series 7 -- debt
Level debt service is best described as:
debt service remains the same amount each year
All of the following statements are true regarding equipment trust certificates ("ETCs") EXCEPT:
default of ETCs is common during recessionary periods (defaults are rare)
if effective yield is higher than the coupon, the bond is issued at a
discount
If interest rates are rising, which statement about discount and premium bonds is TRUE?
discount bonds will depreciate faster than premium bonds
20 Basis points equals:
0.2%
Treasury Bills are issued for all of the following initial maturities EXCEPT:
1 week
All of the following statements are true about "plain vanilla" CMO tranches EXCEPT:
each tranche has a different credit rating
Additional security backing a general obligation bond is provided if the issuer has:
escrowed the issue to the maturity date
All of the following are methods that an issuer can use to retire bonds prior to maturity EXCEPT:
exercise of put option
Yield quotes for collateralized mortgage obligations are based upon:
expected life of the tranche
The money market instrument with the shortest maturity is:
federal funds
The money that a bank has in excess of its reserves is called:
federal funds
Which of the following designates "primary" U.S. Government securities dealers?
federal reserve
The interest received from a Collateralized Mortgage Obligation is subject to:
federal, state, and local income tax
Market uncertainty regarding future interest rate levels would indicate that the yield curve should be:
flat
When short term interest rates are the same as long term interest rates, the yield curve is said to be:
flat
Which CMO tranche is LEAST susceptible to interest rate risk?
floating rate tranche
When compared to plain vanilla CMO tranches, Planned Amortization Classes have:
lower extension risk
A mortgage backed security's "PSA" stands for:
prepayment speed assumption
Most of the value of a bond is established by the:
present value of the last payment
A customer wishes to buy a security that provides monthly payments for his retirement. Which of the following is suitable?
GNMA pass through certificates
A customer buys 5M of 6 1/4% Treasury Bonds at 100. How much interest income will the customer receive at each interest payment?
$156.25 (5,000 x 6.25% = $312.50 / 2 = $156.25)
Which investment gives the greatest protection against purchasing power risk?
10 year TIPS
Which investment gives the LEAST protection against purchasing power risk?
10 year treasury STRIPS
In 2020, a customer buys 1 ABC 10%, $1,000 par debenture, M '35, at 100. The interest payment dates are Jan 1st and Jul 1st. The nominal yield on the bond is:
10% (stated) (annual interest / par)
Interest earned on corporate bonds is:
100% taxable at the federal level
Which of the following actions must be taken if a municipality wishes to raise its debt limit?
public referendum
Below is a listing of municipal bonds with the same credit ratings and maturities. Which bond has the lowest yield?
puerto rico bond (triple tax exempt)
A customer purchases 3M of Chicago Water Authority 9% revenue bonds maturing in 2042 at 87. The interest payments are Mar 15th and Sept 15th. The trade took place on Tuesday, April 15th. How much accrued interest will the customer be required to pay the seller?
$24 (Interest accrues from the morning of the last interest payment up to, but not including, settlement, calculated on a 30 day month / 360 day year basis. The last interest payment was made on March 15th. Interest accrues from March 15th through March 30th, so there are 16 days that must be counted for in March; and continues until the settlement date of April 17th, so an additional 16 days of accrued interest must be paid for April. The total number of days is 16 for March + 16 for April = 32 days of accrued interest due. (32 days interest x $90 x 3 bonds) / 360 = $24
A corporation has issued $10,000,000 of 7 1/4%, 20 year, $1,000 par, convertible debentures, convertible at a ratio of 40:1. The bond is currently trading at 120, while the company's common stock is at 24. The conversion price per share is:
$25 (par value of bond / conversion ratio)
The minimum denomination for a mortgage backed pass through certificate is:
$25,000
A customer purchases 5M of New York 8% G.O. bonds, maturing in 2042 at 90. The interest payment dates are Jan. 1st and Jul. 1st. The trade took place on Wednesday, February 2nd. How much accrued interest will the customer be required to pay the seller?
$36.67
A corporation has issued $10,000,000 of 8%, 20 year, $1,000 par, convertible debentures, convertible at a ratio of 25:1. The bond is currently trading at 120, while the company's common stock is at 46. The conversion price per share is:
$40 (par value of bond / conversion ratio)
A customer buys 10M of Allied Corporation 8% debentures, M '35, at 90 on Tuesday, October 8th. The interest payment dates are Feb. 1st and Aug. 1st. The trade settled on Thursday, October 10th. The amount of the next interest payment will be:
$400 (The bonds pay 8% interest annually. 8% of $10,000 is $800 annual interest. Since payments are made semi-annually, $400 is the amount of each payment. Note that the accrued interest paid from buyer to seller on settlement has no effect on the payments made by the issuer to the bondholder of record.)
A municipality has floated a $100,000,000 revenue bond issue. The annual level debt service requirement is $20,000,000. In the first fiscal year, the municipality has collected revenues of $45,000,000. The "Coverage Ratio" is:
$45,000,000 / $20,000,000
A corporation has issued $10,000,000 of 8%, 20 year, $1,000 par, convertible debentures, convertible at a ratio of 25:1. The bond is currently trading at 120, while the company's common stock is at 46. The parity price of the common stock is currently:
$48 ($1,200 / 25)
The conversion price of a convertible debenture is set at issuance at $40 per share. The common stock is now trading at 42 while the bond is trading at par. If the bond rises 20% from its current market value, the new parity price of the common stock will be:
$48 (If the bond rises 20% from its current price of $1,000 (par), the new price will be 120% x $1,000 = $1,200 per bond. Since each bond is convertible based upon a conversion price of $40 per share, the conversion ratio is $1,000 par / $40 conversion price = 25:1. The new parity price is $1,200 / 25 = $48 per share.)
