SIE EXAM

Management companies are subclassified as either: A open-end or closed-end B managed or unmanaged C registered or unregistered D fixed or participating

The best answer is A. Management companies are either open-end or closed-end. An open-end management company is a mutual fund. A closed-end management company is a publicly traded fund.

If an issuer defaults on a moral obligation bond, payment can only be made by: A legislative apportionment B judicial edict C legal authorization D municipal injunction

The best answer is A. Moral obligation bonds are backed by pledged revenues and also by a non-binding pledge to report any revenue deficiencies to the state legislature. The legislature is authorized to apportion the funds necessary to service the debt, but is under no obligation to do so.

The current yield of a bond: A increases as bond market prices decline B increases as bond market prices increase C is unaffected by changes in market interest rates D will vary with the earnings of the issuer

The best answer is A. The current yield is the stated rate of interest as a percentage of market value. It will change as bond prices move - if bond prices rise, the current yield falls; if bond prices fall; the current yield rises.

The market price of common stock will be influenced by which of the following? Incorrect answer A The par value of the shares B Expectations for future earnings growth C Date of incorporation for the issuer D Book value of the company

The best answer is B. The market price of common stock is determined by investor expectations about the future of the company. Par value, book value and the issuer's date of incorporation have no direct bearing on the market price of the common.

Of the following choices, the only method that will raise new funds for a corporation is to: A sell additional common shares through a rights offering B force conversion of outstanding convertible preferred C split its common shares 2 for 1 D call its outstanding preferred

The best answer is A. The only method listed that will raise new funds for the corporation is to sell additional common shares through a rights offering. Forcing conversion of outstanding convertible preferred does not raise new capital. It simply converts preferred stock into common stock. Splitting shares does not raise new capital. After the split, the company has more shares outstanding, worth half the original amount. Calling outstanding preferred uses cash and reduces capital.

A bond counsel would render an unqualified legal opinion in which of the following circumstances? A Underwriters for the issue have not complied with MSRB disclosure requirements in connection with the sale of the issue B Pending litigation against the issuer may affect future revenues from the project C The bonds appear to be taxable D Liens on certain real properties prevent the issuer from obtaining clear title to those assets

The best answer is A. A municipal bond counsel examines the legal and tax aspects of a proposed bond issue and renders an opinion as to whether the issue is valid and binding on the issuer and also gives an opinion on the tax status of the interest income. A qualified opinion is one where the bond counsel has some reservations about the issue, so instead of giving a "clean" opinion, the counsel renders one that has some "qualifications." If the issuer does not have clear title to project assets, say the land on which the project is to be built, then the counsel would qualify the opinion, stating the reason why. Thus, anyone buying the bonds who reads the opinion knows that this "problem" exists which has potential consequences (such as a person proving that he owns the land and wants the facility moved). Pending litigation is another reason for the bond counsel to qualify an opinion, since an adverse legal ruling can negatively impact the project. The bond counsel's relationship is with the issuer and not the underwriter. The bond counsel has no involvement with the underwriter and the actual sale of the bonds so in this case, an unqualified opinion could be written.

The principal difference between an open end management company and a closed end management company is: A capitalization B management C investment objective D expense ratio

The best answer is A. Both open-end and closed-end management companies use an investment adviser to manage a portfolio within the fund's stated objectives. Open-end funds continuously issue and redeem shares. Closed-end funds have a one-time stock issuance and the fund is closed to new investment. The shares are then listed on an exchange where they trade. Therefore, open-end and closed-end funds are capitalized differently. The expense ratio of a fund measures of the "cost" of running the fund, and applies to both open and closed end funds (the largest component of the cost of running either type of fund is the annual management fee).

Bonds with a put feature benefit the: A bondholder B issuer C trustee D transfer agent

The best answer is A. A put feature allows the bondholder to "put" the bonds back to the issuer after a stated time period (say 10 years). Such bonds are issued when interest rates are very low, and there is a general expectation that rates will rise. An issuer can have a hard time selling bonds to long-term investors at current low rates, because if rates start to rise, the value of those bonds will drop - and long maturity bonds will drop a lot! To make the issue attractive to investors, the issuer can include a "put" option on the bonds - where the holder can put the bonds back to the issuer at par after a stated time period. Thus, if rates do rise, the bondholder is protected. This is an advantage to the bondholder. The issuer, on the other hand has just used a chunk of cash to pay those bondholders who exercised the put option. If it needs to replenish those funds, it will now have to issue bonds at higher current market rates.

A client owns 100 shares of COSMO Company common stock. The client receives a notice that COSMO has declared a 10% stock dividend. What does this mean? A The client will receive 10 additional shares of COSMO stock B The client's aggregate stock holding will increase in value by 10% C The client must return 10 shares of stock to COSMO D The client's aggregate stock holding will decrease in value because of the additional shares

The best answer is A. A stock dividend means that the company will issue additional shares to current shareholders instead of paying a cash dividend. Companies often "pay" stock dividends, as opposed to cash dividends, when they are young and growing and want to conserve cash to fund their growth. The dividend percentage indicates how many additional shares each stockholder receives. In this case, 10% of 100 shares = 10 additional shares to be issued. Assume that each share was worth $11 before the 10% stock dividend was declared. The aggregate holding was worth $11 x 100 = $1,100. After the stock dividend is paid, the client will own 100 + 10 = 110 shares. However, each share will now be worth $11/1.1 = $10. The aggregate holding is worth $10 x 110 shares = $1,100. Thus, as a result of the stock dividend, the stock price declines and the number of shares increase, but the aggregate holding does not change in value.

At the time of issuance, a warrant has: A time value B intrinsic value C dividend rights D voting rights

The best answer is A. A warrant is a long-term option to buy common stock that is attached by an issuer to preferred stock or bond offerings to make them more marketable. An example would be a 5-year warrant to buy common stock of ABC at $50 per share that is attached to each $1,000 bond sold by an issuer. The price of the common stock at that time might be, say, $20. This means that the warrant is "out the money" by $30 at the time of issuance - it has no intrinsic value. The stock price must rise by at least $30 over the 5-year life of the warrant for the holder to have a profit. Warrants have no dividend or voting rights. They trade in the market alongside the stock for their life.

Which statement is TRUE regarding American Depositary Receipts? Correct answer A. You did not choose this answer. A Exchange listed ADRs must besponsored Incorrect answer B. You did not choose this answer. B Non-sponsored ADRs trade exclusively offshore Incorrect answer C. You chose this answer. C All ADRs must provide quarterly and annual reports to shareholders in English Incorrect answer D. You did not choose this answer. D Non-sponsored ADRs are not required to provide quarterly and annual reports to shareholders

The best answer is A. All exchange listed ADRs are sponsored. Issuers that sponsor ADRs provide quarterly and annual financial reports to shareholders in English - basically the same financial disclosure required by the SEC for all publicly traded companies. Sponsored ADRs are often called American Depositary Shares or ADSs. Non-sponsored ADRs are assembled by banks and broker-dealers without the issuer's participation. An unsponsored program may have more than one depositary bank, since the issuer does not participate in any way. Holders of non-sponsored ADRs only receive annual reports in the language of the issuer. Non-sponsored ADRs trade in the U.S. over-the-counter market, not on exchanges.

All new corporate bonds are issued in: A book entry form B fully registered form C registered to principal only form D bearer form

The best answer is A. All new issues of U.S. Government bonds, municipal bonds and corporate bonds are book entry. A "book entry" bond is a fully registered bond where no paper certificate is issued. Instead, the owner simply receives that confirmation that he or she bought the bond. On such bonds, the paying agent mails the semi-annual interest payments to the registered owner. Note, however, that there are still many issues of long term corporate bonds still outstanding that have paper certificates. These bonds have not yet matured. Book entry bonds did not really come to dominate bond issuance until the 1990s, so 30-year bond certificates issued, say in 1995, do not mature until 2025. A fully registered bond is one issued with a physical certificate. The paying agent has the record of the owner's name and mails the interest payments semi-annually to the registered owner. Also note that no bearer bonds or registered to principal only bonds (a bond with bearer coupons, but the principal repayment is registered in the owner's name) have been sold since 1983. However, 40-year bearer coupon bonds still exist (at least until 2023!). Bearer bondholders receive interest payments by clipping coupons and submitting them to the paying agent.

Which risk is avoided when making an investment in a GNMA pass-through certificate? A Credit risk B Purchasing power risk C Extension risk D Prepayment risk

The best answer is A. Because a GNMA (Ginnie Mae) pass through certificate is guaranteed by the U.S. Government, it has no credit risk. If interest rates drop after issuance, the homeowners can prepay their mortgages, and the prepayments are passed through to the GNMA holders, who must reinvest the proceeds at lower rates. This is prepayment risk. On the other hand, if interest rates rise after issuance, the homeowners are more likely to stay in their homes and not move, so the anticipated rate of repayment of principal is extended. The GNMA certificate holder is now earning a lower than market rate of return for longer than expected - this is extension risk. Both prepayment risk and extension risk are unique to pass-through certificates. Any long-term fixed income security has purchasing power risk. If there is inflation, market interest rates rise, and the value of fixed income securities will fall. This is even worse for GNMAs because their expected maturity "extends out" even further than originally projected if market interest rates rise steeply (extension risk).

A 9%, $1,000 par corporate bond is trading at $1,100. What is the current yield? A 8.18% B 9.00% C 9.60% D 10.30%

The best answer is A. Since the bond is trading at a premium, its current yield must be lower than its coupon. The formula to find the current yield is: ($90 / $1,100) = 8.18%

Which statement is FALSE regarding Brokered CDs? A Call features are not permitted on these instruments B How the instrument is titled can determine whether FDIC insurance covers the investment C There is no penalty for early withdrawal of principal D These instruments can have maturities of up to 5 years

The best answer is A. Brokered CDs, which can have lives of up to 5 years, can be callable. If interest rates drop after issuance, then the issuer can call in the CD, forcing the investor to reinvest the refunded monies at lower current market interest rates. Brokered CDs are sold by brokerage firms that are representing issuing banks. FDIC insurance of $250,000 maximum covers bank deposits - but only if the deposit is titled in the customer's name. If the CD is titled in the brokerage firm's name, then the insurance coverage would not apply! There is no penalty for early withdrawal of funds on brokered CDs - however the amount of interest earned will be pro-rated over the shorter life of the deposit. If interest rates rise after issuance, the value of the CD in the secondary market will fall (though not by much, since this is a short maturity).

Common dividends can be paid in all of the following forms EXCEPT: A Warrants B Product C Stock D Cash

The best answer is A. Common dividends can be paid in the form of cash, stock, or the products of a company (this last method is obsolete). The distribution of rights or warrants is not a method of dividend payment. In a rights offering, the corporation attempts to raise additional capital by allowing existing shareholders to subscribe to new shares at a discount to the current market price. Rights typically have a life of 30-90 days. Warrants are sweeteners attached to preferred stock or bond offerings by the issuer to make them more attractive to potential investors. Each warrant is a long-term option (up to 5 years) to buy a stated number of shares, at a premium to the market price at the time of issuance. The warrant has no value unless the price of the common stock rises above the exercise price.

All of the following statements are true regarding Construction Loan Notes ("CLNs") EXCEPT: A When the facility is completed, the permanent financing is added to the outstanding balance ("basis") of the CLNs B Accrued interest on CLNs is computed on an actual day month / actual day year basis C The maturity of CLNs is generally 2 to 3 years D The use of CLNs allows the municipal issuer to reduce its interest cost when constructing a new facility

The best answer is A. Construction Loan Notes (CLNs) are a type of short term municipal note used to finance the construction of buildings. Municipalities use CLNs because lenders are reluctant to finance a building until it is completed (for example, a bank will not give a mortgage on a house until there is a certificate of occupancy issued). Thus, during the construction period (which can take a number of years), short term financing is used. Once the building is completed, a long term bond issue is floated, and the proceeds are used to pay off the notes. (This long term financing is often called a "take out" loan, since it takes out the original short term financing). CLNs allow an issuer to reduce its interest cost, since the interest rate that must be paid on short term notes is lower than that for long term bond issues. CLNs typically have a maturity of 2 to 3 years, to coincide with the projected construction period of the building. Accrued interest on all municipal short term notes is computed in a manner similar to other money market instruments - an actual day month / actual day year basis. Please note that this is not true for long term municipal bonds, which accrue interest on a 30 day month / 360 day year. The first statement is false. When the long term financing is completed, the proceeds are used to retire the CLNs. The proceeds of the long term bond issue are not added to the original debt outstanding.

Which of the following trades settle in "clearing house" funds? A General Obligation Bonds B U.S. Government Bonds C Agency Bonds D GNMA Pass-Through Certificates

The best answer is A. Corporate and municipal bond trades settle in clearing house funds. These are funds payable at a registered clearing house, which are usually not good funds for three business days. These trades are settled through NSCC - the National Securities Clearing Corporation. U.S. Government and agency bond trades settle in Federal Funds, which are good funds the business day of the funds transfer (next business day for regular way settlement of government securities). Ginnie Mae Pass-Through certificates are U.S. Government guaranteed, so trades settle in Fed Funds. These trades are settled through GSCC - the Government Securities Clearing Corporation.

Which statement is TRUE? A A debenture is issued under an indenture B An indenture is issued under a debenture C All bonds are commonly known as debentures D All bonds are issued under an indenture

The best answer is A. Debentures are corporate bonds backed solely by the issuer's "full faith and credit." The Trust Indenture Act of 1939 requires that all corporate bonds be issued under a "trust indenture." The indenture is the written contract between the issuer and the bondholder. An independent trustee is appointed (a large commercial bank or trust company) to monitor the issuer's compliance with all of the covenants included in the bond contract. The trustee gives an annual report of compliance to the bondholders. A trust indenture is required for all corporate bond issues of more than $50,000,000. Treasury issues, agency issues and municipal issues are exempt from this requirement (though municipal revenue bonds typically have a trust indenture because the market demands this additional protection).

Which statement is TRUE regarding government agencies and their obligations? A Fannie Mae is a publicly traded company B Ginnie Mae obligations trade at higher yields than Fannie Mae obligations C All Agency obligations have the direct backing of the U.S. Government D Ginnie Mae shares are listed and trade

The best answer is A. Fannie Mae was "spun off" by the government as a public company listed on the NYSE (so was Freddie Mac). Its stock was listed for trading on the NYSE, but Fannie went "bust" in 2008 after purchasing too many "sub prime" mortgages and was placed into government conservatorship. Its shares were delisted from the NYSE and now trade OTC in the Pink OTC Markets. Ginnie Mae obligations trade at lower yields than Fannie Mae obligations since Ginnie Maes are directly backed by the U.S. Government whereas Fannie Maes are only implicitly backed. Ginnie Mae has not been "spun off" by the government as a private company and cannot be spun off because of the guarantee of the U.S. Government that its securities carry.

ABC 8% $100 par preferred is trading at $120 in the market. The current yield is: A 6.7% B 8.6% C 10.6% D 60.6%

The best answer is A. The formula for current yield is: $8 / $120 = 6.7%. Formula: (Annual Income / Market Price) = Current Yield

Which statement is TRUE about commercial paper? A The most common maturity is 10 days B The most common maturity is 30 days C The maximum maturity is 90 days D The maximum maturity is 365 days

The best answer is B. The most common maturity for commercial paper is 30 days. The maximum maturity is 270 days.

Which statement is TRUE regarding the effect of market interest rate movements on callable and puttable bond prices? A When interest rates fall, the call price tends to set a ceiling on the market price of the bond and when interest rates rise, the put price tends to set a floor on the market price of the bond B When interest rates fall, the call price tends to set a floor on the market price of the bond and when interest rates rise, the put price tends to set a floor on the market price of the bond C When interest rates rise, the put price tends to set a ceiling on the market price of the bond and when interest rates fall, the call price tends to set a ceiling on the market price of the bond D When interest rates rise, the put price tends to set a floor on the market price of the bond and when interest rates fall, the call price tends to set a floor on the market price of the bond

The best answer is A. If interest rates drop, it is more likely that an issuer will call its bonds. As interest rates drop, bond prices in the market will rise. The price will not rise by as much for a callable issue as that for a non-callable issue. The reason: Why would someone pay a premium for an issue that is likely to be called off the market? The put price for a "puttable bond" sets a floor under the market price of the bond during periods of rising interest rates. The price will never drop much below par (assuming that the put price is at par) once the option is exercisable, because if it did, customers would buy as many of the bonds as possible and "put" them to the issuer at par for a capital gain.

A wealthy retired investor is interested in buying Agency mortgage backed securities collateralized by 30-year mortgages as an investment that will give additional retirement income. When discussing this with the client, you should advise him that if market interest rates fall: A principal will be repaid earlier than anticipated and will need to be reinvested at lower rates, generating a lower level of income B there may be a loss of principal because homeowners are likely to default on their mortgage loans at higher rates C the maturity of the security is likely to extend and principal will be returned to the customer at a slower rate than anticipated D he will be able to sell the mortgage backed securities at a large profit because of their long maturity

The best answer is A. If market interest rates fall, the homeowners will repay their mortgages faster because they will refinance and use the proceeds to pay off their old high rate mortgages that collateralize this mortgage-backed security. In effect, the maturity will shorten and the investor will be returned principal faster, which will have to be reinvested at lower current rates - another example of reinvestment risk. The rate of homeowner defaults has no effect on the principal repayments to be received because the Agency guarantees principal repayment - making Choice B incorrect. Maturities will only extend if market interest rates rise and homeowners stay in their houses (they don't move because new mortgages are more expensive), and principal is repaid more slowly than expected. Thus. Choice C is incorrect. In a falling interest rate environment, because the maturity will shorten, these securities will not rise in price at the same rate as conventional long-term bonds. Thus, Choice D is incorrect.

A customer who has taken his portfolio and invested it only in money market instruments is most likely concerned with: A purchasing power risk B credit risk C political risk D business risk

The best answer is A. If there a high level of inflation (purchasing power risk), then interest rates start to rise. This causes bond prices to fall. It also causes stock prices to fall, because companies have to pay higher interest rates on bonds that they issue, depressing profits, and companies have a hard time raising prices as fast as their input costs rise, also depressing profits. Because interest rates rise when there is substantial inflation, money market rates go up as well. However, these securities do not lose value because their maturity is short, and when they mature, the proceeds are reinvested in other money market instruments offering high yields. These are one of the best investments during inflationary times.

Short sales rarely occur in the trading market for which of the following securities? A Municipal bonds B Corporate bonds C Government bonds D Agency bonds

The best answer is A. Municipal bonds are usually not sold short because the trading market is very limited. Unlike corporate securities and government securities which receive no special tax status, municipal bonds are typically exempt from state and local tax if purchased by a resident of that state (in addition to the federal tax exemption). Thus, trading of municipal issues is typically confined to the state in which it was issued: there is no national trading market. Shorting a security requires the trader to buy back (and therefore replace) the exact security that was sold. This is difficult to do if there are few bonds trading at any one time. Another important reason why munis are not shorted is because most issues are serial bonds. Serial bonds mature over a sequence of years. Thus, if a bond maturing in the year 2030 is shorted, it must be replaced with a 2030 bond. Out of the total issue, there may have been very few 2030 bonds, further limiting the potential trading market.

What type of municipal bond is backed by the full faith and credit of the issuer? A G.O. bond B Revenue bond C Mortgage bond D Credit enhanced bond

The best answer is A. Municipal general obligation bonds are backed by the full faith and credit of the issuer, as well as the issuer's taxing power. General obligation bonds issued by local units of government often are payable from the issuer's ad valorem taxes, while general obligation bonds issued by states often are payable from appropriations made by the state legislature. Revenue bonds are backed by a pledge of revenues from an enterprise activity or from a taxing source other than ad valorem taxes (e.g., sales or excise taxes). Mortgage bonds are corporate bonds issued by utilities, where a mortgage on all of the property, plant and generating equipment of the utility backs the bond issue. A credit enhanced municipal bond applies a bank letter of credit to the bond issue, improving the bond's rating (the bank will pay if the municipality cannot).

A high income client who lives in California would be more likely to buy a Treasury security as an investment because the interest income is: A exempt from California state income tax B exempt from federal income tax C exempt from both California state income tax and federal income tax D subject to both California state income tax and federal income tax

The best answer is A. The interest income received from U.S. Government obligations is subject to federal income tax, but is exempt from state and local income taxes (one level of government cannot tax the other's obligations). Thus, Treasury securities are a more attractive investment for customers looking for a very safe investment who reside in high income tax states (like New York and California). They are a less attractive investment for customers who live in states that have no income tax (like Florida and Texas).

Which of the following municipal issues is a short term note that is retired by a later permanent bond sale? A BAN B RAN C TAN D TRAN

The best answer is A. Municipalities issue BANs (Bond Anticipation Notes) to "pull forward" funds that will be collected from a later permanent bond sale. For example, a municipality expects to float a 20 year bond issue in 6 months. It can get the funds today by issuing 6 month BANs now. When the bond issue is floated, the proceeds are used to pay off the BANs. Municipalities issue TANs (Tax Anticipation Notes) to "pull forward" funds that will be collected as taxes in later months. For example, if taxes are due on April 15th, and it is now January 15th, and the municipality wishes to get funds at this time, it can issue 3 month TANs. When the taxes are actually collected, the proceeds are used to retire the TAN issue. RANs (Revenue Anticipation Notes) are issued to "pull forward" revenues that are expected to be received by the municipality in the coming months. For example, the City of New York will receive a $200,000,000 payment from the Federal government on July 1st to support mass transit. It is now April 1st. The city can issue 3-month RANs and borrow against the upcoming revenue to be received from the Federal Government. A TRAN is a combination Tax and Revenue Anticipation Note.

An open end fund has a Net Asset Value of $10 per share. The minimum price at which a share can be purchased is: A $10 B $10 plus a commission C $10 plus a mark-up D any price because this is negotiated in the market

The best answer is A. Mutual fund (open-end management company) shares are newly issued by the fund to any purchaser. The purchaser pays the next computed Net Asset Value plus a sales charge if the fund imposes a "sales load." For a "no load" fund, the customer would simply pay Net Asset Value - this is the minimum price for an open-end fund. This contrasts to a closed end fund, where the fund is traded in the market like any other stock. Any purchaser would pay the prevailing market price (which can be below, at, or above Net Asset Value) and would have to pay a commission to have the trade executed. Thus, a closed-end fund share is purchased at the prevailing market price plus a commission (or a mark-up if it is an OTC principal transaction).

All of the following trade "and interest" EXCEPT: A Treasury Bills B Treasury Notes C Treasury Bonds D Corporate Bonds

The best answer is A. Original issue discount obligations trade "flat" - without accrued interest. Every day the issue is held, its value increases towards the redemption price of par. This increase in value is the interest income earned on the obligation. Obligations issued at par make periodic interest payments. They trade "and interest" - with accrued interest. These include Treasury Notes, Treasury Bonds, Corporate Bonds, and Municipal Bonds.

The Federal Reserve would enter into a transaction involving which of the following with a primary U.S. Government securities dealer? A Overnight repurchase agreement B Federal Funds C Eurodollars D Banker's acceptance

The best answer is A. Overnight repurchase agreements are common for transactions between banks and the Federal Reserve. In such an agreement, the Fed buys U.S. Government securities from the dealer for 1 day; agreeing to sell them back to the dealer the next day. The difference in buying and selling price represents one day's worth of interest. By using repurchase agreements, each day the Fed can deposit "cash" into the primary dealers (most of whom are the large commercial banks). This eases credit availability. Due to the fact that the agreement is fully collateralized and the short duration, there is virtually no liquidity risk. However, such agreements do have interest rate risk because the underling securities used as collateral can be longer-term Treasuries. If, during the 1-day period of the agreement, interest rates rise, then on the next day the collateral is returned to the seller, and its decline in value can be more than the 1 day of interest earned!

Prepayment risk applies to holders of: A mortgage backed pass through certificates B equipment trust certificates C face amount certificates D all holders of fixed income securities

The best answer is A. Pass-through certificates are mortgage-backed securities that represent ownership in a pool of underlying mortgages and that pass through the monthly mortgage payments to the certificate holders. If the homeowners prepay their mortgages because interest rates are declining, these are "passed-through" to the holders, who then must reinvest the proceeds at lower current rates. This is "prepayment risk" and is essentially a variation on call risk, but here there are no specified potential call dates in the bond offering. This is a "difficult to quantify" risk and is only associated with pass-through securities. Equipment trust certificates are issued by airlines, railroad and trucking companies, where the airplanes, railroad cars or long distance trucks are the collateral for the bond issue. They have a stated maturity, and no prepayment risk. A face amount certificate is an obsolete type of investment company. It is not a debt instrument.

What risk is unique to holders of mortgage backed pass through securities? A Prepayment risk B Interest rate risk C Credit risk D Reinvestment risk

The best answer is A. Pass-through certificates are mortgage-backed securities that represent ownership in a pool of underlying mortgages and that pass through the monthly mortgage payments to the certificate holders. If the homeowners prepay their mortgages because interest rates are declining, these are "passed-through" to the holders, who then must reinvest the proceeds at lower current rates. This is "prepayment risk" and is essentially a variation on call risk, but here there are no specified potential call dates in the bond offering. This is a "difficult to quantify" risk and is only associated with pass-through securities. Pass through securities have interest rate risk - if market interest rates rise, their value falls. If the pass-through is not backed by the U.S. Government (only Ginnie Maes are directly government backed), then they have some level of credit risk. Finally, any long-term fixed income security making periodic payments has reinvestment risk. If interest rates are falling over the lifetime of the investment, the periodic payments are reinvested at lower and lower rates - reinvestment risk.

U.S. Treasury securities are subject to which of the following risks? A Purchasing Power Risk B Credit Risk C Marketability Risk D Default Risk

The best answer is A. Securities issued by the U.S. Government represent the largest securities market in the world (remember, the national debt is $23 trillion and rising) and the most actively traded. Therefore, very little marketability risk exists. Default risk and credit risk are the same - U.S. Government securities are considered to have virtually no default risk. (The government can always tax its citizens to pay the debt or can print the money to do it). All debt obligations are susceptible to purchasing power risk - the risk that inflation raises interest rates, devaluing existing obligations.

The yield to maturity of a bond will: A increase as bond prices fall B always equal the bond's original coupon rate C remain unchanged as bond prices fall D remain unchanged as bond prices rise

The best answer is A. There are two Yield to Maturity formulas, one for a discount bond and one for a premium bond: Since both the Annual Interest and Annual Capital Gain are fixed, as the cost of the bond falls, the Yield to Maturity must rise. Since both the Annual Interest and Annual Capital Gain are fixed, as the cost of the bond rises, the Yield to Maturity must fall.

Which statement is TRUE regarding Treasury debt instruments? A Treasury securities are sold by competitive bidding at auctions conducted by the Federal Reserve B Treasury securities are sold via negotiated offerings through investment bankers C Treasury securities are issued in fully registered form only D The SEC oversees the Treasury securities marketplace

The best answer is A. U.S. Government debt is sold via competitive bidding at auctions conducted by the Federal Reserve on behalf of the U.S. Treasury. Treasuries are issued in book entry form only. No certificates are issued for book entry securities; the only ownership record is the "book" of owners kept by the transfer agent. Trading in Treasuries is overseen by the Federal Reserve.

