Fixed Income Basics

A Registered Investment Adviser has a client with $100,000 in a 3% savings account. The RIA recommends leaving $20,000 in the account and placing $80,000 in an equity fund expected to yield 10% for the year. The client rejects the proposal. The opportunity cost of the decision is: (question#18)

$5,600

An investment made 10 years ago is worth $100,000. If the annual return over these years was 7.20%, then the original investment amount was: (question #16)

$50,000

What is the equation for yield to maturity?

(Annual income + annual capital gain (discount bond))/average bond value

What is the formula for the yield to maturity for a discount bond?

(annual interest + annual capital gain)/(Bond cost+redemption price)/2

What is the formula for the yield to maturity for a premium bond?

(annual interest- annual capital loss)/(bond cost + redemption price)/2

Which security's price would fluctuate the most due to a change in interest rates? A. 10 year GNMA with an 8% coupon and a 9% yield to maturity B. 10 year zero-coupon Treasury Note with a 7% yield to maturity C. 10 year AA rated corporate bond with an 8.5% coupon and a 9.3% yield to maturity D. 10 year junk-rated corporate bond with a 9% coupon and a 10% yield to maturity

10 Year zero-coupon treasury note with a 7% yield to maturity

In 2016, a customer buys 5 GE 10% debentures, M '26, at 85. The interest payment dates are Feb 1st and Aug 1st. The bonds are callable as of 2021 at 103. The yield to maturity on the bonds is: (question #49)

12.43%

Which security would be expected to have the greatest duration? A. 5 year, 5% coupon bond B. 5 year, zero-coupon bond C. 20 year, 6% coupon bond D. 20 year, zero-coupon bond

20 year, zero-coupon bond

A customer buys a 2-year maturity, 10% coupon bond at par. If market interest rates rise to 12% then the bond's price will fall by approximately: (question #8)

3.4%

A municipal dealer quotes a 9 year, 6% term revenue bond at 109. The bond is callable in 3 years at a 3% call premium. The yield to call is: (question #55)

3.77%

A municipal dealer quotes a 2 year, 8% term revenue bond at 106. The yield to maturity is: (question #53)

4.85%

In 2015, a customer buys 1 GE 10%, $1,000 par debenture, M '40, at 120. The interest payment dates are Jan 1st and Jul 1st. The bond is callable in 3 years at an 8% call premium. The yield to call on the bond is: (question #56)

5.26%

A municipal dealer quotes a 2 year, 6% term revenue bond at 99. The yield to maturity is : (question #48)

6.53%

In 2016, a customer buys 1 GE 8%, $1,000 par debenture, M '31, at 110. The interest payment dates are Jan 1st and Jul 1st. The yield to maturity on the bond is: (question #52)

6.98%

A municipal dealer quotes a 9 year, 6% term revenue bond at 92. The yield to maturity is: (question #50)

7.18%

In 2016, a customer buys 1 GE 10%, $1,000 par debenture, M '31, at 115. The interest payment dates are Jan 1st and Jul 1st. The yield to maturity on the bond is: (Question #54)

8.37%

A yield quote change of 5 basis points on municipal bonds with a 6.25% nominal yield will result in the greatest dollar price change for bonds quoted at:

8.50% with 4.5 years to maturity (general rule, the deeper the discount, the more volatile the bond's price movements in response to market interest rate changes)

In 2016, a customer buys 1 GE 8%, $1,000 par debenture, M'31, at 85. The interest payment dates are Jan 1st and Jul 1st. The yield to maturity on the bond is: (question#51)

9.73%

Which bond will decrease the most in price, if interest rates rise by 50 basis points?

A bond with high duration

Years ago, a bond was issued at par with a 7% coupon. This year, new issue bonds of similar credit quality are being issued at 10%. Which statement is true? A. The new bonds will be issued at a premium to the current price of the 7% bonds B. The new bonds will be issued at a discount to the current price of the 7% bonds C. The new bonds will be issued at the same price as the current price of the 7% bonds D. There is no relationship between the prices of the 2 bond issues

A. the new bonds will be issued at a premium to the current price of the 7% bonds

What is the formula for the yield to call date?

