Kaplan Unit 1
A customer owns cumulative preferred stock (par value of $100) that pays an 8% dividend. The dividend has not been paid this year or for the two previous years. How much must the company pay the customer per share before it may pay dividends to the common stockholders? A) $24. B) $8. C) $16. D) $0.
The correct answer was - A: $24. Explanation: If the company is going to pay a common stock dividend, it must pay any preferred dividends first. A cumulative preferred stockholder must also receive all dividends in arrears. There are $16 due in back dividends in addition to $8 this year, for a total of $24.
An investor's portfolio includes ten bonds and 200 shares of common stock. If both positions increase by one point, what is the appreciation? A) $300. B) $210. C) $220. D) $100.
The correct answer was - A: $300. Explanation: The gain would be $100 for the bonds (one point for one bond is $10 × 10 bonds) and $200 for the common stock (one point is $1 × 200 shares). The total portfolio gain is $300.
U.S. Treasury bills are issued for all of the following maturities EXCEPT: A) 39 weeks. B) 4 weeks. C) 26 weeks. D) 13 weeks.
The correct answer was - A: 39 weeks. Explanation: U.S. Treasury bills are issued with 4, 13, 26, and 52-week maturities. There are no 8-week T-bills.
Which of the following interest rates is determined by a vote rather than market forces? A) Discount rate. B) Federal funds rate. C) Broker call loan rate. D) Prime rate.
The correct answer was - A: Discount rate. Explanation: The discount rate is set by vote of the Federal Reserve Board. The other three rates are set directly or indirectly in response to market forces.
Common stockholders may take advantage of which of the following features of their security? I. The right to vote. II. The potential appreciation of stock value. III. Tax-free income. IV. Guaranteed payment of dividends
The correct answer was - A: I and II. Explanation: Common stockholders are the owners of the corporation, and, as owners, they may vote their shares and potentially enjoy appreciation of the value of their stock. They are not entitled to tax-free income or guaranteed payment of dividends.
Which of the following statements are NOT true concerning revenue bonds? I. They are secured by a specific pledge of property. II. They are a type of general obligation bond. III. Generally, their interest is tax-exempt at the federal level. IV. They are analyzed primarily on the project's ability to generate earnings.
The correct answer was - A: I and II. Explanation: Revenue bonds are not secured by a specific pledge of property and are not a type of general obligation bond. They are secured by user fees, such as tolls.
Which of the following statements regarding a two-for-one stock split are TRUE? I. The share price is reduced by half. II. The total market value of the outstanding stock decreases. III. The total market value of the outstanding stock may increase or decrease as a result of the split. IV. The number of shares doubles.
The correct answer was - A: I and IV. Explanation: In a two-for-one stock split, the number of outstanding shares is doubled and the price is halved. The total market value of the issuer's stock therefore remains the same.
With regard to the suitability for a customer of buying shares of an international stock fund, which of the following circumstances will likely have a positive effect on NAV? I. A strengthening dollar. II. A weakening dollar. III. A strengthening economy abroad. IV. A weakening economy abroad.
The correct answer was - A: II and III. Explanation: If the dollar weakens, foreign currencies buy more dollars; therefore on redemption, NAV (in U.S. dollars) should benefit. Furthermore, a strengthening economy abroad should have a favorable impact on the foreign companies in which the fund invests and, thus, on the NAV of the shares.
Which of the following characteristics describe Treasury bills? I. Issued at face value. II. Issued at a discount. III. Pay semiannual interest. IV. Pay all interest on maturity.
The correct answer was - A: II and IV. Explanation: Treasury bills are issued at a discount and pay all interest at maturity.
A debt security issued by the City of Chicago that is backed by the rents received from a corporation leasing industrial park facilities is likely to be what kind of bond? A) Industrial development revenue. B) Collateral trust. C) Convertible. D) General obligation.
The correct answer was - A: Industrial development revenue. Explanation: Industrial Development Revenue bonds (IDRs) are used to finance municipal projects, such as industrial parks, that are in turn leased to private corporations. The lease payments serve as security for the bond.
Which of the following statements is true of Treasury STRIPS, but NOT of a Treasury receipt? A) It is backed by the full faith and credit of the federal government. B) Its stripped-off interest coupons are sold separately. C) It may be stripped and issued by a securities broker/dealer. D) Investors may purchase it at a discount.