Which statement is TRUE regarding repurchase agreements? A Repurchase agreements are used by dealers to reduce the carrying cost of Government securities held in their inventory B Repurchase agreements are initiated by the Federal Reserve to tighten the money supply C Reverse repurchase agreements enhance the liquidity of the dealer D If a repurchase agreement extends for longer than overnight, the agreement is known as a "Due Bill" repurchase agreement

The best answer is A. Under a "repurchase agreement," a government securities dealer sells some of its inventory to another dealer or to the Federal Reserve, with an agreement to buy back the securities at a later date for a pre-established price. In this manner, the dealer gets a temporary inflow of cash which loosens the money supply. Since government dealers finance their inventory, by reducing the amount of inventory on hand, they are reducing inventory finance charges when such an agreement is employed. Under a "reverse repurchase agreement," the dealer is buying securities from the Federal Reserve (instead of selling), draining the dealer of cash. Under any repurchase agreement, the underlying government securities are the collateral. The collateral that underlies the agreement must be transferred from seller to buyer to support the transaction. In the "good old days," dealers could do repurchase agreements that were backed by a promise to deliver the underlying securities (a "due bill" for the securities) instead of making physical delivery. Due bill repurchase agreements are no longer permitted.

In a period of steep decreases in interest rates, which issuer is most likely to be positively affected? A Public utility B Railroad C Consumer goods D Mining

The best answer is A. Utilities are capital intensive - building electric generating plants is expensive! To obtain long term funds, utilities can issue either stock or bonds. Because their revenue stream is stable, utilities can issue large amounts of bonds at favorable interest rates without negatively affecting their credit rating. The vast majority of utility financing is done via the issuance of mortgage bonds. It is typical for a utility to have 90% of its capitalization come from the sale of bonds with only 10% from equity. It contrast, mature manufacturing companies can rarely have more than 30% of their capital base coming from the issuance of debt without negatively affecting their credit rating. If interest rates drop steeply, a utility can call its outstanding bonds and refund at lower current market rates. This reduces its interest cost (which is one of its largest expenses), so earnings will improve, and the price of the stock will rise in the market. Because the other industries listed cannot issue such a large amount of bonds, the positive impact of refunding at lower current market rates is not as great.

All of the following statements are true regarding warrants EXCEPT: A Warrants generally have a maximum life of 2 months B At issuance, the exercise price of the warrant is set higher than the current market price of the underlying common stock C The price of the warrant will vary with the price movements of the underlying stock D The price of the warrant will vary depending upon the time to expiration of the warrant

The best answer is A. Warrants generally have a life of 5 years - in contrast, rights have very short lives (e.g., 1 or 2 months). At issuance, the exercise price of the warrant is set higher than the current market price of the underlying common stock. Thus, the warrant is issued at a price that is "out the money" and the market price of the stock must rise to at least this level for it to be worthwhile to exercise the warrant. The price of the warrant will vary with the price movements of the underlying stock. As the stock's price rises, the warrant becomes more valuable; as the stock's price falls, the warrant becomes less valuable. The price of the warrant will vary depending upon the time to expiration of the warrant. The greater the time to expiration, the greater the value of the warrant, since there is a greater probability that the price will rise in the remaining time to expiration.

If a bond is purchased at a discount, which statement is TRUE? A Yield to call is higher than the yield to maturity B Yield to call is equal to the yield to maturity C Yield to maturity is equal to current yield D Yield to maturity is lower than the current yield

The best answer is A. When a bond is purchased at a discount and called prior to its redemption date, the yield to call received will be higher than if the bond is held to maturity since the discount will be earned faster. Yield to maturity will always be higher than current yield for a discount bond because YTM includes the earning of the discount as part of the overall return received from the bond while current yield ignores this component (it is simply Annual Income / Current Market Price).

BABs are: A subject to Federal income tax B exempt from Federal income taxes only C triple tax free D issued by the U.S Treasury to help ailing cities

The best answer is A. "BABs" are Build America Bonds. Build America Bonds were issued by municipalities in 2009 and 2010. They are taxable municipal bonds that get a 35% Federal interest rate subsidy and the bond proceeds must be used for capital improvements (this is part of the economic stimulus program after the 2008-2009 "great recession"). These bonds were meant to create jobs and make to it easier for municipalities to access the debt market for needed capital projects.

Which rating applies to short term municipal issues? A MIG 1 B P2 C P1 D NP

The best answer is A. MIG ratings stand for "Moody's Investment Grade," with MIG 1 being highest and SG ("Speculative Grade") being the lowest ratings. These are the ratings used for short term municipal notes. The "P" (Prime) ratings are used to grade corporate commercial paper.

A Capital Appreciation Bond (CAB) is a: A general obligation bond issued at a deep discount B revenue bond issued at a deep discount C general obligation bond issued at par D revenue bond issued at par

The best answer is A. A Capital Appreciation Bond (CAB) is a municipal zero coupon bond with a "legal" twist to it. A conventional zero coupon G.O. bond is counted against an issuer's debt limit at par value because the discount is treated as "principal." If a new issue discount bond is legally crafted as a CAB, then the principal counted against the issuer's debt limit is the discounted principal amount and the discount earned is considered to be interest income. The bond is purchased at the discounted price and then par is returned at maturity, with the 2 components of that par payment being the return of the discounted purchase price (the "principal" amount) and the accreted interest income.

A political subdivision wishes to issue a bond backed by taxes on cigarettes and gasoline. It would most likely issue a(n): A Special tax bond B Industrial revenue bond C Special assessment bond D General obligation bond

The best answer is A. A municipal bond which is secured by taxes other than ad valorem taxes is a special tax bond. These "special taxes" are typically excise taxes on tobacco, alcohol and gasoline.

An open-end management company is a: A mutual fund B publicly traded fund C fixed unit investment trust D real estate investment trust

The best answer is A. A mutual fund portfolio is managed by an investment adviser and the fund continuously issues and redeems its common shares - so it is an "open- end" management company.

If market rates of interest increase, bonds issued at par would trade at (a): A discount B premium C par D parity

The best answer is A. A rising market rate of interest means that interest rates are rising. If market interest rates rise, then bond prices will decline to a discount below par, and the yields on those bonds will rise.

New issues of Treasury Bonds, are issued by the U.S. Government in which form? A Book Entry B Bearer C Registered to Principal Only D Registered to Principal and Interest

The best answer is A. All Treasury debt obligations are issued in book entry form only

New issues of municipal short term notes are available in which form? A Book entry B Bearer C Fully registered D Registered to principal and interest

The best answer is A. All new debt issues only come in book entry form.

On customer account statements, long-term negotiable certificates of deposit must be shown at: A market value B market value plus accrued interest C face value D face value plus accrued interest

The best answer is A. All securities positions on customer account statements must be shown at market value - not face value. The amount of accrued interest earned on a debt instrument as of the statement date is not disclosed.

American Depositary Receipts pay dividends in: A U.S. dollars only B Eurodollars C European Currency Units D Foreign Currency or U.S. dollars based on the investor's preference

The best answer is A. American Depositary Receipts pay dividends in U.S. dollars only. The dividends are declared and paid in the foreign currency by the issuer. The bank that issues the ADR exchanges the dividend that was received in the foreign currency into U.S. Dollars and pays this to the U.S. ADR holders.

All of the following statements about warrants are true EXCEPT? A At issuance, warrants have intrinsic value B Warrant valuation is directly influenced by the market price of the common stock C Warrant valuation reflects market expectations for future earnings of the company D Warrant valuation reflects the life of the instrument

The best answer is A. At issuance, warrants typically have exercise prices well above the current market price of the common stock and have no intrinsic value. Thus, for the warrant to have real value, the market price of the common must rise above the exercise price of the warrant. Warrant valuation is directly influenced by the common stock price, the life of the warrant, and expectations for future corporate earnings.

Bonds quoted on a percentage of par basis are generally: A term bonds B series bonds C serial bonds D short term maturities

The best answer is A. Bonds quoted on a percentage of par basis are term bonds. Municipal bonds quoted in basis points (yield quotes) are serial bonds.

All of the following statements are correct when comparing bonds and preferred stock EXCEPT? A Payments to bondholders are subject to approval of the Board of Directors B Payments to preferred stockholders are subject to approval of the Board of Directors C Bonds are considered senior securities over common stock in a corporate dissolution D Preferred stock is considered to be a senior security over common stock in a corporate dissolution

The best answer is A. Both bonds and preferred stock are "Senior" securities over common. Payments to bondholders are a legal obligation of the issuer. They are not a discretionary decision on the part of the Board of Directors, as is the decision to pay a dividend to preferred and common shareholders.

The maximum maturity on commercial paper is 270 days (9 months) because: A this is the longest maturity for the security to be exempt from the provisions of the Securities Act of 1933 B this is the maximum maturity for the security to be defined as a money market instrument C longer duration issues are not readily marketable to institutional investors D longer duration issues will not be rated by a nationally recognized ratings agency

The best answer is A. Commercial paper is an exempt security under the Securities Act of 1933. It does not have to be registered and sold with a prospectus if its maturity is 270 days or less. This makes it much less expensive for an issuer to market the securities, since the regulatory burden is much lower. Review

Which statement is TRUE about shareholder rights? A Only common shareholders have preemptive rights B Preferred shareholders have preemptive rights C Both common and preferred shareholders have voting rights D Only preferred shareholders have voting rights

The best answer is A. Common shareholders have both voting rights and preemptive rights (the right to maintain proportionate ownership if the issuer issues additional common shares). Preferred stockholders do not have voting rights and do not have preemptive rights. This is the case because they are being given a fixed rate of return that is not affected by dilutive actions taken on the part of the company (as is the case with common shareholders).

Which term describes common stock? A negotiable B redeemable C non-negotiable D callable

The best answer is A. Common stock is a negotiable (transferable) security. It is not redeemable with the issuer nor is it callable by the issuer.

An investor has 300 shares and is voting for 3 open board seats. Which statement is correct if the election employs the cumulative voting method? A Cumulative voting gives the shareholder a disproportionate voting weight and allows her to cast a maximum of 900 votes for a favored director. B Cumulative voting gives the shareholder a disproportionate voting weight and allows her to cast a maximum of 300 votes for a favored director. C Cumulative voting gives the shareholder a proportionate voting weight and allows her to cast a maximum of 900 votes for a favored director. D Cumulative voting gives the shareholder a proportionate voting weight and allows her to cast a maximum of 300 votes for a favored director.

The best answer is A. Cumulative voting gives the shareholder a disproportionate voting weight as compared to statutory voting and is considered to be an advantage to the small investor. Under the statutory method, the number of shares held is the number of votes that the shareholder can apply to each directorship. Under the cumulative method, the shareholder can accumulate all votes that he has for all directorships and apply them to favored individuals. In this case the investor has 900 total votes (1 vote per share per board seat) so they may cast a maximum of 900 votes for a favored director.

Dividends on preferred stock may be paid in: A Cash B Common shares of the same issuer C Common shares of another issuer D Common shares of the same issuer

The best answer is A. Dividends on preferred stock are paid solely in cash. Dividends on common stock may be paid in cash; stock; stock of another company (such as shares of a subsidiary company) or products of that company.

Which statement is TRUE regarding Federal Funds? A Federal funds are overnight loans between member institutions of the Federal Reserve System B Federal funds are overnight loans of reserves from the Federal Reserve Bank to a member institution C The interest rate charged on Federal Funds is the LIBOR Rate D The interest rate charged on Federal Funds is the Discount Rate

The best answer is A. Federal Funds are overnight loans of reserves from Fed member bank to Fed member bank. The interest rate charged on Fed Funds is the Federal Funds Rate. When the Federal Reserve Bank lends directly to a member bank, it does so at the discount rate. LIBOR" = London Interbank Offered Rate.

All of the following may initiate repurchase agreements with government and agency securities as collateral EXCEPT: A Federal Home Loan Banks B Commercial banks C Federal Reserve Banks D Government securities dealers

The best answer is A. Government securities dealers, Commercial banks, and the Federal Reserve through its open market trading desk, all initiate repurchase agreements. Federal Home Loan Banks sell bonds to obtain funding. With the funds, it buys mortgages from Savings and Loans, making a secondary mortgage market and injecting fresh funds into the S&L's. Review

Which of the following revenue bond issues would likely pledge the earnings from invested endowment funds to the bondholders? A Hospital bond B Water and Sewer bond C Mortgage bond D Turnpike bond

The best answer is A. Hospitals and colleges are often given large monetary gifts - known as "endowments." The institution invests the endowment funds to generate interest and dividend income. It usually agrees not to invade the principal amount. The earnings on the endowment funds are a source of revenue that can be pledged to bondholders under a revenue pledge.

If a company repurchases its own common shares, the number of: A outstanding shareswill decrease B outstanding shares will increase C issuedshares will decrease D unissued shares will increase

The best answer is A. If a company repurchases shares, the number of outstanding shares decreases.

Which of the following actions must be taken if a municipality wishes to raise its debt limit? A Public referendum B Court order C Judicial edict D Tax assessment

The best answer is A. If a municipality wishes to raise its debt limit, the voters must approve via a public referendum. In effect, the voters are approving an increase in their taxes when they approve such a measure.

A customer buys a Brokered CD for $100,000. Upon receipt of his next account statement, the customer sees that the market value of the CD is shown as $99,800. This would occur because: A interest rates have risen B interest rates have fallen C the broker's commission for selling the CD has been subtracted out D the bank that issued the CD has charged an up-front handling fee

The best answer is A. If interest rates rise after issuance, the value of the CD in the secondary market will fall. Since the interest rate on the instrument is fixed at issuance, if market interest rates rise, then the price of this instrument must fall to bring its yield up to current market levels.

The conversion price of a convertible debenture is set at issuance at $50 per share. The common stock is now trading at 46 while the bond is trading at 110. If the bond drops 20% from its current market value, the new parity price of the common stock will be: A $44 B $46 C $48 D $50

The best answer is A. If the bond falls 20% from its current price of $1,100, the new price will be 80% x $1,100 = $880 per bond. Since each bond is convertible based upon a conversion price of $50 per share, the conversion ratio is $1,000 par / $50 conversion price = 20:1. The new parity price is $880 / 20 = $44 per share.

Which statement is TRUE when the Federal Reserve enters into a repurchase agreement with a U.S. Government securities dealer? A The Fed buys U.S. Government securities from the dealer and is loosening credit in the banking system B The Fed buys U.S. Government securities from the dealer and is tightening credit in the banking system C The Fed sells U.S. Government securities to the dealer and is loosening credit in the banking system D The Fed sells U.S. Government securities to the dealer and is tightening credit in the banking system

The best answer is A. In a repurchase agreement, the Fed buys government securities from a dealer (giving the dealer cash) with an agreement to sell them back at a later date. This injects cash into the banking system, loosening credit. Review

Which statement is TRUE when the Federal Reserve enters into reverse repurchase agreements with U.S. Government securities dealers? A The Federal Reserve is tightening credit B The Federal Reserve must sell back the securities at a later date C Banks are gaining reserves D Banks have more money to loan out

The best answer is A. In a reverse repurchase agreement, the Federal Reserve drains reserves from dealer banks, tightening credit. It does this by selling eligible securities to the banks, who buy them for cash. Thus the banks are drained of excess cash and credit availability is reduced. The agreement calls for the Fed to buy back the securities at a later date.

Which statement is TRUE about non-sponsored ADRs? A These ADRs are created without the participation of the foreign corporation B These ADRs are sponsored by the country in which the foreign corporation resides C These ADRs must provide financial statements to the ADR holder in English D These ADRs are typically NASDAQ or NYSE listed

The best answer is A. Non-sponsored ADRs are assembled without the participation of the issuer and trade over-the-counter. These trade over-the-counter while sponsored ADRs are sponsored by the issuing foreign corporation. When an ADR is sponsored, the issuer agrees to provide financial statements to the ADR holder in English. Non-sponsored issued may provide reports in the issuer's native language. NYSE, AMEX (NYSE American) and NASDAQ will only list sponsored ADRs.

A corporation has issued 50,000,000 shares of common stock at $.50 par. The corporation has 10,000,000 shares of Treasury Stock on its books. The aggregate par value of the outstanding shares is: A $20,000,000 B $40,000,000 C $80,000,000 D $100,000,000

The best answer is A. Outstanding stock is: Issued stock (50,000,000 shares) minus Treasury stock (10,000,000 shares) = 40,000,000 shares outstanding at $.50 par = $20,000,000.

Which risk is unique to investing internationally in less-developed countries? A Political risk B Market risk C Marketability risk D Default risk

The best answer is A. Political risk is the risk of investing internationally in countries that have weak political systems. Thus, the bondholder has very little in the way of legal protection. Political risk is an issue for consideration when making investments in 3rd World countries. Any investment in a fixed rate bond has market risk. Marketability risk depends on how deep and liquid the market is for the bonds purchased. And all bonds have some potential level of default risk.

ABC gold mining company has issued a preferred stock. Dividends on the issue may be paid as: A Cash only B Cash or additional preferred shares of ABC C Cash or additional common shares of ABC D Cash or gold bullion

The best answer is A. Preferred dividends may only be paid in cash. This differs from common stock, which can be paid a dividend in the form of cash, stock, or product.

A customer wishes to maximize liquidity and minimize interest rate risk. The best recommendation is (are): A short term maturities B long term maturities C callable bonds D non callable bonds

The best answer is A. Short term bonds do not fluctuate much in value as interest rates move since they will be redeemed shortly at par. (The longer the maturity, the greater the price movement in response to market interest rate changes). Short term maturities are also the most liquid. Review

140 Basis points equal: A 1.4% B 14% C 140% D 1400%

The best answer is A. Since 1 Basis Point = .01% = $.10, 140 Basis Points = 1.40% = $14.00.

ABC Corporation has declared a rights offering to stockholders of record on Tuesday, June 22nd. Under the offer, shareholders need 20 rights to subscribe to 1 new share at a price of $60. Fractional shares can be rounded up to purchase 1 full share. A customer owning 240 shares wishes to subscribe. The market price of the stock is currently $73. The customer can buy: A 12 shares for $720 B 12 shares for $876 C 240 shares for $14,400 D 240 shares for $17,520

The best answer is A. Since 20 rights are needed to buy 1 new share, the customer holding 240 shares, and therefore receiving 240 rights can buy 240 / 20 = 12 shares at $60 each = $720 total for 12 shares.

A corporation is offering a new issue consisting of 100,000 units at $200 each. Each unit consists of 1 share of preferred stock and a 1/4 warrant to buy one additional common share. A full warrant allows the purchase of an additional common share at $5. If all the warrants are exercised, the corporation will have: A 100,000 preferred shares and 25,000 common shares B 100,000 preferred shares and 50,000 common shares C 200,000 preferred shares and 100,000 common shares D 20,000 preferred shares and 200,000 common shares

The best answer is A. Since each unit consists of 1 preferred issue, 100,000 units x 1 = 100,000 preferred shares. Since a warrant which enables one to buy 1/4 additional share is also attached to each unit, 100,000 units x 1/4 = 25,000 common shares issued if the warrants are exercised.

All of the following are true statements regarding Treasury Bills EXCEPT: A T-Bills are issued in bearer form in the United States B T-Bills are registered in the owner's name in book entry form C T-Bills are issued at a discount D T-Bills are non-callable

The best answer is A. T-Bills are registered in the owner's name in book entry form; no bearer securities can currently be issued in the U.S. to individual residents. T-Bills are original issue discount obligations and are not callable, since they are short term obligations.

The obligor on a municipal bond issue is the: A borrower of the bond proceeds B lender of the bond proceeds C guarantor of the payment of debt service on the bond issue D fiduciary acting for the benefit of the bondholders

The best answer is A. The "obligor" on a bond issue is the party having the obligation to pay the debt service on the bonds. This is the "legal" name for the borrower or debtor.

A customer buys 100 shares preferred at $110 per share. The par value is $100. The dividend rate is 5%. Each dividend payment will be: A $250 B $275 C $500 D $550

The best answer is A. The annual rate is 5% x $100 par value = $5 per share x 100 shares = $500. Since preferred dividends are paid semi-annually, each payment is $250.

A customer buys 100 shares of preferred at $51 per share. The par value is $50. The dividend rate is 8%. Each dividend payment would be: A $200 B $400 C $600 D $800

The best answer is A. The annual rate is 8% x $50 par value = $4 per share x 100 shares = $400. Since preferred dividends are paid semi-annually, each payment is for $200.

A corporation has issued 10%, $1,000 par convertible debentures, convertible at $100. The common stock is currently trading at $90. If the bond and the common are trading at parity, a customer purchasing 5M of the bonds will pay: A $4,500 B $5,000 C $5,225 D $5,500

The best answer is A. The bonds are convertible at $100, based on $1,000 par value. Therefore each bond converts into 10 shares ($1,000 par / $100 conversion price). If the common is trading at $90, the bond must be trading at 10 times this to be at parity. $90 x 10 = $900 parity price of one bond. The parity price of "5M" ($5,000 face amount, "M" is Latin for $1,000) is $900 x 5 = $4,500.

What is the Net Asset Value per share of a mutual fund? A Assets - Liabilities / Outstanding Shares B Assets - Operating Expenses / Issued Shares C Assets - Management Fees / Outstanding Shares D Assets - Redemption Fees / Issued Shares

The best answer is A. The formula for Net Asset Value per share of a mutual fund is the market value of all fund investments (assets) minus any fund liabilities (for example, mutual funds can borrow from banks within limits, so any bank loans would be deducted). This gives Net Asset Value (NAV). Dividing NAV by the number of outstanding shares gives NAV per share.

The market price of common stock will be influenced by which of the following? A Expectations for future dividend payouts by the company B Number of Board of Directors C Book value per share D Par value per share

The best answer is A. The market price of common stock is determined by investor expectations about the future of the company. Par value, book value and the number of Board of Director seats have no direct bearing on the market price of the common.

If interest rates are rising rapidly, which U.S. Government debt prices would be LEAST volatile? A Treasury Bills B Treasury Notes C Treasury Bonds D Treasury STRIPS

The best answer is A. The shorter the maturity, the lower the price volatility of a negotiable debt instrument. Of the choices listed, Treasury Bills have the shortest maturity. Treasury STRIPS are a zero-coupon T-Bond issue with a long maturity, and would be the most volatile of all the choices offered.

Promises made by corporate issuers to bondholders, as well as any restrictions placed on the issuer are found in the: A indenture B legal opinion C prospectus D underwriting agreement

The best answer is A. The trust indenture of a bond spells out all of the protective and restrictive covenants made to the bondholders. The trustee ensures that the corporation adheres to the covenants.

Regular way trades of U.S. Government bonds settle in: A Fed Funds on T+1 B Clearing House Funds on T+1 C Fed Funds on T+2 D Clearing House Funds on T+2

The best answer is A. Trades of U.S. Government bonds settle in Fed Funds. Regular way settlement of government securities trades takes place the business day following trade date (T+1).

Variable rate municipal notes avoid which of the following risks? A market risk B default risk C marketability risk D credit risk

The best answer is A. Variable rate municipal notes avoid "interest rate risk," also known as market risk, since a rise in interest rates will not devalue these securities. With a fixed rate note, as interest rates rise or fall, the note's value must decrease or increase proportionately, so that the note gives a yield that approximates the current level of interest rates. Variable rate notes periodically adjust the rate of interest paid to holders, usually based upon an index of government securities. The interest rate on the notes is adjusted up or down, based upon prevailing market interest rates; thus the price of the instrument will stay at, or very close to, par.

A proxy given to a caretaker to vote a stockholder's shares is a: A power of attorney B trading authorization C discretionary authority D voting trust

The best answer is A. When a shareholder cannot attend the annual meeting and vote, the shareholder can give a power of attorney to another individual or the management of the company to "stand in" and cast that shareholder's votes as directed. This is called a "proxy," where the individual granted the power of attorney acts as the shareholder's proxy. The "caretaker" wording used in the question is a little odd, but that individual granted the proxy must act in the shareholder's interests, so this person could be viewed as a caretaker.

A customer buys 5M of 3 1/4% Treasury Bonds at 98-8. How much will the customer receive at each interest payment? A $35.00 B $81.25 C $162.50 D $325.00

The best answer is B. "5M" means that 5-$1,000 bonds are being purchased (M is Latin for $1,000). Annual interest on the bonds is 3.25% of $5,000 face amount equals $162.50. Since interest is paid semi-annually, each payment will be for $81.25. Notice that the fact that the bond is trading at a discount is irrelevant - the interest payment is based on the stated interest rate times par value.

Dawn owns 100 shares of ACME Company common stock, currently trading at $60 per share. She receives a notice that ACME has declared a 20% stock dividend. What does this mean to Dawn? A Dawn's stock will increase in value by 20% per share B Dawn will receive 20 additional shares of stock C Dawn will receive $20 in cash from ACME Corporation D Dawn's stock will decrease in value by 20% per share

The best answer is B. A stock dividend means that the company will issue additional shares to current shareholders instead of paying a cash dividend. Companies often "pay" stock dividends, as opposed to cash dividends, when they are young and growing and want to conserve cash to fund their growth. The percentage indicates how many additional shares each stockholder receives. In this case, 20% of 100 shares = 20 additional shares to be issued. Assume that each share was worth $60 before the 20% stock dividend was declared. The aggregate holding was worth $60 x 100 = $6,000. After the stock dividend is paid, Dawn will own 100 + 20 = 120 shares (same as 100 x 1.2). However, each share will now be worth $60/1.2 = $50. The aggregate holding is worth $50 x 120 shares = $6,000. The stock declines in value from $60 to $50, which is a $10 decrease from the original $60 value, for a $10/$60 = 16.66% decline in price.

Which statement is TRUE about variable annuities? A Variable annuities are fixed unit investment trusts B Variable annuities are participating unit investment trusts C Variable annuities are only regulated under state insurance law D Variable annuities are held in the insurance company general account.

The best answer is B. A variable annuity is a participating unit investment trust. The trust is an "umbrella vehicle" used to collect payments from annuity contract holders. The trust invests the funds in one type of security only - shares of management companies. These are held in a "separate" investment account; and the performance of the securities in the separate account determines the amount of the annuity to be received. Because the investor bears the "investment risk" in this product, these are non-exempt securities that must be registered under the Securities Act of 1933 and sold with a prospectus; and are defined as an investment company type that is regulated under the Investment Company Act of 1940.

The nominal yield of a bond will: A increase as bond prices fall B remain unchanged as bond prices fluctuate C increase as bond prices rise D decrease as bond prices rise

The best answer is B. The nominal yield is the stated rate of interest as a percentage of par value. It does not change as bond prices move. However, the current yield and yield to maturity will be affected by changes in bond prices.

Which statement is TRUE about the liquidity and risk associated with federal agency securities? A There is minimal market risk B There is minimal marketability risk C Credit risk is the same as for U.S. Government securities D Both short and long maturities fluctuate considerably in price over time

The best answer is B. Agency bonds have little marketability risk; the trading market for U.S. Government and Agency Bonds is the most active in the world. As with any fixed income security, there is market risk associated with these securities. If interest rates rise, their prices will drop, with longer maturity and lower coupon issues dropping much faster than shorter maturity and higher coupon issues (making Choices A and D incorrect). Credit risk for federal agency securities is a bit higher than for U.S. Governments because they are not directly backed, they are only implicitly backed (making Choice C incorrect). Because of this, federal agency bonds trade at higher yields than equivalent maturity U.S. Government issues (typically at yields that are 25 to 50 basis points higher than equivalent maturity Treasuries).