A corporation has issued 10%, $1,000 par convertible debentures, convertible at $31.25. The common stock is currently trading at $35. If the bond and the common are trading at parity, a customer purchasing 5M of the bonds will pay:
$5,600 ($1,000 / $31.25 = 32 shares) (32 x $35 = $1,120) ($1,120 x 5 = $5,600)
A corporation has issued 10%, $1,000 par convertible debentures, convertible at $40. The common stock is currently trading at $45. If the bond and the common are trading at parity, a customer purchasing 5M of the bonds will pay:
$5,625 (The bonds are convertible at $40, based on $1,000 par value. Therefore each bond converts into 25 shares ($1,000 par / $40 conversion price). If the common is trading at $45, the bond must be trading at 25 times this to be at parity. $45 x 25 = $1,125 parity price of one bond. The parity price of "5M" ($5,000 face amount, "M" is Latin for $1,000) is $1,125 x 5 = $5,625.)
A municipality has a tax rate of 8 mills. A piece of real property in the municipality is assessed at $100,000 and has a fair market value of $200,000. The annual tax liability on the property is:
$800 ($100,000 x .008)
A customer buys 5M of 3 1/4% Treasury Bonds at 98-8. How much will the customer receive at each interest payment?
$81.25
A 10 year 4 3/4% Treasury Note is quoted at 95-11 - 95-15. The note pays interest on Jan 1st. and Jul. 1st. A customer buys 10M of the notes. Approximately how much will the customer pay, disregarding commissions and accrued interest?`
$9,546.88
XYZ Debentures Issue Date:8-1-XX Payment Dates:J 1 & J 1 Maturity Date:7-1-XX Some years after issuance, a customer buys 10 debentures in a regular way trade on Tuesday, October 10th. The customer will owe the seller:
101 days of accrued interest (July, August, September, October)
A municipality issues a 30-year zero-coupon bond at deep discount. The bond is callable at 103. The bond is called in Year 10 when its current accreted value is $500. The bondholder will receive:
103% of $500
A municipality issues a zero-coupon bond that is callable at 104. If the municipality calls the bonds prior to maturity, the bondholder will receive:
104% of current accreted value
XYZ Debentures Issue Date:8-1-XX Payment Dates:J 1 & J 1 Maturity Date:7-1-XX Some years after issuance, a customer buys 10 debentures in a regular way trade on Friday, October 14th. The customer will owe the seller:
107 days of accrued interest
In 2020, a customer buys 5 GE 10% debentures, M '30, at 85. The interest payment dates are Feb 1st and Aug 1st. The bonds are callable as of 2025 at 103. The yield to maturity on the bonds is:
12.43% (The formula for yield to maturity for a discount bond is: $100 + ($150 discount / 10 years to maturity)($850 + $1,000) / 2=$100 + $15$925= $115$925=12.43%)
A 20-year 3 1/2% Treasury Bond is quoted at 99-4 - 99-8. The note pays interest on Jan 1st and Jul 1st. If a customer buys 5 T-Bonds on Friday, Jan 13th in a regular way trade, how many days of accrued interest are owed to the seller? (It is not a leap year.)
15
A customer buys a new municipal issue from an underwriter on Wednesday, January 14th, with settlement taking place on Friday, January 16th. The bond is dated January 1st. How many days of accrued interest must be paid by the customer to the underwriter?
15
A customer buys a new issue corporate bond with a dated date of January 1st, settling on January 21st. The first interest payment is due March 1st. How many days of accrued interest must the customer pay to the underwriter?
20
A 6% corporate bond with 15 years left to maturity is currently trading at 115. The bond is callable in 5 years at 105. If a client buys the bond and then the issuer calls it in 5 years, the yield to call will be:
3.64% (YTC is Net Annual Return / Average Value. The annual income is 6% of $1,000 par = $60 per year. The bond can be purchased at 115, but it will be called in 5 years at 105, so there will be a 10 point ($100) loss over 5 years = 2 point loss ($20) per year. The Net Annual Return is: Annual Income ($60) - Annual Loss ($20) = $40 The Average Value is: $1,150 Purchase Price + $1,050 Redemption Price / 2 = $2,200 / 2 = $1,100 YTC is: $40 / $1,100 = 3.636%)
A customer buys a new issue municipal bond with a dated date of January 1st, settling on January 31st. The first interest payment is due March 1st. How many days of accrued interest must the customer pay to the underwriter?
30
A 7% corporate bond with 10 years left to maturity is currently trading at 108. The bond is callable in 3 years at 102. If a client buys the bond and then the issuer calls it in 3 years, the yield to call will be:
4.76% (YTC is Net Annual Return / Average Value. The annual income is 7% of $1,000 par = $70 per year. The bond can be purchased at 108, but it will be called in 3 years at 102, so there will be a 6 point ($60) loss over 3 years = 2 point loss ($20) per year. The Net Annual Return is: Annual Income ($70) - Annual Loss ($20) = $50 The Average Value is: $1,080 Purchase Price + $1,020 Redemption Price / 2 = $2,100 / 2 = $1,050 YTC is: $50 / $1,050 = 4.76%)
A 30 year $1,000 par 4 3/4% Treasury Bond is quoted at 95-11 - 95-15. The note pays interest on Jan 1st and Jul 1st. A customer buys 1 bond at the ask price. What is the current yield, disregarding commissions?
4.98% (annual income / market price) ($47.50 / $954.6875)
The longest initial maturity available for new issues of Treasury Bills is:
52 weeks
All of the following callable municipal bonds are trading at a 5% basis. Which is MOST likely to be called?
6 3/4% coupon rate callable at 100 in 2020 (high rates, low call premiums)
An investor purchases a bond, which pays interest on January 1st and July 1st. The trade settles on May 1st. How many months of interest will the buyer receive from the issuer in the next interest payment?
6 months
In 2020, a customer buys 1 GE 8%, $1,000 par debenture, M '35, at 110. The interest payment dates are Jan 1st and Jul 1st. The yield to maturity on the bond is:
6.98% ($80 - ($100 premium / 15 years to maturity)($1,100 + $1,000) / 2 = $80 - $6.67$1,050 = $73.33$1,050= 6.98%)
Municipalities would issue tax exempt commercial paper for all of the following reasons EXCEPT to:
refund an outstanding bond issue
All of the following callable municipal bonds are trading at an 8% basis. Which is MOST likely to be called?
8 3/4% coupon rate callable at 100 in 2020 (An issuer is most likely to call bonds which have high interest rates (high financing cost to the issuer) and low call premiums (the least expensive for the issuer to call in these bonds))
A 9%, $1,000 par corporate bond is trading at $1,100. What is the current yield?
