Unit 2

A bond with a coupon rate of 7.5% pays _____ of interest annually.

$75

A bond convertible at $50 is selling at 105% of parity, while the common stock has a current market value of $45. What is the market value of the bond?

$945

One of your customers buys a new issue municipal revenue bond on March 19. The trade settles on March 21, and the bond pays interest on February 1 and August 1. If the dated date of the bond is March 1, how many days of accrued interest are due?

20

Ten municipal bonds were purchased with 9% nominal yield for settlement on February 1, 2005. The maturity date of the bonds is July 1, 2020. What is the number of days of accrued interest on the 10-bond trade?

30

What affects the marketability of a block of corporate bonds?

Block size, maturity, rating

If a bond has a basis price of 7%, which of the following would most likely be refunded? 1. Coupon 6-½%, maturing in 2033, callable in 2013 at 103. 2. Coupon 7-½%, maturing in 2033, callable in 2013 at 103. 3. Coupon 7-½%, maturing in 2033, callable in 2013 at 100. 4. Coupon 6-½%, maturing in 2033, callable in 2013 at 100.

Coupon 7-½%, maturing in 2033, callable in 2013 at 100.

An investor interested in monthly interest income should invest in

GNMAs

Which of the following are characteristics of negotiable (sometimes referred to as jumbo) CDs? I.Issued in amounts of $100,000 to $1 million. II.Always FDIC insured to face value. III.Always mature in 1 to 2 years. IV.Trade in the secondary market.

I and IV

Which of the following are characteristics of commercial paper? I.Registered with the SEC II.Short-term debt instrument. III.Issued by commercial banks. IV.Unsecured debt.

II and IV

_____ are the most liquid investment

Money Market Funds

Rank PREMIUM yields from highest to lowest

Nominal-CY-YTM-YTC

Which of the following mortgage-backed securities would provide investors with the most predictable maturity date? Ginnie Maes, TACS, Fannie Maes, or PACS?

PACS

What type of bond would be characterized by decreasing interest costs to the issuer?

Serial bonds

_____ bonds are all issued at one time and mature in successive years.

Seriel

What type of bond is more liquid? Long-term or short-term?

Short-term

Which rate is more volatile, short-term or long-term bonds?

Short-term

________ bonds all have the same maturity date.

Term

A debenture maturing in 2019 is bid at 77-7/8 and asked at 78-3/4. The spread represents _________ per bond equivalent to $________.

The spread represents 7/8 per bond equivalent to $8.75. (The spread between the bid and ask price is 7/8. 7/8 of one bond point ($10) = $8.75.)

When a higher interest rate is predicted for the future, a municipality will issue what type of bond?

a long-term bond

If a customer sells a zero-coupon bond before maturity, gain or loss will be the difference between sales proceeds and:

accreted value

CMOs are taxed

at all levels

unsecured corporate debt and more risky

debenture

The ________rate is set by vote of the Federal Reserve Board.

discount rate

If an investor is anticipating that the yield spread between U.S. government and BBB-rated corporate bonds will widen, the investor is expecting the U.S. economy to expand or enter a recession over the coming months?

enter a recession

Which of the following is the most sensitive/volatile short-term interest rate? broker call loan rate, federal funds rate, prime rate, discount rate?

federal funds rate

When the yield curve is positively sloped (and thus normal), long-term bonds carry __________ interest rates than short-term bonds of the same quality.

higher

Banker's acceptances are used primarily to finance:

imports and exports

Once a municipal issue has been defeased (pre-refunded), its rating ________ as it is now backed by U.S. government securities held in escrow.

increases

What moves/reacts more given a change in interest rates? Long or short-term bonds?

long-term bond prices move more than short-term bond prices because of the compounding effect over a much longer period.

A corporate bond with a nominal yield of 6% is currently trading at a yield to maturity (YTM) of 5.8%. It would be accurate to state that this bond is trading at

premium

The accreted interest income from Treasury STRIPS is tax____

taxed at the federal level.