All of the following are money market instruments EXCEPT: A REPOs B ADRs C CDs D BAs

The best answer is B. All of the choices are money market instruments except ADRs. BAs (Banker's Acceptances) are time drafts used to finance imports and exports with typical 30 - 90 day maturities. CDs (Certificates of Deposit) are Jumbo instruments with a fixed maturity date, typically 6 months, that are issued by banks in units of at least $100,000. REPOs (Repurchase Agreements) are generally overnight agreements between government securities dealers to buy securities and sell them back the next day. ADRs (American Depositary Receipts) are equity, not short term debt, and hence are not a money market instrument. ADRs are the means by which foreign securities are traded in the United States.

All of the following securities can be purchased on margin EXCEPT: A Treasury bills B Structured products C Bankers' acceptances D Commercial paper

The best answer is B. Because money market instruments are "safe," they can be margined - meaning that the brokerage firm can lend money against these securities held as collateral for the loan. Government securities, agency securities, investment grade money market instruments, investment grade corporate bonds, and listed stocks are the marginable securities. As a general rule, structured products cannot be margined because they are not readily transferable.

Corporate dividend payments may be made in all of the following forms EXCEPT: A Cash or company products B Listedoptionsof that company C Additionalcommon sharesof another company D Additional common shares of that company

The best answer is B. Corporations can pay dividends as cash or company products (the distribution of company products as a dividend is pretty much obsolete, however). A corporation can also make a distribution of additional shares of that company or can issue a dividend consisting of shares of another company (typically a subsidiary). Options are created and issued by the Options Clearing Corporation, not the company, and cannot be used as a form of dividend payment.

A customer owns 1,000 common shares of ABC Corporation. Which of the following actions will dilute the shareholders' equity? A ABC declares a 10%stock dividend B ABC declares that it will call itsconvertible preferredstock, which is currently trading at apremium C ABC declares a 2:1stock split D ABC declares a 1 for 4 reverse split

The best answer is B. Dilution of an individual stockholder's equity does not occur if there is a stock dividend or any type stock split. In a forward split, the shareholder receives more shares worth proportionately less. In a reverse split, the shareholder receives fewer shares worth proportionately more. However, in total, the shareholder has the same percentage interest in the corporation. If the issuer forces conversion of convertible securities, additional common shares are issued to the individuals who tender the convertible securities. This dilutes common equity.

A customer owns 1,000 common shares of ABC Corporation. Which of the following actions will dilute the shareholders' equity? A ABC declares a 5%stock dividend B ABC declares that it will call itsconvertible preferredstock, which is currently trading at apremium C ABC declares that it will issue an additional $100,000,000 in bonds D ABC declares a 4:1 stock split

The best answer is B. Dilution of an individual stockholder's equity does not occur if there is a stock dividend or stock split. The shareholder receives more shares worth proportionately less. However, in total, the shareholder has the same percentage interest in the corporation. If the issuer forces conversion of convertible securities, additional common shares are issued to the individuals who tender the convertible securities. This dilutes common equity. If the corporation issues additional bonds, this has no effect on stockholders' equity.

Voting of the common stockholder is required for all of the following EXCEPT: A when a corporation declares astock split B when a corporation declares astock dividend C when a corporation wishes to issueconvertible securities D deciding whether to accept atender offerfor the company's shares

The best answer is B. Dividend decisions are made by the Board of Directors - no shareholder approval is required. This is true whether a cash or stock dividend is being declared. Changes in the equity capitalization of a company require shareholder approval. A stock split changes par value per share, which requires a shareholder vote. The issuance of convertible securities (which can be converted to equity) is potentially dilutive to the existing common shareholders. They must vote to permit this. A tender offer is when someone outside the company makes an offer to the existing shareholders to buy their shares, typically at a premium to the current market price. The shareholder can choose to tender or not. If the shareholder chooses to tender, he or she is "voting" to sell the shares to the maker of the offer.

Prepayment risk applies to holders of: A long duration bonds B Ginnie Mae pass-through certificates C General Obligation bonds D all holders of fixed income securities

The best answer is B. Pass-through certificates are mortgage-backed securities that represent ownership in a pool of underlying mortgages and that pass through the monthly mortgage payments to the certificate holders. If the homeowners prepay their mortgages because interest rates are declining, these are "passed-through" to the holders, who then must reinvest the proceeds at lower current rates. This is "prepayment risk" and is essentially a variation on call risk, but here there are no specified potential call dates in the bond offering. This is a "difficult to quantify" risk and is only associated with pass-through securities.

Which agency issuing mortgage backed pass through certificates is permitted to purchase conventional home mortgages that are not VA or FHA insured? A Ginnie Mae B Freddie Mac C Sallie Mae D Federal Farm Credit System

The best answer is B. Freddie Mac - Federal Home Loan Mortgage Corporation - buys conventional mortgages from financial institutions and packages them into pass through certificates. These mortgages are not required to be FHA or VA guaranteed. This agency was partially sold off to the public as a corporation that was listed on the NYSE. Fannie Mae (Federal National Mortgage Association) buys FHA and VA insured mortgages from financial institutions and packages them into pass through certificates. It also buys conventional mortgages. This agency was sold off to the public as a corporation that was listed on the NYSE. Both Fannie and Freddie are now bankrupt due to excessive purchases of bad "sub prime" mortgages and have been placed in government conservatorship. Their shares have been delisted from the NYSE and now trade OTC in the Pink OTC Markets. Ginnie Mae (Government National Mortgage Association) performs the same function as Fannie Mae except that its pass through certificates are guaranteed by the U.S. Government. Unlike Fannie and Freddie, it only buys FHA and VA insured mortgages. It remains an agency of the government and cannot be "sold off" as a public company as long as the government continues to guarantee its securities. Sallie Mae securitizes student loans, not mortgages. The Federal Farm Credit System provides loans to farmers - it does not purchase conventional home mortgages.

Which statement is TRUE regarding Government National Mortgage Association pass-through certificates? A GNMA securities are insured by the FDIC B Dealers typically quote GNMA securities on a basis point differential to equivalent maturity U.S. Government Bonds C Credit risk for GNMAs is higher than that for equivalent maturity Treasury Bonds D Reinvestment risk for GNMAs is the same as for equivalent maturity U.S. Government Bonds

The best answer is B. GNMA securities are not insured by the Federal Deposit Insurance Corporation - they are guaranteed by the U.S. Government giving these securities the same credit risk as a U.S. Treasury (none). Dealers typically quote agency securities, including Ginnie Maes, on a basis point differential to equivalent maturing U.S. Governments. A typical quote is 50 basis points above the yield on the same maturity U.S. Government issue. (Please note, that dealers also quote agency securities on a percentage of par basis in 32nds, but this is not given as a choice in the question.) Reinvestment risk is greater for Ginnie Maes than for U.S. Government bonds. Ginnie Mae holders receive monthly payments that must be continuously reinvested while T-Bond holders only receive payments every 6 months that must be reinvested. The greater the frequency of receipt of payments that must be reinvested, the greater the reinvestment risk.

Which statement is TRUE regarding Ginnie Mae Pass Through Certificates? A The certificates pay holders on a semi-annual basis B The certificates are self-amortizing C Each payment consists of interest only D After 30 years, the holder receives his or her original principal value

The best answer is B. Ginnie Mae Pass Through Certificates "pass through" monthly mortgage payments to the certificate holders. Each payment is a combination of both interest and principal paid from the underlying mortgage pool. Since each monthly mortgage payment is a combined payment of interest and principal, the certificates are self-amortizing (self-liquidating) which means there is no return of the face value at maturity since the investor has been receiving principal throughout the issue's life.

The credit rating of a guaranteed corporate bond is based on the credit quality of the: A corporate issuer B corporate guarantor C FDIC D SIPC

The best answer is B. Guaranteed corporate bonds are guaranteed by another corporation (typically a parent company guaranteeing the debt of a wholly owned subsidiary). The guarantor will have the higher credit rating, so the bonds will be able to be issued at a lower interest cost. Such bonds take on the credit rating of the corporate guarantor, who is liable for payment if the issuer defaults. Agencies, such as Federal Deposit Insurance Corp. and Securities Investor Protection Corp. do not guarantee corporate bonds. They protect customer accounts if banks, or securities firms fail, respectively.

An investor who expects interest rates to drop would invest in: A short term issues B puttable debt issues C callable debt issues D debt issues with adjustable interest rates

The best answer is B. If interest rates decline, it is likely that issuers will call in outstanding bonds and refund the issues at the lower current interest rates. An investor who expects interest rates to drop should avoid callable issues or issues with adjustable interest rates (since each year as interest rates drop, the rate on the bond is dropped). If they expect rates to fall, investors would also likely prefer to lock in the current higher rate by purchasing long term bonds - but that is not offered as a choice! Non-callable bonds are fine, as are bonds with put options. The put option will only be used if interest rates rise, decreasing the value of the bond. Then, the bondholder would exercise the option and "put" the bonds to the issuer at par.

An investor expects that interest rates will decline over the next 5 years. Which of the following is an appropriate investment? A 10 year bonds callable at par in 3 years B 10 year bonds puttable at par in 5 years C Very short term bonds D Adjustable rate (reset) bonds, with an annual reset period

The best answer is B. If interest rates decline, it is likely that issuers will call in outstanding bonds and refund the issues at the lower current interest rates. An investor who expects interest rates to drop should avoid callable issues or issues with adjustable interest rates (since each year as interest rates drop, the rate on the bond is dropped). Short term bonds are also not a good choice because at maturity the proceeds will be rolled into a new lower coupon issue as rates fall. Non callable bonds are fine, as are bonds with put options. The put option will only be used if interest rates rise, decreasing the value of the bond. Then, the bondholder would exercise the option and "put" the bonds to the issuer at par.

An investor seeking a moderate level of income and a low level of risk would buy: A common stock B mortgage bonds C income bonds D convertible bonds

The best answer is B. Mortgage bonds pay interest semi-annually and are backed by a mortgage on real property - so these bonds are secure. Convertible bonds pay a moderate rate of interest, but they are only backed by the faith and credit of the issuing company - they are not secured. So their risk level is higher than a mortgage bond. Income bonds are unsuitable since they pay only if the company has sufficient earnings. Common stock is unsuitable since the dividend decision is discretionary on the part of the Board of Directors.

The manager of a pension plan would most likely invest in all of the following debt issues EXCEPT: A Corporate Bonds B Municipal Bonds C Ginnie-Maes D T-Bills

The best answer is B. Pension plans are "tax qualified" retirement plans. Earnings on securities held are tax deferred; so there is no benefit to investing in municipals, which have lower interest rates because their interest income is exempt from Federal income tax. Investments would be made in corporate and government bonds, both of which have higher interest rates because their interest income is taxable by the Federal government.

Regarding bonds with put options, which statement is TRUE? A Exercise of the put is at the option of the issuer B Once the option is exercisable, the bond's price will not fall below the option price if interest rates rise C Yields on bonds with put options are higher than similar bonds without this feature D Put features are a benefit to bond issuers

The best answer is B. Put options are exercisable at the option of the bondholder; once the option is exercisable, the bond price cannot fall below the option price, since the bondholder can always "put" the bond to the issuer for this amount. This benefits the bond investor if interest rates rise. The put price represents a floor on the market price of the bond. Because the put option removes some of the market risk from the bond, this feature is valued by bondholders, who will accept lower yields on bonds having this option.

When comparing Fannie Mae certificates to Ginnie Mae certificates, which statement is TRUE? A Fannie Mae certificates are rated slightly higher than Ginnie Mae certificates and will have a slightly lower yield B Fannie Mae certificates are rated slightly lower than Ginnie Mae certificates and will have a slightly higher yield C Both Ginnie Mae and Fannie Mae certificates will have yields in line with current T-Bill rates D Fannie Mae certificates and Ginnie Mae certificates will have identical yields since both are guaranteed by the U.S. Government

The best answer is B. Since Ginnie Mae certificates are guaranteed by the U.S. Government, they are rated slightly higher than Fannie Mae certificates - which only have an "implied" government backing. In the same sense, since Fannie Mae certificates have a bit more credit risk (because they are not guaranteed directly by the U.S. Government), they will have a slightly higher yield than Ginnie Mae certificates. GNMA and FNMA securities will pay an interest rate much higher than that found on a T-Bill, mainly because their maturity is much longer.

An issuer would MOST likely call bonds with: A low coupon rates B high nominal yields C high call premiums D long call protection period

The best answer is B. The bonds which are most likely to be called are bonds with high nominal yields, which is the same as the coupon rate. After calling the bonds, the issuer can refund the issue at lower current market rates (given that interest rates have fallen after issuance). Bonds with low coupon rates are not going to be called since the interest cost to the issuer is low. Bonds with high call premiums would be expensive for the issuer to retire. Finally, long call protection periods prevent the issuer from calling the bond during the protection period.

A customer bought a $1,000 par convertible subordinated debenture at par, convertible into common at $25 per share. If the bond's market price increases by 20%, the parity price of the stock will be: A 25 B 30 C 40 D 48

The best answer is B. The conversion price (and hence the conversion ratio) are fixed when the convertible security is issued and does not change. In this case, the bond is issued with a conversion price of $25, based upon converting each bond at par. $1,000 par / $25 conversion price = 40:1 conversion ratio. Thus, for every bond that is converted, the holder receives 40 shares. To be at parity, since the bond is now trading at $1,200 (120 % x $1,000), the stock which is convertible into 40 shares, must have a parity price of $30 ($1,200 / 40).

When the market price of ACME Common stock is at $45, which of the following actions, when completed by ACME Corporation, would raise additional capital? A Declaration of a 2 for 1stock split B Announcement of a rights distribution, allowing existing shareholders to buy the stock at $35 per share C Announcement of a call of ACME $100 parc onvertible preferred at par, convertible at a 2.5:1 ratio D Announcement of a 10% stock dividend

The best answer is B. The declaration of a stock split or stock dividend will not raise additional capital. Stock splits are typically declared when a company's stock price has risen too high for investors to easily trade 100 share units. By splitting the stock, the price is halved in the marketplace, making 100 share lots more affordable. A rights distribution will raise additional capital, since the existing shareholders are asked to "subscribe" and therefore, pay, for more shares. The call of a convertible security will either use the cash of the company if the security is handed in on the call notice; or will have no effect at all on the cash position of the company if the preferred stockholders convert to common stock. In this case, the issuer is doing a "forced conversion," because it makes sense for the preferred stockholders to convert to stock worth $45 per share in the market, rather than to tender their preferred shares at par, receiving $100 per preferred share/2.5 common shares per preferred shares = $40 equivalent price per share. Finally, the issuance of new preferred stock would raise new capital for the issuer.

ABC 8% $100 par preferred is trading at $105 in the market. The current yield is: A 6.6% B 7.6% C 8.6% D 10.6%

The best answer is B. The formula for current yield is: annual income / market price = current yield $8 / $105 = 7.6%

As interest rates rise, which following statement is TRUE? A Bonds trading at small discounts fall faster in price than bonds trading at large discounts. B Bonds trading at large discounts fall faster in price than bonds trading at small discounts. C Premium bonds fall faster in price than discount bonds. D Bonds trading at large premiums fall faster in price than bonds trading at small premiums.

The best answer is B. The general rule is the lower the price of the bond, the faster that bond's price will move as market interest rates change. Premium bonds will fall more slowly than discount bonds in a rising rate environment. Large premium bonds have a higher price than small premium bonds, so their change in price as a percentage of current market value is smaller. Deep (large) discount bonds have a lower price than small discount bonds, hence their prices move faster. Deep discount bonds have a lower price than small discount bonds, so their change in price as a percentage of current market value is higher.

An investor in 30-year Treasury Bonds would be most concerned with: A deflation B inflation C marketability risk D call risk

The best answer is B. The primary risk associated with holding long term U.S. Government obligations is "purchasing power" risk caused by inflation. This is the risk that inflation reduces the value of future interest payments and the principal repayment yet to be received in the future.

All of the following statements are true about the purchase of a Treasury Bond at par EXCEPT: A interest income received is subject to federal income tax B interest income received is subject to state income tax C interest payments will be made semi-annually D the amount of each interest made is constant

The best answer is B. The interest income received from U.S. Government obligations is subject to federal income tax, but is exempt from state and local income taxes (one level of government cannot tax the other's obligations). Treasury Bonds pay a stated rate of interest (the coupon rate) divided into 2 semi-annual interest payments. For example, a 6% bond would pay 6% of $1,000 par = $60 of annual interest, in 2 semi-annual payments of $30 each.

The nominal interest rate on a TIPS is: A the same as the rate on an equivalent maturity Treasury Bond B less than the rate on an equivalent maturity Treasury Bond C more than the rate on an equivalent maturity Treasury Bond D unrelated to the rate on an equivalent maturity Treasury Bond

The best answer is B. The interest rate placed on a TIPS (Treasury Inflation Protection Security) is less than the rate on an equivalent maturity Treasury Bond. For example, a 30 year Treasury Bond might have a coupon rate of 4%; but a 30 year TIPS has a coupon rate of 2.75%. The "difference" between the two is the current market expectation for the inflation rate (1.25% in this example). The reason why the TIPS sells at a lower coupon rate is that, every year, the principal amount is adjusted upwards by that year's inflation rate. So there are really 2 components of return on a TIPS - the lower coupon rate plus the principal adjustment equal to that year's inflation rate.

A 5-year 3 1/2% Treasury Note is quoted at 101-4 - 101-8. The note pays interest on Jan 1st and Jul 1st. If a customer buys 5 T-Notes on Friday, April 4th, when does the settlement occur? A Friday, April 4th B Monday, April 7th C Tuesday, April 8th D Wednesday, April 9th

The best answer is B. Trades of U.S. Government and agency securities settle "regular way" on the next business day. Trades of corporate and municipal securities settle "regular way" 2 business days after trade date (T+2).

Which statement is TRUE when comparing Treasury Notes to Treasury STRIPS? A Treasury Notes pay interest annually B Treasury STRIPS pay interest at maturity C Treasury STRIPS pay interest semi-annually D Treasury Notes pay interest at maturity

The best answer is B. Treasury Notes are government obligations maturing between 1 year and 10 years which pay interest semi-annually. Treasury STRIPS are notes or bonds "stripped" of coupons, meaning all that is left is the principal repayment portion of the note or bond (sometimes called the "corpus" or body). STRIPS are zero coupon original issue discount obligations that do not have a stated interest rate. The accretion of the discount over the bond's life represents the interest earned.

Which of the following would be a quote for a U.S. Government bond? A 99.50 B 99-16 C 99 1/2 D 99 8/16

The best answer is B. U.S. Government bonds are quoted on a percentage of par basis in 32nds. 99-16 = 99 16/32nds = 99.50% of $1,000 par = $995.00 per bond. Choice C is a corporate bond. Corporate bonds are quoted on a percentage of par basis in 1/8ths. 99 1/2 = 99.50% of $1,000 par = $995.00 per bond. Note that corporate, municipal and government bonds are not quoted in penny movements, as is the case with equities.

Which of the following would be a quote for a U.S. Government bond? A 105.625 B 105-20 C 105 5/8 D 105 10/16

The best answer is B. U.S. Government bonds are quoted on a percentage of par basis in 32nds. 105-20 = 105 20/32nds = 105.625% of $1,000 par = $1,056.25 per bond. Choice C is a corporate bond. Corporate bonds are quoted on a percentage of par basis in 1/8ths. 105 5/8 = 105.625% of $1,000 par = $1,056.25 per bond. Note that corporate, municipal and government bonds are not quoted in penny movements, as is the case with equities.

Which statement is TRUE regarding a corporation that has adopted cumulative voting? A Each stockholder must accumulate his votes and cast them for one director B Minority stockholders have a greater ability to elect the director of their choice C Each director must be elected by a majority of the shareholders D Minority stockholders are given proportionately more votes than majority stockholders

The best answer is B. Under "cumulative" voting, shareholders can accumulate their votes and place them on any directorship (or combination of directorships). Thus, minority shareholders who place all of their accumulated votes on 1 director have a reasonable chance of electing that person. The statement that each shareholder must accumulate his votes and cast them for 1 director is false - the votes are accumulated and can be cast as the stockholder sees fit. The statement that each director must be elected by a majority of the shareholders is incorrect - each director must be elected by a majority of the outstanding shares. The statement that minority shareholders are given proportionately more votes than majority shareholders is incorrect - the benefit of cumulative voting is that the minority shareholder can vote all of his votes for 1 (or for a few) director(s), and by virtue of the extra weight of those votes, get the director(s) elected.

A municipality is at its debt limit and wishes to sell additional bonds. Voter approval would NOT be required for the municipality to sell: A Limited tax general obligation bonds B Bonds to construct a for-profit sports facility C Bonds to construct a new high school D Unlimited tax general obligation bonds

The best answer is B. Voter approval is needed for a municipality to sell general obligation (G.O.) bonds (non-self supporting debt) in an amount that exceeds the municipality's constitutional limit. It makes no difference if the general obligation bonds are backed by limited or unlimited taxing power. Bonds used to construct schools would be G.O. issues. Revenue bonds and industrial revenue bonds are not subject to debt limits because they are self-supporting and pay their own way from collected revenues. They are not paid from tax collections. The stadium bonds would be self supporting.

Which statement is FALSE about preferred stock? A Dividends are paid before common B Dividends are paid quarterly C Dividends are based on corporate earnings D Preferred shareholders have a senior claim to common shareholders

The best answer is B. Whereas common dividends are typically paid quarterly, preferred dividends are typically paid semi-annually - similar to bond interest payments (remember, both preferred and bonds are fixed income securities; common stock is not). Preferred stock dividends are paid before common dividends can be paid and preferred shareholders have a prior (senior) claim to assets in a liquidation before common shareholders.

All of the following statements are true regarding warrants EXCEPT: A Warrants are considered to be an equity-related security B Warrant holders have pre-emptive rights C Warrants allow the holder to buy the stock of that issuer at a fixed price D Warrants are attractive to speculators because of the leverage that they offer

The best answer is B. Warrants are an equity-related security that give the holder the right to buy the stock of that issuer at a fixed price. The exercise price is much higher than the market price of the common at the time of issuance, so the stock must rise in price for the warrant to have real value. They are typically attached by issuers to debt and preferred stock offerings (securities that are "senior" to the common stock of the issuer) to make the securities more attractive to purchasers. Warrant holders do not receive dividends, nor do they have other shareholder rights such as the right to vote or the pre-emptive right. Warrants are much cheaper than the actual stock, because they only have value if the underlying stock price rises. Thus, they give the holder greater leverage (gain potential as a percentage of capital contributed) if the common stock does appreciate than actually purchasing that stock.

Which statement is FALSE about the time value and intrinsic value of rights and warrants when issued? A Warrants have time value at issuance B Warrants have intrinsic value at issuance C Rights have virtually no time value at issuance D Rights have intrinsic value at issuance

The best answer is B. Warrants are long term options (usually 5 years) that allow the holder to buy the stock at a substantial premium to the current market price. Therefore, the stock's price must rise substantially over time for the warrant to have any real monetary value. They have no intrinsic value at issuance; but they have 5 years of "time value." Rights are very short term options (30-60 days) granted to existing shareholders that allow then to buy the stock at a discount to the current market price. The discount is the "intrinsic value" of the right. However, because they are so short term, they have virtually no "time value."

When a corporation declares a stock split, the: A number of outstanding shares increases and the market price per share increases B number of outstanding shares increases and the market price per share decreases C number of outstanding shares decreases and the market price per share increases D number of outstanding shares decreases and the market price per share decreases

The best answer is B. When a company splits its stock (say 2:1), the number of outstanding shares increases to twice the previous number and the per share price becomes 1/2 of the previous number. The aggregate value of the stock holding does not change. For example, assume that a customer originally owned 100 shares at $500, for an aggregate holding of $50,000. After the 2:1 split, the customer will now have 200 shares, each worth $250, for an aggregate value of $50,000 - the same as before.

A corporation has been in financial difficulty and its stock price has fallen to an extremely low level. To avoid delisting, it wishes to raise its stock and it wants to conserve its cash. To do this, it should declare a: A stock split B reverse stock split C stock buy-back program D cash dividend on outstanding shares

The best answer is B. When a corporation's stock price falls too low, the company might be delisted from its principal exchange, which would make the stock very difficult to trade. To keep the stock trading in the market, the corporation could raise the per share price by declaring a reverse stock split. Declaring stock split would reduce the price per share. Buying back shares uses cash, which the company wants to conserve. The same is true if the company pays a cash dividend.

A customer gives a power of attorney to a caretaker to vote his shares on his behalf at the company's annual meeting. Which statement is TRUE? A This is known as aproxyand once given, it cannot be revoked B This is known as aproxywhich may be revoked prior to the annual meeting C This is known as avoting trustand once given, it cannot be revoked D This is known as a voting trust which may be revoked prior to the annual meeting

The best answer is B. When a shareholder cannot attend the annual meeting and vote, the shareholder can give a power of attorney to another individual or the management of the company to "stand in" and cast that shareholder's votes as directed. This is called a "proxy," where the individual granted the power of attorney acts as the shareholder's proxy. A power of attorney is revocable at any time as long as it is revoked in writing. The customer can revoke the power of attorney if he decides to change his vote or decides to go to the annual meeting himself. The "caretaker" wording used in the question is a little odd, but that individual granted the proxy must act in the shareholder's interests, so this person could be viewed as a caretaker.

For bonds trading at a premium, rank the yield measures from lowest to highest? A Nominal; Current; Yield to Maturity; Yield to Call B Yield to Call; Yield to Maturity; Current; Nominal C Current; Nominal; Yield to Call; Yield to Maturity D Yield to Maturity; Current; Yield to Call; Nominal

The best answer is B. When bonds are trading at a premium, the yield to call will be the lowest measure since the annual return is reduced by the annual amortized portion of the premium that will be "lost" over the life of the bond to the call date. The next highest yield will be the yield to maturity, since the premium will be lost over a longer "life" than if the bond is called early. Current yield will be higher than yield to maturity, since it does not include the annual premium loss. Stated yield will be the highest since it is the return based on par value.

All of the following are true statements regarding convertible bond issues EXCEPT: A at the time of issuance, the conversion price is set at a premium to the stock's current market price B the yield on convertible issues is higher than the yield for similar non-convertible issues C when the stock price is at a premium to the conversion price, bond price movements are usually caused by those of the stock D when the stock price is at a discount to the conversion price, bond price movements are usually caused by interest rate changes

The best answer is B. When convertible bonds are issued, it is normal for the conversion price to be at a premium to the current market price. Thus, for the conversion feature to be worth something, the stock's price must move up in the market. Due to the value of the conversion feature (or rather, the potential value if the stock price goes up), convertible bonds are saleable at lower yields than bonds without the conversion feature. When the stock price is at a discount to the conversion price, the conversion feature is worthless. The bond is valued based on interest rate movements. On the other hand, when the stock price is at a premium to the conversion price, the conversion feature now has intrinsic value. For every dollar that the stock now moves, the bond will move as well, since the securities are "equivalent."

During periods of stable interest rates, which type of preferred stock will have the greatest price volatility? A Cumulative B Participating C Callable D Adjustable Rate

The best answer is B. Participating preferred gives the preferred shareholder the right to participate with common in any "extra" dividends declared by the Board of Directors. If these extra dividend payments are made, this can cause the preferred stock price to rise even though interest rates have not fallen. Virtually all preferred stock is cumulative - if the company misses preferred dividend payments, then before it can pay a common dividend, it must make up all unpaid preferred dividend payments. Callable preferred gives the issuer the right to call in the preferred at a pre-established price, which the issuer would do if market interest rates fell. This would tend to suppress the upward movement of the stock price to no more than the call price as market interest rates fell. In a period of stable interest rates, the issuer has no reason to call the preferred stock. Adjustable rate preferred adjusts the dividend rate, tied to the movements of a market interest rate index, so as market rates move up, the dividend rate moves up and vice versa. Therefore, in a period of stable interest rates, the dividend rate will not change, nor will the price (unless the credit quality of the issuer deteriorates)

A municipal note that is issued in anticipation of receiving future revenues is a: A TAN B RAN C TRAN D BAN

The best answer is B. A Revenue Anticipation Note (RAN) is issued by a municipality that wishes to borrow short-term against revenues that are expected to be received in the near future. An example would be the City of New York borrowing, via a RAN issue, against a mass transit subsidy payment from the Federal government to be received in the near future.

