SIE 02: Debt Securities

Which of the following best describes the nominal yield on a bond?

the interest stated on the face of the bond

When mortgages are pooled together to create a CMO product,

the mortgages are said to be securitized.

The best way to "lock in" interest payments is to purchase

the non-callable bond

If the basis (yield to maturity) is higher than coupon

the bond price is below par

6 1/2's of '19 means:

$65 annual interest maturing in 2019

6 1/2's at '19 means:

$65 annual interest with a quote of 190

In what order do the following receive payments in the event of a corporate liquidation?

1. Taxes 2. Senior lien bondholders 3. Debenture holders 4. Preferred stockholders

What is the current yield on a corporate bond trading at 103 with a 7% coupon?

70/1,030=6.8%

Which of the following is a corporate bond quote?

75 1/2

Which of the following callable bonds currently trading at an 8% basis would most likely be refunded?

8 1/2% of 2035, callable at 100

A debt security that can be backed by various assets such as auto loans, mortgages, or credit card debt is called a(n)

A CDO (Collateralized Debt Obligation)

Which of the following is NOT permitted in a CMO advertisement?

A comparison of the risks of investing in CDs vs. CMOs.

Which of the following would represent a quote for a railroad bond?

A railroad bond quote would be a corporate bond. Corporate bonds are quoted in eighths only (1/8) ex. 106 1/2

An investor's portfolio includes 10 corporate bonds and 200 shares of common stock. If both securities decline in value by ½ point the dollar loss is

A ½ point on a stock equals $ .50 A ½ point on a bond equals $5.00 Therefore, 200 shares x $ .50 per share = $ 100 decline 10 bonds x $5.00 per bond = $ 50 decline $150 Total decline in value

Which of the following is the implied credit rating on a Collateralized Mortgage Obligation (CMO)

AAA

Place the following types of bonds in order of highest coupon rate to lowest coupon rate, assuming all mature at the same time.

AAA Corporate bonds, US Government bonds, AAA Municipal bonds

What of the following would be the effect on a collateralized mortgage obligation (CMO) if interest rates declined?

An increase in the market price of the CMO

When an investment grade corporate bond is downgraded to a Junk bond, it is referred to as a:

Fallen Angel

Collateralized Mortgage Obligations (CMOs) may be collateralized by which of the following?

Fannie Maes

Which of the following statements is generally accurate regarding securities issued by agencies of the U.S. Government?

Both the principal and interest payments are considered to be safe.

What is the key factor that determines which CMO tranches receive principal payments from mortgages?

By maturity date

Which of the following would a company most likely issue in order to stabilize cash flow?

Commercial paper

Which of the following securities may offer convertible features that allow the holders to exchange the securities for other issues of the company?

Corporate bonds

The two issuance formats used when Corporate Bonds are issued, are Serial Form and Series Form. In describing Series Form, the issue would have

Different issuance dates and the same maturity dates

CMO pools are issued and collateralized (secured with collateral) with mortgage loans from:

Ginnie Mae, Fannie Mae, Freddie Mac, FHA Mortgage Loans, Conventional / Private Mortgage Issuers NOT Sally Mae

Investors should consider bonds with long-term maturities when interest rates

Have been high but are expected to drop

CMO tranches that pay a variable rate of interest which is usually measured against the:

LIBOR (London Interbank Offered Rate)

When comparing low quality bonds to higher quality bonds, the low quality bonds would have

Lower prices and higher yields

Which of the following is issued by state and local governments and pays interest, typically semi-annually?

Municipal Bonds

The Alternative Minimum Tax (AMT) may be applied to shareholders of a mutual fund that has which of the following securities contained within?

Municipal bonds issued for private industry purposes

Which of the following statements are true regarding registered bonds?

Ownership of the bond is transferable only upon proper endorsement. Principal payments are sent directly to the registered owner of the bond.

ABC Corporation wants to issue $20,000,000 of debentures each of which would be convertible in 20 shares of common stock. How many common shares are issued if all the debentures are converted?

