Chapter 3 SIE
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) $20,000. B) $2,000. C) $1,000. D) $200,000.
A) $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.
Your customer is a resident of a state with no income tax. They want an income-producing investment that produces tax-free income for them. Which of the following meets the customer's needs? A) A municipal bond issued from any state B) Only a municipal bond issued by the customer's home state C) A GNMA certificate D) A Treasury bond
A) A municipal bond issued from any state The customer's state of residence has no income tax, so any municipal bond would meet the customer's need. A municipal bond issues by the customer's home state is not the correct answer only because it states "only," which is not true. The customer would pay federal income tax on the T-bond and the GNMA.
Most municipals pay interest that is tax free at the federal level. Which one of the following is a taxable municipal bond? A) BABs B) RANs C) TANs D) GANs
A) 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. Note that industrial development revenue bonds (IDRs or IDBs) are also taxable for investors subject to the alternative minimum tax (AMT).
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) GO bond. B) revenue bond. C) a debenture. D) an equipment trust bond.
A) 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
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? A) Money market instruments B) Government bonds C) Common stock D) Corporate bonds
A) Money market instruments With a short-term time horizon and an already identified need for the funds, the only choice of those listed here would be money market instruments with a fixed rate of return. Bonds are generally long-term instruments, and equity investments, such as common stock, do not offer a fixed rate of return and can be volatile.
Which of the following would all be considered the same regarding yields on debt instruments? A) Stated, nominal, and coupon yields B) Nominal, yield to call, and yield to maturity C) Nominal, coupon, and yield to call D) Stated, nominal, and yield to maturity
A) Stated, nominal, and coupon yields The interest rate the issuer has agreed to pay the investor is the coupon yield. The coupon yield is also called the stated or nominal yield.
Regular way settlement for Treasury bills is A) T+1. B) T+3. C) same day. D) T+2.
A) T+1. All U.S. government issues settle next business day (T+1).
Which of the following is true regarding money market securities? A) T-notes and T-bonds can be considered money market instruments when they have only a year left to maturity. B) Only T-bonds can ever be considered money market securities. C) Only T-notes can ever be considered money market securities. D) T-bills, notes, and bonds are all considered money market securities at the time they are issued.
A) T-notes and T-bonds can be considered money market instruments when they have only a year left to maturity. Only T-bills, because they have maturities of one year or less, are considered money market securities at the time of issue. However, though issued with longer maturities, both T-notes and bonds are considered money market instruments once they have only a year left to maturity.
BigCo, Inc., issues a collateral trust bond. Which of the following statements about this bond is true? A) This is a secured bond backed by marketable securities owned by the issuer. B) This is a secured bond backed by rolling stock owned by the issuer. C) This is an unsecured bond backed by marketable securities owned by a third party. D) This is a secured bond backed by real estate owned by the issuer.
A) This is a secured bond backed by marketable securities owned by the issuer. When issuing collateral trust bonds or certificates, an issuing corporation deposits marketable securities it owns into a trust in order to secure the loan. The securities it deposits can be securities in other corporations or those of partially or fully owned subsidiaries as long as the securities are marketable. The securities become the lender's (bondholder's) collateral.
A put feature attached to a bond allows A) a bondholder to put a bond back to the issuer for redemption at times that will benefit the bondholder. B) a bondholder to put a bond back to the issuer for redemption at times that will benefit the issuer. C) a bondholder to hold a bond beyond the maturity date benefitting the bondholder. D) an issuer to put additional bonds to existing bondholders before the maturity date of bonds they hold.
A) a bondholder to put a bond back to the issuer for redemption at times that will benefit the bondholder. A put feature attached to a bond allows a bondholder to put a bond back to the issuer for redemption before maturity. Bondholders will do this when interest rates have risen. For example, if a bondholder has a bond paying 4% and interest rates have risen to 6%, why settle for a 4% return when prevailing market rates are now up to 4%? Better to put the 4% bond back to the issuer for redemption and then purchase a new bond paying the prevailing higher rate. Obviously, the ability to put the bond back to the issuer benefits the bondholder.
