SIE Unit 2 Qbank

Your customer calls you with a question. They tell you that they received a phone call from the bond desk telling them that they bought 20 bonds at 100. They want to know how much they paid for the bonds before any commission or other charges. You tell them A) $1,000. B) $20,000. C) $2,000. D) $200,000.

$20,000 100 means they paid 100% of par ($1,000) per bond. They purchased 20 bonds, so the total amounts to $20,000. Note that the question asked how much they paid for the bonds, not the price per bond.

A bond with a 3% stated yield and a $1,000 par value would pay how much in annual interest?

$30 The amount of interest payable annually as the stated, nominal, or coupon yield is calculated as follows: rate 3% × par value ($1,000) = $30.

When an issuer has equipment trust certificates outstanding, 1) title to the assets backing the certificates are held in trust. 2) the equipment is held in trust. 3) the assets can be repossessed and sold by the trustee. 4) the certificates are unsecured because they represent 5) the debt owed on the assets.

1 & 3 When equipment trust certificates have been issued, the titles to the assets (not the actual equipment) backing the certificates are held in trust. If the issuer fails to make the payments on the equipment, it can be repossessed and sold to pay off the debt held by the certificate holders. In other words, it is the equipment acting as the collateral that secures these loans.

A bond with a 4.5% stated yield might make 1) annual interest payments of $45. 2) annual interest payments of $450. 3) semiannual interest payments of $2.50. 4) semiannual interest payments of $22.50.

1 & 4 A bond with a 4.5% stated, nominal, or coupon yield pays $45 annual interest (4.5% × $1,000 par value). If the $45 annual interest is paid in semiannual payments, each would be $22.50.

Your customer is in the 30% federal tax bracket. They consider purchasing a 7% corporate bond. Their after-tax yield would be A) 2.1%. B) 10%. C) 7%. D) 4.9%.

4.9%. The formula for the calculation is 7% (corporate rate) × (100% — 30% (tax bracket)). 7 × (1 - 0.3) = = 7 × 0.7 = 4.9%

6% XYZ debentures are trading for $1,200 while similarly rated bonds are being offered at 4.5%. What is the current yield on the 6% XYZ debentures? A) 1.5% B) 5% C) 6% D) 7.5%

5% Current yield is defined as the annual income (or coupon rate) from a bond divided by the bond's current market price ($60 ÷ $1,200 = 0.05 or 5%). Accordingly, the current yield (5%) is lower than the coupon rate (6%) because the bond is trading at a premium.

An investor purchases a bond at $900 with a 5% coupon and a 5-year maturity. The bond has a current yield of A) 7.8%. B) 4.5%. C) 5.6%. D) 7.4%.

5.6% Current yield is determined by dividing annual interest (coupon) payment by the current market price of the bond ($50 ÷ $900 = 5.6%). Years to maturity is not a factor in calculating current yield.

The current yield on a bond with a coupon (nominal) rate of 7.5% currently selling at 105½ is approximately A) 8.2%. B) 6.5%. C) 7.5%. D) 7.1%.

7.1%. A bond with a coupon rate of 7.5% pays $75 of interest annually. Current yield equals annual interest amount divided by bond market price, or $75 ÷ $1,055 = 7.109%, or approximately 7.1%.

Which of the following expressions describes the current yield of a bond? A) Yield to maturity divided by current market price B) Annual interest (coupon) payment divided by par value C) Annual interest (coupon) payment divided by current market price D) Yield to maturity divided by par value

Annual interest (coupon) payment divided by current market price The current yield on a bond is calculated by dividing the annual interest (coupon) payment by the current market price of the bond: Annual coupon payment ÷ market price = current yield.

A bond's rating is used primarily as a measure of its A) volatility risk. B) interest rate risk. C) default risk. D) purchasing power risk.

C) default risk.

The Alta Loma High School District is asking voters to approve a bond to fund the purchase of new computers and software. The bond will mature in 40 years and the interest and principal payments will be funded from real estate taxes. This is an example of a A) a debenture. B) GO bond. C) an equipment trust bond. D) revenue bond.

GO bond If a municipal bond requires a vote it is most likely a GO bond. Generally revenue bonds do not require a vote (note that there is no revenue generating source here). Debentures and equipment trust certificates are issued by corporations, not municipalities

Which of these reasons would allow for a municipality to issue revenue bonds easier instead of general obligation bonds? 1) Revenue bonds do not require voter approval. 2) Revenue bonds generally have a higher rating than GO bonds from the same issuer. 3) Revenue bonds are not constrained by a statutory debt limit. 4) Revenue bonds are supported by ad valorem taxes.

I and III Because revenue bonds are designed to be self-supporting from the revenue derived from the project funded by the bonds, voter approval is not required. On the other hand, because GO bonds are backed by taxes, such as ad valorem taxes, voter approval is generally required and there is a debt ceiling or limit imposed on the issuer.