An outstanding bond issue which is currently trading at 103 1/4 is callable starting next year at 102. The call premium on the bond issue is: A 3/4 points B 2 points C 2 1/2 points D 3 1/4 points

The best answer is B. A bond "call premium" is simply the price above par at which the issuer has the right to call in the bonds from the bondholders. These bonds are callable at 102, hence the call premium is 2 points.

A "call premium" on a bond is the: A amount by which the purchase price of the bond exceeds par B amount by which the redemption price prior to maturity exceeds par C amount which the redemption price at maturity exceeds par D maximum premium at which the bond can trade over its life

The best answer is B. A call premium is the excess over par value that the issuer will pay the bondholder to call in the bonds prior to maturity.

A municipal variable rate demand note is a municipal: A note that may be retired prior to maturity on any interest payment date at the demand of the issuer B bond that gives the holder a tender option feature, usually at par, as of the reset date C note that requires the issuer to reset the interest rate to the market rate upon demand of the holder D bond that allows the issuer to vary the repayment date, upon giving written notice to the holders

The best answer is B. A municipal variable rate demand note is a municipal bond that gives the holder the right to "put" the bond to the issuer at par, typically at the interest payment dates. The interest rate is reset, usually weekly, to an indexed rate, and thus, will vary. It is called a "note" because the actual maturity is unknown - the holder, in effect, can redeem at par whenever he or she wants. With any variable rate note, the interest rate varies as market rates move; therefore the market price remains at, or very close to, par. Thus, these instruments have almost no market risk.

A closed-end management company is a: A mutual fund B publicly traded fund C fixed unit investment trust D participating unit investment trust

The best answer is B. A publicly traded fund has a 1 time stock issuance; closes its books to new investment and then lists its stock on an exchange. The stock then trades like any other common stock, except the company is in the business of making investments; instead of say, making cars, beer, or computers. Thus, this type of fund is a "closed-end" fund - that is, closed to new investment.

Income sources backing a special tax bond issue could be all of the following EXCEPT a(n): A gasoline tax B property tax C sales tax D alcohol tax

The best answer is B. Ad valorem (property) taxes do not back special tax bond issues. Ad valorem taxes back general obligation bonds. The definition of a special tax bond is one which is not backed by ad valorem taxes, but rather by another tax source (such as excise, sales and income taxes).

An ADR is a: A U.S. security held in U.S. branches of foreign banks B foreign security held in foreign branches of U.S. banks C negotiable certificate denominated in a foreign currency D negotiable certificate denominated in U.S. currency

The best answer is B. An American Depositary Receipt is a foreign security that is held in a foreign branch of a U.S. bank. The bank issues receipts against these shares, and the receipts are registered in the United States as securities and are listed and traded on U.S. stock exchanges. In this manner, the foreign corporation does not have to register its shares with the SEC in order to have trading take place in the U.S.

An "unqualified" legal opinion is one which: A gives a conditional affirmation of the legality of the securities B gives an unconditional affirmation of the legality of the securities C is given by an unqualified bond counsel D disqualifies the issue from legal issuance

The best answer is B. An unqualified legal opinion is a "clean" opinion, where the bond counsel has found no legal problems. Thus, the opinion is an unconditional affirmation of the legality of the issue.

All of the following terms apply to fixed unit investment trusts EXCEPT: A regulated B managed C redeemable D registered

The best answer is B. Fixed unit investment trusts are not managed; the portfolio is fixed and does not change. These are typically bond trusts, where a diversified portfolio of bonds is assembled and placed into trust; with units of the trust sold to investors. These are non-exempt securities that must be registered with the SEC and sold with a prospectus. They are regulated under the Investment Company Act of 1940 and are redeemable with the sponsor, who makes a market in trust units.

Which money market instrument trades "flat"? A Treasury Bonds B Treasury Notes C Treasury Bills D Certificates of Deposit

The best answer is C. Commercial Paper, Treasury Bills, and Banker's Acceptances are all original issue discount obligations - these trade "flat," meaning without accrued interest. The increase in the value of the security is the interest earned if the security is traded prior to maturity. Negotiable Certificates are issued at par and mature at par plus accrued interest. T-Notes and T-Bonds trade with accrued interest. Most CDs are held to maturity, if they are traded before this date, the instrument trades at par plus any accrued interest due.

Which statement is TRUE about a Certificate of Participation (COP)? A COPs are subject to statutory debt limits B COPs are backed by a pledge of lease revenues C COPs have a higher credit rating than G.O. bonds of the same issuer D COPs are full faith and credit obligations of the issuer

The best answer is B. As municipalities reached their debt limits with G.O. bond issuance, they found it harder and harder to get voter approval to raise limits to sell additional G.O. bonds (think of Proposition 13 in California that capped property taxes to almost no increase unless the property was sold). To get around this, the COP - Certificate of Participation - was invented and COP issuance is now greater than G.O. bond issuance in many states.A COP is issued by a state entity where lease revenues are pledged to back the issue. The lease payments are received from a project such as a university dormitory, prison, municipal office building, municipal transit system, etc. The "difference" is that the lease payment is made based on the governing body making an annual appropriation from tax collections, and it is not "legally" obligated to do so, hence it is not really a bond. Rather, it is a security that gives the holder a share of "revenue" if the appropriation is made (which it will be, otherwise that issuer's credit rating would be trashed). COP issuance has increased greatly over the years because they are easier to issue than G.O. debt (no pesky debt limits or voter approval to deal with) - but they are sold at a slightly higher yield, because they have more credit risk.

The exercise price of a warrant is set at issuance at: A adiscountto the market price of the common stock B apremiumto the market price of the common stock C the market price of the common stock D any price designated by the issuer

The best answer is B. At issuance, the exercise price of a warrant is set at a premium to the stock's current market price.

Which debt instrument is used to finance imports and exports? A Eurodollar Bonds B Banker's Acceptances C American Depositary Receipts D Commercial Paper

The best answer is B. Banker's Acceptances are a money market instrument used to finance imports and exports with "Third World" countries.

The essential difference between an open end management company and a closed end management company is: A management B capitalization C investment objective D regulation

The best answer is B. Both open-end and closed-end management companies use an investment adviser to manage a portfolio within the fund's stated objectives. Open-end funds continuously issue and redeem shares. Closed-end funds have a one-time stock issuance and the fund is closed to new investment. The shares are then listed on an exchange where they trade. Therefore, open-end and closed-end funds are capitalized differently. Both types of funds are regulated under the Investment Company Act of 1940.

All of the following statements are true about "Build America Bonds" EXCEPT: A the issuer gets a federal tax credit equal to 35% of the stated interest rate on the issue B the interest is federally tax exempt C the bonds give municipal issuers access to the conventional corporate debt market D the proceeds of the bond issues can only be used for infrastructure improvements

The best answer is B. Build America Bonds (BABs) were issued by municipalities in 2009 and 2010. They are taxable municipal bonds that get a 35% Federal interest rate subsidy and the bond proceeds must be used for capital improvements (this is part of the economic stimulus program after the 2008-2009 "great recession"). These bonds were meant to create jobs and make to it easier for municipalities to access the broader corporate debt market (which includes international investors who do not participate in the municipal market) for needed capital projects.

Which of the following ratings is applicable to commercial paper? A MIG-1 B P-1 C BBB D AAA

The best answer is B. Commercial paper is rated on a P-1,2,3, and NP ("Not Prime") scale by Moody's or an A-1,2,3 scale by Standard & Poor's. MIG ratings are assigned by Moody's to short-term municipal notes. "ABC" ratings are used by both Moody's and Standard and Poor's for long-term corporates and municipals.

Common dividends are usually paid: A. monthly B. quarterly C. semi-annually D. annually

The best answer is B. Common dividends are usually declared and paid quarterly.

Common dividends are paid: A. quarterly on issued shares B. quarterly on outstanding shares C. semi-annually on issued shares D. semi-annually on outstanding shares

The best answer is B. Common dividends are usually declared and paid quarterly. Dividends are only paid on outstanding shares - defined as issued shares minus Treasury stock.

Which terms describe common stock? Incorrect answer A. Negotiableand callable B. Negotiable and non-callable C. Non-negotiable andcallable D. Non-negotiableand non-callable

The best answer is B. Common stock is a negotiable (transferable) security. It is not redeemable with the issuer nor is it callable by the issuer.

An investor purchases a $1,000 par convertible bond at $80 per share. The bond is convertible into common at $20 per share. The current market price of the common is $10 per share. If the investor were to convert, he or she would receive how many shares of common stock? A 40 B 50 C 80 D 100

The best answer is B. Conversion is based on the par value of the bond, which is $1,000. The investor can convert at $20 per share, so upon conversion, the investor would receive $1,000 par / $20 conversion price = 50 shares.

Which statement is TRUE about the Federal National Mortgage Association (FNMA)? A FNMA is a publicly traded corporation that issues pass through certificates guaranteed by the U.S. Government B FNMA is a publicly traded corporation that issues pass through certificates which are not guaranteed by the U.S. Government C FNMA is owned by the U.S. Government and issues pass through certificates that are U.S. Government guaranteed D FNMA is owned by the U.S. Government and issues pass through certificates that are not guaranteed by the U.S. Government

The best answer is B. Fannie Mae performs the same functions as Ginnie Mae except that its pass through certificates are not guaranteed by the U.S. Government; and it has been "sold off" as a public company. Its stock was listed for trading on the NYSE, but Fannie went "bust" in 2008 after purchasing too many "sub prime" mortgages and was placed into government conservatorship. Its shares were delisted from the NYSE and now trade OTC in the Pink OTC Markets.

Which characteristics make a security least subject to liquidity risk? A Short term maturity and low credit rating B Short term maturity and high credit rating C Long term maturity and low credit rating D Long term maturity and high credit rating

The best answer is B. Liquidity risk is the risk that a security can only be sold by incurring large transaction costs. The easiest securities to sell (meaning the most readily marketable) are those with high credit ratings and short term maturities.

Which is considered to be a direct obligation of the U.S. Government? A Federal National Mortgage Association Pass Through Certificates B Government National Mortgage Association Pass Through Certificates C Federal National Mortgage Association Bonds D Federal Home Loan Bank Bonds

The best answer is B. GNMA certificates are backed by a pool of mortgages, the full faith and credit of GNMA, as well as the full faith and credit of the U.S. Government. GNMA is empowered to appropriate the funds necessary to pay interest and principal on its obligations from the U.S. Treasury. As such, this is considered a direct obligation of the U.S. Government. FNMA and FHLB are implicitly backed; there is no direct guarantee.

All of the following statements are true regarding GNMA "Pass Through" Certificates EXCEPT: A the certificates are quoted on a percentage of par basis in 32nds B the certificates are available in $1,000 minimum denominations C certificates trade "and interest" D accrued interest on the certificates is computed on a 30 day month/360 day year basis

The best answer is B. GNMA certificates are quoted on a percentage of par basis in 32nds, with the minimum denomination of a certificate being $25,000. Unlike Governments on which interest accrues on an actual day month / actual day year basis, accrued interest on "agency" securities is computed on a 30 day month/360 day year basis. All debt instruments that make periodic interest payments trade "and interest," meaning they trade with accrued interest.

If Treasury bill yields are dropping at auction, this indicates that: A Treasury bill prices are rising and interest rates are rising B Treasury bill prices are rising and interest rates are falling C Treasury bill prices are falling and interest rates are rising D Treasury bill prices are falling and interest rates are falling

The best answer is B. If Treasury bill yields are dropping at auction, then interest rates are falling and debt prices must be rising.

Two 20-year corporate bonds are issued at par, with stated interest rates of 10%. One issue is callable at par in 5 years, while the other is callable at par in 10 years. If interest rates drop by 200 basis points shortly after issuance, which statement is TRUE? A The bond callable in 5 years will appreciate more than the bond callable in 10 years B The bond callable in 10 years will appreciate more than the bond callable in 5 years C Both bonds will appreciate by equal amounts D The rate of appreciation depends on the credit rating of the bonds

The best answer is B. If a bond is callable at par in the near future, any price rise due to falling interest rates will be suppressed since the issuer is likely to call in the debt and refund at lower interest rates. Thus, the bond callable in 10 years will appreciate more than the bond callable in 5 years if interest rates fall.

Two 20-year corporate bonds are issued at par, with stated interest rates of 10%. One issue is puttable at par in 5 years, while the other is puttable at par in 10 years. If interest rates rise by 200 basis points shortly after issuance, which statement is TRUE? A The bond puttable in 5 years will depreciate more than the bond puttable in 10 years B The bond puttable in 10 years will depreciate more than the bond puttable in 5 years C Both bonds will depreciate by equal amounts D The rate of depreciation depends on the credit rating of the bonds

The best answer is B. If a bond is puttable at par in the near future, any price decline due to rising interest rates will be suppressed since the holder is able to put the bond back to the issuer sooner. Thus, the bond puttable in 10 years will depreciate more than the bond that is puttable in 5 years if interest rates rise.

Which bond does NOT have interest rate risk? A A bond that is currently callable B A bond that is currently puttable C A bond with a high current coupon D A bond with a low current coupon

The best answer is B. If market interest rates rise, bond prices fall. If the bond has a put option, the holder can put the bond back to the issuer at par. Thus, it is protected against interest rate risk and its price will not fall below the put price.

In 2020, a customer buys 5 GE 10% debentures, M '40. The interest payment dates are Feb 1st and Aug 1st. The current yield on the bonds is 11.76%. The bonds are callable as of 2030 at 103. The bond is trading: A at a premium B at a discount C at par D in the money

The best answer is B. If the bond's current yield (11.76%) is higher than the coupon yield (10%), the bond is trading at a discount. In order for the yield to rise above the stated fixed coupon rate, the price of the bond must drop in the market.

In a corporate liquidation, common stockholders are paid: A before bondholders and preferred stockholders B after bondholders and preferred stockholders C after bondholders but before preferred stockholders D before all creditors

The best answer is B. In a liquidation, common shareholders are paid last, after creditors, bondholders, and preferred stockholders.

Which statement is TRUE about adjustment (income) bonds? A Timing of interest payments made is not predictable and any interest payment made is not predictable in amount B Timing of interest payments made is not predictable and any interest payment made is predictable in amount C Timing of interest payments made is predictable and any interest payment made is predictable in amount D Timing of interest payments made is predictable and any interest payment made is not predictable in amount

The best answer is B. Income bonds only pay interest if the corporation earns enough "income" to make that interest payment. So, timing of payments is not predictable. However, if a payment is made, the amount received is the stated rate of interest on the bond - so the payment amount (if the payment is made) is predictable.

The manager of a pension plan would invest in all of the following debt securities EXCEPT: A Corporate bonds B Municipal bonds C U.S. government bonds D Foreign government bonds

The best answer is B. Income from securities held in Pension Plans is tax deferred; so there is no benefit to investing in municipals, which have lower rates because their interest income is exempt from Federal income tax. Investments would be made in corporate and government bonds (both U.S. government obligations and foreign government obligations, such as Canadian government bonds), both of which have higher interest rates because their interest income is taxable by the Federal government.

Who guarantees an Industrial Development Bond? A Municipal issuing authority B Corporate lessee C MBIA D AMBAC

The best answer is B. Industrial Development Bonds are issued by municipal authorities, with the revenue source being the lease payments made by a corporate lessee. Furthermore, the corporate lessee unconditionally guarantees the bonds - so they take on the credit rating of the corporate guarantor.

Municipalities would issue tax exempt commercial paper for all of the following reasons EXCEPT to: A meet a temporary cash shortage due to unforeseen extraordinary expenses B refund an outstanding bond issue C provide construction period financing that will be permanently financed by a future bond sale D smooth out collections of funds that are normally subject to seasonal fluctuations

The best answer is B. Most municipalities finance short term needs through BANs (Bond Anticipation Notes), TANs (Tax Anticipation Notes), RANs (Revenue Anticipation Notes) and TRANs (Tax and Revenue Anticipation Notes). However, commercial paper could be used by a municipality to finance short term cash shortages caused by slow tax collections or unforeseen extraordinary expenses (these could also be financed by tax anticipation notes). Also, commercial paper could be used for an interim construction loan, because when a building is under construction, the long term financing may not yet be in place (of course, the municipality could also finance the construction through a bond anticipation note). Commercial paper cannot be used for long term financing such as a bond refunding.

Municipal variable rate demand notes have a: A market value which will never go below par and have a yield which will never fall below the stated rate B market value which will never go below par and have a yield which will never rise above the stated rate C market value which will never go above par and have a yield which will never fall below the stated rate D market value which will never go above par and have a yield which will never rise above the stated rate

The best answer is B. Municipal variable rate demand notes are issued by a municipality. The interest rate is reset to the market rate weekly; and at the reset date, the holder can "put" the bonds back to the issuer at par. Here, the minimum value of the bond is par - because of the put feature. Because the price of the bond cannot go below par, these bonds are not subject to market risk and the yield cannot go above the stated rate. However, if interest rates fall, the price can go above par (by a small amount) and the yield can fall below the stated rate until the next reset date.

Which money market instrument trades "and interest"? A Commercial Paper B Certificates of Deposit C Banker's Acceptance D Treasury Bills

The best answer is B. Negotiable Certificates of Deposit are issued at par and mature at par plus accrued interest. Though most CDs are held to maturity, if they are traded before this date, the instrument trades at par plus any accrued interest due. Commercial Paper, Treasury Bills, and Banker's Acceptances are all original issue discount obligations. The increase in the value of the security is the interest earned if the security is traded prior to maturity.

Which of the following can be purchased on margin? A Mutual Funds B Closed End Funds trading on the NYSE C Initial public offerings of Closed End Funds D Annuity Contracts

The best answer is B. New issues are not marginable. Every issue of a mutual fund (open-end management company) share is a "new issue" as is the initial public offering of a closed-end fund. Both are made with a prospectus. However, once closed-end fund shares trade in the market, they are marginable like any other listed stock. Annuities are not negotiable and may not be purchased on margin.

When quoting bonds on a yield basis, the difference between a bond priced at a yield of 5.45 and a bond priced at a yield of 5.55 is: A 1 Basis Point B 10 Basis Points C 100 Basis Points D 1,000 Basis Points

The best answer is B. One basis point = .01%. The difference between 5.45 and 5.46 = .01%, or one basis point. In this case, the difference between 5.45 and 5.55 = .10%, or 10 basis points.

All of the following statements are true regarding overnight repurchase agreements EXCEPT: A the investment has no liquidity risk B the investment has no interest rate risk C interest rates charged are most similar to the Federal Funds rate D the issuer loses control of the underlying securities for the duration of the agreement

The best answer is B. Overnight repurchase agreements are typically effected between government securities dealers. A dealer who needs cash will "sell" some of its inventory overnight to another dealer, with an agreement to buy the position back the next day. The difference between the sale price and the repurchase price is the interest earned. There is virtually no liquidity risk, since the loan is of the shortest term and is secured by pledged government securities. The interest rate on such agreements generally parallels and is somewhat lower (since the loans are secured) than the Fed funds rate, since overnight loans using government securities are most similar to overnight loans of reserves (Fed Funds) from bank to bank. Since government securities are pledged as collateral, the dealer gives up custody of the securities overnight.Repos do have interest rate risk, relating to the underlying securities. If interest rates rise, the underlying securities can decline in value. Since the maturity of the underlying securities can be of any length, long maturity values may decline more than the accrued interest to be earned on the agreement. When the borrower of the funds buys back the securities the next day at the pre-agreed price, it buys back securities at more than they are worth! If the borrower of the funds defaults, the lender can sell the collateral - but it will still be worth less than the original loan amount!

A customer buys 100 shares of preferred at $80 per share. The par value is $100. The dividend rate is 10%. The customer will receive how much in each dividend payment? A $400 B $500 C $800 D $1,000

The best answer is B. Preferred dividends are based on a stated percentage of par value. The stated rate is 10% of $100 par = $10 annual dividend per preferred share. Since there are 100 shares, the annual dividend is $1,000. Remember, though, that preferred dividends are paid twice a year, so each payment will be for $500.

As interest rates fall, preferred stock prices will: A remain unaffected B rise C fall D fluctuate

The best answer is B. Preferred stock is a fixed income security whose prices move inversely with interest rates. As interest rates fall, preferred stock prices rise, so that the preferred will give a yield that is competitive with the current market.

A customer buys 10 ABC Corporation 10% debentures, M '45, at 93 on Tuesday, May 10th in a regular way trade. The interest payment dates are March 1st and September 1st. The trade settles on: A Wednesday, May 11th B Thursday, May 12th C Friday, May 13th D Monday, May 16th

The best answer is B. Regular way trades of corporate bonds and stocks settle 2 business days after trade date.

Which of the following influences the market price of common stock? A. The par value of the shares B. Investor expectations about the future of the company C. Stated value of the shares D. Book Value of the shares

The best answer is B. The market price of common stock is determined by investor expectations about the future of the company. Par value (which is the same as stated value) and book value have no bearing on the market price of the common shares

Trades of which of the following instruments will settle in Fed Funds? A General Obligation Bonds B Treasury Notes C Municipal Revenue Bonds D Corporate Bonds

The best answer is B. Securities that are eligible to be traded by the Federal Reserve are those backed by the guarantee of the U.S. Government as well as certain agency obligations. Both Treasury Bills and Treasury Notes are eligible securities. Trades in eligible securities settle through the Federal Reserve system, and therefore settle in "Fed Funds." Municipal bond trades and trades in corporate securities are not eligible for trading and settling through the Federal Reserve system; these securities settle in "clearing house" funds.

All of the following statements regarding short term negotiable certificates of deposit are correct EXCEPT: A the minimum denomination is $100,000 B short term negotiable CDs are callable C trading occurs in the secondary market D these securities are issued by banks

The best answer is B. Short term negotiable CDs are issued by banks in minimum $100,000 denominations. They are non-callable and trade in the secondary market. Note, in contrast, that banks also issue long term negotiable CDs that can be callable.

A corporation is offering a new issue consisting of 100,000 units at $200 each. Each unit consists of 2 shares of preferred stock and a warrant to buy one additional common share. A full warrant allows the purchase of an additional common share at $5. If all the warrants are exercised, the corporation will have: A 100,000 preferred shares and 100,000 common shares B 200,000 preferred shares and 100,000 common shares C 200,000 preferred shares and 50,000 common shares D 50,000 preferred shares and 100,000 common shares

The best answer is B. Since each unit consists of 2 preferred shares, 100,000 units x 2 = 200,000 preferred shares. Since a warrant which enables one to buy one additional share is also attached to each unit, 100,000 units x 1 = 100,000 additional common shares issued if the warrants are exercised.

The conversion price of a convertible debenture is set at issuance at $40 per share. The common stock is now trading at $42 while the bond is trading at 110. In order for the common stock to be trading at parity to the current market price of the bond, the stock price would be: A $40 B $44 C $46 D $48

The best answer is B. Since the bond is now trading at 110 ($1,100 per bond) and each bond is convertible into 25 common shares, the parity price of the common is $1,100 / 25 = $44. Since the common is currently trading at 42, it is below parity and it does not make sense to convert. It only makes sense to convert if the common is trading above parity.

All of the following statements are true regarding the Federal Funds rate EXCEPT the rate is: A charged from one Federal Reserve member bank to another member bank B set by the Federal Reserve C lower than the discount rate D computed every business day

The best answer is B. The Federal Funds rate is the interest rate charged by Federal Reserve member banks for overnight loans to each other. The discount rate is charged by the Federal Reserve itself to member banks that wish to borrow reserves directly from the Fed. Federal Reserve actions such as Open Markets Operations strongly influence the Federal Funds rate, but the Fed itself does not set this rate. The Fed Funds rate is lower than the discount rate because the discount rate is pegged by the Fed at 50 basis point over the Fed Funds rate. Lastly, the Fed Funds rate is computed every day and can change throughout the day.

Which of the following designates "primary" U.S. Government securities dealers? A Securities and Exchange Commission B Federal Reserve C Office of the Comptroller of Currency D Congress

The best answer is B. The Federal Reserve designates a dealer as a "primary" dealer - meaning one entitled to trade with the Federal Reserve trading desk. There are about 20 primary dealers (such as Cantor Fitzgerald, Nomura Securities, Citibank, Goldman Sachs, J.P. Morgan, etc.) The rest of the government dealers are termed "secondary" dealers. They do not enjoy a special relationship with the Federal Reserve.

All of the following securities are eligible for trading by the Federal Reserve EXCEPT: A Treasury Bills B Bond Anticipation Notes C U.S. Government Bonds D Federal Home Loan Bank Bonds

The best answer is B. The Federal Reserve trading desk can trade securities issued by the U.S. Government, Government Agencies, and prime Banker's Acceptances. Bond Anticipation Notes are municipal issues. They are not eligible for Fed trading.

Which of the following is NOT defined as an "investment company" under the Investment Company Act of 1940? A Face Amount Certificate Company B Real Estate Investment Trust C Management Company D Unit Investment Trust

The best answer is B. The Investment Company Act of 1940 defines 3 types of investment companies; face amount certificate companies, unit investment trusts, and management companies. Real Estate Investment Trusts are not defined under the Investment Company Act of 1940 because they do not invest in securities; rather, they make real estate investments.

The Price / Earnings Ratio is a measure of: A profitability B valuation C volatility D velocity

The best answer is B. The P/E ratio of a company is a valuation measure. Companies with high P/E ratios are being valued very highly by the market; while those with low P/E ratios are being valued at a low level. Rapidly growing companies tend to have high P/E ratios, while mature companies tend to have low P/E ratios.

The current yield on a bond is: A stated interest rate / bond par value B stated interest rate / bond market value C market interest rate / bond par value D market interest rate / bond market value

The best answer is B. The current yield is the stated rate of interest on the bond, based on current market value.

Interest income from municipal bonds is: A exempt from Federal, State and Local tax B exempt from Federal tax and subject to State and Local tax C subject to Federal tax and exempt from State and Local tax D subject to Federal, State and Local tax

The best answer is B. The interest income from municipal bonds is exempt from Federal income tax; but is subject to State and Local tax. However, if a bond is purchased by a State resident, then the State exempts that issue from taxation as well.

Which is the lowest-rated investment grade bond? A A-rated B BBB-rated C BB-rated D CCC-rated

The best answer is B. The lowest investment grade is BBB. Any securities below this rating (BB or lower) are considered to be speculative - and are commonly known as "junk" issues.

A debt issue is commonly referred to as "junk" if its credit rating is BELOW: A A B BBB C B D CCC

The best answer is B. The lowest investment grade is BBB. Any securities below this rating are considered to be speculative - and are commonly known as "junk" issues.

