Series 66 - Unit 2 (Session 4, 5, 6, 7, 8, 9, 10)
A client approaches the IAR handling the advisory account with a request to find a preferred stock that will offer a 6% income return. The IAR suggests a stock paying a $.28 quarterly dividend. That stock will meet the income objective if it has a current market price of:
$18.67 The first thing to do is annualize the dividend by multiplying hte $.28 by 4. Once we have the annual dividend of $1.12, divided by 6% and the result is $18.6666 or $18.67 properly rounded.
What do fundamentalist look at?
-Book value -dividend returns
What factors does the Dividend Growth Model consider?
-Current Dividend -Required Rate of Return -Growth of the dividend
What are the 2 most common forms of DCF (Discounted Cash Flow) used in the valuation of common stock?
-Dividend discount models -Dividend growth models
A corporation has issed a 4% $60 par convertible stock with a conversion price of $20. With the preferred stock selling at $66 per share, an investor holding 100 shares of this stock would benefit by converting if the price of the common stock was?
Above $22 per share With a conversion price of $20 and a par value of $60, this preferred stock is convertible into 3 shares of the company's common stock. We divide the current price of the preferred ($66) by the 3 shares to arrive at the parity price of $22. If the common stock is selling for more than the parity price, the investor can benefit by converting and selling the stock in the marketplace. I CAN ONLY ASSUME THAT THE EXCHANGE RATE OF 3 SHARES DOES NOT CHANGE.
Credit risk is the risk of default, found only with which security?
Debt instruments. Although debentures are issued strictly on the issuer's credit rating, they have the advantage over any zero-coupon bond in that interest payments begin approximately six months after issuance while in a zero-coupon bond, nothing is paid until maturity date
What a bond is selling below par, it is selling at a
Discount
Does inflation lead to Lower or Higher Interest rates?
Higher interest rates.
What happens if you buy a bond at a Discount?
If you pay less, you get more. Any time an investor purchases a bond at a discount, the return will be more than the rate stated on the face of the bond
What is the "discount rate" referring to when it comes to fixed income and bonds?
It is just another way of stating the current interest rate in the marketplace.
During inflationary periods, what would one expect to happen to the market value of non-convertible preferred stock?
Its market value decreases.
Proponent of which of the following technical theories assume that small investors are usually wrong?
Odd Lot Odd Lots are usually traded by small investors.
On the initial public offering, an investor buys a $10,000 Aa rated 20 year corporate bond with a 4% coupon rate. One year later, the prevailing market rate is 5% and the bond has had its rating increased to Aa1. Is the current market price of this bond issuing at a: -Premium -Par Value -Cannot be determined from the information given -Discount
Place your finger on the desk or paper. Move right no mater what. So if the investor has a bond with a 4% coupon rate and one year later, the prevailing market rate is 5%. Keep the finger on the desk/paper and move that up and to the right. Does that draw a left or right dab. If it is a left tab, it is a discount because it is not your dominant hand If it is a right dab, it is a premium because it is your dominant hand.
When a bond is secured by Real Estate it is secured by??
Real Estate
A technical analyst (chartist) with a long position in a particular stock would most likely enter a sell stop order below that stock's:
Support Level. These are theoretical levels where the market supports the stock price (keeps it from falling below the state level). So it would make sense for a technical analyst who charts to enter a sell stop below a support level in order to sell out if the support level is breached. A breakthrough of a support level is believed to forecast a major market price decline.
Which bond has a longer duration? 1) a 10-year bond with a 5% coupon 2) a 10-year bond with a 10%
The 10-year bond with a 5% coupon. If two bonds with
A client is interested in Fixed Income is viewing different bonds with the same rating and a coupon of 5%. If the agent is choosing between a bond with a 12 year maturity when the discount rate is 3% and a bond with a 6 year maturity when the discount rate is 7%, Which bond should have the highest market value?
The 12 year maturity when the discount rate is 3%. Remember when the discount rate is lower than the coupon rate, the present value will be above the par value. Remember the slant for discount (left dab)
Which dividend model forecasts a higher stock price?
The Dividend Growth Model
How is the reporting of Zero-Coupon bonds?
The annual interest is reported for tax purposes. Because this income is not actually received annually, it is referred to as phantom income. Conversely, because nothing is paid until maturity, the issuing corporation cannot deduct the interest until it is paid at maturity.
Dividend yield
a stock's expected cash dividend divided by its current price
Is a short stock position bullish or bearish?
A short stock position is Bearish
Can open-end investment companies sell at a price below NAV?
NO. They must sell at NAV, plus sales charge (if any).
Do Class C shares have a front-end load?
NO. Think C = f for no front end load. Think of that same curve.
What kind of load to Class B shares have?
A back-end load. Think the letter, "B" B comes after A
What does owning a call option do for the holder?
A call option gives the holder the right but not the obligation, to purchase shares of the underlying stock at the exercise date.