A money market security will have all of the following characteristics except A) a limited market. B) a higher credit rating. C) a short term to maturity. D) high liquidity.
A) a limited market. Money market securities have short-term maturities. With little time left to default, they are considered to be highly liquid and, therefore, relatively safe. Safety or less risk equates to lower returns. Typically issued at a discount and maturing at face value, they generally make no regular interest payments. The difference between the discounted purchase price and the face value received at maturity represents their return.
A CMO consists of A) an FNMA, FHLMC, and other mortgage backed securities. B) bonds and money market instruments. C) different sorts of nonmortgage debt. D) various government backed mortgages.
A) an FNMA, FHLMC, and other mortgage backed securities. A Collateralized Mortgage Obligation is made up of different mortgage backed securities (including FNMA and FHLMC), not the mortgages directly.
A 6% corporate bond trading on a 7% basis is trading A) at a discount. B) with a current yield above 7%. C) at a premium. D) with a coupon rate below 6%.
A) at a discount. The term a 7% basis means that the YTM is 7%. YTM is higher than the coupon rate (6%), so the bond trades at a discount. Current yield must be between the coupon rate and the YTM.
T-notes are delivered in A) book entry. B) physical certificates. C) registered as to principal only form. D) bearer form.
A) book entry. All U.S. government issues are delivered in book entry.
A bond having a call feature A) can be redeemed before maturity at the issuer's option. B) must be redeemed before the bond matures. C) is guaranteed not to be redeemed before maturity. D) can be redeemed before maturity at the bond holder's option.
A) can be redeemed before maturity at the issuer's option. A bond with a call feature may be redeemed before maturity at the issuer's option. There is no guarantee that it will or will not be called, nor is there a requirement that it must be called.
Regarding bankruptcy proceedings, A) courts protect both corporate and individual filers from creditors. B) the procedure is only available to individuals seeking protection from creditors and not business entities. C) liquidation of assets must occur first before the courts can offer protection from creditors. D) a plan for reorganization must be submitted first before the courts can offer protection from creditors.
A) courts protect both corporate and individual filers from creditors. Bankruptcy is a general term for court procedures available to both individuals and businesses. During the proceedings, filers are protected by the court from creditors. Protection is granted independent of any actions to liquidate or file a plan for reorganization.
All of the following are names for the rate stated on the face of the bond except A) current yield. B) fixed rate. C) coupon rate. D) nominal yield.
A) current yield. The current yield is calculated by dividing the annual interest payment amount by the current price of the bond. The others are all the same as the stated rate and are calculated by dividing the annual interest payment amount by $1,000.
A bond's rating is used primarily as a measure of its A) default risk. B) interest rate risk. C) purchasing power risk. D) volatility risk.
A) default risk. Bond ratings from credit rating agencies are used to compare the relative risk of default. None of the others are issues of default.
All of the following are considered money market instruments except A) exchange-traded funds (ETFs). B) banker's acceptances (BAs). C) negotiable jumbo certificates of deposit (CDs). D) commercial paper.
A) exchange-traded funds (ETFs). Money market instruments are short-term debt instruments. ETFs are equity securities. Remember that in order to be considered a money market security, the debt instrument should have one year or less to maturity. Banker's acceptances and commercial paper both have maximum maturities of 270 days; most negotiable jumbo certificates of deposit mature in one year or less.
Par value for a bond is also known as A) face value or the amount a bond will be redeemed for at maturity. B) face value or the amount of interest the bond pays annually. C) stated or coupon yield payable annually. D) principal value or the amount of interest the bond pays annually.
A) face value or the amount a bond will be redeemed for at maturity. Par value (usually $1,000) is the face value of a bond or the amount a bond will be redeemed for by the investor at maturity.
A state government has outstanding debt that it issued to finance toll roads, sports facilities, and public housing projects. All of these issues are examples of A) municipal revenue bonds. B) municipal general obligation (GO) bonds. C) convertible bonds. D) Treasury bonds.