A security which gives the holder an undivided interest in a pool of mortgages is known as a(n): A equity real estate investment trust B pass through certificate C first mortgage bond D mortgage real estate investment trust

The best answer is B. The question defines a pass through certificate - an undivided interest in a pool of mortgages, where the mortgage payments are passed through to the certificate holders. Real Estate Investment Trusts (REITs) are investment companies similar to closed end funds. In such an investment, one owns a trust unit; however the unit does not represent a undivided ownership interest in the underlying real estate or mortgages. Mortgage bonds are issued by corporations pledging real estate as collateral.

A customer owns 210 shares of ABC common stock. ABC declares a rights offering, with the terms being that for every 20 rights tendered, a shareholder may purchase one additional share at $20 per share. Any fractional rights holding may be rounded up to buy an additional share. If this shareholder wishes to subscribe, which statement is TRUE? A The shareholder can buy a maximum of 10 shares by paying $20 B The shareholder can buy a maximum of 11 shares by paying $220 C The shareholder can buy a maximum of 11 shares by paying $420 D The shareholder can buy a maximum of 110 shares by paying $2,200

The best answer is B. The terms of the rights offering are that fractional holdings are rounded up to buy 1 additional share. This person owns 210 shares and thus, will receive 210 rights. 210 rights / 20 rights per share = 10.5 shares, which is rounded up to 11 shares @ $20 each = $220 necessary to subscribe.

A government securities dealer quotes a 3-month Treasury Bill at 5.00 Bid - 4.90 Ask. A customer who wishes to sell 1 Treasury Bill will receive: A a dollar price quoted to a 4.90 basis B a dollar price quoted to a 5.00 basis C $4,900 D $5,000

The best answer is B. Treasury Bills are quoted on a yield basis. From the basis quote, the dollar price is computed. A customer who wishes to sell will receive the "Bid" of 5.00. This means that the dollar price will be computed by deducting a discount of 5.00 percent from the par value of $100.

Treasury Notes: A pay interest annually B pay interest semi-annually C mature in under 1 year D mature between 5 and 20 years

The best answer is B. Treasury Notes are government obligations maturing between 2 years and 10 years which pay interest semi-annually.

The definition of Treasury Stock is: A issued shareswhich areoutstanding B issued shares which are no longer outstanding C unissued shares which are outstanding D unissued shares which are no longer outstanding

The best answer is B. Treasury Stock consists of authorized shares which have been issued and subsequently repurchased, thus they are no longer outstanding.

The definition of Treasury Stock is: A issued stockminusauthorized stock B issued stock minusoutstanding stock C authorized stock minus outstanding stock D outstanding stock minus authorized stock

The best answer is B. Treasury stock consists of issued shares that have been repurchased by the corporation. Repurchased shares are no longer "outstanding," so the definition of Treasury Stock is issued shares minus outstanding shares.

Which statement is FALSE regarding Treasury Stock? A Treasury Stock is not entitled to dividends B Treasury Stock has voting rights C Treasury Stock buybacks decreases the number of sharesoutstanding D Treasury Stock purchases are used to increase reportedEarnings Per Share

The best answer is B. Treasury stock does not vote nor receive dividends. Treasury stock is deducted from outstanding shares, and since outstanding shares are reduced, Earnings Per Share increases.

Which statement is TRUE regarding the effect of a repurchase of Treasury Stock? A Outstanding sharesare reduced and Earnings Per Share are reduced B Outstanding shares are reduced and Earnings Per Share are increased C Outstanding sharesare increased and Earnings Per Share are reduced D Outstanding sharesare increased and Earnings Per Share are increased

The best answer is B. Treasury stock is deducted from outstanding shares and since outstanding shares are reduced, Earnings Per Share increases.

Which of the following securities pays a rate of interest that is adjusted periodically to reflect the current interest rates for Treasury securities? A Adjustment bonds B Variable rate notes C Treasury Receipts D Treasury Rate Notes

The best answer is B. Variable rate notes, also known as reset notes, have a rate of interest that is reset periodically, usually weekly, based upon a recognized interest rate index that usually consists of Treasury Issues. Treasury Receipts are Government bonds that have been "stripped" of coupons. Adjustment bonds are corporate bonds that are issued in reorganizations with interest payable only if the corporation hits a specified earnings target. Finally, there is no such thing as Treasury Rate Notes.

All of the following securities represent equity ownership of a corporation EXCEPT: A Convertible preferred stock B Warrants C Preferred stock D Common stock

The best answer is B. Warrants do not represent equity ownership of a corporation. Common stock and preferred stock (whether or not convertible) both represent equity ownership.

An investor buys a bond at a premium. Later in the year, the bond is trading at a discount. This is termed: A Amortization B Depreciation C Accretion D Devaluation

The best answer is B. When an asset decreases in value, this is termed depreciation.

Which of the following would be a quote for a manufacturing company bond? A 99.50 B 99-16 C 99 1/2 D 99 8/16

The best answer is C. A manufacturing company bond is a corporate bond. Corporate bonds are quoted on a percentage of par basis in 1/8ths. 99 1/2 = 99.50% of $1,000 par = $995.00 per bond. Choice B is a U.S. Government bond quote in 32nds. 99-16 = 99 16/32nds = 99.50% of $1,000 par = $995.00 per bond. Note that corporate, municipal and government bonds are not quoted in penny movements, as is the case with equities.

A bond issue with a single issue date and differing maturities is a: A term bond offering B series bond offering C serial bond offering D combined serial and term bond offering

The best answer is C. A serial bond offering is one with all bonds issued on the same date, but with differing maturities. This compares to a term bond issue, where all the bonds are issued on the same date; and all the bonds mature on the same date. Most municipal bond issues and corporate equipment trust certificates are serial bonds. It allows issuers to schedule principal repayment as an annual budget item.

Which statement is TRUE regarding ADRs? A ADRs are vehicles for trading United States securities in foreign countries B ADRs are vehicles for trading foreign securities in other overseas markets C ADR market prices are influenced by foreign currency exchange fluctuations D ADRs must be redeemable with the sponsor

The best answer is C. ADRs are vehicles for trading foreign securities in the United States. Foreign companies do not want to list their actual shares for trading in the U.S. because the shares would then have to be registered with the SEC and the company would have to comply with U.S. financial reporting rules (and all of that is expensive). Since dividends on ADRs are declared by the foreign company in local currency, and are then converted into U.S. dollars and remitted to the receipt holders by the depositary bank, market prices of ADRs will be influenced not only by the performance of the company's stock, but also by foreign currency exchange fluctuations. ADRs are not redeemable - they trade like any other stock.

Which characteristic is NOT common to both Treasury STRIPS and Treasury Notes? A Minimum $100 denominations B Quoted as a percent of par in 32nds C Pay interest at maturity D Guaranteed by the U.S. Government

The best answer is C. All T-Notes and T-STRIPS have a minimum $100 par value; are quoted in 32nds; and are directly backed by the U.S. Government. T-Notes pay interest semi-annually. Treasury STRIPS are notes or bonds "stripped" of coupons, meaning all that is left is the principal repayment portion of the note or bond (sometimes called the "corpus" or body). STRIPS are zero coupon original issue discount obligations that do not have a stated interest rate. The accretion of the discount over the note's or bond's life represents the interest earned, which is paid at maturity.

Which of the following would be a quote for an airline bond? A 105.625 B 105-20 C 105 5/8 D 105 10/16

The best answer is C. An airline bond is a corporate bond. Corporate bonds are quoted on a percentage of par basis in 1/8ths. 105 5/8 = 105.625% of $1,000 par = $1,056.25 per bond. Choice B is a U.S. Government bond quote in 32nds. 105-20 = 105 20/32nds = 105.625% of $1,000 par = $1,056.25 per bond. Note that corporate, municipal and government bonds are not quoted in penny movements, as is the case with equities.

Which statement is TRUE about a Certificate of Participation (COP)? A COPs are considered to be a general obligation of the issuer and payments to security holders are contingent on the governing body making an annual appropriation from budgeted funds B COPs are considered to be backed by a revenue pledge and payments to security holders are not contingent on the governing body making an annual appropriation from budgeted funds C COPs are considered to be backed by a revenue pledge and payments to security holders are contingent on the governing body making an annual appropriation from budgeted funds D COPs are considered to be a double barreled revenue bond because they are backed by both a revenue pledge and an annual appropriation from budgeted funds

The best answer is C. As municipalities reached their debt limits with G.O. bond issuance, they found it harder and harder to get voter approval to raise limits to sell additional G.O. bonds (think of Proposition 13 in California that capped property taxes to almost no increase unless the property was sold). To get around this, the COP - Certificate of Participation - was invented and COP issuance is now greater than G.O. bond issuance in many states. A COP is issued by a state entity where lease revenues are pledged to back the issue. The lease payments are received from a project such as a university dormitory, prison, municipal office building, municipal transit system, etc. The "difference" is that the lease payment is made based on the governing body making an annual appropriation from tax collections, and it is not "legally" obligated to do so, hence it is not really a bond. Rather, it is a security that gives the holder a share of "revenue" if the appropriation is made (which it will be, otherwise that issuer's credit rating would be trashed). COP issuance has increased greatly over the years because they are easier to issue than G.O. debt (no pesky debt limits or voter approval to deal with) - but they are sold at a slightly higher yield, because they have more credit risk.

All of the following investment company securities are redeemable EXCEPT: A Open end fund shares B Fixed unit investment trusts C Closed end fund shares D Participating unit investment trusts

The best answer is C. Closed-end fund shares are not redeemable - they are listed on an exchange and trade like any other security. Open-end fund shares (mutual funds) are redeemable with the fund itself and do not trade. Unit trust interests are also "redeemable" securities, because the trust sponsor makes a market in trust units, and will buy them back from the purchaser. Then the trust sponsor will resell that "slightly used" trust unit to someone else. There is no "trading" of trust units, however.

How are corporate bonds quoted? A Coupon B Yield to Maturity C Whole and Fractional D Decimal

The best answer is C. Corporate bonds are quoted as a percentage of par value, with each "whole" point movement representing 1% of $1,000 par or $10. The minimum price increment is 1/8th of 1%, so it is a fraction of par. Thus, corporate bonds are quoted in whole and fractional points. For example, a corporate bond quoted at 100 1/8 is priced at 100.125% of $1,000 par = $1,001.25.

Which of the following are the least likely purchasers of commercial paper? A Trust Companies B Insurance Companies C Individuals D Open-End Investment Companies

The best answer is C. Dealer commercial paper is sold for corporations by dealer firms such as Goldman Sachs. The minimum purchase amount is generally $100,000. This eliminates most individuals from the market. The dealer commercial paper market is primarily an institutional market, with purchasers including insurance companies, trust companies and money market mutual funds. As compared to "dealer" paper, many corporations sell their commercial paper directly to the investing public. "Direct" paper is sold directly to the investing public, usually via the web. It also sells in $100,000 and $500,000 minimum amounts, so the individual investor is pretty much cut out.

Which statement regarding Freddie Mac is FALSE? A Freddie Mac buys conventional mortgages from financial institutions B Freddie Mac is an issuer of mortgage backed pass-through certificates C Freddie Mac debt issues are directly guaranteed by the U.S. Government D Freddie Mac is a corporation that is publicly traded

The best answer is C. Freddie Mac - Federal Home Loan Mortgage Corporation - buys conventional mortgages from financial institutions and packages them into pass through certificates. These pass through certificates are not guaranteed by the U.S. Government (unlike GNMA pass through certificates). This agency has been partially sold off to the public as a corporation that was listed on the NYSE. Freddie is now bankrupt due to excessive purchases of bad "sub prime" mortgages and has been placed in government conservatorship. Its shares have been delisted from the NYSE and now trade OTC in the Pink OTC Markets.

Which statement is TRUE? A Both Fannie Mae and Ginnie Mae are owned by the U.S. Government B Both Fannie Mae and Ginnie Mae are publicly traded companies C Both Fannie Mae and Ginnie Mae issue mortgage backed pass-through certificates D Both Fannie Mae and Ginnie Mae issues are indirectly backed by the U.S. Government

The best answer is C. Ginnie Mae is a government owned (not a private) company and cannot be spun off because of the guarantee of the U.S. Government that its securities carry. Fannie Mae was "spun off" by the government as a public company listed on the NYSE (so was Freddie Mac). Its stock was listed for trading on the NYSE, but Fannie went "bust" in 2008 after purchasing too many "sub prime" mortgages and was placed into government conservatorship. Its shares were delisted from the NYSE and now trade OTC in the Pink OTC Markets. Fannie Mae debt issues are implicitly backed by the U.S. Government - they are not directly backed. Both Fannie and Ginnie buy VA and FHA mortgages from originating lenders, pool them, and then sell mortgage-backed pass through certificates to the public.

Municipalities would issue tax exempt commercial paper for all of the following reasons EXCEPT: A to smooth out collections of funds that are normally subject to seasonal fluctuations B to meet a temporary cash shortage due to unforeseen extraordinary expenses C to refund an outstanding bond issue D to provide construction period financing that will be permanently financed by a future bond sale

The best answer is C. Municipal commercial paper is not very popular. Most municipalities finance short term needs through BANs (Bond Anticipation Notes), TANs (Tax Anticipation Notes), RANs (Revenue Anticipation Notes) and TRANs (Tax and Revenue Anticipation Notes). However, commercial paper could be used by a municipality to finance short-term cash shortages caused by slow tax collections or unforeseen extraordinary expenses (these could also be financed by tax anticipation notes). Also, commercial paper could be used for an interim construction loan, because when a building is under construction, the long term financing may not yet be in place (of course, the municipality could also finance the construction through a CLN - construction loan note). Commercial paper cannot be used for long term financing such as a bond refunding. Remember, commercial paper is a short term promissory obligation - not long term.

Municipalities will issue which of the following to "pull forward" funds that will be collected as taxes in later months? A BAN B RAN C TAN D CLN

The best answer is C. Municipalities issue TANs (Tax Anticipation Notes) to "pull forward" funds that will be collected as taxes in later months. For example, if taxes are due on April 15th, and it is now January 15th, and the municipality wishes to get funds at this time, it can issue 3 month TANs. When the taxes are actually collected, the proceeds are used to retire the TAN issue. RANs (Revenue Anticipation Notes) are issued to "pull forward" revenues that are expected to be received by the municipality in the coming months. For example, the City of New York will receive a $200,000,000 payment from the Federal government on July 1st to support mass transit. It is now April 1st. The city can issue 3-month RANs and borrow against the upcoming revenue to be received from the Federal Government. A TRAN is a combination Tax and Revenue Anticipation Note. A BAN is a Bond Anticipation Note - a short term note that will be retired by a later long term bond sale. A CLN is a Construction Loan Note - a 2-3 year IOU used to start a major building project. The short term financing is "taken-out" (retired) from the proceeds of a later long term bond sale.

Which of the following would NOT purchase STRIPS? A Pension fund B IRAs C Individual seeking current income D Individual wishing to avoid reinvestment risk

The best answer is C. Pension funds and retirement accounts are the large purchasers of STRIPS. These zero-coupon bonds are purchased at a deep discount and are held to maturity to fund future retirement liabilities. There is little credit risk, because the U.S. Treasury is a top credit. There is no current income because they don't pay until maturity. They have a huge amount of purchasing power risk as a long-term zero coupon obligation, but this is not an issue if they are held to maturity. Retirement plan managers like STRIPS because they don't have to worry about reinvestment risk - there are no semi-annual interest payments to reinvest! It is an investment that can be "tucked away" for 20 or 30 years, with no further work or worry on the part of the retirement fund manager.

During a period of stable interest rates, which type of preferred stock would show the greatest price volatility? A Cumulative B Adjustable rate C Participating D Callable

The best answer is C. Preferred stock is interest rate sensitive, since it is a fixed income security. As market interest rates rise, preferred stock prices fall. As market interest rates fall, preferred stock prices rise. If market interest rates are stable, preferred stock prices should be stable as well. However, participating preferred stock gives the preferred participation in any "extra" dividends declared by the company to its common shareholders. Thus, the declaration of such an extra dividend would make the preferred stock more valuable and its price would go up in the market - and this did not happen because market interest rates fell. Almost all preferred stock is cumulative - any unpaid dividends accumulate and must be paid before a common dividend can be paid. A call provision can suppress the price of preferred from rising as market interest rates drop, since it is likely that the issuer will call in the preferred and issue new stock at lower current rates. However, during a period of stable interest rates, the call provision has no impact of the preferred stock's price. Adjustable rate preferred moves the dividend rate up or down as market interest rates move up or down. With any variable rate security, the dividend or interest rate moves and the price stays right at par. Furthermore, when interest rates are stable, the dividend rate will not adjust and the price will be stable as well.

An ADR has been issued where each ADR equals 10 ordinary shares of the foreign issuer. If a client wished to buy enough ADRs to cover 1,000 ordinary shares, how many ADRs must be purchased? A 1 B 10 C 100 D 1,000

The best answer is C. Since each ADR equals 10 ordinary shares, the purchase of 100 ADRs would cover 1,000 ordinary shares. Note that when the foreign shares are inexpensive, it is typical for the ADR to cover a "multiple" of shares; and when the foreign shares are expensive, it is typical for the ADR to cover a "fraction" of shares.

Which money market instrument is issued by corporations? A Treasury Bill B Repurchase Agreement C Commercial Paper D Prime Banker's Acceptances

The best answer is C. Commercial paper is corporate money market debt which is not eligible for Fed trading. Treasury bills are issued by the U.S. Government. Repurchase agreements are entered into between Government securities dealers; and banker's acceptances are issued by commercial banks.

X Corporation stock has been trading at $1,200 per share recently and trading volume has fallen to record lows. To increase trading volume, the X Corporation may: A perform a reverse split to reduce the number of shares outstanding B suspend trading for a month period to create a market for its stock C split the stock three-for-one to make its price more attractive D reverse split the stock one-for-three to increase its price

The best answer is C. Splitting the stock three for one will reduce its price from $1,200 per share to $400 per share. Current shareholders will have three times the stock shares they had before the split, but the total value will not change. New purchasers will be able to purchase X Corporation stock at a much more attractive $400 per share. This should bring more investors into the market for X Corporation stock and this may even contribute to future price increases because more investors can afford to buy the typical 100 share round lot of the stock. If the issuer were to reverse split its stock 1:3, then it would give the shareholders 1 new share in exchange for every 3 shares outstanding. The effect would be to increase the market price from $1,200 per share to 3 times this amount, or $3,600 per share, with the number of outstanding shares reduced to 1/3rd the previous amount. This would make the stock even less accessible to small investors.

Stockholder approval is needed if a corporation wishes to do all of the following EXCEPT: A split its stock 1 for 2 B split its stock 2 for 1 C repurchase shares for Treasury D issue convertible securities

The best answer is C. Stockholder approval is needed for a stock split, because it changes the par value of the stock. The State in which the company is incorporated typically requires shareholder approval of a par value change. In contrast, dividend decisions, either in cash or stock, do not require shareholder approval because they are "paid" out of retained earnings and do not affect par value per share. They are made solely by the Board of Directors of the company. Issuance of convertible securities requires shareholder approval because it is potentially "dilutive" (if the securities are converted, there will be more common shares outstanding, and earnings per common share will fall). The repurchase of shares for Treasury will boost earnings per share, because there will be fewer shares outstanding. This boosts the value of the existing common shares, so no shareholder approval is required. This is another decision that is made solely by the Board of Directors.

All of the following are methods of dividend payment EXCEPT: A cash B stock C rights D product

The best answer is C. The distribution of "rights" is not a dividend. Rather, it is the "pre-emptive" right of all shareholders to maintain proportionate ownership if the corporation wishes to issue additional shares. The corporation must distribute rights to existing shareholders if it wishes to sell new common shares. Dividend distributions, on the other hand, are voluntary payments made by the corporation to its shareholders. The amount and form of payment are determined by the Board of Directors. Dividend payments can take the form of cash; stock dividends; or product dividends. For example, in years past, Procter and Gamble would send a "variety pack" of its products to shareholders in addition to the regular cash dividend. Product dividends are no longer popular, since they are taxable to the shareholder as is any dividend, and the owner would rather receive cash.

The lowest investment grade rating is: A B B BB C BBB D CCC

The best answer is C. The lowest investment grade rating is BBB. BB and B ratings are considered to be medium grade while CCC, CC, and C are all speculative ratings, with C rating being the most speculative.

A corporation wishes to raise funds to build a new manufacturing facility. Which method is suitable for the issuer to obtain financing? A Force conversion of outstanding convertible preferred B Split the outstanding shares of common stock 2 for 1 C Issue rights to outstanding shares of common stock D Call outstanding convertible preferred

The best answer is C. The only method listed that will raise new funds for the corporation is to sell additional common shares through a rights offering. Forcing conversion of outstanding convertible preferred does not raise new capital. It simply converts preferred stock into common stock. Splitting shares does not raise new capital. After the split, the company has more shares outstanding, worth half the original amount. Calling outstanding preferred uses cash and reduces capital.

A municipality would use general obligation bonds to finance all of the following EXCEPT the: A addition to an existing school building B construction of a new town hall C construction of an industrial park D addition of traffic lights to main intersections

The best answer is C. The proceeds of general obligation bonds are used by municipalities to provide services to the general population - including the building and improvement of schools, police and fire department structures, and general municipal buildings. These bonds are serviced from general tax collections. Revenue bonds are used where there is a specific revenue source that can be pledged to bondholders to service the debt. Toll roads; toll bridges and tunnels; industrial parks where rents paid are the revenue source; water and sewer systems where separate water and sewer charges are imposed; are all typically built with revenue bond issues.

Question:Which statement is FALSE regarding Treasury Inflation Protection securities? A In periods of deflation, the amount of each interest payment will decline B In periods of deflation, the interest rate is unchanged C In periods of deflation, the principal amount received at maturity will decline below par D In periods of deflation, the principal amount received at maturity is unchanged at par

The best answer is C. Treasury "TIPS" are Treasury Inflation Protection Securities - the principal amount of these securities is adjusted upwards with the rate of inflation. Even though the interest rate is fixed, the holder receives a higher interest payment, due to the increased principal amount. When the bond matures, the holder receives the higher principal amount. In periods of deflation, the principal amount is adjusted downwards. Even though the interest rate is fixed, the holder receives a lower interest payment, due to the decreased principal amount. In the situation where the principal amount has been adjusted below par due to deflation, when the bond matures, the holder receives par - not the decreased principal amount - a real benefit if an investor is concerned about deflation.

Which of the following securities does NOT trade "flat" ? A Treasury Bills B STRIPS C Treasury Notes D Treasury Receipts

The best answer is C. Treasury Bills are short term original issue discount obligations, with the discount earned being the "interest." Treasury Receipts (broker-created zero coupon Treasury bonds that have now all matured) and Treasury STRIPS are zero-coupon obligations. Because all of these obligations do not make periodic interest payments, they trade "flat" - that is, without accrued interest. Treasury Notes pay interest semi-annually, so these issues trade with accrued interest.

Which of the following trades settle in "Fed" funds? A General Obligation Bonds B Convertible bonds C Agency Bonds D Corporate Bonds

The best answer is C. U.S. Government and agency bond trades settle in Federal Funds, which are good funds the business day of the funds transfer (next business day for regular way settlement of government securities). Ginnie Mae Pass-Through certificates are U.S. Government guaranteed, so trades settle in Fed Funds. These trades are settled through GSCC - the Government Securities Clearing Corporation. Corporate and municipal bond trades settle in clearing house funds. These are funds payable at a registered clearing house, which are usually not good funds for three business days. These trades are settled through NSCC - the National Securities Clearing Corporation. Convertible bonds by definition are corporate issues.

Question:Exchange rate risk is a factor to consider when investing in foreign debt issues and the: A U.S. dollar depreciates in value B U.S. dollar value remains constant C foreign currency depreciates in value D foreign currency appreciates in value

The best answer is C. When an investment is made outside the U.S. that is denominated in a foreign currency, the investor assumes exchange rate risk. This is the risk that the foreign currency weakens against the U.S. dollar (which is the same as the U.S. dollar strengthening). For example, assume that an investment is made in $100,000 of bonds denominated in Japanese Yen when the Yen is trading at 100 to the U.S. dollar. Thus, $100,000 x 100 Yen per U.S. dollar = 1,000,000 Yen being spent. Also assume that each bond costs 10,000 Yen, so 100 bonds are purchased at $100 each. Now assume that the bonds do not move in price, but the Yen weakens to 200 Yen to the U.S. dollar (each U.S. dollar now "buys" 200 Yen instead of 100 Yen). This means that 100 bonds are still priced at 10,000 Yen each in Japan. However, because each U.S. dollar is worth 200 Yen, the bonds are now worth 10,000 Yen / 200 Yen per U.S. dollar = $50 each. Thus, the bonds are now worth 1/2 of what was paid for them, solely due to the movement in currency exchange rates.

For bonds trading at a premium, rank the yield measures from lowest to highest? A Nominal, Basis, Current B Nominal, Current, Basis C Basis, Current, Nominal D Current, Basis, Nominal

The best answer is C. When bonds are trading at a premium, the yield to maturity will be the lowest measure since the annual return is reduced by the annual amortized portion of the premium that will be "lost" over the life of the bond. Current yield will be higher than yield to maturity, since it does not include the annual premium loss. Stated yield will be the highest since it is the return based on par value.

PDQ Company $10 par common stock is currently trading at $40. PDQ is currently paying a quarterly common dividend of $.90 per share. The current yield of PDQ stock is: A 2.25% B 4% C 9% D 10%

The best answer is C. Yields are based on annual returns. This stock is paying a $.90 dividend quarterly, so the annual dividend rate is $3.60. The formula for current yield is: ($3.60 / $40) = 9% Formula: Annual income / market price = current yield

A customer buys 5M of 6 1/4% Treasury Bonds at 100. How much interest income will the customer receive at each interest payment? A $31.25 B $62.50 C $156.25 D $312.50

The best answer is C. "5M" means that 5-$1,000 bonds are being purchased (M is Latin for $1,000). Annual interest on the bonds is 6.25% of $5,000 face amount equals $312.50. Since interest is paid twice per year, each payment will be for $156.25.

A 5-year 3 1/2% Treasury Note is quoted at 101-4 - 101-8. The note pays interest on Jan 1st and Jul 1st. A customer buys 5M of the notes. How much will the customer pay, disregarding commissions and accrued interest? A $5,056.25 B $5,070.00 C $5,062.50 D $5,090.00

The best answer is C. "5M" means that the customer is buying $5,000 par value of the notes (M is Latin for $1,000). A customer will buy at the ask price, which is 101 and 8/32nds = 101.25% of $5,000 par = $5,062.50.

A "double barreled" municipal issue has: A the backing of two adjacent municipalities B the dual backing of two distinct revenue pledges C primary backing of a revenue pledge and secondary backing of a general obligation pledge D primary backing of a general obligation pledge and secondary backing of a revenue pledge

The best answer is C. A "double barreled" bond is a municipal revenue bond whose principal and interest payments are backed by a revenue pledge; however, if the revenues are insufficient to cover the debt service requirements, the municipality will use its ad valorem taxing power to meet the deficit.

Which statement is TRUE regarding a "step-down" certificate of deposit? A The interest payment is fixed B The principal payment may be reduced C The interest payment may be reduced D The security may be "stepped down" to another smaller bank at the issuer's discretion

The best answer is C. A "step-down" CD is one that starts with a high introductory "teaser" interest rate. Then the rate "steps down" to the market rate of interest at specified intervals. Regardless, at maturity, the CD is redeemed at par. Review

A Prime Banker's Acceptance is one: A rated AAA by Moody's B rated P-1 by Moody's C eligible for trading with the Federal Reserve D eligible for trading with commercial banks

The best answer is C. A Prime BA is of sufficient quality to be an eligible for Fed trading.