When assets of a third party are backed/secured by a third party, it is what type of bond?
A guaranteed bond
What is a straddle?
A straddle consists of a put and call on the same stock with the same strike price and the same expiration date. Therefore, with two option positions, it is a multi-option strategy.
What kind of load to class B shares have
"Back-end" load.
When someone writes an option, what does it provide?
-Income -Hedging -limited downside protection when long the underlying asset
What are examples of derivatives?
-Options (both puts and calls) -Futures (and Forwards) -Warrants (and Stock rights)
Is a long stock position bullish or bearish?
A long stock position is bullish Think that you expect the market trend to continue this way for a long time
What kind of maturity does a Treasury note have?
2 to 10 years. Think about how treasure maps are always from a long time ago.
If a client has a TIPS with a coupon rate of 3.5%. The inflation rate has been 4% for the last year. what is the inflation-adjusted return?
3.5% TIPS adjust the principal value each 6 months to account for the inflation rate. Therefore, the real rate of return will always be the coupon.
A Thirty-five year-old client purchases a variable life insurance policy. Under current regulations, the maximum sales charge permitted over the life of the policy is:
9%
What is the max charge a variable life insurance plan may charge:
9% over a period not to exceed 20 years.
Which of the following are characteristics of a REIT? A)It is traded on an exchange over the counter. B)It is professionally managed. C) It passes through both gains and losses to investors. D) It is a type of limited partnership.
A & B
Purchasers of options can have a number of different objectives. One of your clients who is a soft drink fan already has a long position in KO. What would be a possible reason for this client to go long a KO call option? A) To fix the cost of acquiring additional stock to the portfolio. B) To complete the other side of a spread. C) Owning a long call on stock you already own offers a hedge against a market decline. D) This would generate additional income.
A) To fix the cost of acquiring additional stock to the portfolio. Those who are bullish on a stock, but don't have sufficient funds at this time to purchase the stock, can "lock-in" their future cost by going long a call. Income is generated only through selling options. Since a long call is on the same side of the market as long stock, there is no hedge. A spread involves a long and short option.
One of your clients owns an equity index annuity with a participation rate of 85% and a cap of 11%. During the past 12 months, the index used in the computation showed a gain of 12.80%. As a result, the client's account value was credited with a gain of A) 10.88% B) 9.35% C) 11.00% D) 12.80%
A) 10.88% Remember you apply the 11% cap after the participation You need to participate before they can cap you.
You have a client who wishes to invest $100 per month into something that will give him the opportunity to share in the long-term growth prospects of the overall economy. Which of the following would probably be the most cost efficient investment vehicle? A) A fund of hedge funds. B) An exchange traded fund (ETF) that mimics the S&P 500. C) Class A shares of a large-cap growth fund. D) A no-load index mutual fund that mimics the S&P 500.
A) A no-load index mutual fund that mimics the S&P 500 Although there is possible room to argue, we'll go with what the exam would choose. The only other logical choice is the ETF, but, since each purchase involves a commission and, on $100 purchases investors don't get any real break, most experts agree that ETFs are not suitable for dollar cost averaging plans (unless the periodic investments were substantial).
Which of the following would you NOT expect to see issued at a discount? A) Bank jumbo CD B) Commercial paper C) Treasury Bill D) Zero-coupon bond
A) Bank Jumbo CD Of these securities, only the bank jumbo (negotiable) CDs are always interest bearing and issued at par or face value. Just think about how that big CD dealer will never sell his CDs for a discount and how he still thinks they are making a comback.
You have a client who is bullish on XYZ stock and currently owns 100 shares that last traded at $50. He has a CD coming due in March, 6 months from now, and is afraid that by the time those funds are available, XYZ will have shot up in price. How can he ensure that he'll be able to pick up the stock at today's price 6 months from now and not miss out on that market appreciation? A) Buy an XYZ March 50 call option B) Buy XYZ stock rights C) Sell an XYZ March 50 put option D) Buy an XYZ March 50 put option
A) Buy an XYZ March 50 call option Owning a March 50 call means that any time between now and the expiration date in March, the investor could exercise the option and purchase 100 shares per contract at $50 per share. If the stock doesn't rise in price, the investor can allow the option to expire.
Which of the following is NOT a money market instrument? A) Newly issued Treasury notes. B) Treasury bills. C) Commercial paper. D) Banker's acceptances.
A) Newly issued Treasury Notes Think Treasure maps are always from a long time ago.
What are debt instruments that the final payment at maturity is based on the return of a single stock, a basket of stocks, or an equity index.
An equity- or index linked note (ELN or ILN)
What is a spread option?
An investor goes long one ABC May 45 Call @ 3 and short one ABC 40 Call @ 7. A spread option position is a long and short position of the same type of option on the same stock with different strike prices or different expiration dates. In this case, the proceeds of $700 from the short position exceed the $300 cost of the long giving the investor a credit of $400.