Annual income- annual capital loss to the call date/ (purchase price + call price)/ 2

The yield to maturity on a bond is more than the yield to call. This bond is trading:

At a premium

The lowest investment grade rating is:

BBB

A 65 year old widow that is in a low tax bracket and that has a low risk tolerance wishes to make an investment that will provide income. Which is the best recommendation?

Bank certificates of deposit

An investor who places the majority of assets in a single stock exposes the portfolio to:

Business risk

What are the terms relating to mortgage backed securities that are synonymous?

Call risk, contraction risk, prepayment risk

During periods of high inflation, the money supply typically has been:

Expanding

When short term interest rates are the same as long term interest rates, the yield curve is said to be:

Flat

What happens to the rate of return calculation on a non-callable bond if the rate of interest stays the same and the time intervals are changed? I. Shortening the time intervals will increase the rate of return II. Shortening the time intervals will decrease the rate of return III. Lengthening the time intervals will increase the rate of return IV. Lengthening the time intervals will decrease the rate of return

I and IV

When a recession is expected: I. yields on corporate bonds will increase II. yields on U.S. Government bonds will increase III. yields on corporate bonds will decrease IV. yields on U.S. Government bonds will decrease

I and IV

Yield curve analysis is useful for an investor in debt securities because: I. the curve shows market expectations for interest rates II. investors can compare rates of return relative to changing maturities III. the yield of a specific security can be compared to the market expectation for similar securities IV. the curve can show relative demand for differing maturities by comparing the change in yield to the change in maturity

I, II, III, IV

A corporation has issued 10% AA rated sinking fund debentures at par. Three years later, similar issues are being offered in the primary market at 8%. Which are TRUE statements about the outstanding 10% issue? I. The current yield will be higher than the nominal yield II. The current yield will be lower than the nominal yield III. The dollar price of the bond will be at a premium to par IV. The dollar price of the bond will be at a discount to par

II and III

During periods when a normal yield curve exists, which of the following statements are TRUE? I. Long term bond prices are less volatile than short term bond prices II. Long term bond prices are more volatile than short term bond prices III. Yields on long term maturities are greater than yields on short term maturities IV. Yields on short term maturities are greater than yields on long term maturities

II and III.

Which risks are unique to mortgage backed securities? I Interest rate risk II Contraction risk III Credit risk IV Extension risk

II and IV

A 5% coupon bond is being offered on a 6% basis. If interest rates for similar bonds rise above 6%, the basis for this bond will:

Increase

The cost of money is known as the:

Interest rate

The quantitative method of evaluating investments that finds the interest rate that discounts periodic cash inflows and outflows to a present value of "0" is:

Internal rate of return

To compute the interest rate that will discount the present value of cash flows to be received in upcoming years to "0", the method to be used is called:

Internal rate of return

The risk of tax law changes that may negatively affect securities held in a portfolio is called:

Legislative risk

A trader maintains a position in a small capitalization stock that has low trading volume. The trader has a high level of:

Liquidity risk

A bond is rated BBB by Standard and Poor's. The bond is:

Lowest quality investment grade

The effect on the prices of securities due to the "changing tastes, likes and dislikes" of investors is:

Market risk

The primary risk associated with investing in an index fund is:

Market risk

What is the best investment recommendation for an individual in a high tax bracket who is risk averse?

Municipal bonds

The quantitative method of evaluating investments that uses periodic cash inflows and outflows is:

Net present value

A yield curve with a positive slope is one that is:

Normal

2 brothers, Joe and Bob get equal dollar amounts of securities as a gift. Joe immediately sells his securities and deposits the money to a bank account. On the other hand, Bob keeps his securities positions and holds them in a brokerage account. After 5 years, Joe has $10,000 in his bank account, while Bob has $30,000 in his brokerage account. The $20,000 difference between the account balances is explained by:

Opportunity cost

A customer has invested in the bonds of companies based in a third world country and is concerned about the results of an upcoming election for the country's president and that this could negatively impact the value of the customer's bonds. This is called:

Political risk

What security is most affected by interest rate risk?