The rating level at which a bond is first considered to be speculative is: A A B Aa C Ba D Baa

The best answer is C. A bond's rating becomes speculative when it falls below a BBB or Baa rating.

A guaranteed corporate bond is one which is: A insured by a private agency such as FGIC B guaranteed by the Federal Government C guaranteed by another corporation D funded through mandatory sinking fund payments

The best answer is C. A guaranteed corporate bond is one guaranteed by another corporation. For example, a corporation may want to issue bonds through a subsidiary. The subsidiary may have a lower credit rating than the parent company. The parent can guarantee the issue, which then takes on the parent's higher credit rating.

All of the following securities are eligible for Fed trading EXCEPT: A Treasury Bonds B Prime Banker's Acceptances C Commercial Paper D Treasury Bills

The best answer is C. Commercial paper, which is issued by corporations, is not eligible for Fed trading. The eligible securities are U.S. Government debt, Government Agency debt, and prime Banker's Acceptances. These are the securities that the Fed trades with the primary U.S. Government dealers (the major commercial banks and brokerage firms) to control credit availability in the economy.

All of the following are sources of income that can be used for debt service on municipal revenue bonds EXCEPT: A User Fees B Special Taxes C Capitalized Interest D Lease Rentals

The best answer is C. A revenue bond is defined as a debt where payment of interest and principal is derived from a source other than ad valorem taxes. Thus, revenue bonds can be paid off by lease rental fees, user fees, and special taxes (such as excise taxes). Capitalized interest is not an income source; rather it is part of the cost of a construction project that is included in the total financing needs when building a facility.The best answer is C. A revenue bond is defined as a debt where payment of interest and principal is derived from a source other than ad valorem taxes. Thus, revenue bonds can be paid off by lease rental fees, user fees, and special taxes (such as excise taxes). Capitalized interest is not an income source; rather it is part of the cost of a construction project that is included in the total financing needs when building a facility.

All of the following statements are true about American Depositary Receipts EXCEPT: A ADRs facilitate domestic trading of foreign securities B ADR holders receive dividends C ADR holders have voting and pre-emptive rights D ADRs are issued by domestic banks

The best answer is C. ADR holders receive dividends but do not have voting or pre-emptive rights. The bank holding the shares passes through dividends to the receipt holders; the bank votes the shares and sells off any pre-emptive rights, distributing the monies to shareholders. ADRs are the means by which foreign securities are traded in the U.S.

A corporation has posted a large financial loss for this year. It has a legal obligation to pay interest on all of the following bonds EXCEPT: A debentures B subordinated debentures C adjustment bonds D equipment trust certificates

The best answer is C. Adjustment (also known as "income") bonds obligate the issuer to pay interest only if the company meets a specified earnings test. If the earnings are not sufficient, no interest payment is legally required. All other bonds obligate the issuer to pay interest, regardless of events.

An accelerating rate of inflation would lead to: A higher bond prices and higher bond yields B higher bond prices and lower bond yields C lower bond prices and higher bond yields D lower bond prices and lower bond yields

The best answer is C. An accelerating rate of inflation will lead to higher interest rates. If interest rates rise, then bond prices will fall.

An "unqualified" legal opinion on a revenue bond is one which: A states that the pledged revenues are subject to prior liens B is given by an unqualified bond counsel C states that no liens have been found against pledged revenues D states that the bond counsel is qualified in the state to render an opinion

The best answer is C. An unqualified legal opinion is a "clean" opinion, where the bond counsel has found no legal problems. For a revenue bond issue, an unqualified opinion means that the bond counsel has not found any legal claim (liens) on the revenues that have been pledged to the bondholders.

Which statement is TRUE regarding warrants? A The exercise price of a warrant is set at a premium to the stock's current market price and the warrants are exercised when the exercise price is above the market price B The exercise price of a warrant is set at a discount to the stock's current market price and the warrants are exercised when the exercise price is above the market price C The exercise price of a warrant is set at a premium to the stock's current market price and the warrants are exercised when the exercise price is below the market price D The exercise price of a warrant is set at a discount to the stock's current market price and the warrants are are exercised when the exercise price is below the market price

The best answer is C. At issuance, the exercise price of a warrant is set at a premium to the stock's current market price. The warrants will only be exercised when the market price rises above the exercise price (why would you want to buy the stock at a price HIGHER than the current market?)

Bonds quoted on a yield to maturity basis are generally: A term bonds B series bonds C serial bonds D short term maturities

The best answer is C. Bonds quoted in basis points (yield quotes) are serial bonds - this is the usual case for municipal bonds. Bonds quoted on a percentage of par basis are term bonds.

Common stockholders and preferred stockholders BOTH have: A voting rights B pre-emptive rights C dividend rights D subscription rights

The best answer is C. Both common and preferred shareholders have the right to receive dividends, if declared by the Board of Directors. Common shareholders have both voting rights and preemptive/subscription rights (the right to maintain proportionate ownership if the issuer issues additional common shares). Preferred stockholders do not have voting rights and do not have preemptive/subscription rights.

A customer wishes to buy a $50,000 certificate of deposit offered by your firm. The customer wishes to know if the CD is FDIC insured. As the broker handling the account, you should tell the customer that: A the CD is insured because the amount is less than the $100,000 maximum permitted amount that qualifies for FDIC coverage B CDs sold through brokerage firms do not qualify for FDIC insurance regardless of the amount, but they are SIPC insured C as long as the CD is titled in the customer's name and the customer does not have accounts at the issuing bank totaling more than $200,000, then the CD is FDIC insured D as long as the CD is held in the custody of an FDIC member bank and the amount is $100,000 or less, then FDIC insurance covers the CD

The best answer is C. Brokered CDs are sold by brokerage firms that are representing issuing banks. FDIC insurance of $250,000 maximum covers bank deposits - but only if the deposit is titled in the customer's name. If the CD is titled in the brokerage firm's name, then the insurance coverage would not apply! This customer wishes to buy a $50,000 CD. As long as the customer does not have deposits at the issuing bank in excess of $200,000 (thus not exceeding the $250,000 maximum FDIC coverage) and the CD is titled in the customer's name, then the CD would be FDIC insured.

Which statement is FALSE about CMBs? A CMBs are used to smooth out cash flow B CMBs are sold at a discount to par C CMBs are sold at a regular weekly auction D CMBs are direct obligations of the U.S. government

The best answer is C. CMBs are Cash Management Bills. They are sold at auction by the Treasury on an "as needed" basis to meet unexpected cash shortfalls, so they are not part of the regular auction cycle. They are the shortest-term U.S. government security, often with maturities as short as 5 days. They are sold in $100 minimums at a discount to par value, just like Treasury Bills.

Common shareholders have all of the following rights EXCEPT the right to: A receive a dividend if one is declared by the Board of Directors B remaining assets in a liquidation of the company after all other claimants C inspect the minutes of meetings of the Board of Directors D vote for each individual proposed for election to the Board of Directors

The best answer is C. Common stockholders have the right to vote for the Board of Directors, but they do not have the right to inspect the minutes of Board of Directors meetings. They do have the right to "inspect the books and records" of the company - but this right is limited to inspection of financial reports. The shareholder has the right to receive a dividend if declared by the Board; and is last in line for receiving remaining assets of the company if it liquidates.

Construction Loan Notes are repaid from: A rents received from the housing project built with the proceeds of the offering B rent subsidies received from the U.S. Government C monies received from a permanent take-out financing D monies received from the issuance of the Construction Loan Note

The best answer is C. Construction Loan Notes (CLNs) are a type of short term municipal note used to finance the construction of buildings. Municipalities use CLNs because lenders are reluctant to finance a building until it is completed (for example, a bank will not give a mortgage on a house until there is a certificate of occupancy issued). Thus, during the construction period (which can take a number of years), short term financing is used. Once the building is completed, a long term bond issue is floated, and the proceeds are used to pay off the notes. (This long term financing is often called a "take out" loan, since it takes out the original short term financing).

Which statement is correct concerning cumulative voting? A It allows for a proportionate voting weight and helps smaller investors B It allows for a proportionate voting weight and helps larger investors C It allows for a disproportionate voting weight and helps smaller investors D It allows for a disproportionate voting weight and helps larger investors

The best answer is C. Cumulative voting allows a disproportionate voting weight to be placed on selected directors who are up for election. This is considered to be advantageous for the smaller investor, who wishes to have a specific director (or directors) elected.

Dividends on preferred stock may only be paid in: A Common shares of another issuer B Common shares of the same issuer C Cash D Preferred stock of the same issuer

The best answer is C. Dividends on preferred stock are paid solely in cash. Common stock dividends may be paid in cash, stock, stock of another company (i.e. subsidiary), or products of that company.

A percentage of par quote is also known as a: A firm quote B yield quote C dollar quote D basis quote

The best answer is C. Dollar Bonds - most corporate, government, and any municipal issues which are term bonds - are quoted on a percentage of par basis. Anytime a bond is quoted as a percentage of par, it is quoted on a dollar basis. In contrast, municipal serial issues are quoted on a yield basis.

What are Eurodollars? A Deposits of Euros held in banks in the United States B Deposits of Euros held in banks outside the United States C Deposits of U.S. dollars held in banks outside the United States D Deposits of U.S. dollars held in banks in the United States

The best answer is C. Eurodollars are deposits of U.S. dollars held in banks outside the U.S. - mainly in London. Because these deposits are held in banks outside of the U.S, they are not subject to Federal Reserve regulation. Multi-national companies use Eurodollars to settle international transactions, where payment is often required in U.S. dollars. They are also used to create Eurodollar-denominated securities that trade outside of the U.S. and are outside of SEC regulation.

Which terms apply to fixed unit investment trusts? A Managed and regulated B Managed and unregulated C Unmanaged and regulated D Unmanaged and unregulated

The best answer is C. Fixed unit investment trusts are not managed; the portfolio is fixed and does not change. These are typically bond trusts, where a diversified portfolio of bonds is assembled and placed into trust; with units of the trust sold to investors. These are non-exempt securities that must be registered with the SEC and sold with a prospectus. They are regulated under the Investment Company Act of 1940 and are redeemable with the sponsor, who makes a market in trust units.

Which statement is TRUE about the Government National Mortgage Association (GNMA)? A GNMA is a publicly traded corporation that issues pass through certificates which are guaranteed by the U.S. Government B GNMA is a publicly traded corporation that issues pass through certificates which are not guaranteed by the U.S. Government C GNMA is owned by the U.S. Government and issues pass through certificates which are guaranteed by the U.S. Government D GNMA is owned by the U.S. Government and issues pass through certificates which are not guaranteed by the U.S. Government

The best answer is C. GNMA performs the same function as Fannie Mae except that its pass through certificates are guaranteed by the U.S. Government; and it remains an agency of the government. It has not been "sold off" as a private company, like Fannie Mae, which, since it is bankrupt and is in government conservatorship, now trades OTC. For as long as the government continues to guarantee Ginnie Mae securities, it cannot be a publicly traded company.

Which risk is NOT applicable to Ginnie Mae Pass Through Certificates? A Purchasing power risk B Risk of early prepayment of mortgages if interest rates fall C Risk of default if homeowners do not make their mortgage payments D Risk of loss of principal if interest rates rise

The best answer is C. Ginnie Maes are guaranteed by the U.S. Government so there is no risk of default. Ginnie Mae is authorized to raid the U.S. Treasury to make up any payment shortfalls, if required. The holder of a certificate is subject to potential loss of principal if interest rates rise, and to loss of interest income if mortgages are prepaid early (these prepayments are passed on to the certificate holders).

All of the following can initiate repurchase agreements with government and agency securities as collateral EXCEPT: A Government securities dealers B Federal Reserve Banks C Federal Home Loan Banks D Commercial banks

The best answer is C. Government securities dealers, Commercial banks, and the Federal Reserve through its open market trading desk, all initiate repurchase agreements. Federal Home Loan Banks sell bonds to obtain funding. With the funds, it buys mortgages from Savings and Loans, making a secondary mortgage market and injecting fresh funds into the S&L's.

If interest rates decline, which of the following is likely to happen? A Issuers will sell new issues with shorter maturities and will call outstanding bonds with high interest rates B Issuers will sell new issues with shorter maturities and call outstanding bonds with low interest rates C Issuers will sell new issues with longer maturities and call outstanding bonds with high interest rates D Issuers will sell new issues with longer maturities and call outstanding bonds with low interest rates

The best answer is C. If interest rates decline, it is likely that issuers will call in outstanding bonds with high interest rates and refund (refinance) these issues at the lower current interest rates. When rates are low, issuers attempt to lock-in the low rate for the longest period of time by issuing long-term bonds. When rates are high, issuers sell shorter term debt, hoping that rates will drop so that they can refund the debt at maturity at lower rates.

If interest rates fall, issuers most likely will call: A all preferred issues B any preferred issue close to maturity C preferred issues trading at a premium D preferred issues trading at a discount

The best answer is C. If interest rates fall, issuers most likely will "call in" old high rate preferred and replace it by selling new preferred at the lower current rates. High rate preferred will sell at a premium if market interest rates are dropping. Preferred stocks do not have a stated maturity.

If interest rates fall, issuers most likely will call: A all preferred issues B preferred issues with below market interest rates C preferred issues with above market interest rates D only preferred issues with high call premiums

The best answer is C. If interest rates fall, issuers most likely will "call in" old high rate preferred and replace it by selling new preferred at the lower current rates. The "call premium" is any amount that the issuer will pay the preferred stockholder above par value as "extra" compensation for calling in the issue. Issuers are more likely to call in issues with low call premiums (lower extra cost to the issuer) than call in issues with high call premiums (higher extra cost to the issuer).

In a repurchase agreement, the initiating government securities dealer: A buys back securities from the Treasury that were previously sold B sells securities to the Treasury with a specified buy back provision C sells securities to another dealer and agrees to buy back the securities at a later date D buys securities from another dealer and agrees to sell the securities at a later date

The best answer is C. In a repurchase agreement, the initiating government securities dealer "sells" securities to another dealer to obtain cash, with an agreement to buy them back at a later date. Review

All of the following are significant investment features of the purchaser of municipal bonds EXCEPT: A Maturities and issues may be diversified B Insured issues are available for customers wishing minimum credit risk C Interest is currently state and local tax exempt D Interest is currently federal tax exempt

The best answer is C. Interest income derived from municipal bonds is currently exempt from federal income tax; however, it is SUBJECT to state and local tax unless the issue is purchased by a state resident and that state exempts the issue from taxation for those purchasers.

From an issuer's standpoint, level debt service serial bonds have: A constant interest cost in the later years B constant principal repayment in the later years C declining interest payments equally offset by rising principal repayments D declining principal repayments equally offset by rising interest payments

The best answer is C. Level debt service means that the issuer pays a constant yearly amount to service both the interest and principal repayment of a serial bond issue. Similar to a mortgage amortization schedule, part of the payment goes to principal repayment with the rest going to interest. In the early years, most of the payment is interest. In the later years, most of the payment is principal, since a majority of the bonds have been retired.

Which characteristics make a security most subject to liquidity risk? A Short term maturity and low credit rating B Short term maturity and high credit rating C Long term maturity and low credit rating D Long term maturity and high credit rating

The best answer is C. Liquidity risk is the risk that a security can only be sold by incurring large transaction costs. The easiest securities to sell (meaning the most readily marketable) are those with high credit ratings and short term maturities. The least marketable securities (meaning the hardest to sell) are those with low credit ratings and long term maturities.

Treasury STRIPS are quoted by dealers: A as a percentage of par in minimum increments of $.10 B as a percentage of par in minimum increments of 1/8ths C as a percentage of par in minimum increments of 1/32nds D on a yield to maturity basis

The best answer is C. Long term government and agency securities, like T-Notes and T-STRIPS, are quoted in 32nds, T-Bills are quoted on a discount yield basis.

All of the following securities are quoted on a yield basis EXCEPT: A Commercial Paper B Treasury Bills C American Depositary Receipts D Banker's Acceptances

The best answer is C. Money market instruments are original issue discount obligations quoted on a yield basis that are priced at a discount to par (with the exception of negotiable certificate of deposit that are priced at par plus accrued interest). The discount from par is the interest earned. American Depositary Receipts are not a money market instrument. They are essentially shares of a foreign company, traded domestically similar to equity securities. They are dollar price quoted in 1/8ths.

Short sale transactions are typical for all of the following EXCEPT: A Listed options B Common stock C Municipal bonds D Treasury bonds

The best answer is C. Municipal bonds are generally not sold short because the trading market in each maturity is very thin, making short covering difficult, if not impossible. Short selling (the sale of borrowed securities, with the purchase and replacement of the borrowed securities occurring later) is a strategy that allows the investor to profit in a falling market. Short selling can only be performed with actively traded securities (since ultimately the borrowed securities that were sold must be repurchased and replaced). Common stocks, listed options, and U.S. Government securities are all actively traded; and short selling of these securities is common.

All of the following are participants that offer municipal bonds in the secondary market EXCEPT: A bank dealers B general securities dealers C issuers D municipal broker's brokers

The best answer is C. Municipal issuers offer bonds in the primary market. Issuers do not trade their outstanding debt. Bank dealers, general securities dealers and municipal broker's brokers all trade in the secondary market.

Constitutional debt limits are imposed on the issuance of: A revenue bonds B moral obligation bonds C general obligation bonds D industrial development bonds

The best answer is C. Municipalities impose debt ceilings on the dollar amount of bonds that can be issued backed by ad valorem taxing power (G.O. bonds). To raise this limit requires a public referendum. Debt limits do not apply to self supporting debt such as revenue bonds or industrial revenue bonds. They also do not apply to moral obligation bonds, which the issuer does not legally have to pay (though the issuer is "morally" obligated to pay).

All of the following securities are redeemable EXCEPT: A Common stock mutual funds B Bond mutual funds C Corporate debentures D Series HH bonds

The best answer is C. Mutual funds - common stock and bond funds - are redeemable securities which do not trade. Savings bonds (Series EE and HH) sold by the U.S. Government are redeemable securities. There is no trading in these issues. To "cash out," they are redeemed with an agent for the Government - a bank or savings and loan. Corporate debentures are negotiable (tradeable) - they cannot be redeemed with the issuer. They trade OTC and on exchanges.

Which of the following can be purchased on margin? A Mutual Funds B Initial public offerings of Closed End Funds C Closed End Funds trading on the NYSE D Initial public offerings of Fixed Unit Investment Trusts

The best answer is C. New issues are not marginable. Every issue of a mutual fund (open-end management company) share is a "new issue" as is the original offering of a closed-end fund or a unit trust. Both are made with a prospectus. However, once closed-end fund shares are listed on an exchange and begin trading in the market, they are marginable like any other listed stock.

A municipality has a tax rate of 18 mills. A piece of real property in the municipality is assessed at $180,000 and has a fair market value of $165,000. The annual tax liability on the property is: A $1,800 B $2,970 C $3,240 D $4,420

The best answer is C. One mill = .001; 18 mills = .018. Taxes are based on assessed valuation, not fair market value. .018 x $180,000 = $3,240. Another way to think about it is that 1 mill = $1 of tax for each $1,000 of assessed value.

Issuers of federal tax exempt commercial paper include: A Corporations B Federal Government C Municipal Governments D Ginnie-Mae

The best answer is C. Only municipal issues are exempt from federal income tax on interest income. Corporate and U.S. Government debt interest income is subject to federal income tax.

All of the following statements are true about preferred stock EXCEPT: A Preferred dividends are paid before common B In most cases dividends are paid semi-annually C Corporations must pay preferred dividends D Preferred shareholders are paid before common shareholders upon liquidation of a corporation

The best answer is C. Preferred stock has preference over common as to the payments of dividends and as to assets upon liquidation. Preferred dividends are, in most cases, paid semi-annually. The Corporation will only pay the preferred dividend if the Board of Directors decides. There is no legal obligation to pay the preferred, however, if it is not paid, investors will not find the stock attractive and won't invest in it.

All of the following are terms associated with preferred stock EXCEPT: A Callable B cumulative C redeemable D convertible

The best answer is C. Preferred stock is not a redeemable security - it is a negotiable security. The stock cannot be redeemed with the issuer - an investor who wishes to liquidate must sell the stock in the market. Preferred stock can be callable, cumulative, and convertible.

All of the following pay dividends EXCEPT: A Preferred Stock B ADRs C Rights D Real Estate Investment Trust Shares

The best answer is C. Preferred stock pays a fixed dividend rate; American Depositary Receipt holders receive dividends; and Real Estate Investment Trusts make dividend distributions to shareholders. Holders of warrants and rights do not receive dividends on these instruments.

Which of the following projects would NOT be financed by a revenue bond issue? A The construction of a new subway line B The construction of a new hydroelectric generating plant C The construction of a new junior high school D The construction of a new sewage treatment plant

The best answer is C. Public schools do not produce revenue and thus are not funded by revenue bond issues. Rather, school bond issues are general obligations of the issuer. A subway line, hydroelectric plant, and sewage treatment plant all charge for their use and can be financed with revenue bonds.

All of the following terms apply to publicly traded fund shares EXCEPT: A one-time issuance B managed C redeemable D negotiable

The best answer is C. Publicly traded fund shares represent an undivided interest in a portfolio of securities that is managed to meet an investment objective. A publicly traded fund has a 1-time stock issuance and then "closes" its books to new investment and then lists its stock on an exchange. The stock then trades like any other common stock, except the company is in the business of making investments; instead of say, making cars, beer, or computers. Thus, this type of fund is "closed end."

All of the following terms describe rights EXCEPT? A Exercisable B Negotiable C Redeemable D Giftable

The best answer is C. Rights are exercisable, negotiable (as they can be sold), and giftable (as they can be given to someone as a gift). Rights are not redeemable with the issuer.

Trades of all of the following securities will settle in Fed Funds EXCEPT: A Treasury Bills B Treasury Notes C Municipal Bonds D Agency Bonds

The best answer is C. Securities that are eligible to be traded by the Federal Reserve are those backed by the guarantee of the U.S. Government as well as certain agency obligations. Both Treasury Bills and Treasury Notes are eligible securities. Trades in eligible securities settle through the Federal Reserve system, and therefore settle in "Fed Funds." Municipal bond trades and trades in corporate securities are not eligible for trading and settling through the Federal Reserve system; these securities settle in "clearing house" funds.

The term "Funded Debt" refers to which of the following issues? A Commercial paper with under 270 days to maturity B Revenue bond with at least 5 years to maturity C Corporate debt with at least 5 years to maturity D Treasury bond with at least 5 years to maturity

The best answer is C. The term "funded debt" refers to CORPORATE debt that is considered part of a company's permanent long term funding. Included is all long term corporate debt. Revenue bonds are issued by municipalities and T-Bonds are issued by the Government. Commercial paper is a short term financing and is an "unfunded" debt.

XYZ Company has issued 10%, $100 par non-cumulative preferred stock. Two years ago, XYZ omitted its preferred dividend. Last year, it paid a preferred dividend of $5 per share. This year, XYZ wishes to pay a common dividend. In order to make the distribution to common shareholders, each preferred share must be paid a dividend of: A 0 B C $10 D $15

The best answer is C. Since the preferred stock is noncumulative, to make a dividend distribution to common shareholders, the company need only make this year's preferred dividend distribution. The stated dividend rate on the preferred is 10% based on $100 par, so $10 of preferred dividends must be paid per share. If this preferred were cumulative, then all omitted dividends must be paid before a distribution can be made to common. Please note that almost all preferred stock issues are cumulative - but non-cumulative issues must still be known for the exam.

All of the following rate commercial paper EXCEPT? A Standard and Poor's B Fitch's C Morningstar D Moody's

The best answer is C. The 3 major debt ratings agencies are Moody's, Standard and Poor's and Fitch's. Morningstar rates mutual funds . All three rate commercial paper.

The Federal Reserve would permit all of the following to be "primary" U.S. Government securities dealers EXCEPT? A A domestic commercial bank B A foreign broker-dealer C A domestic thrift institution D A domestic broker-dealer

The best answer is C. The Federal Reserve allows commercial banks (such as Citibank and J.P. Morgan Chase); domestic broker-dealers (such as Goldman Sachs); and foreign broker-dealers (such as Daiwa Securities and Nomura Securities); and foreign banks such as Deutsche Bank; to be primary dealers. Primary dealers are expected to bid in weekly Treasury auctions, and must make a secondary market in all U.S. Government issues. There are approximately 20 such firms. Thrift institutions are not permitted to be primary dealers. Their focus is on obtaining deposits that are then used to make mortgages to homeowners.

The Federal Reserve is: A a primary purchaser of Treasury securities and an active participant in the secondary market for these issues B a primary purchaser of Treasury securities but not an active participant in the secondary market for these issues C not a primary purchaser of Treasury securities but an active participant in the secondary market for these securities D not a primary purchaser of Treasury securities and not an active participant in the secondary market for these securities

The best answer is C. The Federal Reserve is not a primary purchaser of Treasury securities - it does not bid at the weekly Treasury auction - only the primary dealers are required to bid. However, it does trade them in the secondary market to influence the availability of credit.

All of the following securities are eligible for trading by the Federal Reserve EXCEPT: A Treasury Bonds B Treasury Bills C Corporate Money Market instruments D Federal Home Loan Bank Bonds

The best answer is C. The Federal Reserve trading desk can trade securities issued by the U.S. Government, Government Agencies, and prime Banker's Acceptances. Corporate money market securities such as commercial paper, are not eligible for Fed trading.

To determine if a stock appears to be overpriced, what would be examined? A The company's Earnings Per Share B The company's Dividend Payout Ratio C The company's Price to Earnings Ratio D The company's Debt to Equity Ratio

The best answer is C. The P/E ratio of a company is a valuation measure. Companies with high P/E ratios as compared to peer companies might be overvalued; while companies with low P/E ratios as compared to peer companies might be undervalued.

The municipal bond counsel opines on which of the following ? A Viability B Feasibility C Validity D Marketability

The best answer is C. The bond counsel examines new municipal issues for legal or tax problems and renders an opinion on the validity, legality and tax exempt status of the issue. Bond counsels do not render economic opinions, which is the same as rendering an opinion on feasibility of an issue.

Which statements are TRUE regarding the effect of interest rate movements on bond price volatility? A Bonds with the lowest price volatility will be ones with the lowest coupon rates B Bonds with the lowest price volatility will be zero coupon issues C Bonds with the lowest price volatility will be ones with the highest coupon rates D Bonds with the highest price volatility will be ones with the highest coupon rates

The best answer is C. The bond with the lowest price volatility will be the one with the highest coupon rate. Bonds with low coupon rates exhibit greater price volatility. (Zero coupon bonds are extremely volatile in pricing as interest rates fluctuate) Thus, to minimize price volatility due to interest rate movements ("interest rate risk"), high coupon bonds are more appropriate than low coupon bonds.

How is the interest income received from U.S. Government obligations taxed? A Subject to both federal and state income tax B Exempt from both federal and state income tax C Subject to federal income tax and exempt from state income tax D Exempt from federal income tax and subject to state income tax

The best answer is C. The interest income received from U.S. Government obligations is subject to federal income tax, but is exempt from state and local income taxes (one level of government cannot tax the other's obligations).

