) mezzanine debt D) subordinated debt
A) bank debt
Convertible bonds have the features of both A) debt and equity B) equity and PIPEs C) hybrid and equity-linked securities D) debt and 144A issues
A) debt and equity
A bond that pays a variable rate of interest is known as a A) fixed-rate note B) zero-coupon note C) floating rate note D) covenant-lite note
C) floating rate note
Unlike investors who trade only equity securities, investors who trade structured products A) must obtain special account approval permitting them to use structured product strategies B) trade in more active and accessible markets C) are fully protected from loss of principal D) have guaranteed liquidity
A) must obtain special account approval permitting them to use structured product strategies
Publicly held shares are calculated by Nasdaq as A) total shares outstanding less insider holdings B) total shares outstanding plus insider holdings C) restricted shares plus secondary shares D) restricted shares less secondary shares
A) total shares outstanding less insider holdings
A corporation receives $10,000 of dividend income from preferred stock. What portion of the dividend is subject to taxation? A) $10,000 B) $7,000 C) $3,000 D) $0
C) $3,000
A company is expected to pay a dividend of $1.50 per share next year. Using the dividend discount model, what is the implied stock price assuming its dividend will grow by 5% annually, with required cost of capital of 9%? A) $18.75 B) $24.80 C) $37.50 D) $49.90
C) $37.50 1.50/(9%-5%)
Among the following statements, which is the MOST beneficial feature of structured products? A) They have a uniform standard for pricing because of their defined structure. B) They have reduced credit risk because of their principal guarantee feature. C) They are highly liquid and readily marketable because of their uniformity and fungibility. D) They are a complement to more traditional investment vehicles and can play a useful role in modern portfolio management.
D) They are a complement to more traditional investment vehicles and can play a useful role in modern portfolio management.
