UNIT 2 QUIZ - DEBT

An investor has purchased a bond with a 5% coupon. This investor will receive

$50 annual interest until maturity.

Rank the following in order of payment at the time of a corporate liquidation, from first to last.

-Secured debtholders -Debentures -Subordinated debentures -Preferred stock

For Treasury bills, which of the following are true?

-T-bills are issued at a discount to par. -T-bills are a direct obligation of the U.S. government.

Your client is about to retire and wants to rearrange his portfolio in order to have predictable income. Which of the following would not be a good investment vehicle?

Adjustment bonds

Which of the following expressions describes the current yield of a bond?

Annual interest (coupon) payment divided by current market price

An investor purchases a bond at $900 with a 5% coupon and a 5-year maturity. The bond has a current yield of

5.6%.

All of the following securities are backed by the full faith and credit of the U.S. government except

A) Treasury STRIPS. B) Treasury notes. C) Treasury receipts. D) Treasury bonds. C)

All of the following are names for the rate stated on the face of the bond except

A) fixed rate. B) current yield. C) nominal yield. D) coupon rate. B)

Money market instruments can be associated with all of the following except

A) highly liquid debt instruments. B) nonvolatile and safe debt instruments. C) short-term debt instruments. D) high-yielding debt instruments. D)

All of the following are corporate secured bonds except

A) mortgage bonds. B) equipment trust certificates. C) collateral trust certificates. D) debentures. D)

The repayment or maturity date of a banker's acceptance is normally which of the following?

As short as 1 day or as long as 270 days

Most municipals pay interest that is tax free at the federal level. Which one of the following is a taxable municipal bond?

BABs BABs are Build America Bonds that were issued without the tax free status. The others are tax-free municipal notes. Though BABs are not covered in the SIE material, the other three items are, and are all tax free.

Which of the following securities is most often used to fund international trade?

Banker's acceptance (BAs)

Which of the following terms best describes a corporate debt instrument secured by a pledge by the issuer of property that consists of stocks or bonds of other corporations?

Collateral trust certificate

Rank the following investors from lowest to highest priority in liquidation.

Common stock, preferred stock, subordinate debentures, debentures, secured debt

If a bond is trading at a premium, which of the following rates is correctly ranked from high to low?

Coupon rate, current yield, yield to maturity, yield to call

Regarding a corporate bankruptcy and the liquidation priority, which of the following is accurate?

Debt securities claims are satisfied before equity securities claims.

Which of the following statements regarding Treasury receipts are true?

Interest is paid at maturity -They are sold at a discount.

A customer has a short-term investment time horizon and a fairly certain need for funds she wishes to invest. Which of the following might meet those two investment objectives?

Money market instruments

Water and sewer facilities are most likely to use what kind of debt financing to fund expansion plans?

Municipal revenue bonds

Which of the following are fixed at the time a bond is issued?

Nominal yield

When interest rates in the marketplace move up, what happens to the coupon rate on existing bond?

Nothing; it does not change. --The coupon rate (the fixed rate, the nominal rate, the stated rate) is fixed when the bond is issued and does not change.

A corporate bankruptcy liquidation took place. Of the following—general creditors, secured bondholders, subordinated debenture holders, accrued taxes—who was paid first and who was paid last?

Secured bondholders first, subordinated bondholders last

Regarding corporate bond issues, which of the following statements best describes secured debt and unsecured debt?

Secured debt is asset backed, while unsecured debt is not.

A bond has been structured so that the principal of the entire issue matures on a single date. This is what type of bond?

Term

Which of the following statements regarding $1,000 par value 6.5% bond trading offered at 110 is true?

The bond's current yield equals $65 ÷ $1,100 or 5.9%.

U.S. government deposits securities with a trustee against which certificates are sold representing principal only with no regular interest payments. These are known as

Treasury STRIPS.

Debt instruments put up for auction by the U.S. Treasury Department that offer intermediate maturities best describes

Treasury notes.

In safety of principal, municipal bonds are considered second only to

U.S. government and agency bonds.

If a bond is trading at a premium, rank the following rates from low to high.

Yield to call, yield to maturity, current yield, nominal yield

A put feature attached to a bond allows

a bondholder to put a bond back to the issuer for redemption at times that will benefit the bondholder.

When selling a bond, the issuer is taking

a borrower's position.

Treasury bond (T-bond) interest is stated as

a percentage of par value.

Accrued interest on U.S. government bonds is calculated using

actual days in each month and actual days in the year.

Treasury bills pay

all interest at maturity.

An income bond is also known as

an adjustment bond and is unsecured.

An investor holding a corporate-issued mortgage bond is holding a debt security that is

backed by real estate and therefore considered secured.

Securities issued by the U.S. federal government are classified as

bills, notes, and bonds.

A corporation has issued debt securities backed by the shares of another corporation that it owns. These debt securities are known as

collateral trust bonds.