8.18% ($90/$1,100)
The interest expense on monies used to buy bank qualified municipal bonds is:
80% deductible for bank investors
A 5 year 3 1/4% Treasury Note is quoted at 101-4 - 101-8. The note pays interest on Jan. 1st and Jul. 1st. If a customer buys 5 T-Notes on Friday, April 4th in a regular way trade, how many days of accrued interest are owed to the seller? (It is not a leap year.)
96
A municipality would defease its debt with all of the following EXCEPT:
AAA municipal securities
All of the following securities are quoted on a yield basis EXCEPT:
ADRs
Which of the following statements are TRUE about CMOs? I CMO issues have a serial structure II CMO issues are rated AAA III CMO issues are more accessible to individual investors than regular pass-through certificates IV CMO issues have a lower level of market risk than regular pass-through certificates
I, II, III, IV
The purchase price of each of the following can be negotiated EXCEPT:
savings bond
Which of the following municipal issues is a short term note that is retired by a later permanent bond sale?
BAN
The lowest investment grade rating is:
BBB
What source of information provides dealer offerings of municipal bonds in the secondary market?
Bloomberg
Current dealer offerings of corporate bonds can be found in:
Bloomberg (and Reuters)
A structured product that invests in tranches of private label subprime mortgages is a:
CDO
The Federal Reserve Board is: I a primary purchaser of Treasury securities II not a primary purchaser of Treasury securities III an active participant in the secondary market for Treasury securities IV not an active participant in the secondary market for Treasury securities
II and III
A customer wishes to determine the call provisions on a municipal bond that he currently holds. Which source provides this information?
EMMA
The yield to maturity of a bond will: I increase as bond prices fall II decrease as bond prices rise III remain unchanged as bond prices fall IV remain unchanged as bond prices rise
I and II
When a municipal issuer defeases its debt in accordance with the terms of the bond contract, it: I terminates the lien that existing bondholders have on pledged revenues II substitutes another source of revenue acceptable to the bondholders III returns the principal amount to the bondholders at the time of the defeasance
I and II
Which of the following statements are TRUE regarding repurchase agreements? I Repurchase agreements are used by dealers to reduce the carrying cost of Government securities held in their inventory II Repurchase agreements are initiated by the Federal Reserve to loosen the money supply III If a repurchase agreement specifies a date and price at which time the trade will be reversed, the agreement is known as a "Reverse" repurchase agreement IV If a repurchase agreement extends for longer than overnight, the agreement is known as a "Due Bill" repurchase agreement
I and II
Trades of which of the following securities will settle in Fed Funds? I Treasury Bills II Treasury Notes III Municipal Bonds IV Corporate Bonds
I and II only
A company that has issued first mortgage bonds is declared in default by the trustee. Which statements are TRUE? I The bondholders have legal claim to the property backing the bond II The bondholders do not have legal claim to the property backing the bond III The bondholders may sell the property to satisfy the unpaid obligation IV The bondholders may not sell that property to satisfy the unpaid obligation
I and III
If a bond is purchased at a discount, which of the following statements are TRUE? I Yield to call is higher than the yield to maturity II Yield to call is lower than the yield to maturity III Yield to maturity is higher than the current yield IV Yield to maturity is lower than the current yield
I and III
Interest on a corporate bond accrues on a: I 30-day month II actual day month III 360-day year IV actual day year
I and III
Treasury bills: I are issued in minimum $100 denominations II are issued in minimum $10,000 denominations III mature at par IV mature at par plus accrued interest
I and III
When bonds are trading at a large discount, which of the following statements are TRUE? I The deeper the discount, the more volatile the bond's price movement in response to interest rate changes II The deeper the discount, the less volatile the bond's price movement in response to interest rate changes III Discount bonds with long maturities are more volatile than ones with short maturities IV Discount bonds with short maturities are more volatile than ones with long maturities
I and III
When monies are deposited into a sinking fund to retire municipal debt under mandatory call provisions found in the bond contract, the issuer: I calls bonds by random selection at preset dates and at preset prices II tenders for the bonds at preset dates and at preset prices III is permitted to retire outstanding bonds by making purchases of that issue in the open market IV is prohibited from retiring outstanding bonds by making purchases of that issue in the open market
I and III
When the yield curve is inverted: I short term rates are higher than long term rates II long term rates are higher than short term rates III to maximize income, one should invest in short term maturities IV to maximize income, one should invest in long term maturities
I and III
Which of the following statements are TRUE regarding Federal Funds? I Federal funds are overnight loans between member institutions of the Federal Reserve System II Federal funds are overnight loans of reserves from the Federal Reserve Bank to a member institution III The interest rate charged on Federal Funds is the Federal Funds Rate IV The interest rate charged on Federal Funds is the Discount Rate
I and III
Which of the following statements are TRUE regarding a municipal bond issue that is advance refunded? I The marketability of the advance refunded bonds will increase II The issuer redeems an old bond issue by advancing funds from the U.S. Government for this purpose III The funds to pay debt service requirements are deposited to an escrow account and used to buy U.S. Government securities IV The funds to pay debt service requirements are deposited to an escrow account and used to buy Municipal securities
I and III
Which statements are TRUE regarding the tax treatment of the annual adjustment to the principal amount of a Treasury Inflation Protection Security? I An annual upward adjustment due to inflation is taxable in that year. II An annual upward adjustment due to inflation is not taxable in that year. III An annual downward adjustment due to deflation is tax deductible in that year. IV An annual downward adjustment due to deflation is not tax deductible in that year.
