Series 6 Unit 1
A customer believes that ABC's price will go up but does not have the money to buy 100 shares right now. How could the customer use options to profit from an increase in the stock's price?
buy calls or write puts
How are revenue bonds secured?
by user fees and a type of GO
Municipal bonds are part of what market?
capital market since they are long term
During the past two quarters, the GDP declined by 3%, unemployment rose by .7%, and the Consumer Price Index fell off by 1.3%; this economic condition is called:
recession
Who issues commercial paper?
broker-dealers, service companies, and finance companies
An investor buys a call option with a strike price of 40
the investor is bullish and has a right to buy the underlying stock
If your customer holds ten KLP 6% bonds, how much money will he receive in total at the debenture's maturity?
$10,300.
The minimum face amount of a negotiable CD is:
$100,00
If your customer has two bonds, and one has a coupon of 5.1% and the other has a coupon of 5.3%, what is the difference in annual interest payments between the bonds?
$2
An investor purchased a corporate bond for 97 3/8. If the bond is sold for 99 3/8, the investor has a profit of:
$20.00
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?
$24
An electric company issued mortgage senior lien bonds, with an 8-7/8 coupon, priced at 96. Each bond pays annual interest of:
$88.75
6s 2020 93:20 - 94:16 An investor reads this typical newspaper listing quote on a U.S. Treasury bond with a par value of $1,000. Disregarding transaction costs, if purchasing this bond, the investor would expect to pay:
$945
How long must a decline in GDP continue before it is classified as a recession?
6 months
The current yield of a 6% bond offered at 95 is:
6.3%
You have a client who is in the 30% tax bracket. She has an opportunity to purchase a 9% corporate bond. This would be tax-equivalent to a municipal bond with a coupon of:
6.3%
A client is in the 30% tax bracket. He owns a 10% XYZ, Inc., debenture due to mature shortly. What yield in a municipal will give him the same after-tax return that he now has with his debenture?
7%
The current yield on a bond with a coupon rate of 7.5% currently selling at 105½ is approximately
7.1%
Jack Smith, in the 35% tax bracket, has an opportunity to buy a 5.3% municipal bond. What corporate yield would provide an equivalent return?
8.15%
A prospect is 50 years old and has just inherited $50,000. He wants to invest the money but is very risk averse and fears losing principal. Which of the following recommendations would be most suitable?
A bond fund with low duration
What are advantages of investing in American Depository Receipts (ADRs)?
ADRs fall under the oversight of the SEC, transactions are done in U.S. currency, and dividends are received in U.S. currency
Baa bonds may yield more than Aaa bonds because
Baa bonds carry more default risk than Aaa bonds
Which feature of preferred stock allows the holder to reduce the risk of inflation?
Convertible
Zero coupon bond maturity has what relationship to duration?
Duration is equal to maturity since they make no minimum payments
If a customer's chief concern is to shelter as much of his portfolio earnings from tax as possible, which of the following securities would be most suitable?
Municipal GOs
An increase in the Federal Reserve Board's (FRB) reserve requirement has which of the following effects?
Increase interest rates and contract the economy
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?
Industrial development revenue
How are GNMA securities taxed, backed, and what is the minimum purchase price?
Interest income received on GNMA's is fully taxable at both the state and federal level, directly backed by the U.S. Treasury, and usual minimum purchase amount is $25,000
If interest rates are increasing and the market prices of bonds are decreasing, what happens to the value of straight preferred stock during this period?
Its value decreases
Do investors receive dividends from warrants?
No
Does the following corporate bond have a nominal yield in excess of its current yield? DEF 6.3s of 2018 at 100
No
Does the following corporate bond have a nominal yield in excess of its current yield? GHI 5s of 2020 at 96
No
Is a newly issued Treasury notes issued to meet a specific government-funding requirement
No
A debt fund manager, extremely sensitive to interest rate risk has taken the opinion that interest rates will begin to come down and perhaps stay at low rates for the foreseeable future. With that opinion in mind, and wanting to take a conservative approach, what would be a suitable recommendation for the portfolio?
Non-callable corporate bonds
Which stocks would be most affected by changes in interest rates?
Noncumulative preferred stock.
A 45 year-old investor is in the highest tax-bracket and wants to save over the next 20 years for a retirement income, how should he save?
Open an IRA and fund it with municipal bonds
When selling a CMO to a customer, the registered representative must disclose what?
Rate of return may vary as a result of early repayment
A corporate offering of 200,000 additional shares to existing stockholders is what type of offering?
Rights
What debt instrument pays no current interest?
Series EE
Which type of nonmarketable security pays semiannual interest?
Series HH bonds
In assessing the economy's productivity and the general health of the currency, the chief measures used includes what?
The CPI to measure inflation and the GDP to measure productivity
If an investor buys a put option with a strike price of 40
The investor has a right to sell the underlying stock at the strike price and is bearish
Ginnie Mae issues pass-through certificates. What does this mean?
The investor receives principal and interest after the homeowner has made his monthly mortgage payment
What best describes book entry?
The transfer of ownership is entered on the books of the issuer or the issuer's transfer agent.
Security listed without a stated return?
Treasury bill
Which type of marketable security pays semiannual interest?
Treasury bond
Do investors receive dividends from ADRs?