Five years ago your client purchased at par $100,000 of New Brunswick City GO bonds maturing in 20 years from now and callable in six months. Interest rates have gone down over the last five years. Which of these should your client do? 1) Your client should recognize that the bonds have a high probability to be called. 2) Your client should recognize that the bonds are unlikely to be called. 3) Your client should expect the bond is trading at a large discount. 4) Your client should expect the bonds are trading at a small premium.

I and IV If rates have declined the bonds are likely trading at a premium and very likely to be called at the first call date in six months. The proximity of the call date means the bonds premium will be small.

Of the debt and equity holders listed here, in what order would claimants receive payment in the event that a corporate bankruptcy liquidation needed to occur? 1) Holders of secured debt 2) Holders of subordinated debentures 3) General creditors 4) Preferred stockholders

I, III, II, IV In the event of a corporate bankruptcy liquidation, the order of payment is as follows: secured debtholders, unsecured debtholders (including general creditors), holders of subordinated bonds, preferred stockholders, and common stockholders.

For revenue bonds issued by a state or municipality, which of the following is true? A) Interest will be paid only if the enterprise owned and operated by the state or municipality has sufficient earnings to cover the interest payments or the debt service reserve. B) The bonds carry an unqualified promise to pay interest and principal backed by the power of the issuer to levy taxes. C) Interest and principal payment is backed by the full faith and credit of the issuer. D) Interest and principal payment is guaranteed.

Interest will be paid only if the enterprise owned and operated by the state or municipality has sufficient earnings to cover the interest payments or the debt service reserve. Revenue bonds are not backed by the full faith and credit of the municipality that issues them. Instead, they are backed by the revenue produced by the project or facility that they support. In that light, the revenue must be large enough to cover the interest and principal payments if those obligations are to be met.

Regarding filing for corporate bankruptcy, which of the following is true? A) Reorganization means that property will be taken and sold to repay all debts. B) Liquidation means that property will be taken and sold to repay all debts. C) Reorganization can only occur after liquidation in a corporate bankruptcy filing. D) Reorganization does not allow for continued operations to occur.

Liquidation means that property will be taken and sold to repay all debts. The primary difference between a reorganization and a liquidation is that in a reorganization, the corporation can keep property and continue doing business. Liquidation means that all property will be taken and sold to repay all debts.

A bank issues and guarantees certificates of deposit, and those that are negotiable are considered money market instruments. What makes a CD negotiable? A) Backing by the banks good faith and credit B) A fixed interest rate C) Secondary market trading D) Short-term maturity

Secondary market trading While all of these are characteristics of negotiable certificates of deposit issued by banks, it is the ability to trade the CDs in the secondary market that makes them negotiable.

Regular way settlement for Treasury bonds is A) T+2. B) same day. C) T+3. D) T+1.

T+1 All U.S. government issues settle next business day (T+1).

A municipality wants to issue general obligation (GO) bonds that will put it over its statutory debt limit. Which of the following is true? A) This is prohibited by the federal government. B) They may do so with voter approval. C) They may do so with the approval of their state senators. D) This is statutorily forbidden.

They may do so with voter approval. The amount of GO debt that a municipal government may incur can be limited by state or local statutes to protect taxpayers from excessive taxes. In order to issue bonds that would exceed this borrowing limit voter approval would be needed—that is, the approval of those who would be paying the taxes.

Which of the following is a debt instrument that pays no periodic interest? A) Treasury STRIPs B) Corporate bonds C) Treasury bonds D) Treasury notes

Treasury STRIPs STRIPS are Treasury bonds with the coupons removed. With no coupons, STRIPS do not make regular interest payments. Instead, they are sold at a deep discount and mature at par value.

Which of these statements regarding Treasury bills is correct? A) Treasury bills are the only type of Treasury security issued without a stated interest rate. B) They are usually issued at a slight premium to par value. C) They are issued with initial maturities of 3, 12, 24, and 50 weeks. D) They have the highest interest rate risk of all Treasury securities.

Treasury bills are the only type of Treasury security issued without a stated interest rate Treasury bills are always issued at a discount, without a stated interest rate. Receiving par value back at maturity represents the interest income to the investor. Because of their short-term maturities, they have the lowest interest rate risk for Treasury securities, not the highest. T-Bills are issued in initial maturities of 4, 13, 26, and 52 weeks.

A brokerage firm places U.S. Treasury notes and bonds in a trust at a bank and then issues securities collateralized by either the principal or interest payments those notes and bonds represent. These new securities the broker-dealer is offering are A) Treasury receipts. B) Treasury STRIPS. C) Treasury bills. D) collateralized obligations.

Treasury receipts. Brokerage firms can create a type of bond known as a Treasury receipt from U.S. Treasury notes and bonds placed in trust at a bank. They then sell separate receipts against the principal and coupon payments the notes and bonds represent.

T-bills are issued (auctioned) by the U.S. Treasury Department how often? A) Weekly B) Bimonthly C) Only when the U.S. Treasury Department deems it necessary D) Monthly

Weekly

A customer buys a callable 5% coupon bond at par that will mature in 10 years. Which of the following statements is true? A) Yield to call (YTC) is higher than yield to maturity (YTM). B) Yield to call (YTC) is lower than yield to maturity (YTM). C) Nominal yield is higher than either yield to maturity (YTM) or yield to call (YTC). D) Yield to call (YTC) is the same as yield to maturity (YTM).

