Chapter 2
Seventy-five basis points are equal to which of the following?
.75% and 7.50
A bond has a 7% coupon and an offering price of 102. Which of the following yields could be the yield to maturity for this bond?
0.0655; lowest to highest is: YTC, YTM, current yield, and nominal yield.
The current yield on a bond with a coupon rate of 7.5% currently selling at 105-½ is approximately:
75/1055=7.1
ABC Company issues a 10% bond due in 10 years. The bond is convertible into ABC common stock at a conversion price of $25 per share. The ABC bond is quoted at 90. Parity of the common stock is:
$1,000 face amount / $25 per share = 40 shares). Because the bond has a current price of $900, divide $900 by 40 to get the underlying parity price (90% × $25 = $22.50).
If a bond has a basis price of 7%, which of the following would most likely be refunded?
Coupon 7-½%, maturing in 2033, callable in 2013 at 100.
Which of the following statements regarding convertible bonds is NOT true?
Coupon rates are usually higher than nonconvertible bond rates of the same issuer.
Which of the following is NOT a risk to a U.S. resident owning a Eurodollar bond?
Currency risk
The federal funds rate is which of the following?
I. Computed daily IV. The rate charged in bank-to-bank lending
T-Bills
I. The government auctions T-bills at a discount. IV. The minimum denomination of a T-bill is $100 face amount.
When the U.S. dollar is devalued against other currencies
I. U.S. products become more competitive abroad IV. foreign products become less competitive in the U.S.
Accrued interest on a bond confirmation is
I. added to the buyer's contract price II. added to the seller's contract price
In treasury auctions a bidding system known as a Dutch auction is used. With this auction process the winning bid is the
I. lowest yield at which all of the securities can be sold III. the price paid by bidders who bid at or below the winning yield bid
Which of the following characteristics describe Treasury bills?
II. Issued at a discount IV. Pay all interest on maturity
Which of the following statements regarding put and call features of bonds are TRUE?
II. The put feature would likely be exercised if interest rates rise. III. The issuer will likely call bonds if interest rates fall.
When a customer purchases a newly issued municipal bond or corporate bond, the accrued interest is calculated
II. from the dated date IV. up to, but not including, the settlement date
All of the following bonds have 5 years to go to maturity. Which would have the greatest price change in response to a change in interest rates?
Lowest rating, farthest from par. 7-½%, B rated, price 88.
GNMA
Private lending institutions approved by GNMA originate eligible loans and sell the mortgage-backed securities to investors.
All of the following statements regarding CMOs are true
TACs provide protection against prepayment risk PACs provide protection against prepayment risk PACs provide protection against extension risk
A customer purchased 10 9% convertible debentures at 98. The bonds are callable at 101. The conversion ratio is 40. The bonds are called while the common is trading at $24 and the debenture is trading at 98. Which of the following options would be most beneficial to the customer?
Tender the bonds to the corporation.
A 7% convertible debenture is selling at 101. It is convertible into the common stock of the same corporation at $25. The common stock is currently trading at $23. If the stock were trading at parity with the debenture, the price of the stock would be:
To determine the parity price of the common, first find the number of shares the debenture is convertible into (conversion ratio) by dividing par value by the conversion price ($1,000 / $25 = 40 shares). Next, divide the current price of the bond by the conversion ratio. The result is the parity price of the common stock. (1010 / 40 = $25.25).
vWhich one of the following best describes a debenture?
Unsecured corporate debt.
XYZ Corporation has outstanding a 7% convertible bond currently trading at 102. The bond, which has a conversion price of $50, was issued with an antidilution covenant. If XYZ declares a 10% stock dividend, the new conversion price, as of the ex-date, will be:
divide the current conversion price by 100% plus the percent increase in shares. $50 / 110% = $45.45.