A) municipal revenue bonds. These are all examples of municipal revenue bonds, which are bonds issued to finance a project or facility with the bonds' debt service backed by the facility's revenue stream. The revenue might come from rents, tolls, or admission fees, among other sources.
All of these are debt-security-maturity schedules except A) series. B) term. C) serial. D) balloon.
A) series. The three types of debt-security-maturity schedules are term, serial, and balloon. There is no series maturity schedule.
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 and local level, but she will still owe taxes at the 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 state level, but she will still owe taxes at the local and federal level. D) the interest from her T-bonds is exempt at the federal level, but she will still owe taxes at the state and local level.
A) the interest from her T-bonds is exempt at the state and local level, but she will still owe taxes at the federal level. Securities issued by the federal government produce interest that is not taxed at the state or local level. It is taxed at the federal level.
It would be expected that a repurchase (repo) agreement contract would include A) the repurchase price and the maturity date. B) the repurchase price and the rate of return. C) the rate of return and maturity date. D) the maturity date only.
A) the repurchase price and the maturity date. A repurchase (repo) agreement contract would include the repurchase price (the price that the securities initially sold would be bought back at) and the maturity date (the date that the initial sale would be reversed). The return would be the difference between the initial sale price and the repurchase price.
All of the following characteristics are true of securities issued by the Government National Mortgage Association except A) they generate tax-free interest. B) they are backed by the federal government. C) they are called pass-through securities because the payments are made up of both interest and principal. D) they pay monthly.
A) they generate tax-free interest. GNMA interest is fully taxable. All the other statements are true.
Your customer, Eleanor, purchased an InDebt, Inc., 5% debenture at a price of 94. It matures in 12 years. What is the yield to maturity? A) 5.32 B) 5.73 C) 5 D) 4.69
B) 5.73 You do not have to calculate YTM for this problem. You could if you really wanted to, but it is not necessary for the question. You do need to recall the bond inverse relationship chart. The bond is trading at a discount so the YTM must be higher than the coupon of 5%; that eliminates two responses. Note that YTM is higher than current yield, and that you do need to calculate CY. The bond's annual interest divided by the price (50/940) is 5.32% (the CY). Only one response is higher than 5.32%.
Which of the following is a money market security? A) A short-term T-bond mutual fund B) A 30-year T-bond issued by the Treasury 29 years ago C) A TAN maturing in 14 months D) A newly issued T-note
B) A 30-year T-bond issued by the Treasury 29 years ago A money market security is a high quality and highly liquid security with one year, or less, left to maturity. Both the T-note and the Tax Anticipation Note are more than a year from maturity. The mutual fund has no maturity.
Which of the following is considered an investment-grade debt rating? A) BB B) Baa C) Ba D) B+
B) Baa Baa is the same as BBB. At this level and above, a debt is considered investment grade. S&P uses "+" and "-" to indicate subgrades, but we do not expect that to be a tested point by itself. However, a "B" rating is not investment grade, regardless of the subgrade.
Which of these Treasury securities is in correct order of shortest to longest maturities? A) Notes, bonds, bills B) Bills, notes, bonds C) Notes, bills, bonds D) Bonds, notes, bills
B) Bills, notes, bonds Bills have the shortest maturities with a maximum of one year (52 weeks), notes are from two to ten years, and bonds have maturities of more than ten years.
Which of the following shows Treasury bills, Treasury bonds, and Treasury notes listed in ascending order of maturity? A) Bonds, notes, bills B) Bills, notes, bonds C) Bills, bonds, notes D) Notes, bills, bonds
B) Bills, notes, bonds Treasury bills have a maturity of less than one year, Treasury notes mature in 2 to 10 years, and Treasury bonds mature in 10 years or more. Therefore, in ascending order, short-term to long-term, they are T-bills, T-notes, T-bonds.
