Progress Exam 3A

American Utility Company of Ohio is offering $750,000,000 worth of 8% bonds at a price of 99.25% of par value. An investor buying the bonds will receive yearly interest of: a. $80.00 per $1,000 face amount b. $99.25 per $1,000 face amount c. $750.00 per $1,000 face amount d. $1,000.00 per $1,000 face amount

a. $80.00 per $1,000 face amount The bonds have a coupon rate of 8%. The bonds pay 8% of their par value of $1,000 each year or $80 (8% of $1,000 = $80) in interest payments.

A holder of XYZ Corporation's convertible debentures is a(n): a. Creditor of XYZ Corporation b. Common stockholder of XYZ Corporation c. Preferred stockholder of XYZ Corporation d. Equity owner of XYZ Corporation

a. Creditor of XYZ Corporation A holder of the convertible debentures (unsecured bonds) is a creditor of XYZ Corporation. The holder of the bonds would become a common stockholder if he decided to convert the bonds into common stock.

Which of the following statements best defines the term duration? a. It is a measure of a fixed-income security's relative interest-rate risk b. It is a measure of a fixed income portfolio's average yield c. It is the period before a fixed-income security will be called d. It is the measure of volatility that compares an equity security to the S&P 500 Index

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

An investor purchased T-bonds that mature January 1, 2030. He purchased the T-bonds on Friday, February 20, for regular-way settlement. How many days of accrued interest did the investor owe? a. 51 b. 53 c. 54 d. 55

b. 53 Accrued interest is calculated from the last interest payment date up to, but not including, the settlement date. The last interest payment was made January 1. (Since maturity is January 1, 2030, interest payments are every January 1 and July 1.) The settlement date is Monday, February 23. (A transaction for government securities settles on the next business day.) Government securities accrue interest on actual days elapsed. The investor owes 31 days for January and 22 days for February, for a total of 53 days of accrued interest.

Which of the following statements is NOT a feature of GNMA pass-through certificates? a. They are backed by the U.S. government b. Interest is subject to federal tax but is exempt from state tax c. Interest and principal payments are made on a monthly basis d. Pools consist of fixed-rate residential mortgages

b. Interest is subject to federal tax but is exempt from state tax The Government National Mortgage Association (Ginnie Mae) is an agency of the United States government. It guarantees a pool of mortgages purchased by investors through Ginnie Mae pass-through certificates. These instruments pay interest and principal monthly at a stated rate on the remaining principal. The repayment of principal and interest is guaranteed by the United States government. Ginnie Mae pass-through certificates are purchased in $25,000 minimums. Interest received from Ginnie Mae pass-through certificates is subject to federal, state, and local taxes.

Which of the following securities trade without accrued interest? a. Municipal bonds b. Treasury bills c. Debentures d. Convertible bonds

b. Treasury bills Treasury bills do not trade with accrued interest. They are issued at a discount and mature at par.

A U.S. government bond is selling in the market at 95.28. The dollar value of this bond is: a. $950.87 b. $952.80 c. $958.75 d. $9528.00

c. $958.75 U.S. government notes and bonds (Treasury securities) are quoted in 32nds. 95.28 is equivalent to 95 28/32nds (28/32 = .875). This is equivalent to 95.875 percent of the par value of $1,000, which equals $958.75.

Private label CMOs are more likely than government-sponsored CMOs to be subject to which of the following risks? a. Extension b. Prepayment c. Credit d. Interest-rate

c. Credit Private label CMOs include mortgages that are issued by banks and are subject to the creditworthiness of the issuer. By contrast, government-sponsored CMOs are supported by the government agency that backs them.

The real interest rate is best defined as the: a. Interest earned by an investor after taxes b. Interest earned that is less than the rate of inflation c. Interest earned that exceeds the inflation rate d. Amount that LIBOR exceeds the fed funds rate

c. Interest earned that exceeds the inflation rate The real interest rate received by an investor is the amount of interest received minus the inflation rate. If an investor is receiving a 10% interest rate when inflation is at 6%, the real interest rate received is 4% (10% - 6%).

Which of the following statements BEST describes an indenture? a. It is a written agreement between the issuer of a bond and an underwriter b. It is a written agreement between the underwriter and investors when a new bond is issued c. It is a contract between the issuer of a bond and the trustee for the benefit of the holder of the bonds d. It is a contract between the issuer of stock and shareholders of a corporation

c. It is a contract between the issuer of a bond and the trustee for the benefit of the holder of the bonds An indenture is a written contract between the issuer of bonds and the trustee under which bonds and debentures are issued. Listed in the indenture are the maturity date, the coupon rate, other terms for the benefit of the bondholder, and obligations of an issuer of a bond.

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

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

An individual owns an ARF corporation 8% convertible debenture. The debenture is convertible at 20 and is currently selling in the market at 97 1/2. If ARF common stock is trading in the market at 18, at what price should the debenture sell to be at a 10% premium to parity with the common? a. $900.00 b. $965.25 c. $975.50 d. $990.00

d. $990.00 Since the conversion price is $20 per share, the debenture can be converted into 50 shares ($1,000 par divided by $20 per share). If converted, the stock will have a total value of $900 (50 shares x $18 per share market price). To be at a 10% premium to parity, the debenture should be trading at $990 ($900 parity plus 10% of $900).