The correct answer was - A: It is backed by the full faith and credit of the federal government. Explanation: Treasury receipts are stripped treasuries, and are issued in stripped form by an institution other than the federal government (such as a securities broker/dealer). Only direct issues of the U.S. government are backed by its full faith and credit. STRIPS are issued directly by the U.S. government and are its direct obligations. Receipts are backed by the firm that stripped and issued them.
Which of the following secures an industrial development revenue bond? A) Net lease payments from a corporation. B) State tax. C) Trustee. D) Municipal tax.
The correct answer was - A: Net lease payments from a corporation. Explanation: Municipalities issue industrial development revenue bonds to construct a facility that will be used by a corporation. When this occurs, the corporation must sign a long-term lease. Although classified as municipal securities, IDRs are backed by the lease payments of the corporation participating in the project.
To benefit the economy, business activity needs to increase. Which of the following policy measures might a supply-side economist urge the government to implement? A) Reduce recordkeeping and reporting requirements imposed on business. B) Require businesses to provide more funds for employee benefits such as health care and retirement. C) Lower the discount rate. D) Raise taxes.
The correct answer was - A: Reduce recordkeeping and reporting requirements imposed on business. Explanation: Supply-side economists concentrate on reducing the portion of cash flow and other assets that businesses (the suppliers) must allocate to matters other than the conduct of business. The discount rate is controlled by the Federal Reserve, not the government.
When a company liquidates assets, in which order are claims satisfied, earlier to later? A) Secured bondholders, debentures, preferred stockholders, common stockholders. B) Debentures, secured bondholders, common stockholders, preferred stockholders. C) Common stockholders, preferred stockholders, secured bondholders, debentures. D) Secured bondholders, preferred stockholders, common stockholders, debentures.
The correct answer was - A: Secured bondholders, debentures, preferred stockholders, common stockholders. Explanation: With this type of question, look for what you know should be first and last; it simplifies choosing the correct answer. Only one choice starts with secured bondholders and ends with common stockholders.
If the current dividend of a stock increased by 5% while the offering price increased by 7%, the current yield of the stock: A) decreased. B) remained the same. C) cannot be determined from the information given. D) increased.
The correct answer was - A: decreased. Explanation: Current yield is determined by dividing the annual dividend by the current offering price of the stock. If the offering price (the denominator of the fraction) has increased by relatively more than the annual dividend (the numerator), the value of the fraction is lower.
Banks pay the federal funds rate for: A) loans from other banks. B) loans offered by major financial institutions other than banks. C) loans from broker/dealers. D) short-term loans from the government.
The correct answer was - A: loans from other banks. Explanation: The federal funds rate is the rate of interest at which banks may borrow excess funds from other banks, usually on an overnight basis.
DMF Company has $50 million of convertible bonds (convertible at $50) outstanding. The current market value of DMF's stock is $42. The bond indenture contains a nondilution feature. If DMF declares a 10% stock dividend, the new conversion price will be: A) lower than $50. B) higher than $50. C) $50. D) the stock's current market price.
The correct answer was - A: lower than $50. Explanation: With an antidilution feature, the issuer will increase the number of shares available upon conversion if the company declares a stock split or stock dividend. This means the bondholder must be able to convert it to more shares, which requires a lower conversion price.
A 7% bond is selling to yield 4.5%. The next time interest is paid, an investor who owns $10,000 face amount of the bonds will receive: A) $225. B) $350. C) $450. D) $700.
The correct answer was - B: $350. Explanation: The bond is a 7% bond. The total amount paid each year on 10 bonds is $700. The amount for an individual semi-annual interest payment is $350.
If GHI currently has earnings of $3 and pays an annual dividend of $1.00 and GHI's market price is $20, the current yield is: A) 3%. B) 5%. C) 15%. D) 17%.
The correct answer was - B: 5%. Explanation: The current yield is calculated by dividing the annual dividend by the current market value ($1.00/$20.00 = 5%).
The current yield on a bond with a coupon rate of 7.5% currently selling at 105½ is approximately: A) 8.5%. B) 7.1%. C) 7.5%. D) 8%.
The correct answer was - B: 7.1%. Explanation: 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%. Note that the answer must be lower than the coupon rate, and only one answer fits.