An issuer of bonds can be

corporate and both the federal and municipal governments.

A company's board of directors (BOD) approves a dividend payment. When this occurs it is recognized as the

declaration date.

For a corporate bond, once issued, nominal yield

does not change in response to interest rate movements.

An investor purchases a bond offered at par. The bond has a coupon rate

equal to its current yield.

U.S. Treasury notes are U.S. government-issued

intermediate-term debt securities with maturities of 2-10 years.

When the interest rates in the marketplace moves up or down, the price of all bonds move

inversely.

A statutory debt limitation imposed on a municipality restricts its authority regarding

issuing general obligation (GO) bonds.

An investor holds a 5% bond callable in six years and maturing in eight years. The bond's current yield (CY) measures its annual coupon payment relative to

its market price.

An investor holds a 6% callable bond purchased at 105. If the issuer calls the bond before maturity, the yield to call (YTC) realized by the investor would be

less than the coupon.

Repurchase agreements and reverse repurchase agreements are

money market instruments.

Secured corporate debt includes

mortgage debt.

An investor anticipates that a fall in interest rates is imminent. This investor, now wanting to purchase bonds in order to lock in interest income, would likely buy

noncallable bonds.

Two benefits of owning preferred stock over common stock are

priority at liquidation and payment of dividends.

A bond certificate represents

the borrower's obligation to repay the amount it borrowed plus interest.

The coupon rate on a debt security represents

the interest rate the issuer has agreed to pay the investor.

With a balloon maturity,

the major portion of the principal debt is paid on the final maturity date.

Interest on a 7% corporate bond would be paid to the investor as

two semiannual checks for $35 each.

For a callable bond priced at a discount,

yield to maturity (YTM) will be lower than the yield to call (YTC).

The two classifications of chapters for corporate bankruptcies are

-liquidations. -reorganizations.

Which of the following best describes what 1 bond point equals?

1% of $1,000

Regarding different types of debt security maturities available to issuers, which of the following is accurate?

A balloon maturity uses elements of both serial and term maturities.

An issuer has a subordinated debt issue outstanding. Which of the following is true?

A) A subordinated debenture has a claim that is junior to all other debt issues. B) A subordinated debenture has a claim that is senior to all other debt issues and equity issues. C) A subordinated debenture has a claim that is senior to all other debt and senior to common stock. D) A subordinated debenture has a claim that is junior to all other debt but senior to preferred stock. D)

All of the following are types of maturities for debt instruments except

A) balloon. B) term. C) series. D) serial. C)

Which of the following is an unsecured debt instrument?

Aaa/AAA-rated debentures --Corporate debentures are unsecured bonds backed by the good faith and credit of the issuing corporation; they are not secured by any underlying collateral.

A corporation has issued a single bond having successive maturity dates set from 2020 through 2030. This is known as what type of bond?

Serial

When an issuer schedules portions of a bond issue's principal to mature at predetermined intervals over a period of years until the entire balance has been repaid, the issuer has issued what type of bond?

Serial --A serial bond issue schedules portions of the principal to mature at intervals over a period of years until the entire principal balance has been repaid.

Regular way settlement for Treasury notes is

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

Which of the following statements is most accurate about feature benefits?

The call feature benefits the issuer; the put feature benefits the investor.

Which of the following statements is true of income bonds?

Unlike other bonds, they don't pay income unless declared by the board of directors.

Par value for a bond is also known as

face value or the amount a bond will be redeemed for at maturity.

To the benefit of the issuer, a callable bond is likely to be called when interest rates

fall. --Bonds with call features are most likely to be called by an issuer when interest rates fall. For example, if an issuer has an outstanding bond paying 6% and interest rates have fallen to 4%, why pay out 6% when prevailing market rates are only 4%? Better to call in the 6% bond and reissue a new bond at the current rate of 4%. In this way, call features benefit the issuer.

A customer buys a 4% Treasury bond, maturing in 10 years, at a price of $96.08. The yield to maturity (YTM) is

greater than nominal yield.

The coupon on a bond can be described as its

nominal yield.

A serial bond is best described as

portions of bond principal scheduled to mature at intervals over a period of years until the entire balance has been repaid.

Treasury bonds pay interest

semiannually and mature at par value.

T-bills are the U.S. government's

short-term debt of 1 year or less. --T-bills have a maximum maturity of 52 weeks (one year) by law.

A customer buys a 10% bond with a current yield of 12% and holds the bond until one year before maturity. The bond is sold when current interest rates are 8%. Which of the following statements are correct?

-The bond was purchased at a discount. -The bond was sold at a premium.

Commercial paper issued by corporations can have maturities as short or as long as

1 day or 270 days.

Accrued interest on corporate bonds is calculated using

30 days in each month and 360 days in each year.