I and III
Wide swings in market interest rates would affect which of the following for holders of collateralized mortgage obligations? I Prepayment Rate II Interest Rate III Market Value IV Credit Rating
I and III
Regarding bonds with put options, which of the following statements are TRUE? I Exercise of the put is at the option of the bondholder II Exercise of the put is at the option of the issuer III Yields on bonds with put options are lower than similar bonds without this feature IV Yields on bonds with put options are higher than similar bonds without this feature
I and III (Because the put option removes some of the market risk from the bond, this feature is valued by bondholders, who will accept lower yields on bonds having this option)
A corporation has issued $10,000,000 of 8%, 20 year, $1,000 par, convertible debentures, convertible at a ratio of 25:1. The bond is currently trading at 120, while the company's common stock is at $52. Which statements are TRUE? I An arbitrage opportunity exists between the convertible bond and the common stock II An arbitrage opportunity does not exist between the convertible bond and the common stock III The common stock is trading at a discount to the parity price IV The common stock is trading at a premium to the parity price
I and IV
CMOs are: I available in $1,000 denominations II available in $25,000 denominations III quoted in 1/8ths IV quoted in 1/32nds
I and IV
If a bond is trading at a discount, price volatility is greatest for a bond having: I low interest rates II high interest rates III short term maturities IV long term maturities
I and IV
If a bond is trading at a premium, price volatility is greatest for a bond having: I coupon rates slightly above the market interest rate II coupon rates greatly above the market interest rate III short term maturities IV long term maturities
I and IV
Mandatory sinking funds for municipal issues are: I found in revenue bond issues II not found in revenue bond issues III found in general obligation bond issues IV not found in general obligation bond issues
I and IV
Reports of corporate bond trades are made to: I TRACE II RTRS III within 10 seconds of execution IV as soon as practicable but no later than 15 minutes after execution
I and IV
When comparing the effect of changing interest rates on prices of a CMO issues versus the prices of regular bond issues, which of the following statements are TRUE? I When interest rates rise, mortgage backed pass through certificates fall in price faster than regular bonds of the same maturity II When interest rates rise, mortgage backed pass through certificates fall in price slower than regular bonds of the same maturity III When interest rates fall, mortgage backed pass through certificates rise in price faster than regular bonds of the same maturity IV When interest rates fall, mortgage backed pass through certificates rise in price slower than regular bonds of the same maturity
I and IV
Which characteristics make a security least subject to liquidity risk? I Short term maturity II Long term maturity III Low credit rating IV High credit rating
I and IV
Which of following statements best describe the activities of municipal broker's brokers? I They perform trades on an agency basis only II They perform trades on a principal basis only III They carry inventory positions IV They do not carry inventory positions
I and IV
Which of the following statements are TRUE regarding the effect of market interest rate movements on callable and puttable bond prices? I When interest rates fall, the call price tends to set a ceiling on the market price of the bond II When interest rates fall, the call price tends to set a floor on the market price of the bond III When interest rates rise, the put price tends to set a ceiling on the market price of the bond IV When interest rates rise, the put price tends to set a floor on the market price of the bond
I and IV
Which statements are TRUE about adjustment (income) bonds? I Any interest payment made is predictable in amount II Any interest payment made is not predictable in amount III Timing of interest payments made is predictable IV Timing of interest payments made is not predictable
I and IV
Which statements are TRUE about changes in market interest rates and collateralized mortgage obligations? I If interest rates drop, homeowners will refinance their mortgages, increasing prepayment rates on CMOs II If interest rates rise, homeowners will refinance their mortgages, increasing prepayment rates on CMOs III If interest rates drop, the market value of CMO tranches will decrease IV If interest rates drop, the market value of the CMO tranches will increase
I and IV
Which statements are TRUE regarding moral obligation bonds that are issued by authorities? I The bonds are typically secured by the revenues from a financed project II The bonds are typically secured by the special taxing power of the issue rIII Ultimate payment on a moral obligation bond occurs if the U.S. Government apportions the funds to service the debt IV Ultimate payment on a moral obligation bond occurs if the State legislature apportions the funds to service the debt
I and IV
As interest rates rise, which of the following statements are TRUE? I Bonds trading at large discounts fall faster in price than bonds trading at small discounts. II Bonds trading at small discounts fall faster in price than bonds trading at large discounts. III Bonds trading at large premiums fall faster in price than bonds trading at small premiums. IV Bonds trading at small premiums fall faster in price than bonds trading at large premiums.
I and IV (The general rule is the lower the price of the bond, the faster that bond's price will move as market interest rates change. Deep discount bonds have a lower price than small discount bonds, hence their prices move faster. Small premium bonds have a lower price than large premium bonds, hence their prices move faster as well)
Corporate bonds are issued with an "anti-dilutive" covenant. If the corporation declares a 5% stock dividend, which statements are TRUE? I The conversion ratio is increased II The conversion price is increased III The conversion ratio is decreased IV The conversion price is decreased
I and IV (To adjust the terms of conversion, the conversion price is reduced, and the number of common shares into which the security is convertible is increased.)
Which of the following are necessary to calculate the total purchase price for a bond quoted on a yield basis in a municipal bond transaction? I Yield to maturity II Coupon rate III Settlement date IV Dated date
I, II, III
When comparing a CMO Planned Amortization Class (PAC) to a CMO Targeted Amortization Class (TAC), which statements are TRUE? I PACs are similar to TACs in that both provide call protection against increasing prepayment speeds II PACs differ from TACs in that TACs do not offer protection against a decrease in prepayment speeds III PAC holders have a degree of protection against extension risk that is not provided to TAC holders IV TAC pricing will be more volatile compared to PAC pricing during periods of rising interest rates
I, II, III, IV
A 5 year, $1,000 par, 3 1/2% Treasury Note is quoted at 101-4 - 101-8. The note pays interest on Jan 1 and Jul 1. Which statement is TRUE?