Will a yield to maturity be higher than a yield to call?
NO. You want a bond to mature before it is called
Do Class A Shares have a back-end load?
NO. except under conditions that are beyond the scope of this exam.
The risk of default on a U.S. Government security is what for this exam?
Non-existent
When does a Corporate Zero-Coupon bond pay interest?
Not until maturity.
One of your clients just inherited some money and wishes to invest $250,000 into the GEMCO International Equity Fund. The client is attracted to the Class B shares because there is no upfront sales charge on them while the Class A shares have a 3% front-end load. The appropriate response would be that A) the client is doing the smart thing by avoiding the sales charge, even though you will be losing out on the opportunity to earn a nice commission B) because of the higher 12b-1 charges levied against the Class B shares as well as the CDSC, Class A shares are recommended for a purchase of this size C) as long as the client will hold the Class B shares no longer than 4 years, the higher 12b-1 fees will be much less than the load paid on the Class A shares D) you feel so strongly that the Class A shares represent a more attractive solution for the client that you will rebate your share of the commissions
B) because of the higher 12b-1 charges levied against the Class B shares as well as the CDSC, Class A shares are recommended for a purchase of this size In the real world, there is probably no fund group that would accept a $250,000 order for Class B shares; more than likely, no fund group would even accept one above $100,000. That is because at that level, the reduced front-end load available on the Class A shares due to reaching a breakpoint, combined with the lower (or lack of) 12b-1 charge and no redemption charge (CDSC), makes them a better deal than the Class B shares. Rebating of commissions is not permitted and, even at the 4-year holding period, there still is a CDSC.
Which of the following does NOT contain an offer of common stock? A) A sale of a convertible bond B) A sale of a put option C) A sale of warrants D) A sale of a convertible preferred stock
B) A sale of a put option.
A client of yours recommends your services to his mother, who is 80 years old. She lives on Social Security ($2,215 per month) and has a home with a net value of $186,000. She has lost a large amount of money that she had placed into a high-risk technology fund about 10 years ago. The fund is part of a family that has a wide range of funds with varying objectives. With only $27,000 left in that account, what would you suggest as the best option for her? A) Ask her attorney what the best choice would be B) Move her to a lower risk fund that is in the fund family C) Sell all of the account and select a more appropriate fund in a different family D) Leave the funds where they are and hope for a recovery
B) Move her to a lower risk fund that is in the fund family Because families of funds offer the exchange privilege (exchanging shares from one fund to another at NAV), it is generally considered an unfair business practice to move to another fund and potentially incur a new sales charge
On the initial public offering, an investor buys a $10,000 Aa rated 20 year corporate bond with a 4% coupon rate. One year later, the prevailing market rate is 5% and the bond has had its rating increased to Aa1. Which of the following statements is most likely true with reference to the current market price of this bond? A) The bond would be selling at a premium. B) The bond would be selling at a discount. C) The bond would be selling at par value. D) The yield to maturity of this bond is above 4%.
B) The bond would be selling at a discount Note, They are referring to the bond that you the person already has
Which of the following best describes that which backs a debenture issued by an industrial corporation? A) The assets of a company other than the issuing company. B) The general credit standing of the issuing company. C) The securities of the issuing company. D) The mortgages and real estate of the issuing company.
B) The general credit standing of the issuing company.
An investor who is long a put option for 100 shares of ABC common stock A) has the right to buy 100 shares at the stated exercise price B) has the right to sell 100 shares at the stated exercise price C) has the right to sell 100 shares at the higher of the exercise or market price D) has the right to buy 100 shares at the lower of the exercise or market price
B) has the right to sell 100 shares at the stated exercise price
Some analysts use the discounted cash flow to determine the theoretical value of a debt security. Under DCF, the bond price can be summarized as the sum of the A) present value of the par value repaid at maturity plus the future value of the coupon payments B) present value of the par value repaid at maturity plus the present value of the coupon payments C) future value of the par value repaid at maturity plus the present value of the coupon payments D) future value of the par value repaid at maturity plus the future value of the coupon payments
B) present value of the par value repaid at maturity plus the present value of the coupon payments Just think even though it is DCF, and that last F for future (really flow) is actually all about the present.
A company has two outstanding bond issues, both with a coupon rate 8%. Bond A will mature in 2 years while Bond B will mature in 15 years. If market Interest rates were to increase to 10%, which Bond will be selling at a greater discount?
Bond B will selling at a greater discount than Bond A. The nearer the maturity, the shorter the duration, hence the less impact. Therefore, Bond B with a much longer maturity (and longer duration), will see its market price fall far more than bond A.
What fund carry breakpoints?
Breakpoints for quantity purchases are available on shares that carry a front-end load. Those are Class A Shares
Is buying a call bullish or bearish?