Which bond will exhibit the greatest price volatility? A 2-year maturity bond with a 1% coupon B 4-year maturity bond with a 2% coupon C 7-year maturity bond with a 0% coupon D 8-year maturity bond with a 6% coupon

The best answer is C. The longer the expiration, the more volatile a bond's price movements, which narrows the Choices to either C or D. The lower the coupon, the more volatile the bond's price movements, with the lowest coupon being "0." A 7-year zero coupon bond will actually be more volatile in price movements than a slightly longer maturity bond (8 years) with a fairly high coupon (6% in this case). The higher coupon means that more of the bond's value is represented by the interest stream than comes in early and this stabilizes the bond's price as market interest rates move.

In 2020, a customer buys 1 PDQ 10%, $1,000 par debenture, M '35, at 115. The interest payment dates are Jan 1st and Jul 1st. The nominal yield on the bond is: A 8.37% B 8.69% C 10.00% D 10.23%

The best answer is C. The nominal yield is the stated rate of interest on the bond, based on par value. $100 / $1,000 = 10% Formula: (Annual interest / par) = Nominal Yield

A customer buys 5M of 3 1/4% Treasury Bonds at 98-8. The customer will pay how much for the bonds? A $4,900.25 B $4,904.00 C $4,912.50 D $5,000.00

The best answer is C. The purchase price is 98-8 = 98 and 8/32nds = 98.25% of $5,000 = $4,912.50.

Which of the following are risks that should be disclosed to customers when recommending the purchase of a CD sold through a brokerage firm? A There is a substantial penalty for early withdrawal of funds B If interest rates have fallen after issuance and the CD is sold prior to maturity, the investor may experience a loss of principal C The secondary market is limited, so that sale prior to maturity can incur higher than normal transaction costs D Brokered CDs do not qualify for FDIC insurance coverage if the issuing bank should fail

The best answer is C. There is no penalty for early withdrawal of funds on brokered CDs - however the amount of interest earned will be pro-rated over the shorter life of the deposit. If interest rates rise after issuance, the value of the CD in the secondary market will fall (though not by much, since this is a short maturity). Most of these instruments are held to maturity, so the secondary market is very limited. Finally, brokered CDs qualify for FDIC insurance as long as the CD is titled in the customer's name.

Trades of municipal bonds settle "regular way" the: A same business day as trade date B next business day after trade date C second business day after trade date D fifth business day after trade date

The best answer is C. Trades of municipal securities settle "regular way" 2 business days after trade date.

Which of the following investments gives a rate of return that cannot be affected by "reinvestment risk"? A Treasury Notes B Treasury Stock C Treasury STRIPS D Treasury Bonds

The best answer is C. Treasury "STRIPS" are bonds which have been stripped of coupons - essentially they are zero coupon Treasury obligations. The rate of return on the bonds is "locked in" at purchase since the discount represents the compounded yield to be earned over the life of the bond. Because no interest payments are received, the bond is not subject to reinvestment risk - the risk that interest rates will drop and the interest payments will be reinvested at lower rates.

A customer buys a $1,000 par Treasury Inflation Protection security with a 4% coupon and a 10 year maturity. If the inflation rate during the first year of the security's life is 5%, the: A principal amount remains at $1,000 and the coupon rate remains at 4% B principal amount remains at $1,000 and the coupon rate is adjusted to 5% C principal amount is adjusted to $1,050 and the coupon rate remains at 4% D principal amount is adjusted to $1,050 and the coupon rate is adjusted to 5%

The best answer is C. Treasury "TIPS" are Treasury Inflation Protection Securities - the principal amount of these securities is adjusted upwards with the rate of inflation. Even though the interest rate is fixed, the holder receives a higher interest payment, due to the increased principal amount. When the bond matures, the holder receives the higher principal amount. Thus, there is no purchasing power risk with these securities.

Which of the following is a FALSE statement regarding Treasury Bills? A The maturity is 52 weeks or less B Treasury Bills trade at a discount to par C Treasury Bills are callable at any time at par D Payment is backed by the full faith and credit of the U.S. Government

The best answer is C. Treasury Bills are original issue discount obligations of the U.S. Government which mature in 52 weeks or less. They are not callable (as a rule, short term obligations are never callable - why would the issuer bother calling in obligations that will mature in the near future?)

Which of the following investments gives a rate of return that cannot be affected by "reinvestment risk"? A Treasury Notes B Treasury Bonds C Treasury Receipts D Ginnie Mae Pass Through Certificate

The best answer is C. Treasury Receipts are bonds which have been stripped of coupons - essentially they are zero coupon Treasury obligations. The rate of return on the bonds is "locked in" at purchase since the discount represents the compounded yield to be earned over the life of the bond. Because no interest payments are received, the bond is not subject to reinvestment risk - the risk that interest rates will drop and the interest payments will be reinvested at lower rates. The other securities, Treasury Notes and Bonds; and Pass Through certificates; make periodic interest payments - hence they are subject to reinvestment risk.

Which statement is TRUE regarding repurchase agreements effected between the public and government securities dealers? A The public customer is the seller of the government securities B The dealer is losing liquidity C The public customer is the lender of monies D The dealer is obligated to sell the securities back at a later date

The best answer is C. When a government dealer enters into a repurchase agreement with the public, the dealer is "getting liquid" by selling government securities to the customer, with an agreement to buy them back at a later date. Thus, the customer is lender of cash to the government dealer.

If a new bond is issued with a call option, when is it callable by the issuer? A Only during the period of call protection B Only on the call date C Anytime on or after the call date D Only on the semi-annual interest payment date

The best answer is C. When a newly-issued bond is callable, the issuer has the right to call in the bonds anytime on or after the call date. The bond contract will specify the first date that that the bond can be called and the price that the issuer will pay based on a call schedule. There is an initial period of call protection (typically 10 years) where the issuer cannot call the bonds. Also, remember that the issuer will only call the bonds if market interest rates decline after issuance. Then the issuer can refund the issue at a lower interest cost.

A company's common stock is selling in the market at a "multiple of 15". If the market price of the common stock is currently $10, what is the earnings per share? A $.15 B $.16 C $.67 D $1.50

The best answer is C. When a stock is selling at a "multiple" of 15, this means that the market price is 15 times the current earnings per share. Since the market price is at $10 and the P/E ratio is 15, earnings per share is $.67.

A company's common stock is selling in the market at a "multiple of 20". If the market price of the common stock is currently $10, what is the earnings per share? A $.02 B $.20 C $.50 D $2.50

The best answer is C. When a stock is selling at a "multiple" of 20, this means that the market price is 20 times the current earnings per share. Since the market price is at $10 and the P/E ratio is 20, earnings per share is $.50.

Zero coupon bonds: A pay interest semi-annually B pay interest annually C are bought at a discount and mature at par D are bought at a par and mature at a premium

The best answer is C. Zero-coupon bonds are often called "capital appreciation bonds" since the bondholder does not receive annual interest payments from the issuer. Instead, the bonds are bought at a discount from par, and are redeemed at par at maturity (similar to savings bonds). The discount is earned over the life of the bond and is the "income" from this type of investment.

A closed end fund has a Net Asset Value of $10 per share. The minimum price at which the shares can be purchased is: A $10 B $10 plus a commission C market price D market price plus a commission

The best answer is D. A closed end fund is traded in the market like any other stock. Any purchaser would pay the prevailing market price (which can be below, at, or above Net Asset Value) and would have to pay a commission to have the trade executed. Thus, a closed end fund share is purchased at the prevailing market price plus a commission. This contrasts to mutual fund (open end management company) shares that are newly issued by the fund to any purchaser. The purchaser pays the next computed Net Asset Value plus a sales charge if the fund imposes a "sales load."

Which statement is TRUE regarding sponsored American Depositary Receipts? A Sponsored ADRs trade exclusively over-the-counter B Sponsored ADRs are created to facilitate the trading of U.S stocks overseas C Sponsored ADRs are not required to provide quarterly reports to shareholders D Sponsored ADRs provide annual reports to shareholders

The best answer is D. All exchange-listed ADRs are sponsored. Issuers that sponsor ADRs provide both quarterly and annual financial reports to shareholders in English. Sponsored ADRs are often called American Depositary Shares or ADSs. Non-sponsored ADRs are assembled by banks and broker-dealers without the issuer's participation. An unsponsored program may have more than one depositary bank, since the issuer does not participate in any way. Holders of non-sponsored ADRs only receive annual reports in the language of the issuer. Non-sponsored ADRs trade over-the-counter.

What term would apply to Authorized Stock? A Issued B Outstanding C Voting D Par Value

The best answer is D. Authorized stock is the total number of shares that the company is "authorized" to sell. Issued stock is the number of shares that have actually been sold to the public out of the authorized total. Outstanding stock is the number of shares that are outstanding in the hands of the public and is: Issued stock - Repurchased Shares (such as shares repurchased for Treasury). The only stock that votes and that receives dividends is Outstanding shares. Par value is the term that applies to all stock, whether it is Authorized, Issued, Outstanding or Treasury.

In order to determine whether a Brokered CD being recommended to a customer will qualify for FDIC insurance, the registered representative must know all of the following EXCEPT: A name of the bank issuing the CD B ownership title of the CD C face amount of the CD D call dates of the CD

The best answer is D. Brokered CDs are sold by brokerage firms that are representing issuing banks. FDIC insurance of $250,000 maximum covers bank deposits - but only if the deposit is titled in the customer's name. If the CD is titled in the brokerage firm's name, then the insurance coverage would not apply! For example, if a customer wishes to buy a $75,000 CD, as long as the customer does not have deposits at the issuing bank in excess of $175,000 (thus not exceeding the $250,000 maximum FDIC coverage) and the CD is titled in the customer's name, then the CD would be FDIC insured. Therefore, the bank name must be known because the customer gets only one coverage at that bank. The CD must be titled in the customer's name for the FDIC coverage to apply. Since coverage is a maximum of $250,000 per customer at each bank, the amount of the CD must be aggregated with any other customer deposits held at the bank to determine if the FDIC limit is exceeded. Call features are irrelevant to FDIC coverage.

What determines the purchase price of a share of a closed-end management company? A The Board of Directors of the company B The next computed NAV after the order is received C The current bid price in the market where the security trades D The supply and demand for the shares in the market

The best answer is D. Closed-end fund shares are listed and trade in the market like any other stock. They are negotiable securities and are not redeemable. Remember, it is open-end fund shares that are redeemable. When an order is placed to buy any share in the market, the customer pays the ask price. When a customer places an order to sell, the customer receives the bid (lower) price. Since this is an order to buy in the market, it is not filled at the bid - rather, it is filled at the ask price. So this becomes a economics question - what determines the price of anything in a marketplace - supply and demand!

Trades of all of the following securities settle in Fed Funds EXCEPT: A U.S. Government bonds B U.S. Agency bonds C GNMA Pass-Through certificates D General Obligation bonds

The best answer is D. Corporate and municipal bond trades settle in clearing house funds. These are funds payable at a registered clearing house in three business days. These trades are settled through NSCC - the National Securities Clearing Corporation. U.S. Government and agency bond trades settle in Federal Funds, which are good funds the business day of the funds transfer (next business day for regular way settlement of government securities). Ginnie Mae Pass-Through certificates are U.S. Government guaranteed, so trades settle in Fed Funds. These trades are settled through GSCC - the Government Securities Clearing Corporation.

All of the following disclosures must be made to customers who wish to purchase long-term negotiable certificates of deposit EXCEPT: A sale prior to maturity can result in a price that is lower than the original purchase amount B trading in the secondary market is limited C Step-Down CD yields may not reflect the actual market interest rate D these CDs are unconditionally backed by the FDIC but not SIPC

The best answer is D. Customers who wish to buy long-term negotiable certificates of deposit must be informed that sale prior to maturity can result in a loss on the security (if market interest rates have risen in the interim); that while a secondary market exists for these securities, it is limited; that CDs with Step-Up or Step-Down yields may not give an interest rate that is reflective of the market (since many issuers entice buyers with higher than market initial interest rates that then step-down over time to the current market rate); and that long term CDs, if they are callable, subject the customer to reinvestment risk. Negotiable CDs are not FDIC insured for any amount that exceeds the $250,000 insurance limit.

What term would apply to Treasury Stock? A Negotiable B Outstanding C Voting D Par Value

The best answer is D. The only stock that votes and receives dividends is Outstanding shares. Outstanding stock is the number of shares that are outstanding in the hands of the public and is: Issued stock - Repurchased Shares (such as shares repurchased for Treasury). Treasury stock consists of shares that have been repurchased and "retired," so Treasury stock does not receive dividends and has no voting rights. Par value is the term that applies to all stock, whether it is Authorized, Issued, Treasury, or Outstanding.

All of the following actions by a corporation will affect an individual common shareholder's equity EXCEPT: A Issuance of additional common shares B Conversion of convertible preferred stock C Repurchase of common shares D Declaration of a stock dividend or stock split

The best answer is D. Dilution of an individual stockholder's equity does not occur if there is a stock dividend or stock split. The shareholder receives more shares worth proportionately less. If the issuer forces conversion of convertible securities, additional common shares are issued to the individuals who tender the convertible securities. This dilutes common equity. If the corporation purchases Treasury Stock, then with fewer shares outstanding, the reported earnings per share, and book value per share will increase - thus common equity increases. If the corporation issues additional common shares, common equity will be diluted unless the existing shareholders exercise their "pre-emptive" rights.

Voting of the common stockholder is required for all of the following EXCEPT: A When a corporation wishes to issue convertible securities B When a shareholder decides to accept a tender offer for the company's shares C When a corporation declares a stock split D When a corporation declares a cash dividend

The best answer is D. Dividend decisions are made by the Board of Directors - no shareholder approval is required. This is true whether a cash or stock dividend is being declared. Changes in the equity capitalization of a company require shareholder approval. A stock split changes par value per share, which requires a shareholder vote. The issuance of convertible securities (which can be converted to equity) is potentially dilutive to the existing common shareholders. They must vote to permit this. A tender offer is when someone outside the company makes an offer to the existing shareholders to buy their shares, typically at a premium to the current market price. The shareholder can choose to tender or not. If the shareholder chooses to tender, he or she is "voting" to sell the shares to the maker of the offer.

All of the following statements describe Freddie Mac EXCEPT: A Freddie Mac buys conventional mortgages from financial institutions B Freddie Mac is an issuer of mortgage backed pass-through certificates C Freddie Mac is a corporation that is publicly traded D Freddie Mac debt issues are directly guaranteed by the U.S. Government

The best answer is D. Freddie Mac - Federal Home Loan Mortgage Corporation - buys conventional mortgages from financial institutions and packages them into pass through certificates. Freddie Mac pass through certificates are not guaranteed by the U.S. Government (unlike GNMA pass through certificates). This agency has been partially sold off to the public as a corporation that was listed on the NYSE. Freddie is now bankrupt due to excessive purchases of bad "sub prime" mortgages and has been placed in government conservatorship. Its shares have been delisted from the NYSE and now trade OTC in the Pink OTC Markets.

All of the following statements are true regarding Government National Mortgage Association pass-through certificates EXCEPT: A GNMA securities are guaranteed by the U.S. Government B Dealers typically quote GNMA securities on a basis point differential to equivalent maturity U.S. Government Bonds C Credit risk for GNMAs is the same as for equivalent maturity U.S. Government Bonds D Reinvestment risk for GNMAs is the same as for equivalent maturity U.S. Government Bonds

The best answer is D. GNMA securities are guaranteed by the U.S. Government. Dealers typically quote agency securities, including Ginnie Maes, on a basis point differential to equivalent maturing U.S. Governments. Reinvestment risk is greater for Ginnie Maes than for U.S. Governments. Reinvestment risk is the risk that over a long-term investment time horizon, interest rates are dropping and payments received from investments are reinvested at lower and lower rates. Ginnie Mae pass through certificates make monthly payments that must be reinvested, as opposed to U.S. Governments which only make semi-annual payments. Furthermore, if market interest rates drop, the homeowners in the mortgage pool prepay their mortgages, and these early principal repayments must be reinvested, again at lower rates.

Long-term negotiable certificates of deposit are subject to all of the following risks EXCEPT: A Interest rate risk B Call risk C Reinvestment risk D Prepayment risk

The best answer is D. Long-term negotiable Certificates of Deposit (over 1 year maturity) are subject to interest rate risk, as is any fixed rate debt instrument. If market rates go up, the market value of the CD will decline. Long-term CDs can be callable, so they are subject to call risk in a declining interest rate environment. Interest is paid semi-annually and, again in a declining interest rate environment, if these payments are reinvested in new CDs, the rate of return on reinvested monies will decline - thus they have reinvestment risk. Finally, the secondary market for these securities is limited - so they can have marketability risk. Prepayment risk is typically associated with mortgaged-backed securities such as Ginnie-Mae pass-throughs. Review

Which statement about investment companies is FALSE? A An open end fund is a type of management company B A closed end fund is a type of management company C Closed-end fund shares trade throughout the day D Open-end fund shares trade throughout the day

The best answer is D. Management companies are either open-end or closed-end. Either has an investment manager, managing the fund based on a stated investment objective. An open-end management company is a mutual fund. Mutual funds (open-end funds) are "open" to new investment. Shares are issued and redeemed at the end of the day and do not "trade." A closed-end management company is "closed" to new investment. It has a 1-time share offering under a prospectus, and then the shares are listed and trade like any other stock.

Which of the following actions taken by a corporation will raise additional capital? A Declaration of a stock split B Announcement of a call of all convertible preferred shares at par C Declaration of a stock dividend D Announcement of a rights distribution allowing existing shareholders to buy the additional stock

The best answer is D. The declaration of a stock split will not raise additional capital. The call of a convertible security will either use the cash of the company if the security is handed in on the call notice; or will have no effect at all on the cash position of the company if the preferred stockholders convert to common stock. Declaring a stock dividend increases the number of shares outstanding with no dollar change in total stockholders' equity (as the market price of the shares will fall). A rights distribution will raise additional capital, since the existing shareholders are asked to "subscribe" and therefore, pay, for more shares.

In a corporate liquidation, the last to get paid is: A Unpaid wages and taxes B Bondholders C Preferred stockholders D Common stockholders

The best answer is D. In a corporate liquidation, common stockholders are paid after everyone else.

All of the following statements are correct regarding overnight repurchase agreements EXCEPT: A the seller loses control of the underlying securities for the duration of the agreement B the interest rate charged is most similar to the Federal Funds rate C the investment has interest rate risk D the investment has liquidity risk

The best answer is D. Overnight repurchase agreements are typically effected between government securities dealers. A dealer who needs cash will "sell" some of its inventory overnight to another dealer, with an agreement to buy the position back the next day. The difference between the sale price and the repurchase price is the interest earned. There is virtually no liquidity risk, since the loan is of the shortest term and is secured by pledged government securities. The interest rate on such agreements generally parallels and is somewhat lower (since the loans are secured) than the Fed funds rate, since overnight loans using government securities are most similar to overnight loans of reserves (Fed Funds) from bank to bank. Since government securities are pledged as collateral, the dealer gives up custody of the securities overnight. Repos do have interest rate risk, relating to the underlying securities. If interest rates rise, the underlying securities can decline in value. Since the maturity of the underlying securities can be of any length, long maturity values may decline more than the accrued interest to be earned on the agreement. When the borrower of the funds buys back the securities the next day at the pre-agreed price, it buys back securities at more than they are worth! Review

Preferred stock has all of the following features EXCEPT: A Fixed rate of return B Priority claim to assets upon dissolution compared to common stock C Priority claim to dividends declared compared to common stock D Voting rights

The best answer is D. Preferred stock lacks voting rights - remember that it is a fixed income security that is very "bond-like." Preferred has a fixed rate of return (the dividend rate), has priority claim to assets upon dissolution over common, and has priority claim to dividends over common, if declared by the Board of Directors. Preferred stock does not have a fixed maturity date - it has an indefinite life.

Which of the following does NOT receive dividends? A Preferred Stock B SponsoredADRs C Non-Sponsored ADRs D Treasury Stock

The best answer is D. Preferred stock pays a fixed dividend rate. Both sponsored (exchange traded) and non-sponsored (OTC) American Depositary Receipts pay holders dividends. Treasury stock consists of shares that have been repurchased and retired by the company. Treasury stock is not entitled to dividends, nor does it vote.

Which investment does NOT have purchasing power risk? A Treasury Notes B STRIPS C Treasury Bonds D TIPS

The best answer is D. Purchasing power risk is the risk that inflation will cause interest rates to increase; and therefore, bond prices will fall. "TIPS" are Treasury Inflation Protection Securities - the principal amount of these securities is adjusted upwards with the rate of inflation. Even though the interest rate is fixed, the holder receives a higher total payment, due to the increased principal amount. When the bond matures, the holder receives the higher principal amount. Thus, there is no purchasing power risk with these securities. STRIPS are zero-coupon Treasury obligations - these have the highest level of purchasing power risk. If there is inflation, market interest rates are forced upwards, and zero-coupon bonds such as STRIPS fall dramatically in price (Treasury Receipts are broker-created zero-coupon bonds). Long term T-Bonds and middle term T-Notes also susceptible to purchasing power risk, though not as badly as long-term zero-coupon bonds. Money market instruments, such as T-Bills, do not have purchasing power risk, because they mature within 1 year and the funds can be reinvested at higher interest rates caused by inflation.

Regular way trades of U.S. Government bonds settle through the: A National Securities Clearing Corporation on the same day as trade date B National Securities Clearing Corporation on the business day after trade date C Federal Reserve System on the same day as trade date D Federal Reserve System on the business day after trade date

The best answer is D. Regular way trades of U.S. Government bonds settle through the Federal Reserve System in Fed Funds. Settlement of government securities trades takes place the business day following trade date. "Non-eligible" securities settle through national clearing houses, such as the NSCC - National Securities Clearing Corp., of which broker/dealers are members. These trades settle in 2 business days in clearing house funds.

Which statement is TRUE regarding rights? A Rights give the holder the long term option to buy stock B Rights typically give the holder a 6-9 month option to buy stock C Theexercise priceof a right is set at apremiumto the stock's current market price D The exercise price of a right is set at adiscountto the stock's current market price

The best answer is D. Rights are very short term options (about 1 or 2 months) that give existing shareholders the right to subscribe to new shares at a discount to the stock's current market price. Warrants give the holder the long term option to buy stock - they usually have a life of 5 years or so.They are attached by the issuer to preferred stock or bond offerings to make the deal more attractive to investors. At issuance, the exercise price of a warrant is set at a premium to the stock's current market price. Thus, for a warrant to have real value, the price of the common stock must subsequently rise in the market.

Series EE bonds: A are negotiable B are issued in minimum denominations of $100 C pay interest semi-annually D pay interest at redemption

The best answer is D. Series EE bonds are "savings bonds" issued by the U.S. Government with a minimum purchase amount of $25 (or more). The interest rate is set at the date of issuance. Interest is "earned" monthly and credited to the principal amount every 6 months. The bonds have no stated maturity - the holder can redeem at any time, however interest is only credited to the bonds for 30 years. Savings bonds do not trade - they are issued by the Treasury and are redeemed with the Treasury. No physical certificates are issued - the bonds are issued in electronic form.

An ADR has been issued where each ADR equals .1111 ordinary shares of the foreign issuer. If a client wished to buy enough ADRs to cover 100 ordinary shares, how many ADRs must be purchased? A 1 B 90 C 100 D 900

The best answer is D. Since each ADR equals .1111 ordinary shares, then 9 ADRs equal 1 ordinary share. To buy enough ADRs to cover 100 ordinary shares, 900 ADRs must be purchased. Note that when the foreign shares are inexpensive, it is typical for the ADR to cover a "multiple" of shares; and when the foreign shares are expensive, it is typical for the ADR to cover a "fraction" of shares, as in this example.

What is NOT a risk of investing in a GNMA? A Receiving principal payments earlier than expected in a declining interest rate environment B Reinvestment of payments received in a declining interest rate environment C Receiving principal payments later than expected in a rising interest rate environment D Fluctuating principal value due to interest rate movements

The best answer is D. The principal value of a security is fixed - it does not fluctuate. It is the market value of the security that will fluctuate due to market interest rate movements. GNMA (Government National Mortgage Association) issues mortgage backed pass-through certificates, that pass through the monthly payment to the certificate holder. Because payments are being received monthly, if rates have dropped, these will be reinvested at lower and lower rates - classic reinvestment risk. GNMAs also have prepayment risk and extension risk. If market interest rates fall, the homeowners in the mortgage pool will refinance and the early repayment of the loan is "passed-through" to the certificate holders. Because market interest rates have dropped, the certificate holder can only reinvest the repayments at lower rates. On the other hand, if market interest rates rise, the homeowners do not refinance their mortgages - they stay in their homes with the existing low rate mortgage. This means that the expected rate of principal repayment now extends out, and the certificate holder is now holding an investment that is paying a lower than market rate of return for a longer time period than anticipated. This is called extended maturity risk, or extension risk.

Which of the following securities has the lowest level of credit risk? A Equipment Trust Certificate B General Obligation Bond C Industrial Revenue Bond D Treasury Bond

The best answer is D. The safest bonds listed are Treasury bonds (backed by the U.S. Government) and General Obligation bonds (backed by unlimited municipal taxing power). The bonds listed with the highest credit risk are Industrial Revenue Bonds and Equipment Trust Certificates. Since ETCs are secured by rolling stock, they are safer than Industrial Revenue Bonds, which are backed by lease payments made by a corporate lessee and the guarantee of that lessee. If the corporate lessee were to default and then declare bankruptcy, the IRB holders would be left with worthless paper.

Which statement is TRUE when comparing Treasury Notes to Treasury Bills? A Treasury Bills have a longer initial maturity B Treasury Notes have lower default risk C Treasury Bills pay interest semi-annually D Treasury Notes pay interest semi-annually

The best answer is D. Treasury Notes have a maximum maturity of 10 years and pay interest semi-annually. T-Bills have a maximum maturity of 12 months; and are original issue discount obligations that mature at par. When the bills mature, the difference between the purchase price and the redemption value at par is the interest income that is earned. All Treasury securities are considered to have no risk of default.

Which U.S. Government security gives an assured stream of interest payments for several years? A Treasury Receipt B Treasury STRIP C Treasury Bill D Treasury Bond

The best answer is D. Treasury bonds are issued with 30 year maturities and are non-callable. Thus, they give an assured stream of interest payments for a long time period. Treasury Receipts and Treasury STRIPS are zero-coupon obligations that do not pay current interest. T-Bills have a maximum maturity of 52 weeks, and thus will not provide income over many years.

All of the following statements are true regarding the effect of the purchase of Treasury Stock EXCEPT: A the number ofoutstanding sharesis reduced B theearnings per shareis increased C the market price of the stock will increase D the number ofauthorized shareswill be reduced

The best answer is D. Treasury stock is deducted from outstanding shares and since outstanding shares are reduced, earnings per share increases. As earnings per share rises, this makes the stock more attractive to investors, who will bid up the stock's price in the market. The purchase of Treasury Stock has no effect on authorized shares. This is the legal amount of shares that the company is authorized to sell, established in the company's corporate charter.

What is a characteristic of a Unit Investment Trust? A High portfolio turnover B Disclosure of the identity of the investment adviser C Board of directors overseeing investments D Securities that are redeemable with the sponsor

The best answer is D. Unit Investment Trusts (UITs) create a fixed portfolio, transfer it into a trust, and then sell units of the trust (typically $1,000 amounts) that are sold to investors. For that $1,000 investment, the client gets a piece of a diversified portfolio. Once the trust is created, the portfolio does not change. There is no investment adviser and no management fees. There is no Board of Directors (as is the case with a mutual fund) - rather there is a Board of Trustees. The true statement is that the securities are redeemable. There is no trading. The sponsor will buy back trust units from clients that wish to sell. These "slightly used" units are then resold to other investors by the sponsor.