Which of the following obligations is backed by the full faith and credit of the United States Government? A) Federal National Mortgage Association (FNMA) B) Government National Mortgage Association (GNMA) C) Federal Home Loan Mortgage Corporation (FHLMC) D) Treasury receipts
B) Government National Mortgage Association (GNMA) GNMA is a government-owned corporation that supports the Department of Housing and Urban Development. Ginnie Maes are the only agency securities backed by the full faith and credit of the federal government.
Which of these reasons would allow for a municipality to issue revenue bonds easier instead of general obligation bonds? I. Revenue bonds do not require voter approval. II. Revenue bonds generally have a higher rating than GO bonds from the same issuer. III. Revenue bonds are not constrained by a statutory debt limit. IV. Revenue bonds are supported by ad valorem taxes. A) II and IV B) I and III C) II and III D) I and IV
B) 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.
Which of these is in correct order of priority for a corporate liquidation? A) Convertible bonds, participating preferred stock, common stock, subordinated debentures B) Secured bond, debenture, subordinated debenture, common stock C) Subordinated debenture, participating preferred stock, common stock, convertible preferred stock D) Guaranteed bond, secured bond, debenture, common stock
B) Secured bond, debenture, subordinated debenture, common stock Any debt issue is superior to any equity issue. Any preferred stock is senior to any common stock. A guaranteed bond is unsecured debt, or a debenture.
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? A) Secured bondholders first, general creditors last B) Secured bondholders first, subordinated bondholders last C) Secured bondholders first, accrued taxes last D) General creditors first, secured bondholders last
B) Secured bondholders first, subordinated bondholders last The liquidation priority is as follows: secured debt, unsecured debt and general creditors, then subordinated debt, and then equity holders with preferred shareholders first, followed by common shareholders. Therefore, of those that are listed here, secured bondholders would be paid first, and subordinated bondholders last. General creditors and taxes are paid at the same level.
Which of these statements regarding Treasury bills is correct? A) They are issued with initial maturities of 3, 12, 24, and 50 weeks. B) Treasury bills are the only type of Treasury security issued without a stated interest rate. C) They have the highest interest rate risk of all Treasury securities. D) They are usually issued at a slight premium to par value.
B) 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.
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) either a state or city government. D) a state.
B) 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.
An income bond is also known as A) a debenture and is unsecured. B) an adjustment bond and is unsecured. C) a debenture and is secured. D) an adjustment bond and is secured.
B) an adjustment bond and is unsecured. Income bonds or adjustment bonds are used when a company is reorganizing. The bonds only pay interest if the corporation has enough income to meet the obligations on the debt issue and are therefore unsecured.
All of the following are corporate secured bonds except A) mortgage bonds. B) debentures. C) collateral trust certificates. D) equipment trust certificates.
B) 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 customer says they have a diversified portfolio of notes and bonds. This means their portfolio consists primarily of A) equity securities. B) debt instruments. C) limited partnerships. D) hedge funds.
B) debt instruments. Notes and bonds are types of debt and the term is often used generically to represent a debt securities.
Money market instruments are typically A) equity securities with short- to intermediate-term maturities. B) fixed-income (debt) securities with short-term maturities. C) fixed-income (debt) securities with short- to intermediate-term maturities. D) equity securities with short-term maturities.
B) fixed-income (debt) securities with short-term maturities. Money market instruments are fixed-income (debt) securities with short-term maturities, typically one year or less.
Bondholders should expect that interest payments would always be forthcoming for all of the following except A) subordinated debentures. B) income bonds. C) debentures. D) convertible bonds.
B) income bonds. Income bonds pay interest only if earnings are sufficient and the payments to be made are declared by the board of directors (BOD). This is not true of any of the other fixed-income securities listed (debentures, subordinated debentures, or convertible bonds).
Treasury bills (T-bills) are A) issued at a discount, with a stated interest rate paid annually. B) issued at a discount to par, paying interest at maturity. C) issued at face value, with all interest paid in monthly checks. D) issued at face value, with a stated rate of return received as interest annually.
B) issued at a discount to par, paying interest at maturity. T-bills, the shortest-term government-issued securities, are not issued with a stated rate of return. Instead they are issued at a discount to par rather than face value, and they mature at par. The difference between the discounted price paid and the par value received at maturity is considered the interest.