Buying a call is bullish. Think you are always calling up for the market to go up
All of the following are money market instruments except: A) Jumbo (Negotiable) CDs B) Commercial Paper C) Newly issued Treasury Notes. D) Treasury Bills
C) Treasury notes are issued with maturities of 2 to 10 years.
Which of the of the following mutual fund share classes generally has a 1% CDSC that is eliminated once the shares have been held more than 1 year? A) Class 1% B) Class A C) Class C D) Class B
C) Class C only for that 1st year tho
An investor has unexpectedly received $30,000 from an old debt he had written off. This money will come in handy for a business venture planned for 3 years from now. Meanwhile, he would like to generate some income on the money with as little risk and expense as possible. Which of the following recommendations is likely to be the most suitable for this customer? A) Class B shares of the XYZ Growth Fund B) Class B shares of the ABC Investment-Grade Bond Fund C) Class C shares of the ABC Investment-Grade Bond Fund D) Class A shares of the MNO High-Yield Bond Fund
C) Class C shares of the ABC investment-Grade Bond Fund The customer wants income with as little risk as possible, so our answer must be one of the choices that offer an investment-grade bond fund. Of those offered, Class C shares would be best because the customer would pay no front-end sales charge and no CDSC after a short time, probably 1 year. He will pay somewhat higher 12b-1 fees than with Class A shares, but this will amount to only a fraction of 1% per year, and only for the 3 years of his investment.
For which of the following is there no active secondary market? A) Options. B) ETFs. C) Forward contracts. D) Futures contracts.
C) Forward contracts One of the disadvantages when investing in forward contracts is that there is no active secondary market. Because each contract is between one buyer and one seller and there is no standardization, no exchange trading is possible.
In search of higher returns, many investors have turned to structured products. Your clients need to be aware that these are complex instruments and have which of the following characteristics? I. Credit or default risk because they are unsecured obligations of the issuing institution II. High price transparency III. Limited or no liquidity IV. High initial returns that diminish over time A) I and IV B) II and IV C) I and III D) II and III
C) I and III I. Credit or default risk because they are unsecured obligations of the issuing institution III. Limited or no liquidity
Which of the following are characteristics of commercial paper? I. Backed by money market deposits. II. Negotiated maturities and yields. III. Issued by insurance companies. IV. Not registered with the SEC. A) I and II. B) I and III. C) II and IV. D) III and IV.
C) II & IV remember that commercial paper is issued with maturities of less than 270 days, it is exempt from registration under the Securities Act of 1933. but that does not mean it is registered with the SEC.
A bond with a par value of $1,000 and a coupon rate of 6%, paid semiannually, is currently selling for $1,200. The bond is callable in 6 years at 103. In the computation of the bond's yield to call, which of the following would be a factor? Out of what you need to calculate YTC, which one of the following is accurate? A) Future Value B) 20 payment periods C) Interest payments of $30 D) Present value of $10,030
C) Interest payments of $30. Basically know what you need to calculate the YTC and then which one of the options is accurate/correct
Five years ago, an investor purchased an ABC Corporation BBB rated debenture with a coupon of 6% maturing in 2037. Currently, new BBB rated debentures with a maturing in 2037 are being issued with coupons of 7%. Based on the discounted cash flow method, one could say that the present value of the investor's security is A) equal to the par value B) more than the par value C) less than the par value D) negative
C) less than the par value The discounted cash flow method is just a technical way of computing the value of a security that demonstrates the inverse relationship between interest rates and bond prices. The discount rate here is the current market rate of 7%. Because this investor's debenture is paying at a rate of 6%, its cash flow is less valuable than a 7% bond; therefore, it will sell at a discount (below par).
Who issues convertible bonds?
Only Corporations. Since they may be converted or exchanged for the company's common stock
Al of the following securities are bought at a discount Except A) Treasury bills B) CDs C) Commercial Paper D) Zero Coupon Bonds
CDs CDs are interest-bearing debt instruments issued by banks at their face value.
where is the load for each class of share? Class A Shares Class B Shares Class C Shares Closed-end company
Class A - Front-end load Class B - Back-end load Class C - level load Closed-end company - Commissions are charged as would be on any stock purchase.
Are the operating and administrative expenses always higher on class A or class B shares?
Class B Shares
Which class of share is not a wise choice for those holding the fund long term.
Class C shares Because the level load never discontinues This class may be less expensive for investors with shorter investment horizons
What kind of funds can trade at a premium or discount to the NAV per share?
Closed-end funds
When securities of the issuer are used as collateral, the instrument is known as a??
Collateral trust bond (or certificate)
Which preferred stock pays the lowest dividend rate?
Convertible Preferred stock Because of the attraction of the convertibility
Which of the following issues is most affected by credit risk? -Corporate zero-coupon bonds -preferred stock -debentures -common stock
Corporate zero-coupon bonds Although debentures are issued strictly on the issuer's credit rating, they have the advantage over any zero-coupon bond in that interest payments begin approximately six months after issuance while in a zero-coupon bond, nothing is paid until maturity date.