How often do Treasury notes pay interest? A) Once a year. B) Every six months. C) With the same frequency as Treasury bills. D) Once a month.
The correct answer was - B: Every six months. Explanation: Unlike Treasury bills, T-notes pay interest every six months.
Which of the following are steps that Congress and the President may NOT take in attempting to benefit the economy? I. Lowering the discount rate. II. Lowering taxes. III. Increasing the purchase of short-term government debt instruments. IV. Reducing spending.
The correct answer was - B: I and III. Explanation: The President and Congress have authority over taxing and spending. The other choices are restricted to the Federal Reserve, a corporation that is not part of the government.
Which of the corporate bonds listed below have a nominal yield in excess of its current yield? I. ABC 8s of 2015 at 110 II. DEF 6.3s of 2018 at 100 III. GHI 5s of 2020 at 96 IV. JKL cv 4s of 2015 at 125
The correct answer was - B: I and IV. Explanation: Any bond selling at a price in excess of the par value, usually called a premium, will have a current yield that is lower than the stated or nominal yield.
Which of the following set fiscal policies? I. Securities and Exchange Commission (SEC). II. President. III. Congress. IV. Federal Reserve Board (FRB).
The correct answer was - B: II and III. Explanation: Fiscal policy consists of the federal tax and spending policies set by Congress or the president in an effort to benefit the economy.
U.S. government securities that are deposited with a trustee against which certificates are sold representing principal payments only on the securities are: I. clipped bonds. II. stripped bonds. III. subject to annual taxation on the per year accreted amount. IV. subject to taxation at maturity.
The correct answer was - B: II and III. Explanation: U.S. government securities that are deposited with a trustee and against which certificates are sold representing principal payments only on the securities are referred to as Treasury STRIPS. These are zero-coupon bonds issued by the U.S. government and are subject to annual taxation on the per-year accreted amount.
A customer buys a long-term, 10% Treasury bond with a current yield of 12% and holds the bond until one year before maturity. She sells the bond when the short-term T-bill rate is 8%. Which of the following statements are CORRECT? I. The bond was purchased at a premium. II. The bond was purchased at a discount. III. The bond was sold at a premium. IV. The bond was sold at a discount.
The correct answer was - B: II and III. Explanation: When the yield is higher than the coupon, it means the bond was purchased at a discount. Since the question tells us the T-bills are now yielding 8% and she has a bond maturing within a year with a 10% coupon, she would be able to sell that bond at a premium.
Rank the following from first to last in order of payment at liquidation of a corporation. I. General creditors. II. Preferred stock. III. Subordinated debentures. IV. Accrued taxes.
The correct answer was - B: IV, I, III, and II. Explanation: The complete order of liquidation is as follows: wages, taxes, secured debt, debentures and general creditors, subordinated debentures, preferred stock, common stock.
If an investor purchases $50,000 face value of 5.10 bonds at par due in 2025 and holds them to maturity, which of the following statements is TRUE? A) The investor will receive $50,000, the final two interest payments, and 5.10 market gain at maturity. B) The investor will receive $50,000 and the final interest payment at maturity. C) The investor will receive $50,000 plus 5.10 at maturity. D) The investor will receive $50,000 less 5.10 market discount at maturity.
The correct answer was - B: The investor will receive $50,000 and the final interest payment at maturity. Explanation: At maturity, the investor will receive par ($50,000) plus the last semi-annual interest payment.
An ADR is used to: A) sweeten a bond offering. B) facilitate trading foreign securities in U.S. markets by U.S. citizens living in the United States. C) facilitate trading U.S. securities in foreign markets by U.S. citizens living abroad. D) finance foreign trade in which U.S. citizens are engaged.
The correct answer was - B: facilitate trading foreign securities in U.S. markets by U.S. citizens living in the United States. Explanation: American depositary receipts (ADRs) make trading in foreign securities easier in U.S. markets for U.S. investors.
A company that has issued cumulative preferred stock: A) forces conversion of the preferred that is trading at a discount to par, thereby eliminating the need to pay past-due dividends. B) pays past and current preferred dividends before paying dividends on common stock. C) pays the preferred dividend before paying the coupons due on its outstanding bonds. D) pays the current dividends on the preferred, but not the past dividends on the preferred, before paying a dividend on the common.
