CH 6 Custom Exam

An investor purchases a 20-year 5.30% bond at par value that will yield 5.75% if called at the first call date in five years. The yield to maturity on the bond is: A. 5.30% B. More than 5.30% C. Between 5.30% and 5.75% D. 5.75%

A. 5.30% The bond has a coupon rate (nominal yield) of 5.30%. If the bond is purchased at its par value and is not called, but held to maturity, the bond's yield will be the same as the coupon rate, which is 5.30%.

If a bond has a basis of 6.35 and a coupon rate of 6.15%, the bond is selling at: A. A discount B. Par value C. A premium D. A price that cannot be determined from the information given

A. A discount Bonds may be quoted based on their yield-to-maturity, which in this example is 6.35 (basis and YTM are synonymous). Since the bonds has a nominal yield (coupon rate) of 6.15%, which is lower than the 6.35% YTM, the bond is selling at a price that is below the par value of $1,000 (i.e., a discount). On the other hand, if the yield-to-maturity was lower than the nominal yield, the bond would be selling at a premium.

When an investor compares her portfolio's performance to an average or index, the average or index is considered a(n): A. Benchmark B. Total return C. Unrealized gain D. Return of capital

A. Benchmark Investors often compare the performance of their portfolio to a given benchmark. The benchmark could be an average or index that monitors the performance of a group of securities.

On the ex-date of a cash dividend, the subject security would be: A. Reduced by the amount of the dividend B. Increased by the amount of the dividend C. Unchanged D. Valued at a greater amount

A. Reduced by the amount of the dividend

Of the following broad-based indexes, the one with the largest measure of the market is the: A. The Wilshire Associates Equity Index B. Dow Jones Industrial Average C. The New York Stock Exchange Composite Index D. Standard and Poor's 500 Index

A. The Wilshire Associates Equity Index The Wilshire Index represents the dollar value of all the stocks and is considered the broadest of all indexes and averages. The Dow Jones Industrial average contains only 30 stocks. The S&P 500 Index contains 500 stocks, while the NYSE Composite Index consists of all of the common stocks that are listed on the NYSE.

If a bond is currently selling at a premium, then: A. The current yield is lower than the nominal yield B. The current yield is equal to the nominal yield C. The current yield is higher than the nominal yield D. Interest rates are currently higher than when the bond was originally issued

A. The current yield is lower than the nominal yield Bond yields and prices have an inverse (opposite) relationship, meaning that as one increases, the other would decrease. Therefore, if a bond is selling at a premium (above par), its current yield would have to be lower than its nominal yield. For example, an investor owns an 8% bond trading at $1,100. The nominal yield is 8%. The current yield is found by dividing the annual interest by the market price. An 8% bond pays $80 per year assuming a par value of $1,000. Therefore, the current yield is 7.27%.

Which of the following statements is TRUE regarding stock dividends? A. stock dividend increases the number of shares the holder will own. B. A stock dividend creates a current tax liability when the shares are received. C. A stock dividend can only be paid if the company pays a cash dividend. D. A stock dividend will increase the owner's cost basis per share.

A. stock dividend increases the number of shares the holder will own. The only true statement is that a stock dividend increases the number of shares the holder will own. A stock dividend reduces the cost basis per shares of an investor's overall stock position. The tax liability for the additional shares received is only realized when the shares are subsequently sold. A company can pay a stock dividend regardless of whether a cash dividend has been paid.

Wilsons Chemicals bonds have a nominal yield of 6.6%. They closed the previous day at 91 7/8. An owner of 10 bonds will receive a yearly interest payment of: A. $66 B. $660 C. $91.88 D. $918.75

B. $660

A stock closes at $37. The next day the stock sells ex-dividend $0.68 per share. At what price will the stock open the next day if it opens at the same level it closed the day before? A. 36.66 B. 36.32 C. 37.00 D. 37.68

B. 36.32 The price of a stock is reduced by an amount sufficient to cover the dividend. The price will be reduced by 68 cents. Therefore, $37 - .68 = $36.32.

