unit 2 answers to review
If a bond is trading at a premium, which of the following rates is correctly ranked from high to low?
Coupon rate, current yield, yield to maturity, yield to call
Your customer holds a callable bond currently trading at $935. Which of the following is true?
Current yield (CY) is lower than yield to maturity (YTM).
Water and sewer facilities are most likely to use what kind of debt financing to fund expansion plans?
Municipal revenue bonds
Being secured by no physical asset and backed only by a bank's good faith and credit, a bank's promise to pay principal and interest can be evidenced in which of the following securities that are traded in the secondary market?
Negotiable CDs
Which of the following are fixed at the time a bond is issued?
Nominal yield
When interest rates in the marketplace move up, what happens to the coupon rate on existing bond?
Nothing; it does not change.
Twelve years ago your client purchased at par $150,000 of GO bonds maturing in 15 years from now and callable in six months. Interest rates have gone down over the last five years. Which of these should your client do?
Recognize that the bonds have a high probability to be called Expect the bonds are trading at a small premium
Which of the following statements regarding revenue bonds is true?
Revenue bonds normally do not require voter approval.
Which of the following would all be considered the same regarding yields on debt instruments?
Stated, nominal, and coupon yields
Which of the following is true regarding money market securities?
T-notes and T-bonds can be considered money market instruments when they have only a year left to maturity
Regarding municipal general obligation (GO) bonds, which of the following is true?
The lower the statutory debt limit, the safer for bondholders.
Which of these statements regarding Treasury bills is not correct?
They are issued with a stated interest rate.
A brokerage firm places U.S. Treasury notes and bonds in a trust at a bank and then issues securities collateralized by either the principal or interest payments those notes and bonds represent. These new securities the broker-dealer is offering are
Treasury receipts
A customer buys a callable 5% coupon bond at par that will mature in 10 years. Which of the following statements is true?
Yield to call (YTC) is the same as yield to maturity (YTM).
A written promise made by a corporation to pay the principal at its due date and interest on a regular basis on one of its debt issues but backed by no physical assets or titles to assets could only be
a debenture.
A 6% corporate bond trading on a 5% basis is trading with
a premium.
A bond with a rating of AAA will have relatively lower
default risk.
Negotiable jumbo CDs are characterized by all of the following except
each issue generally matures in 5-10 years.
A bank trustee holds the titles to assets a corporation has purchased and utilizes in its day-to-day business. The corporation issues debt securities backed by these assets. These securities are
equipment trust certificates.
An investor holds a 6% callable bond purchased at 105. If the issuer calls the bond before maturity, the yield to call (YTC) realized by the investor would be
less than the coupon.
A bond with a rating below BBB may be called all of the following except
lower yield.
An investor anticipates that a fall in interest rates is imminent. This investor, now wanting to purchase bonds in order to lock in interest income, would likely buy
noncallable bonds.
Municipal revenue bonds are
not subject to statutory debt limits and do not require voter approval.
When a corporation issues a mortgage bond, the issue's total value
should be less than that of the real estate it is backed by.
Your customer is a resident of the state of Texas. She owns bonds issued by Midway Atoll, a territory of the United States. The interest from these bonds is
tax-free at all levels for U.S. citizens.
The City of Philadelphia issued $100 million in GO debt three years ago. The bonds were issued with a 20-year maturity and carry a 5% coupon. Your client, who purchased one of these bonds on the initial offering, calls you to get a current quote. You respond that the bonds are selling at a slight premium. This means that
the nominal yield is higher than the yield to maturity.
For collateral trust bonds, all of the following are true except
these are unsecured debt securities.
All of the following characteristics are true of securities issued by the Federal National Mortgage Association except
they pay monthly
Commercial paper is
unsecured debt with a maximum maturity of nine months.
For a callable bond priced at a discount,
yield to maturity (YTM) will be lower than the yield to call (YTC
Your customers are in the 40% federal tax bracket. They consider purchasing a 6% corporate bond. Their after-tax yield would be
3.60%. = 6 × (1 - 0.40) = 6 × 0.60 = 3.60%
Accrued interest on corporate bonds is calculated using
30 days in each month and 360 days in each year.
Which of the following is a money market security?
A Tax Anticipation Note maturing in 10 months, issued by the City of Upland, California
All of the following are debt securities except
ABC, Inc., 8% preferred stock.
Which of the following securities is most often used to fund international trade?
Banker's acceptance (BAs