The correct answer was - B: pays past and current preferred dividends before paying dividends on common stock. Explanation: Current and unpaid past dividends on cumulative preferred stock must be paid before common stockholders can receive a dividend. Dividends in arrears on cumulative preferred have the highest priority of dividends to be paid. Bond interest is always paid before dividends.
An investor has bonds maturing in two weeks. He plans to purchase some bonds he has identified on the secondary market that have a 6% coupon rate. If interest rates decline before the investor can purchase the new bonds, he can expect the income he will receive from the new bonds to: A) decline. B) stay the same. C) balloon. D) increase.
The correct answer was - B: stay the same. Explanation: Fluctuations in interest rates will affect a bond's price, but will not affect the bond's payable interest. The percentage interest payable for use of money is stated on the face of a bond and is part of the bond indenture, a legal obligation on the part of the issuing company.
Treasury stock is: A) preferred stock. B) stock repurchased by the issuer. C) authorized but unissued stock owned by the company. D) issued by the U.S. Treasury Department.
The correct answer was - B: stock repurchased by the issuer. Explanation: A company may go into the market and buy some of its own outstanding stock, which is then placed in the treasury and called treasury stock.
If your customer holds ten KLP 6% bonds, how much money will he receive in total at the debenture's maturity? A) $10,200. B) $10,600. C) $10,300. D) $10,000.
The correct answer was - C: $10,300. Explanation: The holder of 10 bonds will receive $10,000 in principal at maturity. Each bond pays 6% annual interest, or $60. Thus, ten bonds pay a total of $600 per year in two semiannual payments of $300. At maturity, the bondholder will receive the $10,000 face amount plus the final semiannual payment ($10,000 + $300 = $10,300).
If an investor pays 95.08 for a Treasury bond, how much did the bond cost? A) $9,508. B) $95.08. C) $952.50. D) $950.80.
The correct answer was - C: $952.50. Explanation: Treasury bonds are quoted as a percentage of par plus 32nds. In this case, the price is $950 plus 8/32 (i.e., ¼) of $10, for a total of $952.50.
Which of the following represent ownership in a corporation? I. Debentures. II. Convertible bonds. III. Preferred stock. IV. Common stock.
The correct answer was - C: III and IV. Explanation: Common and preferred stocks represent ownership in a company. Convertible debentures may be converted to equity securities, but until they are, they are considered debt.
Which of the following, though issued by a municipality, is NOT backed by its taxing authority? A) General obligation bond. B) School bond. C) Industrial development bond. D) Courthouse bond.
The correct answer was - C: Industrial development bond. Explanation: An industrial development bond is issued by a municipality to provide funding for a business or commercial facility, which is then leased to a business enterprise. The interest and principal of the bond are then paid off by the business enterprise, not the municipality.
There are a number of risks inherent in investing in equity securities. Which of the following stocks would be most affected by changes in interest rates? A) Convertible preferred stock. B) Common stock. C) Noncumulative preferred stock. D) Treasury stock.
The correct answer was - C: Noncumulative preferred stock. Explanation: For most investors, the primary feature of investing in preferred stock is its fixed dividend. Consequently, it is purchased for income and is more sensitive to changes in interest rates than common stock is. Convertible preferred stock is sometimes more affected by the price of the underlying common stock than by interest rates.
Business activity has been increasing lately. One of your customers has read that this increase is due in part to the government's implementation of fiscal policy measures. Which of the following might be one such measure? A) Stepping up the purchase of short-term government debt. B) Lowering the reserve requirement. C) Reducing taxes. D) Raising the discount rate.
The correct answer was - C: Reducing taxes. Explanation: Reducing taxes is the only fiscal policy measure offered as an answer. The rest are monetary policy measures. Remember that fiscal policy is implemented by the President and Congress and involves
ABC's stock has paid a regular dividend every quarter for the last several years. If the price of the stock has remained the same over the past year, but the dividend amount per share has increased, it may be concluded that ABC's: A) current yield per share has decreased. B) yield to maturity has gone up. C) current yield per share has increased. D) current yield per share has been unaffected.
The correct answer was - C: current yield per share has increased. Explanation: The current yield would have increased because current yield is the income (dividend) divided by price. A higher dividend divided by the same price results in a higher yield.