Preferred stock

The risk that is unique to mortgage backed securities is:

Prepayment risk

A retiree who receives fixed annuity payments is subjecting him or herself to:

Purchasing power risk

If Congress decides to lower income tax rates, municipal bond yields will:

Rise

If an investor believes that inflation rates will be rising in the foreseeable future, he might rebalance his portfolio to include:

Tangible assets

Given the formula: ( Corporate Yield %) x (1 - Tax Bracket %) ='X' X is equal to the:

Tax-free equivalent yield

Over the past 4 years, a customer's fixed income portfolio value has dropped by 2%. During the same period, the Consumer Price Index has dropped by 5%. Based on these facts which statement is true? A. The customer's purchasing power has increased B. The customer's purchasing power has decreased C. The customer's purchasing power is unaffected D. The effect on the customer's purchasing power cannot be determined

The customer's purchasing power has increased

Bond A and Bond B both have an 8% coupon. Bond A matures in 2 years, while Bond B matures in 10 years. If market interest rates rise:

The price of Bond B will fall faster than the price of Bond A

What happens to the rate of return calculation on a non-callable bond if the rate of interest stays the same and the time intervals lengthen?

The rate of return declines

What represents business risk?

The risk of buying a single stock

If a callable bond is purchased at a premium , and is then called at par which of the following is true?

The yield to call is lower than the nominal yield.

A customer has just received a $100,000 inheritance and wants to know what to do with the money until he decides how to use it. He thinks that he will make his decisions on what to do within 3 months. The best recommendation is for the customer to buy:

Treasury Bills

Yield to maturity would be appropriate as a measure of the return from investing in:

Treasury bonds, corporate bonds, municipal bonds

True or False: The yield to maturity of a bond is the same as the internal rate of return.

True

An investor buys a $25,000, 8% corporate bond maturing in 2041 for $30,000. The bond is callable starting in the year 2016. What is the most appropriate measure for calculating yield?

Yield to Call

An investor buys a $30,000, 10% corporate bond maturing in 2041 for $24,000. The bond is callable starting in the year 2016. What is the most appropriate measure for calculating yield?

Yield to Maturity

For bonds trading at a premium, rank the yield measures from lowest to highest?

Yield to call; yield to maturity; current; nominal

An investor buys a $100,000, 7% corporate bond maturing in 2043 for $70,000. The bond is callable starting in the year 2023. What is the most appropriate measure for calculating yield?

Yield to maturity

Which security would suffer the largest adverse price movement due to a rise in interest rates?

Zero-coupon bond

When borrowing money, the interest rate charged measures the

cost of money

When the yield curve is inverted, all of the following statements are true:

demand for long term debt greatly exceeds demand for short term money market securities; the Federal Reserve is pursuing a "tight money" policy; investors are more likely to shift funds out of equity investments into money market instruments

The present value of a fixed income security is based on the:

discounting of all expected future payments to be made by the issuer of the security

Yield curve analysis is useful for an investor in debt securities for all of the following reasons

investors can compare rates of return relative to changing maturities; the yield of a specific security can be compared to the market expectation for similar securities; the curve shows market expectations for interest rates

If the market rate of interest is 10%, the net present value of $1,000 to be received 2 years from now is: (question #5)

less than $1,000

The yield curve shows the yields of different

maturities of the same type of security

A retired married customer, age 73, has a portfolio that is invested in Blue Chip Stocks and Treasury bonds that provides current income. The customer is concerned that he is paying a very high Federal and State combined income tax rate. An appropriate recommendation for this customer would be to diversify part of his portfolio into an investment in:

municipal bonds

An investment in treasury bills has:

no risk

During a period when the yield curve is flat:

short term rates are more volatile than long term rates

A customer is considering buying a new $30,000 car and will put $6,000 down and will borrow the remaining $24,000 from the automobile finance company. Assume that this customer has $24,000 in the bank earning 4% interest, but does not wish to use this money to pay for the new car. The loan terms offered are: 12 month loan: 0% 36 month loan: 2% 48 month loan: 6% To determine the cost of the loan, the customer should:

use net present value

The closest approximation of the internal rate of return on a bond is the bond's:

yield to maturity