How do Futures contracts differ from options contracts?
D) both parties are obligated on futures contracts where only the seller is obligated on an options contract Just remember it takes to get to the future just like back to the future movie. with options, you really only have one option and that seller is obligated
Which of the following statements regarding the properties of duration is NOT true? Duration measures the effect of an interest rate change on the price of a bond or bond portfolio. B) Duration measures a bond's price volatility by weighting the length of time it takes for a bond to pay for itself. C) Duration is a weighted-average term-to-maturity of a bond's cash flows. D) Duration measures the holding period return on a bond.
D) Duration measures the holding period return on a bond. Duration does not measure the holding period return on a bond, it measures the effect of an interest rate change on the price of a bond or bond portfolio. Duration measures a bond's price volatility by weighting the length of time it takes for a bond to pay for itself. Duration is also a weighted-average term-to-maturity of a bond's cash flows.
A TIPS bond is issued in the principal amount of $1,000, paying 3.5%. Over the security's 5-year term, the inflation rate is 4%. What is the amount of the final semiannual interest check? A) $35.00. B) $42.66. C) $17.50. D) $21.33.
D) $21.33 The semiannual interest of a TIPS bond is computed on the basis of the inflation-adjusted principal. Because the principal increases with the inflation rate, at the end of the 5-year term, it has grown to $1,219 ($1,000 × 102% ten times). Therefore, the final interest check is for $1,219 × 1.75% (remember it is a semiannual check).
An investor goes long an RIF 50 Call for $6 when the RIF is selling at $52. Breakeven for this investor will be when the RIF is at A) $46 B) $44 C) $58 D) $56
D) $56 Breakeven on a call option is computed by adding the premium ($6) to the exercise or strike price ($50).
Those who place bonds in client's portfolios usually focus their attention on yields. When computing yield to maturity, all of the following information is necessary EXCEPT: A) coupon rate. B) purchase price. C) maturity date. D) current yield.
D) Current Yield
Which one of the following option positions would generally command the greatest time value? A) puts B) straddles C) calls D) LEAPS
D) LEAPS the acronym for Long-term Equity Anticipation Securities, have expiration dates that can run more than 3 years compared to the 9 months for standard option contracts. Because time value is a direct function of the length of the option, the longer the time until expiry, the greater the potential time value. Just think about LEAPING for joy because of how long you get to keep it. remember the acronym.
Early in the year, an investor purchased shares of the GEMCO Fund at $10.40 per share when the net asset value per share was $9.53. Just before the last trading day of the year, this investor liquidated the position at $10.60 per share when the net asset value per share was $10.77. From this, you can discern that GEMCO Fund is A) an open-end investment company B) a face amount certificate company C) a unit investment trust D) a closed-end investment company
D) a closed-end fund investment Notice the difference between the NAV and the price at which the share is traded.
Flow-through is one of the features of A) REITs B) variable annuities C) open-end investment companies D) direct participation plans
D) direct participation Flow-through is the term commonly used to describe that any income or loss generated by a direct participation program "flows through" to the owner(s). In the case of a REIT, the only thing that passes through is income or gains, never losses. Just think about how those participating and how they participate directly with the income and losses, so in essence, they flow right through to them.
A sudden decrease in market interest rates will have the effect of increasing the trading price of an existing bond because A) a reduction in market interest rates generally signifies a stronger economy B) lower interest rates will result in a higher rating for the bond C) the future value of the bond's present cash flows increases D) the present value of the bond's future cash flows increases
D) the present value of the bond's future cash flows increases
What kind of load do Class A shares have?
Front-end load.
What happens to the seller of a put option if the option is exercised?
He is obligated to purchase the underlying stock.
Writing, call, options, random notes
In general, option writers only realize short-term gains, not long-term. If the question had said this was a covered call, then the second best choice would have been to protect the long position (not the premium).
What does writing of an option do for you?
It always generates premium income to the writer. A) Ask her attorney what the best choice would be B) Move her to a lower risk fund that is in the fund family C) Sell all of the account and select a more appropriate fund in a different family D) Leave the funds where they are and hope for a recovery
What does owning a put option do for the holder?
It give the holder the right to sell the underlying asset at the state exercise (or strike) price. but not the obligation
Are Negotiable, Jumbo certificates of deposit secured obligations of the issuing bank?
NO. They are general obligations of the issuing bank.
When a fund has net redemptions, is more or less money coming into the fund? What does this ultimately mean for the fund?
It means that less money is coming In than is going out. In order to meet those redemptions, the fund's manager will either have to sell securities that they planned to hold on to, or maintain more assets in cash (which generally will return less than other investments.) Although poor performance could lead to net redemptions, that is not always the case so it is not always a true statement. Think redemptions means you are taking/buying something back by sending money out, so if you have net redemptions that means more money is going out then coming
What is the YTC computation all about?