A customer who lives in the state of New York who buys GNMA Pass-Through Certificate: A must include the interest income received on his federal tax return, but not his state tax return B does not include the interest income on his federal tax return, but must include it on his state tax return C excludes the interest income from both his federal tax return and his state tax return D must include the interest income receive on both his federal tax return and his state tax return

The best answer is D. Unlike Treasury obligations and regular agency debt, where interest income is subject to federal income tax, but is exempt from state and local tax, interest income from mortgage backed securities is subject to both federal and state income tax. This is the law because the interest payments made on the underlying mortgages are deductible to the homeowner making the mortgage payments at both the federal and state level, therefore the recipient of these payments should be taxed at both the federal and state level.

A middle-aged widowed customer has an investment objective of stable income and wants minimal market and liquidity risk. What type of preferred stock would be the best recommendation? A Participating preferred B Convertible preferred C Straight preferred D Variable rate preferred

The best answer is D. Variable rate preferred has a dividend rate that is tied to a market rate of interest, and the dividend rate varies as that rate varies. When market interest rates rise, the dividend rate rises; when market interest rates fall, the dividend rate falls. Because the dividend rate varies, the price of the security stays right at par value and has minimal market risk. In contrast, any fixed income security, which includes the other types of preferred stock, is subject to market risk. When market interest rates rise, the value of any fixed rate security must fall, making its yield competitive with current market rates. Finally, all preferred stock has minimal liquidity risk. Preferred shares are listed and trade, so the shares can be sold readily at low cost.

Text:All of the following statements about warrants are true EXCEPT: A At issuance, warrants are "out of the money" B Warrant valuation is influenced by the life of the instrument C Warrant valuation is directly influenced by the valuation of the company's common stock D Warrant valuation rises as the security approaches its maturity

The best answer is D. Warrant prices will erode as the instrument nears maturity since the time value is constantly decaying. Warrant valuation is directly influenced by its life - the longer the warrant, the greater its value; the shorter the remaining life, the lower its value. At issuance, warrants have exercise prices well above the current market price of the common stock, and therefore are "out of the money." If the market value of the common rises, the warrant's value will rise as well. Finally, warrant valuation is influenced by market expectations for future corporate earnings, and hence the future price of the common stock.

A double barreled revenue bond is one which offers investors: A double the normal interest rate due to the high risk factor B both a high rate of interest and a high level of creditworthiness C the choice of both term and serial maturities D general obligation backing in addition to a revenue pledge

The best answer is D. A "double barreled" bond is one backed by a specified source of revenue as well as the full faith and credit of an issuer with ad valorem taxing power. Revenue bonds are "double barreled" to increase the credit rating of the issue and hence reduce interest cost and increase marketability.

When does an investor receive payment of interest and principal on a Capital Appreciation Bond (CAB)? A Interest is paid monthly and principal at maturity B Interest is paid quarterly and principal at maturity C Interest is paid semi-annually and principal at maturity D Interest and principal is paid at maturity

The best answer is D. A Capital Appreciation Bond (CAB) is a municipal zero coupon bond with a "legal" twist to it. A conventional zero coupon G.O. bond is counted against an issuer's debt limit at par value because the discount is treated as "principal." If a new issue discount bond is legally crafted as a CAB, then the principal counted against the issuer's debt limit is the discounted principal amount and the discount earned is considered to be interest income. The bond is purchased at the discounted price and then par is returned at maturity, with the 2 components of that par payment being the return of the discounted purchase price (the "principal" amount) and the accreted interest income.

A call premium on a bond is the amount: A the issuer pays the investor each year until maturity B by which the bond's redemption price maturity exceeds the purchase price C the bondholder will pay the issuer to call in bonds prior to maturity D above par issuer will pay the bondholder to call in bonds prior to maturity

The best answer is D. A call premium is the excess over par value that the issuer will pay the bondholder to call in the bonds prior to maturity.

A municipal "GAN" could be backed by all of the following EXCEPT: A Federal transit assistance monies B Federal pollution control assistance monies C Federal energy conservation assistance monies D Federal tax collection monies

The best answer is D. A municipal "GAN" is a Grant Anticipation Note. These are used by municipalities to "pull forward" federal grant monies that are received to support mass transit improvements in cities, pollution control facilities and energy conservation infrastructure.

A pass through certificate is best described as a: A corporation or trust through which investors pool their money in order to obtain diversification and professional management B security which is backed by the full faith, credit, and taxing power of the U.S. Government C security which is backed by real property and/or a lien on real estate D security which gives the holder an undivided interest in a pool of mortgages

The best answer is D. A pass through certificate is a security which gives the holder an undivided interest in a pool of mortgages. The mortgage payments are "passed through" to the certificate holders.

A variable annuity is a(n): A open end management company B closed end management company C fixed unit investment trust D participating unit investment trust

The best answer is D. A variable annuity is a participating unit investment trust. The trust is an "umbrella vehicle" used to collect payments from annuity contract holders. The trust invests the funds in one type of security only - shares of management companies. These are held in a "separate" investment account; and the performance of the securities in the separate account determines the amount of the annuity to be received.

American Depositary Receipts pay dividends in: A LIBOR Units B European Currency Units C Foreign Currency D U.S. Dollars

The best answer is D. American Depositary Receipts pay dividends in U.S. dollars only. The dividends are declared and paid in the foreign currency by the issuer. The bank that issues the ADR exchanges the dividend into U.S. dollars and pays this to the U.S. ADR holders.

All of the following statements are true regarding the trading of ADRs EXCEPT: A ADRs are traded on theNew York Stock Exchange B ADRs are traded on theNASDAQ Stock Market C ADRs are traded on theAmerican Stock Exchange D ADRs are traded on theChicago Board Options Exchange

The best answer is D. An American Depositary Receipt is a foreign security that is held in a foreign branch of a U.S. bank. The bank issues receipts against these shares, and the receipts are registered in the United States as securities and are listed and traded on U.S. stock exchanges, including the NYSE, AMEX (now renamed the NYSE American) and NASDAQ stock markets. Note that only options trade on the Chicago Board Options Exchange (CBOE) - neither stocks nor ADRs trade in this market.

Which of the following has the first priority of claim in a corporate liquidation? A Unpaid Wages B Debenture Bondholders C Subordinated Bondholders D Secured Bondholders

The best answer is D. In a corporate liquidation, secured bondholders are paid first; then unpaid wages and taxes; then debenture holders; then subordinated bondholders; then preferred stockholders; and finally, common stockholders.

In a corporate liquidation, common stockholders are paid: A first B after creditors but beforepreferred stockholders C afterbondholdersbut before preferred stockholders D last

The best answer is D. In a liquidation, common shareholders are paid last, after creditors, bondholders, and preferred stockholders.

Which statement is TRUE about a Certificate of Participation (COP)? A COPs are subject to statutory debt limits and have a higher credit rating than G.O. bonds of the same issuer B COPs are subject to statutory debt limits and have a lower credit rating than G.O. bonds of the same issuer C COPs are not subject to statutory debt limits and have a higher credit rating than G.O. bonds of the same issuer D COPs are not subject to statutory debt limits and have a lower credit rating than G.O. bonds of the same issuer

The best answer is D. As municipalities reached their debt limits with G.O. bond issuance, they found it harder and harder to get voter approval to raise limits to sell additional G.O. bonds (think of Proposition 13 in California that capped property taxes to almost no increase unless the property was sold). To get around this, the COP - Certificate of Participation - was invented and COP issuance is now greater than G.O. bond issuance in many states.A COP is issued by a state entity where lease revenues are pledged to back the issue. The lease payments are received from a project such as a university dormitory, prison, municipal office building, municipal transit system, etc. The "difference" is that the lease payment is made based on the governing body making an annual appropriation from tax collections, and it is not "legally" obligated to do so, hence it is not really a bond. Rather, it is a security that gives the holder a share of "revenue" if the appropriation is made (which it will be, otherwise that issuer's credit rating would be trashed). COP issuance has increased greatly over the years because they are easier to issue than G.O. debt (no pesky debt limits or voter approval to deal with) - but they are sold at a slightly higher yield, because they have more credit risk.

Which of the following securities cannot be margined? A Treasury bills B Commercial paper C Bankers' acceptances D Structured products

The best answer is D. Because money market instruments are "safe," they can be margined - meaning that the brokerage firm can lend money against these securities held as collateral for the loan. Government securities, agency securities, investment grade money market instruments, investment grade corporate bonds and listed stocks are the marginable securities. As a general rule, structured products cannot be margined because they are not readily transferable.

The proceeds of a "Build America Bond" may be used for all of the following EXCEPT: A public buildings B transportation infrastructure C water and sewer projects D prerefunding outstanding issues

The best answer is D. Build America Bonds (BABs) were issued by municipalities in 2009 and 2010. They are taxable municipal bonds that get a 35% Federal interest rate subsidy and the bond proceeds must be used for capital improvements (this is part of the economic stimulus program after the 2008-2009 "great recession"). These bonds were meant to create jobs and make to it easier for municipalities to access the debt market for needed capital projects. The proceeds of BABs cannot be used to prerefund existing issues (that does not create jobs).

Which statement is FALSE about commercial paper? A Commercial paper has a maximum maturity of 270 days B Commercial paper matures on a pre-set date at a pre-set price C Commercial paper is quoted on a yield basis D Commercial paper is a secured promissory note

The best answer is D. Commercial paper has a maximum maturity of 270 days. Commercial paper is quoted on a yield basis; matures at a pre-set date and price; and is an unsecured promissory note of the issuer. Review

Commercial paper with a maturity of 270 days or less: A must be registered under the Securities Act of 1933 B must be registered under the Securities Act of 1934 C must have a trust indenture D is an exempt security

The best answer is D. Commercial paper is an exempt security under the Securities Act of 1933. It does not have to be registered and sold with a prospectus if its maturity is 270 days or less. This makes it much less expensive for an issuer to market the securities, since the regulatory burden is much lower.

A customer buys 100 shares of XYZ stock at $40. The stock pays a quarterly dividend of $.50. What is the dividend yield? A 1% B 1.25% C 4% D 5%

The best answer is D. Common dividends are paid quarterly. The annual dividend rate is $2.00 ($.50 per calendar quarter x 4). The dividend yield is $2/$40 = 5%.

Which term applies to common stock? A. Convertible B. Redeemable C. non-negotiable D. non-callable

The best answer is D. Common stock is a negotiable (transferable) security that cannot be called by the issuer. It is not redeemable with the issuer nor is it convertible. Only preferred stock and bonds can be convertible.

Corporate debentures are backed by: A real estate B equipment C portfolio of marketable securities D full faith and credit

The best answer is D. Debentures are backed solely by the full faith and credit of the issuer. Debentures are usually issued by "Blue Chip" organizations with high credit ratings or lower credit rated companies in the form of high yield or "junk" bonds.

Which statement is TRUE regarding Eurodollar deposits? A Eurodollar trading is centered in New York City B Eurodollar deposits are foreign currency held in banks in foreign countries C The interest rate paid on Eurodollar deposits is based on the Federal Funds Rate D The interest rate paid on Eurodollar deposits is based on the London Interbank Offered Rate

The best answer is D. Eurodollar deposits are U.S. currency held in banks in foreign countries, mainly in Europe. The Eurodollar market is centered in London - and the interest rate paid on these deposits is the London Interbank Offered Rate - "LIBOR."

A municipality has issued a general obligation bond. Which source of income is NOT available to pay debt service? A Collected current ad valorem taxes B Collected back due ad valorem taxes C Parking meter collections D State income taxes

The best answer is D. General obligation bonds are backed by the full faith, credit, and taxing power of the issuer. Ad valorem taxes, fines collected for paying taxes late, assessments of additional taxes, as well as fees collected that are not a specified income source for revenue bonds, are all sources of income backing G.O. issues. Municipalities have no claim on state tax revenues.

U.S. Government Agency securities are: A Quoted in 1/8ths and traded with accrued interest computed on an actual day month / actual day year basis B Quoted in 1/8ths and traded with accrued interest computed on a 30 day month / 360 day year basis C Quoted in 1/32nds and traded with accrued interest computed on an actual day month / actual day year basis D Quoted in 1/32nds and traded with accrued interest computed on a 30 day month / 360 day year basis

The best answer is D. Government agency securities are quoted in 32nds, similar to U.S. Government securities. Unlike U.S. Governments, on which accrued interest is computed on an actual day month / actual day year basis, Agency securities' accrued interest is computed on a 30 day month / 360 day year basis.

A repurchase agreement is effected between two U.S. Government securities dealers. The interest charged under the agreement is the: A coupon rate of the underlying U.S. Government securities, paid directly from the issuer to the securities' original buyer B coupon rate of the underlying U.S. Government securities, paid directly from the issuer to the securities' original seller C "repo" rate, paid by the buyer of the securities to the seller D "repo" rate, paid by the seller of the securities to the buyer

The best answer is D. In a repurchase agreement between 2 government dealers, a government securities dealer "sells" securities to another dealer, with an agreement to buy them back at a later date. The selling dealer obtains cash, and for this, agrees to pay interest to the buying dealer. The interest rate charged is known as the "repo" rate - the repurchase agreement interest rate. The rate fluctuates with, and parallels, the Federal Funds rate. Review

Municipal bonds would NOT be an appropriate investment for which of the following? A Individuals B Institutions C Bank Holding Companies D Individual Retirement Accounts

The best answer is D. It makes no sense to place "federally tax exempt" municipal bonds into a "tax deferred vehicle" such as an IRA or Keogh account. Since the account is tax deferred, one would place securities earning the highest "before tax" return, such as corporates or governments into the account.

Which statement is TRUE regarding market risk for bondholders? A To avoid market risk, investors should only buy high quality issues B As interest rates rise, the price of short term bonds falls faster than that of long term bonds C To avoid market risk, a customer would invest in bonds with long term maturities D To avoid market risk, a customer would invest in bonds with short term maturities

The best answer is D. Market risk for a bondholder is the risk of rising interest rates forcing the price of a bond to drop. Market risk should not be confused with credit (default) risk. As interest rates rise, the price of a long term bond falls faster than that of a short term bond. To avoid market risk, a bondholder would want to invest in the shortest maturity possible.

Which of the following will increase the marketability risk of a bond? A Active trading in that security B The presence of numerous bids C Round lot size transaction amount D Large block size transaction amount

The best answer is D. Marketability risk is the risk that a security will be difficult to sell. The easiest securities to trade are "round lots" of actively traded issues. For example, a round lot of stock is 100 shares; a round lot of bonds is 5 bonds. Large blocks are more difficult to market; and it is more difficult to sell thinly traded securities than actively traded securities.

The minimum denomination for a mortgage backed pass through certificate is: A $100 B $1,000 C $5,000 D $25,000

The best answer is D. Mortgage backed pass through certificates are sold in minimum denominations of $25,000 (instead of the typical $1,000 for other bonds and $100 for Treasury issues). They have a much higher minimum to discourage small investors (who tend to be less sophisticated) from buying them - because they have difficult to quantify risks of shortening or lengthening maturities, due to interest rates falling or rising, respectively.

A company that issued first mortgage bonds is in default. If mortgage bondholders' claims are not satisfied from the sale of the property backing the bonds, then the bondholders: A have no recourse B can claim other property to satisfy the outstanding loans C can attempt to sell other assets to satisfy the outstanding loans D become general creditors for the balance due

The best answer is D. Mortgage bondholders do not have claim to all property of the failed company (such as cash in bank accounts; accounts receivable; inventory; etc.); they only have claim to the real property pledged. If the bondholders' claims are not satisfied from the sale of the real property, then they become general creditors for the balance due.

Which terms apply to mutual fund shares? A Negotiable with a one-time stock issuance B Negotiable with continuous stock issuance C Redeemable with a one-time stock issuance D Redeemable with continuous stock issuance

The best answer is D. Mutual fund shares do not trade - they are not negotiable. The shares are issued by the fund when a purchase is made and are redeemed by the fund when the shares are sold. The fund continuously issues and redeems its shares.

ABC Company has outstanding 6% cumulative preferred stock. Two years ago, ABC paid a 6% preferred dividend. Last year, ABC paid a 4% preferred stock dividend. This year, ABC wishes to pay a common dividend. The preferred shareholders must receive: A 0% B 2% C 6% D 8%

The best answer is D. On cumulative preferred stock, all back unpaid dividends PLUS this year's preferred dividend must be paid before a common dividend is paid. Thus, 2 years ago the full 6% preferred dividend was paid, so there is no arrearage; last year only 4% was paid, so 2% was missed. Before a common dividend can be paid this year, the missing 2% plus this year's 6% preferred dividend, or a total of 8% must be paid.

Which statement is TRUE about preferred stock? A When interest rates rise, preferred stock prices rise B Interest rates and preferred prices move in the same direction C Preferred stock dividends are typically adjusted for interest rate swings D When interest rates fall, preferred stock prices rise

The best answer is D. Preferred stock is a fixed income security that typically has a fixed dividend. When market interest rates move, the only way for the yield on the security to adjust to the market is to have the price change. When interest rates rise, preferred stock prices fall, increasing the yield on the security; and when interest rates fall, preferred stock prices rise, decreasing the yield on the security. This inverse relationship between rates and price also applies to fixed income securities.

Reinvestment risk is the risk that: A interest rates will rise subsequent to bond issuance and interest payments will be reinvested at higher rates B interest rates will rise subsequent to bond issuance and interest payments will be reinvested at lower rates C interest rates will drop subsequent to bond issuance and interest payments will be reinvested at higher rates D interest rates will drop subsequent to bond issuance and interest payments will be reinvested at lower rates

The best answer is D. Reinvestment risk is the risk that interest rates will drop and that the interest payments received over the life of the bond will be reinvested at lower rates.

XYZ Company has issued 10%, $100 par cumulative preferred stock. Two years ago, XYZ omitted its preferred dividend. Last year, it paid a preferred dividend of $5 per share. This year, XYZ wishes to pay a common dividend. In order to make the distribution to common shareholders, each preferred share must be paid a dividend of: A $5 B $15 C $20 D $25

The best answer is D. Since the preferred stock is cumulative, to make a dividend distribution to common shareholders, the company needs to pay all back, unpaid dividends plus this year's dividend (before a common dividend can be paid). The stated dividend rate on the preferred is 10% based on $100 par. Two years ago the entire dividend was omitted, so $10 per share must be paid. Last year, the corporation only paid $5, so there is another $5 that must be paid. Also, this year's dividend of $10 must be paid. The total dividend that must be paid is $25 per preferred share before a common dividend can be paid.

ABC Company has issued 8%, $100 par, cumulative preferred stock. Two years ago, ABC paid a 4% preferred dividend. Last year, ABC paid a 5% preferred stock dividend. This year, ABC wishes to pay a common dividend. If the preferred stock is now trading at $94, a customer who owns 100 shares of the company's preferred stock will receive: A $700 B $800 C $1,000 D $1,500

The best answer is D. Since this is cumulative preferred stock, all missed dividends must be paid before a common dividend can be paid. Two years ago, 4% was missed; last year 3% was missed; and this year's preferred dividend of 8% must be paid before the common dividend is paid. The total preferred dividend to be paid is 15%.

A municipal bond which funds an improvement that benefits only a small portion of the community is a: A general obligation bond B double barreled bond C moral obligation bond D special assessment bond

The best answer is D. Special assessment bonds are used to fund an improvement which benefits only a small portion of the community. For example: new street lights are installed in a specific area where only that area is assessed higher taxes to pay for the improvement.

Special tax bonds are: A self supporting debt backed by ad valorem taxes B self supporting debt backed by sales or excise taxes C non-self supporting debt backed by ad valorem taxes D non-self supporting debt backed by sales or excise taxes

The best answer is D. Special tax bonds are backed by taxes other than an ad valorem tax, such as liquor taxes, gasoline taxes, cigarette taxes or sales taxes. These bonds are considered to be a non-self supporting debt since they are paid from tax collections. Self supporting debts are revenue bond issues that pay their own way from collected revenues.

In order to render an opinion on a new municipal bond issue, the bond counsel will examine all of the following EXCEPT: A Judicial edicts and municipal statutes B State constitution and amendments C Tax code and interpretive regulations D SEC regulations

The best answer is D. The bond counsel renders an opinion as to the legality, validity, and tax exempt status of a new municipal issue. To do this, he or she examines municipal statutes, state laws, judicial edicts, and tax regulations. Municipal securities are exempt and not subject to SEC oversight.

Ford Motor Company has issued 8% convertible debentures, convertible at a 10:1 ratio. Currently the debenture is trading at 94. The stock is trading at $80. What is the conversion price of the stock? A $10 B $80 C $94 D $100

The best answer is D. The bond is convertible into common at a 10:1 ratio, based on the par value of the bond. The conversion price formula is: (Par Value of Bond / Conversion Ratio) = Conversion Price $1,000 / 10 = $100

All of the following would be found in a municipal bond resolution EXCEPT: A the issuer's duties to the bondholders B the nature of the obligation C any restrictive covenants to which the issuer must adhere D any costs to be paid by the issuer in connection with issuing the bonds

The best answer is D. The bond resolution (or bond contract) is the contract between the issuer and the bondholder. It spells out the nature of the obligation; the issuer's duties to the bondholders; and any restrictive covenants to which the issuer must adhere. Any costs that the issuer incurs to sell the bonds has no bearing on the bond contract, since the bondholder is not involved in these expenses - they are solely the responsibility of the issuer.

All of the following are evaluated in the feasibility study prepared prior to the issuance of revenue bonds EXCEPT: A expected demand for the facility B effect of competing facilities C expected operating costs of the facility D bond trust indenture

The best answer is D. The feasibility study performed prior to the issuance of revenue bonds is an economic study that projects revenues and costs for the facility to determine if there will be sufficient net revenues to service the debt. The effect of any competing facilities is included in the study. Legal aspects, such as the trust indenture, are not included in the feasibility study. These are evaluated by the bond counsel. The rest would be evaluated in the feasibility study.

Which statement is TRUE regarding ADRs? A Dividends are declared by the issuer of the underlying stock in U.S. dollars while investors receive dividend payments in U.S. dollars B Dividends are declared by the issuer of the underlying stock in the foreign currency while investors receive dividend payments in the foreign currency C Dividends are declared by the issuer of the underlying stock in U.S. dollars while investors receive dividend payments in the foreign currency D Dividends are declared by the issuer of the underlying stock in the foreign currency while investors receive dividend payments in U.S. dollars

The best answer is D. The foreign corporation whose shares are "packaged" into an ADR declares any dividend in its home currency. The bank that assembled the ADR converts the dividend to U.S. dollars and remits it to the ADR holders.

A customer owns 256 shares of ABC common stock. ABC declares a rights offering, with the terms being that for every 15 rights tendered, a shareholder may purchase one additional share at $24 per share. Any fractional rights holding may be rounded up to buy an additional share. If this shareholder wishes to subscribe, which statement is TRUE? A The shareholder can buy a maximum of 15 shares by paying $360 B The shareholder can buy a maximum of 16 shares by paying $384 C The shareholder can buy a maximum of 17 shares by paying $408 D The shareholder can buy a maximum of 18 shares by paying $432

The best answer is D. The terms of the rights offering are that fractional holdings are rounded up to buy 1 additional share. This person owns 256 shares and thus, will receive 256 rights. 256 rights / 15 rights per share = 17.06 shares, which is rounded up to 18 shares @ $24 each = $432 necessary to subscribe.

Which rating is considered to be the lowest "investment grade"? A AA B A C BB D BBB

The best answer is D. The top 4 ratings are "investment grade" - AAA, AA, A, and BBB. Any rating below BBB is considered speculative.

A customer owns a long-term negotiable CD. If the customer wishes to tender the CD prior to maturity, the registered representative should inform the customer that: A a prepayment penalty will be charged B he or she will receive par value of the principal plus accrued interest C the CD may not be redeemed prior to maturity D the customer will receive the market value plus accrued interest

The best answer is D. There is no penalty for early withdrawal of funds on brokered CDs - however the amount of interest earned will be pro-rated over the shorter life of the deposit. If the customer redeems prior to maturity, the customer will receive the market value of the CD at that point in time. If market interest rates have risen, the CD value will be lower than par.

All of the following are types of preferred stock EXCEPT? A Performance B Participating C Cumulative D Refundable

The best answer is D. There is no such thing a refundable preferred stock. Participating preferred (also known as performance preferred) allows the holder to receive additional dividend distributions from the issuer if the issuer is having a good year. Cumulative preferred "accumulates" any unpaid dividends. Before a common dividend may be paid, all accumulated dividends must be paid to cumulative preferred shareholders.

Which statement about Treasury STRIPS is TRUE? A Treasury STRIPS are suitable investments for individuals seeking current income B Treasury STRIPS are not suitable investments for retirement accounts C The holder is subject to default risk D The holder is not subject to reinvestment risk

The best answer is D. Treasury STRIPS are government bonds that are "stripped" of coupons. Theses issues are very safe but do not provide current income. STRIPS are often placed into retirement accounts by conservative investors This is a zero coupon obligation with a "locked in" rate of return over the life of the bond (thus, it is not subject to reinvestment risk).

The purchase price of each of the following can be negotiated EXCEPT: A Treasury Bill B Certificate of Deposit C Banker's Acceptance D U.S. Savings Bonds

The best answer is D. U.S. Savings Bonds are not negotiable. All of the other securities listed trade and thus, are all "negotiable."

Variable rate municipal notes are NOT subject to which of the following risks? A legislative risk B default risk C marketability risk D interest rate risk

The best answer is D. Variable rate municipal notes avoid market risk, also known as "interest rate risk." A rise in interest rates will not devalue these securities, since they can be put to the issuer at par at each weekly reset date. Thus, the price will not fall below par if interest rates rise. These notes are subject to legislative risk; marketability risk (Can they be liquidated quickly?); and default risk.

All of the following securities represent ownership of a corporation EXCEPT: A common stock B preferred stock C convertible preferred stock D warrants

The best answer is D. Warrants do not represent ownership of a corporation; only if they are exercised do they represent ownership, since exercise results in the purchase of the common stock of the issuer. Common stock and preferred stock are both securities that represent ownership.

Which security of the same issuer is likely to give the highest current yield? A warrant B common stock C convertible preferred stock D non-convertible preferred stock

The best answer is D. Warrants give no yield. Common stocks give the lowest yields since there is direct growth potential in the price of the stock as reported earnings increase. Convertible preferred yields are higher than common yields but not as high as non-convertible yields. A non-convertible preferred stockholder gets a fixed rate of return without any growth potential. A convertible preferred stockholder can convert to common if the common's price rises, so growth potential is included. Because of this, yields for convertible preferred are lower than for non-convertible preferred.

What is the benefit of a zero coupon bond? A Dividend income B Semi-annual payments C Amortization D Capital appreciation

The best answer is D. Zero coupon bonds do not make period payments. The bond is purchased at a deep discount price and builds internally until maturity, at which point the bond is redeemed at par. They are often called capital appreciation bonds because of this and they are used to accumulate capital that will be used at maturity. For example, parents of young children might buy zero coupon bonds at a deep discount and use them at maturity to pay for the kid's college expenses.

Zero coupon bonds: A do not pay interest B pay interest semi-annually C pay interest annually D pay interest at maturity

The best answer is D. Zero coupon bonds do not make semi-annual interest payments. The bonds are bought at a deep discount and mature at par. The difference is the interest earned, so all of the interest is paid at maturity.