Yield to call (YTC) is the same as yield to maturity (YTM). This bond was purchased at par. If a bond is trading at par, the nominal yield (coupon rate) = current yield (CY) = YTC = YTM. YTC is higher than YTM if the bond is trading at a discount to par. YTC is lower than YTM if the bond is trading at a premium over par. Nominal yield is higher than either YTM or YTC if the bond is trading at a premium over par.

An investor holds a debt security backed by ad valorem taxes. This security is issued by A) the federal government. B) a city or local municipality. C) a state. D) either a state or city government.

a city or local municipality. Ad valorem taxes are real estate taxes. Real estate taxes can only back debt securities issued by towns, cities, or counties (never states). These are collectively known as local municipalities.

A company has issued bonds (debt securities) to investors. For these investors, these securities represent

a loan to the issuing company. Purchasers of bonds have essentially given the issuer a loan for which they will receive repayment plus interest.

A bond that is structured so that a portion of the principal is scheduled to mature at intervals over several years is A) a series bond. B) a term bond. C) a serial bond. D) a balloon bond.

a serial bond.

Accrued interest on U.S. government bonds is calculated using A) actual days in each month and 360 days in each year. B) actual days in each month and actual days in the year. C) 30 days in each month and 365 days in each year. D) 30 days in each month and 360 days in each year.

actual days in each month and actual days in the year. Corporate and municipal bonds use the artificial 30-day, 360-day calendar, but government bonds use actual days.

A CMO consists of A) various government backed mortgages. B) different sorts of nonmortgage debt. C) bonds and money market instruments. D) an FNMA, FHLMC, and other mortgage backed securities.

an FNMA, FHLMC, and other mortgage backed securities. A Collateralized Mortgage Obligation is made up of different mortgage backed securities (including FNAM and FHLMC), not the mortgages directly.

A zero-coupon bond interest pays A) and is taxed at maturity. B) annually and is taxed at maturity. C) and is taxed annually. D) at maturity and is taxed annually.

at maturity and is taxed annually A zero-coupon bond interest is purchased at a deep discount and pays no interest until it matures; however, the interest is taxed on an annual basis, called phantom income.

T-notes are delivered in

book entry All U.S. government issues are delivered in book entry.

All of the following may be callable except A) preferred stock. B) common stock. C) corporate bonds. D) muni bonds.

common stock. Fixed income and debt securities may have a call feature. Common stock does not.

All of the following are corporate secured bonds except A) debentures. B) collateral trust certificates. C) equipment trust certificates. D) mortgage bonds.

debentures. Debentures are unsecured. Mortgage bonds are backed by property. Equipment trust certificates are backed by equipment. Collateral trust certificates are backed by securities.

A company's board of directors (BOD) approves a dividend payment. When this occurs it is recognized as the A) ex-dividend date. B) dividend disbursement date. C) declaration date. D) record date.

declaration date.

Negotiable jumbo CDs are characterized by all of the following except A) they are issued in amounts of $100,000-$1 million. B) they trade in the secondary market. C) each issue generally matures in 5-10 years. D) they are unsecured debt of the issuing bank.

each issue generally matures in 5-10 years. Negotiable jumbo CDs are issued in denominations of $100,000-$1 million and trade in the secondary market. Most jumbo CDs are issued with maturities of one year or less. These CDs are unsecured promissory notes backed only by the credit standing of the issuing institution.

Two benefits of owning preferred stock over common stock are A) priority over subordinate bonds at liquidation and of dividends. B) rising interest rates are a positive for market value and dividends are guaranteed. C) priority for payment of dividends ahead of wages and taxes and liquidation priority over wages. D) priority at liquidation and payment of dividends.

priority at liquidation and payment of dividends. Liquidation and payment of dividends are two areas in which preferred stock has a benefit over common stock. Dividends are not guaranteed and rising interest rates are a negative. Preferred gets paid after debt, wages, and taxes.

Your customer is a resident of the state of Utah. She owns bonds issued by Puerto Rico. The interest from these bonds is A) taxable at all levels because the bonds are not issued by a state. B) tax free at all levels for U.S. citizens. C) taxable at the state and local level because she is not a resident of Puerto Rico, but still tax free at the Federal level. D) taxable at the state level only.

tax free at all levels for U.S. citizens Bonds issued by or from a territory of the United States have tax-free income at all levels to U.S. citizens.

Your customer, Shea, has a large portfolio of bonds and dividend paying stocks. Her primary interest is generating current income. She is trying to understand how taxes work for her T-bonds. You explain that A) the interest from her T-bonds is exempt at the state level, but she will still owe taxes at the local and federal level. B) the interest from her T-bonds is exempt at all levels. C) the interest from her T-bonds is exempt at the federal level, but she will still owe taxes at the state and local level. D) the interest from her T-bonds is exempt at the state and local level, but she will still owe taxes at the federal level.

the interest from her T-bonds is exempt at the state and local level, but she will still owe taxes at the federal level.