All of the following are true of negotiable commercial paper except A) it is considered a money market instrument B) it is typically issued by banks C) it has a maximum 270-day maturity D) the issuers typically have strong credit ratings
B) it is typically issued by banks Commercial paper is short-term unsecured debt issued by corporations having very good credit ratings. With a maximum 270-day maturity, it is considered a money market instrument.
Your customer asks to buy a bond that carries a very attractive yield. When checking the bond, you see that it has a B rating from the major credit rating agencies. When communicating such information to a customer, all of the following terms are commonly used in describing a B-rated bond except A) noninvestment grade. B) lower grade. C) junk bond. D) high-yield.
B) lower grade. Though a B rating is certainly a lower investment-grade rating, that is not a typical term used in the industry. All of the other terms are terms normally associated with these bonds carrying a greater risk of default.
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 the state level only. B) tax free at all levels for U.S. citizens. C) taxable at all levels because the bonds are not issued by a state. D) taxable at the state and local level because she is not a resident of Puerto Rico, but still tax free at the Federal level.
B) 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.
An investor purchases a T-bill for $9,925 that will mature at $10,000. The difference between the $9,925 paid and the $10,000 that will be received is A) the discount to par and will be considered a capital gain at maturity. B) the discount to par and will be considered interest received at maturity. C) the premium above par and will be considered dividends received at maturity. D) the premium above par and will be considered the interest received at maturity.
B) the discount to par and will be considered interest received at maturity. T-bills are purchased at a discount to par. In this case, it is bought at $9,925, which is a $75 discount to the $10,000 par value to be received at maturity. Debt instruments pay interest not dividends, and the $75 difference between what was paid and what will be received is considered the interest paid on the T-bill at maturity.
A basis point is valued at A) 1% of market value. B) 1% of face value or $10. C) 1/100th of 1%. D) 1/1000th of 1%.
C) 1/100th of 1%. A basis point is a measurement of yield equal to 1/100 of 1%. A full percentage point is made up of 100 basis points (bps). A point is a measurement of the change in a bond's price which equals 1% of face value or $10 per bond.
Each year a bond pays semiannual interest payments of $20. This bond has a nominal yield of A) 2%. B) 1%. C) 4%. D) 20%.
C) 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%).
Which of these risks are not normally associated with bonds? A) Default risk B) Purchasing power risk C) Business risk D) Interest rate risk
C) Business risk Business risk is related to the growth prospects of a business and is most closely associated with common stock. Bond prices are subject to changes in interest rates. Default occurs when a company fails to meet its obligations to the bond holders. Most bonds are subject to a loss of purchasing power due to inflation.
Your customer is interested in receiving monthly income from a security that is guaranteed for principal and interest by the federal government of the United States. Which of the following securities best meets this request? A) FNMA Certificate B) 10-year T-note C) GNMA certificate D) Freddie Mac certificate
C) GNMA certificate GNMA certificates pay monthly principal and interest. The others listed here pay semi-annually. Treasury issues and GNMA issues are backed by the full faith and credit of the United States government.
For municipal debt issues, which of the following is true? A) Both revenue bonds and general obligation (GO) bonds are backed by the municipality's good faith and credit. B) Neither general obligation (GO) nor revenue municipal issues are backed by the municipality's good faith credit. C) Revenue bonds are self-supporting, while general obligation (GO) bonds are backed by the municipality's good faith and credit. D) General obligation (GO) bonds are self-supporting, while revenue bonds are backed by the municipality's good faith and credit.
C) Revenue bonds are self-supporting, while general obligation (GO) bonds are backed by the municipality's good faith and credit. Revenue bonds are self-supporting. The project or facilities revenue supports the debt service of the bond. GO bonds are backed by the municipality's good faith and credit, namely the municipality's authority to tax.