Knowing the -amount of interest payments to be received -The length of time to the call -the current price -The call price How much will you make before the bond is taken from you?!?
Long = Short = Call = Put =
Long = Bullish Short = Bearish Call = Bullish Put = Bearish Long and Tall Cal is bullish and overly confident Short Paul is bearish and overly pessimistic
Where do REITs trade?
Mostly on the exchanges or the Nasdaq
Which of the following is used in technical analysis in an attempt to modify fluctuations of stock prices over the long term into a smoothed trend? A) consolidation. B) trend lines. C) moving averages. D) support and resistance.
Moving Averages To avoid the volatility frequently present in stock price trends, analysts will frequently use moving averages. These averages reduce short-term distortions to a minimum. Think about moving your finger up and down like an active chart graph and how you want to eliminate that.
Do Forward Contracts have an active secondary market?
NO its mono e mono
Are REITs a derivatives?
NO.
Are REITs prohibited from using leverage to acquire properties?
NO.
Are ETNs suitable for a client with limited assets seeking additional income in retirement?
NO. Because ETNs are a debt security backed solely by a single issuer while an ETF based on a specific index of debt securities represents a large group of issuers,
Do REITS provide pass-through of gains and losses to investors?
NO. Both REITs and limited partnerships provide pass-through of gains to investors, but REITs do not provide pass-through of losses.
Do class C shares convert to Class A shares?
NO. There is no conversion to Class A shares regardless of how long they are held.
When a bond is selling at a price above par (or face) it is selling at a
Premium
Are money market instruments Long-term equity or short-term debt?
Short-term debt
If an investor is long a put option, what does that mean?
That he is the owner of the option I long put you under my ownership
What does a bond's yield to maturity reflect?
The annualized return of the bond if held to maturity. How much will you make until the bond's maturity??!
The trick for which treasury investment generates regular income?
Think of the four most common: U.S. Treasury Bill U.S. Treasury Bond U.S. Treasury Note U.S. Treasury STRIP because of the word bond, think of a constant bond of payments because of the word note think of a student constantly taking notes.
What do bond valuations using the discounted cash flow take into consideration/determine? Example:
The present value of the bond's future cash flows. That is, the greater the value of the interest payments to be received in the future, the higher the price of the bond. When market interest rates decline, because the coupon rate of the bond is fixed, the present value of those interest payments increases, creating a higher value for the bond.
In a futures contract, who is obligated to deliver?
The seller
What does yield to maturity measure?
The total return on a long-term bond.
What is the result of an unpaid cash value loan?
The unpaid loan reduces the death benefit when the client dies.
What are investment grade bonds rated?
They have ratings between AAA and BBB.
If two bonds with differing coupon rates have identical maturities, which one has the longer duration?
The bond with the lower coupon has the longer duration
What backs a debenture issued by an industrial corporation?
The general credit standing of the issuing company. Debentures are general obligations of the issuing company.
When does the issuing corporation take an interest expense deduction from a zero-coupon corporate bond?
When the bond matures.
How do you hedge a short stock position?
With a long call
How do you hedge a long stock position?
With a long put
Investing in inverse funds is primarily suitable for those A) with a short time horizon B) believing the current market trend will continue C) with a long time horizon D) who are risk averse
With a short time horizon
Are STRIPS the same as zero-coupon bonds?
YES.
Are Jumbo CDs issued by banks money market instruments?
YES. Because their maturities are normally 1 year or less.
Are Treasury Bills Money Market Instruments?
YES. Because their maturities are normally 6 months or less.
Do Class C shares have CDSCs?
YES. They are lower CDSCs than Class B shares for a shorter period.
What are callable bonds?
bonds that the issuing company can redeem (buy back/pay off the principal) at a stated dollar amount prior to maturity
high-yield bonds
bonds with low credit quality that offer a high yield to maturity, also called junk bonds BB or Ba or lower
Is buying a put bullish or bearish?
buying a put is bearish. Think that that a put is putting the market down or expecting the future to put the market down
What does the current discount rate represent?
current Market interest rates.
An investor would write a call option to:
obtain income
an increase in interest rates has the least amount of impact on
the bond with the closer maturity date i.e. shorter duration.
In a futures contract who must accept delivery?
the buyer
Nominal Yield
the interest rate, also known as the "coupon rate" which is stated on the face of the bond.
credit risk (default risk)
the risk that a borrower may not repay on a timely basis
Which of the following are NOT considered money market instruments? A) American depository receipts. B) Commercial paper. C) Corporate bonds. D) Jumbo (negotiable) certificates of deposit.
A & C American Depository Receipts (ADR) are equity. Corporate bonds are long-term instruments.
What is the Dividend Growth Model?