If an investor is anticipating that the yield spread between U.S. government and BBB-rated corporate bonds will widen, the investor is expecting the U.S. economy to:
enter a recession over the coming months.
puttable bonds
lower yields than nonputtable
Parity of common stock
market price/number of shares
marketability of a block
maturity block size rating
Ginnie Mae pass-throughs will pay back both principal and interest:
monthly
A customer purchases an ABC 6-½% convertible preferred stock at $80. The conversion price is $20. If the common stock is trading 2 points below parity, the price of ABC common is:
The conversion ratio is computed by dividing par value by the conversion price ($100 par / $20 = 5). Parity price of the common stock is computed by dividing the market price of the convertible by the conversion ratio ($80 / 5 = $16). $16 − 2 = $14.
Which of the following statements regarding puttable bonds is TRUE?
Their yields are usually lower than those of nonputtable bonds.
If your customer wants to set aside $40,000 for when his child starts college, but does NOT want to endanger the principal, you should recommend
Treasury STRIPS; guaranteed by US gov
Debt instruments put up for auction by the U.S. treasury that offer intermediate maturities best describes:
Treasury notes.
All of the following statements regarding bonds with both a convertible and callable feature are correct EXCEPT:
if called, the owners have the option of retaining the bonds and will continue to receive interest.
An investor purchasing long-term AAA rated bonds should be concerned most with:
inflation risk
All of the following statements regarding municipal bond put options are true EXCEPT that the put option:
is generally exercisable immediately after the bond has been issued.
An investor who has purchased a CMO
is subject to federal, state, and local taxation
All of the following are money market instruments:
jumbo CDs newly issued T-bills commercial paper
The best time for an investor seeking returns to purchase long-term, fixed-interest-rate bonds is when:
long-term interest rates are high and beginning to decline.
An investor seeking a high level of income combined with a moderate level of risk would purchase:
mortgage bonds
An investor purchases a PQR convertible bond at 98 on June 18, 1994. The bond is convertible at $25, and on June 19, 1995, when the common stock is trading at $26 per share, the investor converts his bond into the stock. For tax purposes, these transactions will result in:
neither gain or loss; convertible into common is not taxable.
An investor anticipating a fall in interest rates would likely purchase:
noncallable bond
If a customer believes that interest rates have peaked and wants to buy long-term, fixed-income securities providing semiannual interest payments, you would recommend:
noncallable bonds
A DMF convertible bond (convertible into 25 shares) has increased 20% above par in market value. Which of the following would you expect the price of the DMF's common stock to be?
$1,000 (par) + 20% = $1,200 / 25 shares = $48.
KLM Company has 10 million convertible bonds outstanding that are convertible at $25. The bonds contain an anti-dilution feature. If KLM declares a 10% stock dividend, the new conversion price will be:
$22.73; Before the stock dividend, an investor would have received 40 shares of stock for each $1,000 bond ($1,000 / $25). A 10% stock dividend would now give an investor 44 shares on conversion (40 shares + 10% = 4 shares more). $1,000 / 44 shares = $22.73 per share for the new conversion price.
A customer purchased a callable XYZ Corporation 5% debenture to yield 4.5%. The price paid for the bond would most likely be:
100.5%
A bond is convertible at $25. The market value of the stock is $30. What is the parity price of the bond?
1200; 1000/25= 40 x 30=1200
An investor sells 10 5% bonds at a profit and buys another 10 bonds with a 5-1/4% coupon rate. The investor's yearly return will increase by:
2.50 per bond
A convertible corporate bond with a conversion price of $20 is trading at 115. The parity price of the common stock is:
23; 100/20=5 1150/5
An investor's portfolio includes 10 bonds and 200 shares of common stock. If both positions increase by one point, what is the appreciation?
300; one point for one bond 10x10. 1 point for common
A convertible bond callable at 101 is trading at 105. The bond is a 4% bond convertible at $25. The common stock is trading at $27. If an investor bought the bond and converted, his profit would be:
30; $1,050 / 40 shares = $26.25 per share stock parity price. CMV of the stock minus stock parity price equals profit (or loss). $27.00 − $26.25 = $.75 per share × 40 shares = $30.