Which of the following statements regarding $1,000 par value 6.5% bond trading offered at 110 is true? A) The bond's yield to maturity (YTM) and stated yield are the same. B) The bond is offered at a discount. C) The bond's current yield equals $65 ÷ $1,100 or 5.9%. D) The bond's current yield is lower than its yield to maturity (YTM).
C) The bond's current yield equals $65 ÷ $1,100 or 5.9%. This bond is trading at a premium (110 or $1,100). Given the bond is trading at a premium, the current (stated) yield will be higher than its YTM. A bond's current yield is calculated by dividing its annual interest ($65) by its current (market) price ($1,100), which in this case equals 5.9%
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 statutorily forbidden. B) They may do so with the approval of their state senators. C) They may do so with voter approval. D) This is prohibited by the federal government.
C) 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 statements is true of income bonds? A) Unlike other bonds, they pay income monthly. B) Unlike other bonds, they pay income quarterly. C) Unlike other bonds, they don't pay income unless declared by the board of directors. D) Unlike other bonds, they pay income annually.
C) Unlike other bonds, they don't pay income unless declared by the board of directors. An income bond is normally issued by a corporation emerging from bankruptcy. In order to allow the company to regain a firmer footing, these bonds only pay interest when the board of directors declares that a payment will be made.
T-bills are issued (auctioned) by the U.S. Treasury Department how often? A) Monthly B) Only when the U.S. Treasury Department deems it necessary C) Weekly D) Bimonthly
C) Weekly Treasury bills (T-bills) are issued (auctioned) by the U.S. Treasury weekly.
When interest rates in the open market move up or down, a bond's coupon rate will A) be adjusted to match the open-market rates. B) move inversely to the open-market interest rates. C) be unaffected by the open-market interest rates. D) move with the open-market interest rates.
C) be unaffected by the open-market interest rates. Though the price of a bond will react to market forces, such as supply and demand, and be interest-rate sensitive (inverse), the coupon is always the same: A fixed percentage of par value established by the issuer when the bond was first issued.
A corporation has issued debt securities backed by the shares of another corporation that it owns. These debt securities are known as A) mortgage bonds. B) equipment trust certificates. C) collateral trust bonds. D) debentures.
C) collateral trust bonds. A corporation can deposit securities it owns into a trust to be used as collateral to back its debt issues. When this is done, the securities issued are known as collateral trust bonds.
All of the following may be callable except A) corporate bonds. B) muni bonds. C) common stock. D) preferred stock.
C) common stock. Fixed income and debt securities may have a call feature. Common stock does not.
Money market instruments can be associated with all of the following except A) short-term debt instruments. B) highly liquid debt instruments. C) high-yielding debt instruments. D) nonvolatile and safe debt instruments.
C) high-yielding debt instruments. Money market instruments are highly liquid, short-term debt securities. The short time to maturity makes them less volatile and relatively safe, suitable to meet short-term investment horizons. In return for the safety, investors sacrifice high potential yields for low yields.
A statutory debt limitation imposed on a municipality restricts its authority regarding A) raising tax rates. B) insuring municipal bond issues. C) issuing general obligation (GO) bonds. D) selling municipal revenue bonds.
C) issuing general obligation (GO) bonds. A municipality may be limited by statute regarding the amount of GO debt it may incur, thus limiting the GO bonds it can issue.
The U.S. federal government is the nation's A) largest borrower and therefore considered least safe credit risk. B) smallest borrower and therefore considered best credit risk. C) largest borrower and considered the best credit risk. D) smallest borrower and considered least safe credit risk.
C) largest borrower and considered the best credit risk. The federal government is the nation's largest borrower, as well as the best credit risk. Securities issued by the U.S. government are backed by its full faith and credit. There is no stronger backing than that of the U.S. federal government.
T-bonds are the U.S. government's A) short-term debt of 1 year or less. B) only tax-free debt. C) long-term debt of over 10 years. D) intermediate-term debt of 2-10 years.
C) long-term debt of over 10 years. T-bonds have a maturity in excess of 10 years when issued.
If a bond is purchased at a premium, the yield to maturity is A) higher than the nominal yield. B) the same as the current yield. C) lower than the nominal yield. D) higher than the current yield.