A stock valuation model that deals with dividends and their growth, discounted to today.
current yield
Return/Investment The return will always be the annual interest in dollars (if referring to a stock, the dividend in dollars) divided by the current market price (the amount of investment required to own the security) This calculation is called current yield or current return
What is Market Capitalization?
The number of outstanding shares multiplied by the current market price per share.
What does it mean when two things are at Parity?
They are equal
How long are maturities for Money Market debt securities?
They are short term debt security with maturity of less than 1 year.
Which of the following bear no stated interest rate: A)Treasury bonds B)Treasury Bills C) Treasury notes D) TIPS
Treasury Bills
What does the Discounted Cash Flow Method consider?
What future cash returns will be worth at the time they are received, based on estimates of future inflation and interest rates. -Expected income from an investment over a period of time -The time value of money
What happens to the yield spread when investors are pessimistic?
the yield spread widens
Preferred shares usually have a _____________ dividend rate? Do they have voting rates?
-Fixed -NO, not normally, (or very limited) voting powers
What are technical analysts concerned with?
-Market prices -trends -volumes of securities -Moving Averages
What does a yield to call computation involve?
-The amount of interest payments to be received -The length of time to the call -The current price -The call price
What does duration measure?
-The effect of an interest rate change on the price of a bond or bond portfolio. -A bond's price volatility by weighting the length of time it takes for a bond to pay for itself -A weighted-average term-to-maturity of a bond's cash flow A bond's price volatility by weighting the length of time it takes for a bond's cash flow to pay for itself. Duration is expressed in years (time) rather than in percentage The average lifetime of a security's stream of payments.
What is a chartist interested in?
-The volume of shares traded -the short interest for that particular stock. -The advance-decline line
Liquidation Priority
-Wages -Taxes -Secured Creditors (e.g., Mortgage Bonds, Equipment trust certificates, collateral trust bonds) -Unsecured Creditors (general creditors including debenture holders) -Subordinated debt holders/ debentures -Preferred Stock -Common Stock
When a bond is purchased at a PREMIUM, where do the various bond yields end up? (List from highest to lowest on a slant)
1) Premium 2) Coupon 3) Current Yield 4) Yield to Maturity 5) Yield to Call
When a bond is purchased at a DISCOUNT, where do the various bond yields end up? (List from highest to lowest on a slant)
1) Yield to Call 2) Yield to Maturity 3) Current Yield 4) Coupon 5) Discount
If a bond matures in 25 years and is callable in 15 years, How many interest payments are there?
30 semiannual interest payment periods, not 50.
Which of the following has a shorter duration? A) 8% Treasury bond maturing in 2036 B) Treasury STRIPS, maturing in 2036.
A Those bonds with the highest coupons have the shortest duration, therefore, are the least subject to interest rate risk STRIPS, which are zero-coupon bonds, are the most volatile since they have the longest duration.
Which of the following are characteristics of commercial paper? A) It represents a loan by the holder to the issuer. B) It is a certificate of ownership in the corporation. C) It is commonly issued to raise working capital for a corporation. D) It is junior in preference to convertible preferred stock.
A and C They represent a loan by the holder to the issuer and are commonly issued to raise working capital for a corporation
if a bond is paying an interest rate that is higher than the current market rate, the longer the investor will be receiving that higher rate. therefore, will the bond be selling at a premium or discount?
A high premium
When the discount rate of a bond is lower than the coupon rate, is the present value above or below the par value?
Above the par value.
An analyst interested in measuring the breadth of market movement as an indicator of future market direction would monitor the:
Advance/decline line Which measures the number of stocks that have advanced versus the number of stocks that have declined, an indicator of the breadth of the market's advance or decline.
Interest rate is always stated on an
Annual basis and is payed semi annually
An investment adviser representative has a client who needs a safe, secure investment that generates regular income. Which of the following choices would be appropriate? Why are the other ones not appropriate? A) U.S. Treasury bill. B) U.S. Treasury bond. C) U.S. Treasury note. D) U.S. Treasury STRIP.
B & C U.S. Treasury Bills and STRIPS are purchased at a discount and pay no interest so neither of them would be appropriate investments based upon the client's need for regular income.
What does inflation lead to?
Higher interest rates
If a company enters bankruptcy, who has priority?
Holders of bonds and preferred stock have priority over common stockholders.
What happens if you buy a bond at a Premium?
If you pay more, you get less. An investor buying a bond at a premium will always receive a rate of return less than the coupon (or nominal) yield stated on the face of the bond
Who does a company have more of a obligation to between interest payments and dividends?
Interest payments. The payment of interest is an obligation that comes ahead of the payment of any dividend. Companies can elect to skip or reduce their dividends, but not their interest payments.
What is more affected by interest rates, bonds with short or long duration?
Long Duration Because they spend more time in the market.