Par Value / Conversion Price = Conversion Ratio OR Par Value/Conversion Ratio = Conversion Price => 1000 / 20 = $50 conversion price. Then we take Total Par Value / Conversion Price = Total shares => 20,000,000 / 50 = 400,000.

Which of the following represents an equity interest in a corporation?

Preferred stock

when the Yield To Maturity or Basis is less than the Coupon Rate/Nominal Yield

Premium

Which of the following statements is TRUE about agency CMOs v. private CMOs?

Private CMOs can contain agency CMOs in their portfolios.

Fannie Mae commonly securitizes which of the following forms of debt to create CMO products?

Residential mortgages

Which of the following describe two classifications associated with municipal bonds issued by state and local governments?

Revenue and General Obligation

Which of the following is TRUE of a bond selling above par?

The current yield is lower than the nominal yield. The yield-to-maturity is lower than the nominal yield. The nominal yield always remains fixed.

Which of the following are correct with regard to the Current Yield and Coupon Rate on a bond?

The current yield of a bond fluctuates depending on the price of the bond. The coupon rate is set for the life of the bond.

If a bond is selling at premium

The face value is lower than the market price.

A guaranteed bond is a bond in which?

The payment of interest and principal of a subsidiary corporation is guaranteed by a parent corporation.

Which of the following factors is the LEAST important in analyzing the investment quality of a mortgage bond?

The trustee bank holding the title to the collateral

The Trust Indenture Act of 1939 regulates corporate debt issues and requires the designation of a trustee. What duty does this trustee have?

The trustee is charged with acting on behalf of bondholders and ensuring that the rights of these bondholders are not infringed upon.

Which of the following statements are true regarding equipment trust certificates?

They are normally serial issues, They are most often issued by transportation companies, They are secured by specific corporate assets.

In a normal market, when there is a change in interest rates how do the yield to maturity and the current yield of a bond react?

They move in the same direction

Long term bonds:

Usually provide a greater return than short term bonds, Dollar value is more affected by interest rate fluctuations, more often callable, Long term bonds tend to be less liquid than short term bonds

Which of the following bonds pay all of their interest at maturity?

Zero coupon bonds

US Government Securities are generally brought to market using

a competitive bidding auction

If a customer believes that interest rates will decline substantially, she should invest in

a long term Corporate Bond with a coupon rate of 10% at a 12% basis, non callable.

If a corporation is in liquidation, the holder of a subordinated debenture would be paid at what time?

after bank loans and after general creditors

Junk Bonds or High Yield Bonds

are issued by companies that have little or no track record of sales and earnings. These bonds would be rated BB or lower or not rated at all.

Equipment Trust certificates

are issued by corporations and are fully taxable.

Call features

are less desirable to the investor so the bonds usually sell for a lower price.

If a municipal bond decreases in price, its yield to maturity will

increase

"Junk Bonds" can also be called a corporate bond which:

is a non rated bond, Has a rating of BB or lower. Are also referred to as "high yield" bonds.

The nominal yield of a bond:

is found by multiplying the bond's coupon rate by the bond's par value and is the same as the coupon rate printed on the bond

The interest rate in a collateralized mortgage obligation:

is paid at the coupon rate over the life of a bond

Lesser quality issues that have the same face value, maturity, and coupon will exhibit which two of the following in comparison to high quality debt issues?

low market price and higher yields

An investor who purchases a CMO (Collateralized Mortgage Obligation) can expect distributions of cash how frequently?

monthly basis

An XYZ Corporation Debenture pays annual interest to its bondholders. The interest is taxable to the bondholders as

ordinary income subject to federal and state taxes.

Interest on bonds is paid

semi-annually

An investor who wishes to minimize market risk should buy

short term bonds

Monthly interest received from collateralized mortgage obligations (CMOs) is

taxable at the federal, state, and local levels.

A corporation may issue refund bonds

to retire an existing bond issue, to reduce its interest costs, To take advantage of a substantial drop in interest rates