Unit 13 Quizzes
To protect against possible inflation, your clients purchase some TIPS with a 2.5% coupon. If, over the next 6 years, the annual inflation rate is 6%, the principal value of each TIPS will be closest to
$1,426
One of the reasons why the discounted cash flow method of valuation is useful in assessing the value of fixed income instruments is
the predictability of income
All of the following are true of negotiable, jumbo certificates of deposit EXCEPT
they are readily marketable
All of the following are true about GNMAs EXCEPT
they provide funds for residential mortgages
All of the following factors have an inverse relationship to a bond's duration except
time to maturity.
A client has a TIPS with a coupon rate of 3.5%. The inflation rate has been 4% for the last year. What is the inflation-adjusted return?
3.50%
A bond purchased at $900 with a 5% coupon and a 5-year maturity has a current yield of
5.00%
A bond fund owns $100 million each of a number of different corporate bonds. The duration of those individual bonds is 3, 4, 5, 6, 8, and 10 years. From this information, you would estimate the average duration of the bond fund to be
6 years
A client's bond portfolio consists of 5 Treasury issues in equal amounts. Their durations are: 4, 5, 7, 9, and 15 years. What is the average duration of the portfolio?
8 years
Richard purchased a 30-year bond for 103½ with a stated coupon rate of 8.5%. What is the approximate yield to maturity for this investment if Richard receives semiannual coupon payments and expects to hold the bond to maturity?
8.19%
Which of the following statements represents an advantage of a municipal general obligation bond over a revenue bond?
A GO bond generally involves less risk to the investor.
Which of the following expressions describes the current yield of a bond?
Annual interest payment divided by current market price
Current market interest rates are 6%. A bond with an 8% coupon would be most likely to have a net present value of zero when the bond is
selling at a discount
If a group of money managers were having a discussion and the term LIBOR was mentioned, the topic would most likely be:
short-term borrowing rates
An investor purchases a Treasury note and the confirmation shows a price of $102.21. Rounded to the nearest cent, the investor's cost, excluding commissions, is
$102.21.
An investor owns a TIPS bond with an initial par value of $1,000. The coupon rate is 6% and, during the first year, the inflation rate is 9%. How much interest would be paid for the year?
$64.11
An investor owns a TIPS bond with an initial par value of $1,000. The coupon rate is 6% and, during the first year, the inflation rate is 9%. How much interest would be paid for the year?
$90.00
BFJ Corp's 5% convertible bond is trading at 120. The bond is convertible at $50. An investor buying the bond now and immediately converting into common stock, would receive
20 shares
The Straitened Corporation has filed for bankruptcy. One of your clients held a mortgage secured by the corporation's building. When the building was sold, the proceeds were less than the mortgage balance creating a deficiency balance. Where does this investor's claim stand?
After the secured creditors
What happens to bond durations when coupon rates increase and maturities increase?
As coupon rates increase, the duration on the bond will decrease because investors are receiving more cash flow sooner. As maturity increases, duration will increase because the payments are spread out over a longer time.
An analyst would use the discounted cash flow method in an attempt to find
the fair value of a security.
When it comes to issuing a debt security, which of the following features will generally enable the issuing corporation to borrow at the lowest interest rate?
Convertible
Securities issued by which of the following agencies offer direct government backing?
Federal National Mortgage Association (Finnie Mae)
Which of the following usually does NOT pay interest semiannually?
GNMA
If a resident of New York City purchases an Albany, New York, general obligation bond that yields $600 of interest during the course of the year, how is the interest taxed?
It is subject to state income tax at ordinary rates.
Which of the following statements regarding a $1,000 corporate 8.50% bond offered at 110 is true?
The bond's current yield is calculated by dividing its annual interest by its current market price.
An investor is analyzing various risks related to corporate and government bonds. She is interested in finding a risk that is more specific to corporate bonds than to government bonds. Which of the following options correctly defines that risk?
Liquiudity risk
Which of the following U.S. government securities do NOT bear a stated interest rate but are sold at a discount through weekly auctions?
Treasury Bills
An investor is considering the purchase of $100,000 maturity value of zero-coupon AAA-rated corporate bonds scheduled to mature in 20 years. Among the risks that this investor will be assuming are i default risk ii interest rate risk iii prepayment risk iv reinvestment risk
ii and iii
Which of the following are characteristics of commercial paper? i Backed by money market deposits ii Negotiated maturities and yields iii Issued by insurance companies iv Not registered with the SEC
ii and iv
A new convertible bond has a provision that it cannot be called for 5 years after the issue date. This call protection is most valuable to a recent purchaser of the bond if
interest rates are rising
Treasury bills are
issued in book entry form
Which of the following is not a component of the discounted cash flow method of determining the value of a fixed-income security?
The security's rating
A customer purchased new issue bonds at par 2 years ago. Since then, the CPI has declined by almost half and the current yield on his bonds has also declined. Which of the following best describes the value of the bonds he purchased?
Their market price has increased.
Which of the following is correct regarding zero-coupon bonds?
They offer minimum price volatility.
Which of the following would best describes a Yankee bond?
U.S. dollar-denominated bond issued by a non-U.S. entity inside the United States
Which of the following bonds would be the least price sensitive to changes in market interest rates?
Zero due in one year with a YTM of 6%
Of the following securities, which is most commonly recommended to fund a child's college education?
Zero-coupon Treasury bonds
As defined in the Securities Exchange Act of 1934, the term municipal security would include all of the following EXCEPT
a city of Atlanta, GA public library bond
In general, from the choices given, the type of security offering the greatest degree of safety to an investor is
a mortgage bond
A corporation has issued a 4% $60 par convertible stock with a conversion price of $20. With the preferred stock selling at $66 per share, an investor holding 100 shares of this stock would benefit by converting if the price of the common stock was
above $18.20 per share
An investor owns a debenture convertible into 20 shares of the issuer's common stock. After a 2-for-1 stock split, the terms of the debenture provide for conversion into 40 shares. This is because the debenture has
an antidilution clause
GNMA mortgage-backed securities are
backed exclusively by a pool of mortgages
With respect to safety of principal, of the following investments, the least risky is
corporate AA debentures
Corporate long-term debt securities that are issued on the general credit of the issuer and are NOT otherwise secured are called
debentures
A bond's yield to maturity is
determined by dividing the coupon rate by the bond's current market price
All of the following statements regarding convertible bonds are true EXCEPT
holders have a fixed interest rate
Which of the following would make a corporate bond more subject to liquidity risk? i Short-term maturity ii Long-term maturity iii High credit rating iv Low credit rating
i and iii
Which of the following are characteristics of negotiable jumbo CDs? i Issued in amounts of $100,000 to $1 million or more iiTypically pay interest on a monthly basis iiiAlways mature in 1 to 2 years with a prepayment penalty for early withdrawal iv Trade in the secondary market
i and iv
Which of the following is TRUE of GNMA securities? i Interest is subject to federal income tax. ii Interest is exempt from federal income tax. iii They are backed by farm mortgages. iv They are backed by residential mortgages.
i and iv