C) lower than the nominal yield. A bond purchased at a premium is purchased for an amount greater than the face amount of the bond. The premium paid reduces both the current yield and the yield to maturity.
Short-term securities that generate funds for a municipality that expects alternate longer-term financing include all of the following except A) revenue anticipation notes (RANs). B) tax anticipation notes (TANs). C) real estate investment trusts (REITs). D) bond anticipation notes (BANs).
C) real estate investment trusts (REITs). TANs, for example, are used to finance current operations in anticipation of future tax receipts. This helps municipalities to even out cash flow between tax collection periods. Similarly, BANs will be converted to long-term financing through the sale of bonds, and so on. REITs are not a municipal security. They issue shares of beneficial interest in a trust set up for real estate investment.
An investor holding T-bonds will receive interest payments A) biennially. B) annually. C) semiannually. D) monthly.
C) semiannually. Treasury bonds (T-bonds) and notes (T-notes) pay interest on a semiannual basis.
Interest on a 7% corporate bond would be paid to the investor as A) one annual $70 check. B) several checks totaling $70 each year. C) two semiannual checks for $35 each. D) two semiannual checks for $70 each.
C) two semiannual checks for $35 each. Interest on corporate bonds is paid twice per year, or semiannually. The interest rate reported, however, is an annual rate. Thus a 7% bond would pay 7% of par ($1,000), or $70, per year as two semiannual checks for $35 each.
Accrued interest on corporate bonds is calculated using A) 30 days in each month and 365 days in each year. B) actual days in each month and actual days in the year. C) actual days in each month and 360 days in each year. D) 30 days in each month and 360 days in each year.
D) 30 days in each month and 360 days in each year. Corporate and municipal bonds use the artificial 30-day, 360-day calendar, but government bonds use actual days.
Your customer is in the 30% federal tax bracket. They consider purchasing a 7% corporate bond. Their after-tax yield would be A) 10%. B) 2.1%. C) 7%. D) 4.9%.
D) 4.9%. Explanation The formula for the calculation is 7% (corporate rate) × (100% — 30% (tax bracket)). 7 × (1 - 0.3) = = 7 × 0.7 = 4.9%
All of the following are considered money market instruments except A) negotiable jumbo certificates of deposit (CD). B) banker's acceptances (BAs). C) commercial paper. D) American depositary receipts (ADRs).
D) American depositary receipts (ADRs). Money market instruments are short-term debt instruments. ADRs are equity securities. Remember that in order to be considered a money market security, the debt instrument should have one year or less to maturity. Banker's acceptances (BAs) and commercial paper both have maximum maturities of 270 days; most negotiable jumbo certificates of deposit (CD) mature in one year or less.
The United States Congress has authorized all of the following enterprises to issue securities except A) Government National Mortgage Association (GNMA). B) Federal Home Loan Mortgage Corporation (FHLMC). C) Federal National Mortgage Association (FNMA). D) Federal Deposit Insurance Corporation (FDIC).
D) Federal Deposit Insurance Corporation (FDIC). Explanation In addition to U.S. Treasury securities, the U.S. Congress authorizes certain agencies of the federal government to issue debt securities. These would include GNMA, FNMA, and FHLM. The Federal Deposit Insurance Corporation (FDIC) does not issues securities but is set up to insure bank deposits in the event of bank failure.
A bond with a 4.5% stated yield might make I. annual interest payments of $45. II. annual interest payments of $450. III. semiannual interest payments of $2.50. IV. semiannual interest payments of $22.50. A) I and III B) II and IV C) II and III D) I and IV
D) I and IV Explanation 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.
With money market securities, the risks are I. lack of liquidity. II. a lower return than with longer-term instruments. III. relative safety compared with other longer-term debt instruments. IV. the potential reinvestment of principal at different rates over short periods of time. A) I and IV B) I and III C) II and III D) II and IV
D) II and IV Explanation Because of their short-term maturities, money market instruments are relatively liquid and safe compared with other debt securities. These are considered advantages. The risks, however, would be lower returns (a trade-off for the safety) and potentially having to reinvest one's funds at a different rate each time the instrument matures (short intervals). In this light, not only is income minimal, but it will fluctuate with each new instrument purchased.