the spread is $1.25 per $1,000 (4/32 = .125 x $1,000)
Which of the following statements are TRUE for both government and agency securities? I They are exempt from registration under the Securities Act of 1933 II They are interest bearing obligations quoted in 32nds III Trades settle in Federal Funds IV They are eligible for trading in Federal Reserve open market operations
I, II, III, IV
Which of the following statements are TRUE regarding Treasury Bills? I T-Bills are original issue discount obligations II T-Bills are auctioned off weekly by the Federal Reserve III When T-Bills mature, the difference between the purchase price and the redemption price is taxable as interest income IV Treasury Bills are a direct obligation of the U.S. Government
I, II, III, IV
Which of the following statements are TRUE regarding a 5% municipal bond purchased at par that has a put option at par? I The yield on the bond can fall below 5% II The put would be exercised if interest rates rise III The holder can receive 100% of par for the bond if he or she exercises the put option IV The investor can exercise the put at his or her discretion
I, II, III, IV
Which of the following statements are TRUE regarding convertible bond issues? I At the time of issuance, the conversion price is set at a premium to the stock's current market price II When the stock price is at a premium to the conversion price, the conversion feature has intrinsic value III For the conversion feature to have value, the stock's price must move up in the market after issuance IV Convertible bonds usually have lower yields than bonds without the conversion feature
I, II, III, IV
Which statements are TRUE about structured products? I The bond component pays interest based on an index rate such as the performance of the NASDAQ 100 Index II The interest rate paid is typically capped to an annual maximum rate III The derivative component establishes the payment at maturity and protects principal IV The security may be listed on a national securities exchange, but trading is typically very thin
I, II, III, IV
Which statements are TRUE regarding collateralized mortgage obligations? I CMOs are backed by agency pass-through securities held in trust II CMOs have investment grade credit ratings III CMOs give the holder a limited form of call protection that is not present in regular pass-through obligations IV CMOs are issued by government agencies
I, II, III, IV
Which of the following statements are TRUE about commercial paper? I Commercial paper has a maximum maturity of 270 days II Commercial paper matures on a pre-set date at a pre-set price III Commercial paper is quoted on a yield basis IV Commercial paper is an unsecured promissory note
I, II, III, and IV
Interest income from securities issued by which of the following agencies is fully taxable? I Federal National Mortgage Association II Government National Mortgage Association III Federal Farm Credit Banks Funding Corporation IV Federal Home Loan Mortgage Corporation
I, II, IV
The municipal bond counsel opines on which of the following? I Validity II Legality III Feasibility IV Tax exempt status
I, II, IV
Which of the following money market instruments trades "flat"? I Treasury Bills II Banker's Acceptance III Certificates of Deposit IV Commercial Paper
I, II, IV
A customer purchases a convertible bond at 90, convertible into the common stock at $40. The common stock is currently trading at $40. Which statements are TRUE? I There is a bona fide arbitrage opportunity II The conversion ratio is 25:1 III The bond and the stock are trading at parity IV If the bond is purchased and the equivalent number of common shares are sold short, there is an immediate profit
I, II, IV (The stock and the bond are currently not trading at parity. To be at parity, the stock must be trading for the $900 current bond market price / 25 shares per bond = $36. Since the stock is trading at $40, it is trading above parity, and a bona-fide arbitrage situation exists.)
Which of the following affect the marketability of corporate bonds? I Bond rating II Maturity III Block size IV Bond denominations
I, II, and III
Which of the following are TRUE statements about discount bonds? I Discount bonds will appreciate more rapidly as interest rates fall than will similar premium bonds II A bond trading at a discount can indicate that market interest rates have risen III A bond trading at a discount can indicate that the issuer's credit rating has deteriorated IV Bonds trading at a discount are more likely to be called than bonds trading at a premium
I, II, and III
Which of the following municipal bonds will trade "flat" ? I Defaulted bonds II Zero-coupon bonds III Moral obligation Bonds IV General obligation bonds
I, II, and III
The trust indenture of a bond would include which of the following information? I Interest rate II Maturity III Collateral backing the issue IV Call provisions
I, II, and III, IV
Which of the following are characteristics of municipal secondary market joint accounts? I Order Period II Account Agreement III Good Faith Deposit IV Concession and Takedown
I, II, and IV
Which statements are TRUE regarding the Federal Funds rate? I The rate is computed every business day II The rate is lower than the discount rate III The rate is set by the Federal Reserve IV The rate is charged from one Federal Reserve member bank to another member bank
I, II, and IV
Which of the following securities earn interest? I Treasury Strip II Treasury Stock III Treasury Bond IV Treasury Note
I, III, IV
Municipal bonds would be an appropriate investment for which of the following? I Individuals II Individual Retirement Accounts III Bank Holding Companies IV Casualty Companies
I, III, and IV
A declining rate of inflation would lead to: I lower bond prices II higher bond prices III lower bond yields IV higher bond yields
II and III
In a municipal bond contract, a "covenant of defeasance" would be invoked if: I interest rates have risen subsequent to bond issuance II interest rates have dropped subsequent to bond issuance III call premiums on the issue are low IV call premiums on the issue are high
II and III
Ten basis points are equal to: I $ .10 per $1,000 II $1.00 per $1,000 III .10% IV 1.0%
II and III
When comparing CMOs to their underlying pass-through certificates, which of the following statements are TRUE? I CMOs receive a higher credit rating than the underlying mortgage backed pass-through certificate II CMOs receive the same credit rating as the underlying mortgage backed pass-through certificate III CMOs are subject to a lower degree of prepayment risk than the underlying pass-through certificate IV CMOs are subject to the same degree of prepayment risk as the underlying pass-through certificate
II and III
Which of the following actions by the Federal Reserve will tighten credit? I Repurchase Agreement II Reverse Repurchase Agreement III Matched Sale
II and III
Which statements are TRUE regarding Treasury STRIPS? I Interest is paid semi-annually II The bonds are issued at a discount III Interest income is accreted and taxed annually IV Interest earned is subject to reinvestment risk
II and III
Which statements are TRUE regarding a "step-down" certificate of deposit? I The interest payment is fixed II The interest payment may be reduced III The principal payment is fixed IV The principal payment may be reduced
II and III
Which statements are TRUE regarding interest rate movements and their effect on bond prices? I As interest rates move, the price of short term maturities will change faster than long term obligations II As interest rates move, the price of long term maturities will change faster than short term obligations III As interest rates move, the price of low coupon issues will change faster than high coupon issues IV As interest rates move, the price of high coupon issues will change faster than low coupon issues