The current yield on a municipal bond with a coupon rate of 4.50%, purchased at par and currently trading at $1,055, is: A. 4.15% B. 4.26% C. 4.46% D. 4.50%

B. 4.26% The current yield is found by dividing the yearly interest payment of $45 by the market price of $1, 055. This equals 4.26%. The fact that the bond was purchased at par is not relevant.

The market price of XYZ Corporation common stock is $55 and its quarterly dividend is $0.60. What is the stock's current yield? A. 1.1% B. 4.36% C. 2.2% D. 5.3%

B. 4.36% A stock's current yield is found by dividing the annual dividend by the current market price of the stock. In this example, the stock's annual dividend is found by multiplying the $0.60 quarterly dividend by 4, which is $2.40. Therefore, the current yield is 4.36% ($2.40 ÷ $55).

On Tuesday May 1, XYX Corporation's Board of Directors announced a dividend payable on Friday, May 25 to stockholders of record on Monday, May 14. The ex-dividend date is: A. Thursday, May 24 B. Friday, May 11 C. Monday, May 14 D. Tuesday, May 1

B. Friday, May 11 Stocks sell ex-dividend on the first business day preceding the record date. The record date is Monday, May 14. Therefore, the ex-dividend date would be one business day before, or Friday, May 11.

If an investor purchased a security and receives part of his original investment back, this is considered a(n): A. Stock Dividend B. Return of capital C. Realized gain D. Unrealized gain

B. Return of capital A return of capital occurs when an investor receives a portion of his original investment back. Since this return is not considered either income or a capital gain, it's not a taxable event.

A customer purchases 10 M Dade Co. Florida 7.50% G.O. bonds at a 9.50 basis. How much interest will she collect each year? A. $75 B. $95 C. $750 D. $950

C. $750 10 M equal's $10,000 par value of bonds (the symbol M refers to thousands). The coupon rate is 7.50%. Therefore, the annual interest is $750 ($10,000 x 7.50%).

A customer owns 1,000 shares of XAM at $40 a share. If XAM declares a 10% stock dividend, what is the adjusted cost basis per share? A. 1,000 shares at $36.36 per share B. 1,100 shares at $40 per share C. 1,100 shares at $36.36 per share D. 900 shares at $44 per share

C. 1,100 shares at $36.36 per share With a stock dividend, the number of shares owned will increase. In this case of a 10% stock dividend, the investor will receive an additional 100 shares (1,000 x 10%), but the cost basis per share will be reduced for tax purposes. The cost basis per share is adjusted as follows: $40,000 total investment ÷ 1,100 shares = $36.36. Other than making the adjustment to the cost basis per share, the IRS does not consider a stock dividend as a taxable event.

A stock's price has risen due to an overall market increase. This increase in price is considered: A. A non-taxable capital gain B. A taxable capital gain C. An unrealized capital gain D. Amortization

C. An unrealized capital gain The increase in the stock's price is considered an unrealized capital gain or appreciation. A capital gain is only realized if an asset has increased in value and it is subsequently sold at that higher price.

A customer has placed a market order with a broker-dealer. The broker-dealer must: A. Execute at the closing price B. Execute at the quoted price or better C. Execute at the most reasonable price available D. Execute at a price no higher than the last executed price

C. Execute at the most reasonable price available Market orders are executed immediately after being received. Broker-dealers must use reasonable diligence to execute market orders at the best price at the time they are received. For an order to be executed at a specific price or better, it must be entered as a limit order.

Which of the following statements is TRUE regarding dividends paid on stock? A. The record date is set by the SRO B. The declaration date will occur after the record date C. The ex-dividend date is not set by the company's board of directors D. All open orders are adjusted on the ex-dividend date

C. The ex-dividend date is not set by the company's board of directors When a stock goes ex-dividend, its price is reduced by an amount sufficient to cover the dividend. Ex-dividend dates are set by the SROs, based on settlement rules for the stock. Only orders beneath the current market price are adjusted, not all open orders. The declaration, record, and payable dates are set by the company's board of directors. The declaration date occurs before all other events/dates.