Which bonds would be most affected if the interest rates fall? -Short-term -Long-term -Discount bonds (lower than market coupon) -Premium bonds (Higher than market coupons)
Long-term a general statement, the longer it has to maturity, the more a bond will react to changes in interest rates. Discount bonds (lower than market coupons) will react more than premium bonds because they have longer duration. Therefore, short-term bonds with high coupons will react the least to changes in interest rates
Ginnie Mae pass-throughs will pay back both principal and interest in what time frame?
Monthly Ginnie Mae (GNMA) securities are called pass-through certificates because the monthly home mortgage payments, which consist of both principal and interest, pass through to the GNMA investor monthly.
What do high bond ratings look like?
More letters the higher the Investment Grade Example BBB or Baa and higher
Five years ago, an investor purchased an ABC Corporation BBB Rated debenture bond with a coupon of 6% maturing in 2037. Currently, new BBB rated debentures with a 15-year maturity are being issued with coupons of 5% Based on the discounted cash flow method, once could say that the present value of the investor's security is?
More than par value The discounted cash flow method is just a technical way of computing the value of a security that demonstrates the inverse relationship between interest rates and bond prices. The discount rate here is the current market rate of 5%. Because this investor's debenture is paying at a rate of 6%, its cash flow is more valuable than a 5% bond; therefore, it will sell at a Premium (above Par)
Which of the following debt instruments generally present the least amount of default risk? -High-yield corporate bonds -Municipal revenue bonds -Convertible senior debentures -Municipal general obligation bonds
Municipal general obligation bonds. Because the full taxing power of the municipality backs a general obligation municipal bond, it will exhibit the least amount of default risk. A corporate debenture is an unsecured bond with a greater degree of risk, as is a junk or high-yield corporate bond.
Do U.S. Treasury Bills and STRIPS pay any interest?
NO
Do common stock have access as owners, to information about corporate earnings before the general public?
NO.
Do stockholders get to invest on dividends?
NO.
Is a bond with a high coupon rate more affected by volatility?
NO. Bonds with a high coupon rate generally have a shorter duration. Therefore, are the least subject to interest rate risk.
Do Corporate bonds represent ownership in a company?
NO. But Common and Preferred stock do.
Do debentures have claim ahead of bonds.
NO. It goes: Bonds, Debentures, preferred stock, then common stock
Are Jumbo Certificates of deposit secured obligations of an issuing bank?
NO. Jumbo CDs are general obligations of the issuing bank.
Do you need to know the current yield to calculate YTM?
NO. Only: -Maturity date -The price paid for a bond -Par value/Coupon rate
Would you use a dividend growth model on a cumulative preferred stock?
NO. The dividends on preferred stock, is fixed, there is no possible growth
Does a Treasury Bill and Treasury STRIPs generate any regular income?
NO. They are purchased at a discount and pay no interest.
Are revenue bonds secured by a specific pledge of property and a type of general obligation bond?
NO. They are secured by user fees, such as tolls.
Is a 7% coupon yielding 7.5% selling at a premium?
NO. Think of left dab and discount slant. The yield is higher than the coupon.
When one invests in a common stock, is credit risk something that the investor is exposed to?
NO. When one invests in commons stock, there is no credit risk because there is no credit -- Stock is equity, not a debt.
What happens to the yield spread when investors are feeling optimistic?
The yield spread narrows
Your client has been saving for the purchase of a home. She calls to tell you that her bank CD matured and she is not pleased with the renewal rate offered by the bank. The client plans to purchase the home within the next 9-12 months and will probably need these funds for the down payment. Which of the following would be the most suitable recommendations?
Treasury Bills Because they are highly liquid and safe.
Which of the following investments gives the investor the least exposure to reinvestment risk? -Commons stock in an electric utility -Preferred stock in a growth company -Treasury STRIPS/zero-coupon bonds. -Treasury notes.
Treasury STRIPS/zero-coupon bonds There is no income to reinvest during the holding period and therefore no reinvestment risk
Which of the following is sold at a discount: A)Treasury bonds B)Treasury Bills C) Treasury notes D) TIPS
Treasury bills and are sold at a discount through weekly auctions and are actively traded in the market
Are stockholders entitled to receive an annual report containing audited financial statements?
YES.
Do bonds of higher quality experience less volatility than bonds with lower quality?
YES.
Do dividends for common and Preferred stock need to be declared by the Board of Directors?
YES.
Do the dividends for preferred stock and common stock need to be declared by the board of directors?
YES.
In order to be eligible to cast a vote, does the stockholder's ownership have to be listed on the company's books by the record date?
YES.
If an IA is constructing a bond portfolio for an income oriented investor and wishes to use a duration-based strategy to immunize the portfolio against adverse movements in interest rates, Does the adviser need to know the Market Price of the bond?
YES. as well as the coupon rate & Maturity of the bond
Of the following securities, which is most commonly recommended to fund a child's college education?
Zero-coupon Treasury bonds Particularly those carrying the guarantee of the US Treasury. They have the advantage of providing certain quantifiable sum at a certain date in the future.