II and III
A corporation has issued 8% AA rated sinking fund debentures at par. Three years later, similar issues are being offered in the primary market at 7%. Which are TRUE statements about the outstanding 8% 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 (The bond was issued with a coupon of 8%. Currently, yield for a similar issue is 7%. Therefore, interest rates have fallen subsequent to the issuance of the bond; or the credit quality of the bond has improved. When interest rates fall, yields on bonds already trading must also fall. What causes this is a rise in the dollar price of the issue - the bond now trades at a premium)
If a bond is purchased at a premium, which of the following statements are TRUE? I Yield to call is higher than the yield to maturity II Yield to call is lower than the yield to maturity III Yield to maturity is higher than the current yield IV Yield to maturity is lower than the current yield
II and IV
When a recession is expected: I investors will increase purchases of corporate bonds II investors will increase purchases of government bonds III yields on corporate bonds will decrease IV yields on government bonds will decrease
II and IV
When the price of a bond increases, which of the following statements regarding yields are TRUE? I Current yield increases II Current yield decreases III Yield to maturity increases IV Yield to maturity decreases
II and IV
Which of the following are TRUE statements regarding government agencies and their obligations? I Ginnie Mae is a publicly traded company II Ginnie Mae is a U.S. Government Agency III Ginnie Mae stock is traded on the New York Stock Exchange IV Ginnie Mae bonds are traded Over the Counter
II and IV
Which of the following statements about Treasury STRIPS are TRUE? I Treasury STRIPS are suitable investments for individuals seeking current income II Treasury STRIPS are not suitable investments for individuals seeking current income III The holder is subject to reinvestment risk IV The holder is not subject to reinvestment risk
II and IV
Which statements are TRUE about CMBs? I CMBs are sold at par II CMBs are sold at a discount to par III CMBs are sold at a regular weekly auction IV CMBs are sold on an "as needed" basis
II and IV
Which statements are TRUE about adjustment (income) bonds? I Semi-annual payment of interest is assured II Semi-annual payment of interest is not assured III Repayment of principal at maturity is assured IV Repayment of principal at maturity is not assured
II and IV
Which statements are TRUE regarding Z-tranches? I Interest is paid before all other tranches II Interest is paid after all other tranches III Principal is paid before all other tranches IV Principal is paid after all other tranches
II and IV
A convertible debenture is convertible into common at $40 per share. If the market price of the bond rises to a 5 point premium over par, which statements are TRUE? I The conversion ratio is 20:1 II The conversion ratio is 25:1 III The parity price of the stock is $40 IV The parity price of the stock is $42
II and IV (In this case, the conversion price is set at $40 per share, so the conversion ratio is $1,000 par / $40 conversion price = 25:1 (25 shares per bond). If the bond moves to a 5 point premium over par, its new price will be 105, or $1,050 per bond. For the common stock to be valued at parity to the bond, the price per share must be $1,050 / 25 shares per bond = $42 per share parity price.)
Jumbo Certificates of Deposit are: I issued in amounts in excess of $10,000 II issued in amounts in excess of $100,000 III fully insured by the Federal Deposit Insurance Corporation IV not fully insured by the Federal Deposit Insurance Corporation
II and IV (any amount in excess of $250,000 not insured by FDIC)
Dealer offerings of corporate bonds found in Bloomberg are: I retail quotes II wholesale quotes III new issue offerings sold under a prospectus IV secondary market offerings
II and IV (wholesale quotes are dealer to dealer)
Which of the following ratings are considered to be "speculative"? I BBB II BB III B IV CCC
II, III, and IV
An investor who expects interest rates to drop would NOT invest in: I non-callable debt issues II puttable debt issues III callable debt issues IV debt issues with adjustable interest rates
III and IV (If interest rates decline, it is likely that issuers will call in outstanding bonds and refund the issues at the lower current interest rates. An investor who expects interest rates to drop should avoid callable issues (choice III) or issues with adjustable interest rates (since each year as interest rates drop, the rate on the bond is dropped). Non callable bonds are fine, as are bonds with put options. The put option will only be used if interest rates rise, decreasing the value of the bond. Then, the bondholder would exercise the option and "put" the bonds to the issuer at par)
Which of the following do NOT have an equity position? I Convertible preferred shareholders II Preferred shareholders III Convertible debenture holders IV Subordinated debentures
III and IV (bondholders are creditors)
Arrange the following CMO tranches from lowest to highest yield: I Plain vanilla II Targeted amortization class III Planned amortization class IV Companion
III, II, I, IV
Which of the following would be a rating for short term municipal debt?
MIG 1
Which of the following securities issued by the U.S. Government is considered to be a money market security?
T-bill (mature in 1 year or less)
During its fiscal year, New York state is experiencing a temporary cash flow shortage, expected to last for 5 months. To meet current obligations, the state would most likely issue:
TANs or RANs
Which investment does NOT have purchasing power risk?
TIPS
A customer buys 10 PDQ Corporation 10% debentures, M '35, at 93 on Friday, June 12th in a regular way trade. The interest payment dates are March 1st and September 1st. The trade settles on:
Tuesday, June 16th
CMOs are often quoted on a yield spread basis to similar maturity:
US government bonds
A customer buys a 10% G.O. bond at 110. The issue is callable in 5 years at par and matures in 10 years. Which statement is TRUE?
YTC < YTM
When analyzing a General Obligation bond, all of the following ratios would be evaluated EXCEPT:
debt service coverage ratio
Generally, which statement is FALSE about market index linked CDs?
a market index linked CD can be redeemed at any time
The "interest" received from a zero-coupon corporate bond is:
accreted and taxed annually
A corporation has posted a large financial loss for this year. It has a legal obligation to pay interest on all of the following bonds EXCEPT:
adjustment bonds
In a municipal bond contract, a "covenant of defeasance" would allow the issuer to:
advance refund the issue under the terms specified in the bond contract
When a bond increases in value due to market demand, this is termed:
appreciation
Series EE bonds:
are redeemed at par plus interest earned
Which ratio test is used to analyze a revenue bond?
debt service coverage ratio
The first use of funds under a "gross lien revenue pledge" is to pay the:
debt service fund (not operation and maintenance fund)
A customer wishes to buy a $50,000 certificate of deposit offered by your firm. The customer wishes to know if the CD is FDIC insured. As the broker handling the account, you should tell the customer that:
as long as the CD is titled in the customer's name and the customer doesn't have accounts at the issuing bank totaling more than $200,000, then the CD is FDIC insured
Treasury Receipts pay interest:
at maturity
The effective Fed Funds Rate is the:
averaged rate of member banks throughout the US
Which statement is TRUE about a Certificate of Participation (COP)?