A bond purchased at $900 with a 5% coupon and a 5-year maturity has a current yield of
5.6%
Which of the following callable debentures is least likely to be called?
6% maturing in 2017, callable at 102; bond with shortest maturity.
If all of the following bonds mature on September 1, 2020, which would have the highest price?
6-1/4% coupon at 6.10; trading at a premium
You observe that a yield curve that was previously flat is moving toward having short- term interest rates lower than long-term interest rates. This new yield curve is considered to be
normal
The function of the Federal National Mortgage Association (FNMA) is to
purchase FHA-insured, VA-guaranteed, and conventional mortgages.
Consider a municipal bond issue that has been defeased
rating, marketability increases backed by US gov not considered part of outstanding debt
A single bond has been issued with successive maturity dates set from 1985 through 2015. What type of bond is this?
serial
Prices quoted for immediate payment and delivery of currencies are known as
spot prices
PDQ Corporation has a 6-1/4% convertible preferred stock (conversion ratio of 4) outstanding. The stock has an antidilution covenant. If PDQ declares a 10% stock dividend, the antidilution covenant will adjust:
the conversion price to $22.72; The stock is convertible at $25 ($100 par / 4 shares). To determine the new conversion price, $100 / 4.4 shares = $22.72, or divide $25 by 110%.
Interest on direct debt issued by the U.S. government is taxable at:
the federal level and exempt at the state level.
parity of common; trade price
trade price X conversion price
An investor interested in acquiring a convertible bond as part of his investment portfolio would:
want the safety of a fixed-income investment along with potential capital appreciation.
When investor confidence in the economy is increasing, a technical analyst would anticipate that:
yields on BBB-rated bonds will be higher than those on AAA-rated bonds. III. the spread between yields on AAA-rated and BBB-rated bonds will decrease
Corporate bonds that are guaranteed are:
guaranteed as to payment of principal and interest by another corporation.
A bond would be considered speculative below which of the following Standard & Poor's (S&P) ratings?
BBB
Which of the following is a characteristic shared by debentures and income bonds?
Both must pay principal as it comes due.
Your customer is interested in long-term corporate bonds. Which of the following interest-rate environments makes a call protection feature most valuable to your customer?
Declining interest rates
Which of the following investments is most suitable for an investor seeking monthly income?
GNMA.
Which of the following bonds trade flat?
Income bonds
Which of the following statements regarding the federal funds rate is NOT true?
It tends to fluctuate in response to the prime rate.
The price of which of the following will fluctuate most with a change in interest rates?
Long-term bonds.
Which of the following would make a corporate bond more subject to liquidity risk?
Long-term maturity Low credit rating.
Which of the following would make a corporate bond more subject to liquidity risk?
Low credit rating. Long-term maturity.
A debt instrument, which may or may not be exchange traded, where the final payment at maturity is based on the return of a single stock, a basket of stocks, or an equity index is known as
an equity- or index-linked note (ELN or ILN)
Of the following bonds, which has the greatest price volatility?
Zero-coupon bond with 15 years to maturity
If a customer sells a zero-coupon bond before maturity, gain or loss will be the difference between sales proceeds and:
accreted value.
All of the following statements regarding bonds with both a convertible and callable feature are correct
after the call redemption date, interest payments will cease. the coupon rate on a convertible bond would be less than the rate for comparable nonconvertible debt. dilution of company stock will occur on conversion of the bonds.
All of the following statements regarding a 6% municipal bond that is puttable at par are true EXCEPT the:
bond is likely to trade at a discount in the secondary market when it is puttable.
When a corporation issues a long-term bond, one of the factors influencing the bond's interest rate is the credit rating of the issuer. Another factor is the:
cost of money in the marketplace.
A corporation is likely to call eligible debt when interest rates are:
declining