A company's dividend on its common stock is: A) specified in the company charter. B) voted on by shareholders. C) determined by its board of directors. D) mandatory if the company is profitable.
The correct answer was - C: determined by its board of directors. Explanation: A common stock's dividend payment and amount are determined by the company's board of directors.
When a registered representative refers to a corporate bond using the term "guaranteed", it means that the bond is: A) guaranteed as to payment of principal and interest by the U.S. government. B) insured by AMBAC. C) guaranteed as to payment of principal and interest by another corporation. D) required to maintain a self-liquidating sinking fund.
The correct answer was - C: guaranteed as to payment of principal and interest by another corporation. Explanation: A guaranteed corporate bond is one guaranteed by another corporation that typically has a higher credit rating than the issuing corporation, and is in a control relationship with it.
In a period of deflation, corporate bond prices are: A) staying the same. B) fluctuating. C) increasing. D) decreasing.
The correct answer was - C: increasing. Explanation: In a period of deflation, interest rates are falling. When interest rates drop, bond prices increase.
If interest rates increase, the interest payable on outstanding corporate bonds will: A) change according to the inverse payout theory. B) increase. C) remain unchanged. D) decrease.
The correct answer was - C: remain unchanged. Explanation: The interest payable is the nominal yield, which is stated on the face of the bond. It is the percentage of face value the bond will pay each year regardless of the prevailing interest rates in the market. It is the market price of bonds, not the interest payable, that responds inversely to changes in interest rates.
A company has negative operating revenues for the year. It would NOT be required to make interest payments on which of its following issues? A) Mortgage bonds. B) Subordinated convertible debentures. C) Collateralized debt. D) Adjustment bonds.
The correct answer was - D: Adjustment bonds. Explanation: Adjustment bonds are sometimes called income bonds because they only pay interest when the company has sufficient income.
Securities issued by a bank that represent ownership in foreign equities, but that trade and pay dividends in dollars, are called: A) international equity certificates. B) global equity shares. C) foreign stock credits. D) American depositary receipts.
The correct answer was - D: American depositary receipts. Explanation: American depositary receipts (ADRs) are issued by banks, represent a specific number of shares of a foreign company, and trade and pay dividends in dollars.
Every corporation must issue what kind of stock? A) Cumulative. B) Callable. C) Preferred. D) Common.
The correct answer was - D: Common. Explanation: A corporation, according to its charter, must issue voting common stock. Thereafter, the corporation is free to issue other securities.
What taxes must CMO investors pay on income from their CMOs? A) Neither state nor local taxes. B) Federal taxes only. C) State taxes only. D) Federal, state, and local taxes.
The correct answer was - D: Federal, state, and local taxes. Explanation: CMOs are fully taxable.
In assessing the economy's productivity and the general health of the currency, the chief measures used include which of the following? I. The CPI to measure inflation. II. The CPI to measure productivity. III. The GDP to measure productivity. IV. The GDP to measure inflation.
The correct answer was - D: I and III. Explanation: The gross domestic product (GDP) is the total productive output of a country in a year. It includes exports, government spending, and a host of other quantities and is a direct measure of productivity. The Consumer Price Index (CPI) compares prices for representative commodities with prices for the same commodities in the past and is a direct measure of inflation.
An increase in the Federal Reserve Board's (FRB) reserve requirement has which of the following effects? I. Decrease interest rates II. Increase interest rates III. Contract the economy IV. Expand the economy
The correct answer was - D: II and III Explanation: If the FRB increases the (cash) reserve requirements for banks, banks will have less money to lend customers, money will be tight, interest rates will rise, and the economy will contract.
When discussing securities issued by the U.S. government, mention is made of both marketable and nonmarketable issues. All the following U.S. government securities would be defined as marketable EXCEPT: A) Treasury bonds. B) Treasury notes. C) Treasury bills. D) Series EE bonds.
The correct answer was - D: Series EE bonds. Explanation: Series EE bonds are nonnegotiable or nonmarketable securities. They may only be purchased from the government or a bank (acting as their agent) and they cannot be resold; only redeemed.
A stock's market value is directly determined by which of the following? A) Company's financial condition. B) Board of directors. C) Vote of the stockholders. D) Supply and demand.
The correct answer was - D: Supply and demand. Explanation: The market value of stock is directly determined by supply and demand and only indirectly by the company's financial condition.