The cash flow received from dividends and/or interest, plus any appreciation or depreciation in the value of an investment, is referred to as the: A. Realized gain B. Return of capital C. Total return D Basis

C. Total return The total return calculation takes into account all of the cash flow received from dividends and/or interest, plus any appreciation or depreciation in the value of the investment. This return is expressed as a percentage and is typically calculated over a period of one year.

A corporation may choose to pay its shareholders with cash dividends or stock dividends. Which of the following statements concerning the tax status of these events is the most accurate? A. While only the stock dividend is taxable when received, the receipt of cash dividends will require the investor to adjust in her cost basis per share. B. Neither form of dividend is taxable. C. While only the cash dividend is taxable when received, the receipt of stock dividends will require the investor to adjust her cost basis per share. D. Both forms of dividends are taxable.

C. While only the cash dividend is taxable when received, the receipt of stock dividends will require the investor to adjust her cost basis per share. Only cash dividends are taxable in the year in which they are received. The payment of a stock dividend increases the number of shares held by each shareholder. Since the stock's price will fall in the market, the IRS does not consider there to be a taxable event. However, shareholders are required to adjust their cost basis per share.

An individual received $500 in dividends from the common shares that she owns of an oil company. How much of this dividend income is subject to taxation? A. 0 B. $350 C. $400 D. $500

D. $500 Under current tax law, all cash dividends that individuals receive are fully taxa

XYZ company is paying a 25% stock dividend to its common stockholders. If an investor owns 100 shares at $120.00 before the stock dividend, how many shares will the investor own and at what price per share after the dividend is paid? A. 75 shares at $160 B. 100 shares at $96 C. 125 shares at $120.00 D. 125 shares at $96

D. 125 shares at $96 1. 100 x 25% = 25 additional shares (125 total shares) 2. 100 shares x $120 = $12,000 3. $12,000/125 = $96

A company has $50,000,000 par value convertible bonds outstanding. The coupon rate is 8%. The bonds are currently selling at 96. What is the current yield? A. 7.0% B. 7.5% C. 8.0% D. 8.3%

D. 8.3% To find the current yield of the bonds, divide the yearly interest paid on the bonds by the current market value of the bonds. The yearly interest is $80. The market value of a bond is $960. Therefore, the current yield equals 8.3% ($80 divided by $960 equals 8.3%). The fact that these are convertible bonds is not relevant.

A company is offering $200,000,000 of 8 1/2% bonds due July 1, 2038 at 99 1/2% of par value. The yield-to-maturity on the bonds is: A. 8% B. Less than 8 1/2% C. 8 1/2% D. Greater than 8 1/2%

D. Greater than 8 1/2% The bond is trading at a discount below par (99.5 is less than 1000). On the teter totter we now that when bonds are selling at a discount, YTM is higher than nominal yield

For which of the following circumstances is there a required tax payment? A. Unrealized gain B. Realized loss C. Return of capital D. Realized gain

D. Realized gain Taxes are paid on realized capital gains; however, unrealized capital gains or losses (paper profits or losses) have no impact on the investor's tax situation. Capital or realized gains are generated when an investment is sold for a greater value than its cost basis. Return of capital occurs when an investor receives a portion of her original investment back. Since this return is not considered either income or a capital gain, it's not a taxable event.

The record date for a company's cash dividend is Thursday, October 7. What is the latest date a customer may purchase the stock for regular-way settlement in order to receive this dividend? A. Friday, October 8 B. Thursday, October 7 C. Wednesday, October 6 D. Tuesday, October 5

D. Tuesday, October 5 The ex-dividend date is the first day on which a stock trades without its dividend. It is typically one business day prior to the record date, which in this question, is Wednesday, October 6. For a buyer to receive the dividend, the transaction must settle on or before the record date of Thursday, October 7. If a person purchases the stock on or after the ex-dividend date, he is not entitled to the dividend since regular-way settlement takes two business days and that would be after the record date. For the customer in this question to be entitled to the cash dividend, the latest date he may purchase the stock for regular-way settlement, must take place on the business day before the ex-dividend date, which is Tuesday October 5. Note; If the question does not state the type of settlement, assume regular-way.

How do you calculate current yield?

The current yield is found by dividing the yearly interest payment by the market price (not par value) yearly interest/mkt $