Yes
Does the following corporate bond have a nominal yield in excess of its current yield? ABC 8s of 2015 at 110
Yes
Does the following corporate bond have a nominal yield in excess of its current yield? JKL cv 4s of 2015 at 125
Yes
If your client wants to accumulate $50,000 over the next ten years for her daughter's college education, to achieve this investment objective you would recommend a(n):
Zero-coupon bonds are well-suited for achieving investment goals of a stated sum within a fixed period of time. They are purchased at a discount and mature to their face value. Investors do not receive current income
Newspaper reports indicate that the GDP has been declining steadily over the past two quarters. This would suggest:
a recession
A bond that make interim payments has what duration?
a shorter duration than maturity
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 total of 1,000 votes that may be cast for each of the vacancies.
The exercise price of a right is generally above or below the market value at issue?
above
Reasons a company may issue common stock
acquire capital for corporate operations and become a publicly held corporation
A railroad company pledges its railroad cars as collateral for a bond offering. This bond would be issued as
an equipment trust certificate
How is a CMO taxed?
as ordinary income
Bondholders are paid interest in what order?
before both the preferred and the common stockholders are paid dividends
The exercise price of a warrant is generally above or below the market value at issue?
below
When comparing the change in the GDP from one year to another, each year's GDP should be converted into:
constant dollars
What is not an advantage of investing in American Depository Receipts (ADRs)?
currency risk is virtually eliminated.
When the yield is higher than the coupon, it means the bond was purchased at a
discount
An ADR is used to:
facilitate trading foreign securities in U.S. markets by U.S. citizens living in the United States.
If interest rates in general are rising, the price of T-bills should:
fall
The interest paid to an investor on a municipal general obligation bond is free from what sort of tax?
federal income tax
CMOs
financial institution-sponsored pools of mortgages and issuer collateralizes a pool of various class mortgage loans and creates a tranche
Moody's bond ratings are based primarily on an issuer's:
financial strength
STRIPS are backed by who?
full faith and credit of the federal government
Your customer is interested in a mutual fund that specializes in foreign companies that manufacture products for export. He asks you what effect currency rates will have on his investment. You could tell him:
if the dollar weakens, foreign exporters to the US will do poorly and if their own currency weakens, foreign exporters to the US will do well
To encourage business activity, the FOMC should:
increase their purchases of U.S. Treasury securities in the open market, this increases the amount of money available to banks to lend out. This lowers interest rates and encourages business activity
In a period of deflation, corporate bond prices are:
increasing
What is the prime rate?
rate of interest charged by banks to their best customers
How do agency securities interest get taxed, who are the authorized by, and what are they safer than?
interest paid is always subject to federal income tax, authorized by Congress, considered safer than corporate debt securities
What term are Treasury Notes?
intermediate. between 2 and 10 years
If the U.S. dollar weakens, will it be more or less difficult for residents to purchase foreign made goods?
it will be more difficult
Ginnie Maes pay interest on what basis?
monthly
An investor makes a purchase of common stock at a cost of $1,000. He holds the stock for one year and sells it for $1,500. During the same time, the Consumer Price Index increases by 7%. As a result of this increase, the value of the investment in constant dollars at liquidation would be:
more than $1,000 but less than $1,500.
Are municipal or corporate bonds riskier?
municipal bonds
A convertible bond of the KLP Corporation has a conversion ratio of 20. This means that:
one bond can be exchanged for 20 shares of KLP common stock and the conversion price of the bond is $50 per share.
Holders of XYZ company preferred stock are paid a stated dividend of $5 per share, and then a further dividend of up to $1 per share, if declared by the board of directors. In these circumstances, the preferred stock is known as
participating
What security has a dividend expressed either as a fixed percentage of par or as a fixed dollar amount?
preferred stock
What backs GO bonds?
property taxes
A corporation with a single outstanding bond issue chooses to refund this debt. This means that the corporation:
replaces one debt with another
Interest rates in the United States have dramatically increased. This will tend to:
result in a surplus in the balance of payments
What are municipal revenue bonds are backed by?
revenues generated from the use of the facility that was built with the bond proceeds
As interest rates fall, prices of straight preferred stock will:
rise
In general, a corporation assumes the least risk when it obtains funds from the:
sale of preferred stock.
What is the money market made up of?
short-term, high quality debt issues
Treasury bills are sold how and when do they mature?
sold at a discount and mature in less than a year
Government National Mortgage Association (GNMA) securities are subject to what taxes?
state and federal and they are backed by residential mortgages
Treasury stock is:
stock repurchased by the issuer
Options have ________ and _________
strike price and premium
The discount rate is set by:
the Federal Reserve Board
Importers enjoy the greatest profits when
their own currency is strong and foreign currencies are weak
how are CMOs taxed?
they are subject to federal, state, and local taxation
If the Federal Reserve Board (FRB) decides that the rate of inflation is too high, which is it most likely to do?
tighten the money supply and raise the discount rate
Holders of a common stock traded OTC have certain rights EXCEPT
to receive dividends before preferred stockholders do
What backs revenue bonds?
user charges, payments under leaseback arrangements, lease revenues, and tolls and other fees from the facility's operation
What is often issued with securities to make the offering more attractive?
warrants
The best time to purchase shares in a long-term bond fund is:
when long-term interest rates are falling after a period of high interest rates