A bond backed by a corporation's full faith and credit is secured. unsecured. backed by a specific asset. not backed by any assets. A) I and III B) I and IV C) II and III D) II and IV
D) II and IV Explanation When a bond is backed by a corporation's full faith and credit, it is backed only by the reputation, credit record, and financial stability of the corporation. Not being backed by any of the corporation's assets, this bond is unsecured.
Your customer is a resident of the State of California. Which of the following debt issues would generate interest that would be taxable to your customer at the state level but not taxable at the federal level? A) 10-year STRIP B) Los Angeles County, California, general obligation bond C) California Steel, Inc., debenture D) Phoenix, Arizona, Municipal Water District revenue bond
D) Phoenix, Arizona, Municipal Water District revenue bond A municipal bond's interest is received tax free at the federal level but is only tax free at the state level to residents of the state from which the bond was issued. Treasury issues are taxable at the federal level but not the state level. A corporation's interest payment is taxed at all levels.
A bond has been structured so that the principal of the entire issue matures on a single date. This is what type of bond? A) Serial B) Single maturity C) Balloon D) Term
D) Term Explanation Term bonds are structured so that the principal of the entire issue is all payable on the same date—the maturity date.
A "D" rating from Standard & Poor's indicates which of the following? A) The issuer has missed payment in the past but is current at this time. B) The issue is considered slightly speculative but appears financially sound at the moment. C) The issue is in good standing but is speculative. D) The issuer is in default.
D) The issuer is in default. Explanation A "D" indicates the issue is currently in default. Remember D for default.
A company has issued bonds (debt securities) to investors. For these investors, these securities represent A) ownership in the existing company. B) liability for the issuing company's debt. C) equity in the issuing company. D) a loan to the issuing company.
D) a loan to the issuing company. Explanation Purchasers of bonds have essentially given the issuer a loan for which they will receive repayment plus interest.
Assuming $1,000 par value, a bond priced at $1,200 is trading at A) a discount. B) discount to premium. C) par. D) a premium.
D) a premium. Explanation When a bond is priced above par value, it is trading at a premium (premium to par).
When the interest rates in the marketplace moves up or down, the price of all bonds move A) subversely. B) reversely. C) conversely. D) inversely.
D) inversely. Explanation Interest rates and bond prices move in opposite directions. This is known as an inverse relationship.
Lando Entertainment, Inc., issues a bond collateralized by a trust holding the company's Las Vegas headquarters. This type of bond is called a A) guaranteed bond. B) headquarters debenture. C) collateral trust bond. D) mortgage bond.
D) mortgage bond. Explanation A secured bond backed by real estate is called a mortgage bond. Collateral trust bonds hold other securities in trust as collateral. A guaranteed bond is an unsecured bond backed by a third party. A headquarters debenture is a fictional thing.
All of the following statements about a bond selling above par value are true except A) the nominal yield always stays the same. B) the current yield is higher than the yield to maturity. C) the yield to maturity is lower than the nominal yield. D) the nominal yield is lower than the yield to maturity.
D) the nominal yield is lower than the yield to maturity. Explanation Nominal (coupon) yield is fixed and stays the same with all bonds. A bond selling above par is selling at a premium, so the yield to maturity is lower than the current yield—which, in turn, is lower than the nominal yield.
Evan is a 75-year-old customer with $100,000 to invest. He would like the money to generate additional income. He relates that he intensely hates paying taxes and dislikes the government in general. He is, however, interested in tax-free municipal bonds. All of these are important to gather before making a recommendation except A) the makeup of his portfolio. B) his current tax bracket. C) his liquid net worth. D) why he hates the government.
D) why he hates the government. Explanation Though it might be interesting to find out why he hates the government, the others are all basic points of suitability.