Each year a bond pays semiannual interest payments of $20. This bond has a nominal yield of

4%. --If a bond pays two interest payments of $20 each annually, this means that the total annual interest is $40. Annual interest ($40) divided by par ($1,000) equals the nominal, stated, or coupon yield (0.04 or 4%).

The current yield on a bond with a coupon (nominal) rate of 7.5% currently selling at 105½ is approximately

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%.

If a callable bond is priced at par, which of the following is true?

A) Current yield (CY) is less than yield to maturity (YTM). B) Current yield (CY) equals yield to call (YTC). C) Current yield (CY) is greater than yield to maturity (YTM). D) Yield to maturity (YTM) is less than yield to call (YTC). B)

For Treasury receipts and STRIPS, which of the following is true?

A) Neither Treasury receipts or STRIPS are backed in full by the U.S. government. B) Treasury receipts are backed in full by the U.S. government. Treasury STRIPS are not. C) Both Treasury receipts and STRIPS are backed in full by the U.S. government. D) Treasury STRIPS are backed in full by the U.S. government. Treasury receipts are not. D)

For municipal debt issues, which of the following is true?

A) Neither general obligation (GO) nor revenue municipal issues are backed by the municipality's good faith credit. B) Revenue bonds are self-supporting, while general obligation (GO) bonds are backed by the municipality's good faith and credit. C) General obligation (GO) bonds are self-supporting, while revenue bonds are backed by the municipality's good faith and credit. D) Both revenue bonds and general obligation (GO) bonds are backed by the municipality's good faith and credit. B)

A customer buys a callable 5% coupon bond at par that will mature in 10 years. Which of the following statements is true?

A) Nominal yield is higher than either yield to maturity (YTM) or yield to call (YTC). B) Yield to call (YTC) is the same as yield to maturity (YTM). C) Yield to call (YTC) is lower than yield to maturity (YTM). D) Yield to call (YTC) is higher than yield to maturity (YTM). B)

A court has ordered a corporation to liquidate all assets under a federal bankruptcy proceeding. Which of the following is true?

A) Preferred stockholders are paid before debtholders. B) Common stockholders are paid before preferred stockholders. C) There is no priority for the payment of wages to employees. D) Debtholders are paid before stockholders. D)

Which of the following is the most junior security?

A) Subordinate debentures B) Equipment trust certificates C) Preferred stock D) Collateral trust certificates C)

XYZ Corporation is guaranteeing a debt issue for the IHG Company. Regarding these bonds, which of the following is true?

A) These bonds are secured, with the value of the guarantee being as good as the strength of XYZ. B) These bonds are secured, with the value of the guarantee being as good as the strength of IHG issuer. C) These bonds are unsecured, with the value of the guarantee being as good as the strength of XYZ. D) These bonds are unsecured, with the value of the guarantee being as good as the strength of IHG the issuer. C)

Which of the following regarding federal funds is true?

A) These funds can provide intermediate-term loans for Federal Reserve Board (FRB) members. B) These funds may be loaned from one Federal Reserve Board (FRB) member bank to another. C) These funds can provide long-term loans for Federal Reserve Board (FRB) members. D) These funds are the amount required to be held on reserve at the Federal Reserve Board (FRB). B)

Each of the following makes regular interest payments except

A) corporate bonds. B) Treasury bonds. C) Treasury notes. D) Treasury STRIPS. D)

Municipal bonds are issued by all of the following government entities except

A) districts. B) agencies. C) states. D) territories. B)

Bonds can be issued with additional features attached, making them more attractive to investors. All of the following can be considered such features except

A) puttable. B) convertible. C) callable. D) maturity. D)

Short-term securities that generate funds for a municipality that expects alternate longer-term financing include all of the following except

A) real estate investment trusts (REITs). B) revenue anticipation notes (RANs). C) bond anticipation notes (BANs). D) tax anticipation notes (TANs). A)

A written promise made by a corporation to pay the principal at its due date and interest on a regular basis on one of its debt issues but backed by no physical assets or titles to assets could only be

a debenture. --A debenture is a debt obligation of a corporation backed only by its word and general creditworthiness. Debentures are written promises of the corporation to pay the principal at its due date and interest on a regular basis.

An investor purchases a bond in the secondary market at $950. Assuming $1,000 par value, this bond is trading at

a discount.

An issuer has issued bonds with a call feature. It is likely that these bonds have

a higher coupon than similar bonds without the feature.

A balloon maturity for an issuer's debt securities is most accurately described as

a later final maturity within a serial issue of bonds that contains a disproportionately large percentage of the principal amount of the original issue.

An investor has purchased bonds having a put feature attached. With this put feature, it is likely that these bonds were issued with

a lower coupon than similar bonds without the feature.

An investor holding T-bonds will receive interest payments

semiannually.

Treasury bills (T-bills) are

short-term debt obligations issued weekly.