backed by a pledge of lease revenues
A 65-year old customer wishes to invest part of his retirement funds with the dual objectives of enhanced income and safety of principal. The customer notices that "C" rated corporate bonds yield significantly more than equivalent maturity Treasury issues and asks you, the registered representative, whether these would be an appropriate investment. The best response is to tell the customer that this is a:
bad idea because "C" rated corporate bonds have a much higher risk of default than Treasury issues
When a bond trades at a premium, which bond yield will be the lowest?
basis
What does a bond trading "flat" mean?
bond is trading without accrued interest
A municipal variable rate demand note is a municipal:
bond that gives the holder a tender option feature, usually at par, as of the reset date
All of the following are true statements about discount bonds EXCEPT:
bonds trading at a discount are more likely to be called than bonds trading at a premium
Treasury Bills are issued by the U.S. Government in which form?
book entry
When does an investor receive payment of interest and principal on a Capital Appreciation Bond(CAB)?
both interest and principal are paid at maturity
What is the benefit of a zero coupon bond?
capital appreciation
All of the following are sources of income that can be used for debt service on municipal revenue bonds EXCEPT:
capitalized interest
All of the following statements are true regarding GNMA "Pass Through" Certificates EXCEPT:
certificates are available in $1,000 minimum denominations ($25,000 is minimum)
A short term corporate debt which is backed solely by the full faith and credit of the issuer is:
commercial paper
Which of the following money market instruments is rated on a "P" scale?
commercial paper
Which of the following are due interest from the corporation?
convertible bondholders
The Standard and Poor's Bond Guide includes information on:
corporate bonds
The risk that a debt issuer cannot make interest and principal payments as due on an issue is:
credit risk
Information about the municipal secondary market can be obtained from all of the following EXCEPT:
daily bond buyer
The majority of corporate bond trades take place:
dealer to dealer in the OTC market
A corporation has issued $1,000 par, 8% convertible bonds, callable at par. The bonds are convertible into 14 shares of common stock. Currently, the bond is trading at 102 while the common stock is trading at $75.50. The corporation calls the bonds at par plus accrued interest of $20 per bond. The corporation is making a(n):
forced conversion (amount received if converted > par)
Exchange rate risk exists when making an investment in a:
foreign security when the USD strengthens
A municipality is at its constitutional debt limit. Voter approval would be required for a municipality to float a(n):
general obligation bond
A pledge that all revenues received will be used for debt service prior to deductions for any costs or expenses is a:
gross revenue pledge
A bond which is guaranteed by another corporation is known as a:
guaranteed corporate bond
Which security is MOST subject to reinvestment risk?
high coupon bonds (Reinvestment risk for bondholders is the risk that interest rates drop after issuance of the bonds; and that as interest payments are received over the life of the issue, they cannot be reinvested at the same rate. This risk is the greatest for high coupon bonds; and the lowest for low or zero coupon bonds.)
Which of the following bonds trades "flat"?
income bonds
Periodic deposits of monies to the sinking fund are required to cover required:
interest and principal payments
The investment performance of an ELN (Equity Linked Note) is determined by all of the following EXCEPT:
interest rate credit set by weekly auction
A customer buys a Brokered CD for $100,000. Upon receipt of his next account statement, the customer sees that the market value of the CD is shown as $99,800. This would occur because:
interest rates have risen
The nominal yield of a bond:
is unaffected by changes in market interest rates
A corporation is going to tender for 75% of its 10% subordinated debentures, M '25. The price of the offer will be decided by the:
issuer
The trust indenture is a contract between the:
issuer and trustee
All of the following are participants that offer municipal bonds in the secondary market EXCEPT:
issuers
An ETN offers an investor all of the following benefits EXCEPT:
lack of credit risk
The nominal interest rate on a TIPS is:
less than the rate on an equivalent maturity treasury bond
The principal difference between a structured product and an ETN is:
liquidity risk
During a period when the yield curve is flat:
long term bond prices are more volatile than short term bond prices
During periods when the yield curve has a "normal" shape, as market interest rates change, which statement is TRUE?
long term bond prices move more sharply than short term bond prices
During a period when the yield curve has a normal ascending shape, which statement is TRUE?
long term prices are more volatile than short term prices
A customer wants to know the principal difference between a market index linked CD and a regular CD. As the registered representative, you should inform the customer that:
market index-linked CDs give a rate of return tied to the S&P 500 index, whereas regular CDs give a rate of return tied to market interest rates
Yields on 3 month Treasury bills have declined to 1.84% from 2.21% at the prior week's Treasury auction. This indicates that:
market interest rates are falling
On customer account statements, long-term negotiable certificates of deposit must be shown at:
market value
Treasury Bills cannot be used as the underlying collateral for Treasury Receipts because:
maturity is too short
Holders of CMOs receive interest payments:
monthly
All of the following debt securities may be issued by corporations EXCEPT:
moral obligation bonds
In a corporate liquidation, the priority of claim to corporate assets is:
mortgage bondholders, unpaid wages and taxes, debenture holders, preferred stockholders
TRACE reports trades of all of the following EXCEPT:
municipal bonds
Moody's Investment Grade (MIG) rating is used for:
municipal short-term notes
The most commonly used measure to evaluate the ability of a revenue bond issuer to pay interest and repay principal is the ratio of:
net revenues / debt service
When a bond trades at a premium, which bond yield will be the highest?
nominal
For bonds trading at a discount, rank the yield measures from lowest to highest?
nominal -- current -- YTM -- YTC
An investor believes that interest rates are peaking and wishes to buy long term fixed income securities that will assure the investor of receiving periodic payments at today's rates. The best recommendation is high grade:
non-callable bonds (The investor wishes to receive periodic interest payments, so zero coupon obligations are not appropriate. Furthermore, if interest rates are currently high and the investor wants to "lock-in" these high rates, he or she will want a non-callable issue. If rates drop, the issuer cannot call these bonds. Puttable bonds are of no value unless interest rates rise, devaluing the bond. Then, the holder could exercise the put option and "put" the bond back to the issuer - usually at par)
Which of the following terms describe a special tax bond issue?