The dollar has significantly strengthened against the English pound. Which of the following statements best describes the consequences? A) This is bad news for American tourists. B) The pound will now buy more dollars. C) This is good news for English importers. D) The dollar will now buy more pounds.
The correct answer was - D: The dollar will now buy more pounds. Explanation: A strengthening dollar means that it is equivalent to (i.e., will buy) a larger amount of a foreign currency. This is good news for American tourists, whose dollars will now buy more when they travel abroad. It is bad news for foreign importers, whose currency must buy American goods priced in more expensive dollars.
Ginnie Mae issues pass-through certificates. What does this mean? A) The issuer receives principal and interest passed through from the Treasury. B) The investor receives principal and interest passed through after taxes and interest. C) The issuer will pass through all losses. D) The investor receives principal and interest after the homeowner has made his monthly mortgage payment.
The correct answer was - D: The investor receives principal and interest after the homeowner has made his monthly mortgage payment. Explanation: The term pass-through means that Ginnie Mae has received money from the homeowner and passed it through to the investor.
An investor would like to make a long-term investment in a debt security whose duration is equal to its maturity. Which of the following AAA rated bonds should his registered representative recommend? A) DEF 10-year 8% bond maturing in 8 months. B) ABC 8% bond maturing in 15 years, callable in 10 years. C) MNO zero-coupon bond maturing in 8 months. D) XYZ zero coupon bond maturing in 15 years.
The correct answer was - D: XYZ zero coupon bond maturing in 15 years. Explanation: The simplest definition of duration is that it is the time it takes for a bond's cash flow (interest payments) to equal the maturity value. Since there is no cash flow from a zero coupon bond, its duration is equal to its maturity. Since the question says, "long-term", we're not going to choose an 8 month maturity over a 15 year one.
An investor owns 200 shares of common stock in ABC Corporation, and the corporate charter provides for statutory voting in elections for the board of directors. If there are eight candidates running for five vacancies on the board, the investor has: A) a total of 1,600 votes that may be cast in any manner. B) a total of 1,000 votes that may be cast in any manner. C) a total of 1,000 votes that may be cast for each of the vacancies. D) a total of 1,000 votes, of which 200 may be cast for each of the vacancies.
The correct answer was - D: a total of 1,000 votes, of which 200 may be cast for each of the vacancies. Explanation: Statutory voting allows investors one vote per stock share they own for each director position to be filled. This investor has 200 votes for each of the five vacancies on the board, for a total of 1,000 votes, which statutory voting requires that he allocate at 200 votes per seat.
A municipal bond has a coupon of 6.25% and at the present time, its yield to maturity is 6.75%. From this information, it can be determined that the municipal bond is trading: A) at a premium. B) at par. C) flat. D) at a discount.
The correct answer was - D: at a discount. Explanation: The YTM is greater than the nominal yield, or coupon yield. Therefore, the bond is trading at a discount.
Each of the following securities are issued with a fixed rate of return EXCEPT: A) convertible preferred stock. B) preferred stock. C) bonds. D) common stock.
The correct answer was - D: common stock. Explanation: Bonds and preferred stock are issued with a stated payment in interest or dividends, respectively. Common stockholders are entitled to receive a variable distribution of profits if a dividend is declared.
Stockholders have the preemptive right to: A) purchase bonds. B) serve on the board of directors. C) purchase lettered stock. D) maintain their proportionate interest in the company.
The correct answer was - D: maintain their proportionate interest in the company. Explanation: Most corporations have a preemptive rights clause in their bylaws. This is the privilege granted to stockholders to maintain their proportionate share of ownership in the corporation by having the right of first refusal to purchase shares of any new common stock to be issued by the corporation.
The discount rate is set by: A) the open market. B) large commercial banks. C) the SEC. D) the Federal Reserve Board.
The correct answer was - D: the Federal Reserve Board. Explanation: The discount rate is set by a vote of the Federal Reserve Board. Member banks borrow from the Fed at the discount rate.
All of the following may pay dividends EXCEPT: A) common stock. B) convertible preferred stock. C) preferred stock. D) warrants.
The correct answer was - D: warrants. Explanation: Warrants do not pay dividends. The other instruments listed pay dividends when declared by the board of directors.