non-self supporting
When short term interest rates are lower than long term interest rates, the yield curve is said to be:
normal
The city of Jacksonville, Florida is issuing $100,000,000 of general obligation bonds paying interest on January 1st and July 1st of each year until maturity. The dated date of the issue is June 1, 2020. The first payment will be made on January 1st, 2021. A bondholder purchases the issue at the offering. The first interest payment is a(n):
odd first interest payment (Since the issue is dated on June 1st, interest starts accruing from this date forward. The first interest payment is made on January 1st, covering the prior 7 months. This is an "odd" first interest payment. Afterwards, interest payments are made regularly every 6 months)
A security which gives the holder an undivided interest in a pool of mortgages is known as a:
pass through certificate
Which of the following is the most likely purchaser of STRIPS?
pension fund
Which Collateralized Mortgage Obligation tranche has the MOST certain repayment date?
planned amortization class
The ratio of pledged revenues to debt service requirements is:
pledged revenues / annual interest payments and principal payments
Which risk is unique to investing internationally in less-developed countries?
political risk
If market rates of interest decline, bonds issued at par would trade at (a):
premium
if effective yield is lower than the coupon, the bond is issued at a
premium
Which risk is NOT associated with Long Term Negotiable Certificates of Deposit?
prepayment risk
A corporation has issued $1,000 par, 8% convertible bonds, callable at par. The bonds are convertible into 20 shares of common stock. Currently, the bond is trading at 101 while the common stock is trading at $54. The corporation calls the bonds at par plus accrued interest of $20 per bond. A customer holds 100 bonds, purchased at par. The customer wishes to liquidate the position at the greatest profit. The BEST recommendation is to (ignoring commissions):
sell short the common stock and convert the bonds for delivery to cover the short (If the bonds are tendered at the call price, the owner receives $1,000 per bond. If the bonds are sold at the current market price, the owner receives $1,010 per bond. Since each bond is convertible into 20 common shares, the short sale of 20 common shares will yield 20 x $54 = $1,080. The bonds can then be converted to common to cover the short position.)
Bonds quoted on a yield to maturity basis are generally:
serial bonds (basis points aka yield quotes)
A bond issue where the bonds have the same maturity but different dates of issuance is a:
series bond issuing
Which statement is TRUE about bond price changes that result from interest rate movements?
short term bond prices move slower than long term bond prices
During a period when the yield curve is normal:
short term rates are more volatile than long term rates (Whether the yield curve is ascending (normal), flat or descending, the true statement always is that short term rates are more volatile than long term rates. Short term rates are susceptible to Federal Reserve influence, and move much faster than do long term rates. Long term rates respond more slowly; and reflect longer term expectations for inflation and economic growth, among other factors. Please note that if the question referred to bond price movements, long term bond prices always move faster than short term bond prices, as interest rates change. This is due to the compounding effect on the bond's price that occurs, which increases with longer maturities.)
Which of the following would cause the yield curve to be ascending?
short term yields declining at the same time as long term yield increasing
As stated in the flow of funds found in a revenue bond issue's trust indenture, monies to meet debt service requirements are deposited to the:
sinking fund
Which of the following securities cannot be margined?
structured products
If the principal amount of a Treasury Inflation Protection Security is adjusted upwards due to inflation, the adjustment amount is:
taxable in that year as interest income received
The formula for a municipality's collection ratio is:
taxes collected / taxes assessed
A corporation has issued $1,000 par, 8 1/2% convertible bonds, callable at 105. The bonds are convertible into common stock at $50 per share. Currently, the bond is trading at 104 while the common stock is trading at $52. The corporation calls the bonds at 105 plus accrued interest of $10 per bond. A customer holds 100 bonds, purchased at par. The customer wishes to liquidate the position at the greatest profit. The BEST recommendation is to (ignoring commissions):
tender the bonds at the call price (If the bonds are tendered at the call price, the owner receives $1,050 per bond. If the bonds are sold at the current market price of 104, the owner receives $1,040 per bond. Converting the bonds into common means that the bonds must be tendered to the transfer agent, who will cancel the bonds and issue 20 shares of stock for each bond tendered. Since each share is now worth $52, this would yield 20 x $52 = $1,040 if those shares are sold right now.)
Municipal dollar bonds are generally:
term bonds (basis points = serial bonds)
Two 20-year corporate bonds are issued at par, with stated interest rates of 10%. One issue is puttable at par in 5 years, while the other is puttable at par in 10 years. If interest rates rise by 200 basis points shortly after issuance, which statement is TRUE?
the bond puttable in 10 years will depreciate faster than the bond puttable in 5 years
Under which circumstances would an arbitrage possibility exist between a convertible bond and the stock into which it is convertible?
the common is trading at a premium to parity and the bond is trading at par
A customer in the 28% tax bracket is considering the purchase of a municipal bond yielding 8% or a corporate bond yielding 11%. Both bonds have similar maturities and credit ratings. Which statement is TRUE?
the effective yield on the municipal bond is higher (tax free yield / (100% - tax bracket)
Yield curve analysis is useful for an investor in debt securities for all of the following reasonsEXCEPT:
the yield curve is used to compare the marketability risk of one issue to that of another (The yield curve is not used to compare the marketability risk of different issuers. This is the risk that the security will be difficult to sell.)
A 5 year 3 1/2% Treasury Note is quoted at 101-4 - 101-8. The note pays interest on Jan 1st and Jul 1st. All of the following statements are true regarding this trade of T-Notes EXCEPT:
the yield to maturity will be higher than the current yield (trading at premium, so YTM will be lower)
All of the following would be considered examples of derivative products EXCEPT:
treasury STRIP
Which security has, as its return, the "pure" interest rate?
treasury bill
Which security is considered to have a "risk-free" rate of return?
treasury bill
Price volatility of a CMO issue would most closely parallel that of an equivalent maturity:
treasury bond
Which U.S. Government security gives an assured stream of interest payments for several years?
treasury bond
The physical securities which are the underlying collateral for Treasury Receipts are:
treasury notes
Which of the following investments is issued with a stated coupon rate and with a maximum maturity of 10 years?
treasury notes
What type of bond offers a "pure" interest rate?
us government bond
Which bond does NOT have interest rate risk?
variable rate bond
Which statement is TRUE about floating rate tranches?
when interest rates rise, the interest rates on the tranche rises
Which CMO tranche is MOST susceptible to interest rate risk?
z-tranche (zero tranche)