A customer bought a bond that yields 6-½% with a 5% coupon. If the bond matures at this point, the customer will receive:

$1,025 (Upon redemption of a bond, whatever current interest rates may be, the investor receives par ($1,000) plus the final semiannual interest payment ($25 in this case), for a total of $1,025.)

A customer purchases five 6-1/4% U.S. Treasury notes at 98.24. How much will the customer receive on each interest payment date?

$156.25 (While minimum purchase denominations can be less, always use par value ($1,000) for these calculations. A 6-1/4% bond pays $62.50 annually (6-1/4% × $1,000 = $62.50). Therefore, a customer purchasing 5 bonds receives $312.50 each year. As Treasury notes pay semiannually, each interest payment equals $156.25.)

A J & J Treasury bond with a 5% coupon due July 1, 2007, is purchased in a cash transaction on February 24. What is the number of days of accrued interest?

54 (A bond begins accruing interest on the prior interest payment date (January 1) and accrues up to, but not including, the settlement date (February 24). Because accrued interest on government bonds is computed actual days, actual year, 31 days for January plus 23 days for February, it equals 54 days.)

Which of the following bonds would appreciate the most if the interest rates fell? A) 15 year premium B) 15 year discount C) 30-year discount D) 30-year premium

C) 30-year discount (discounted bonds respond more favorably to falling rates than do premium bonds. )

The ________ chooses banks and broker/dealers to act as Primary Dealers in U.S. government securities.

Federal Reserve Board (FRB)

_________ is a government-owned corporation who approves private lending institutions such as banks and mortgage companies to originate eligible loans, pool them into securities and sell the (same) mortgage-backed securities to investors

GNMA

Which of the following are issued by the Federal Intermediate Credit Banks (FICB)? I.Discount notes. II.Debentures. III.Mortgage-backed securities. IV.Equity securities.

I and II

A customer is interested in diversifying a portfolio by using an investment technique known as bond laddering. Regarding suitability, which of the following are applicable and should be brought to the investor's attention? I.Liquidations needed to be made before maturity may expose one to interest rate risk. II.The strategy cannot be used to reduce investment risk. III.This strategy is best suited for someone with an income objective. IV.This strategy is best suited for someone with a growth objective.

I and III

A customer purchases a 4% corporate bond yielding 5%. A year before the bond matures, new corporate bonds are issued at 3%, and the customer sells the 4% bond. Which of the following statements regarding the bond are TRUE? I. The customer bought it at a discount. II. The customer bought it at a premium. III. The customer sold it at a premium. IV. The customer sold it at a discount.

I and III

If interest rates fall, which of the following statements regarding CMOs are TRUE? I. Prepayment risk will increase. II. Prepayment risk will decrease. III. Prices of each tranche will rise. IV. Prices of each tranche will fall.

I and III

Seventy-five basis points are equal to which of the following? I. .75%. II.7.5%. III.$7.50. IV.$75.00.

I and III

Which of the following statements regarding negotiable CDs are TRUE? I.The issuing bank guarantees them. II.They are callable. III.Minimum denominations are $1,000. IV.They can be traded in the secondary market.

I and IV

A convertible corporate bond has been issued with an antidilution covenant. If the issuer declares a 5% stock dividend, which of the following are TRUE as of the ex-date? I. Conversion ratio increases. II. Conversion ratio decreases. III. Conversion price increases. IV. Conversion price decreases.

I and IV (The bond will be convertible into 5% more shares, so the conversion price will decrease in proportion. If the conversion price is lowered, the conversion ratio must increase.)

A married couple with a two-year-old child wants a suitable investment to help meet the financial obligations for the child's college education. Which of the following choices are the most suitable alternatives? I.A CMO tranche scheduled to mature in 5 years II.A STRIP scheduled to mature in 15 years III.Treasury receipts IV.A money-market fund

II and III

U.S. government securities that are deposited with a trustee against which certificates are sold representing principal payments only on the securities are: I.clipped bonds. II.stripped bonds. III.subject to annual taxation on the per year accreted amount. IV.subject to taxation at maturity.

II and III

Which of the following characteristics are associated with bond laddering? I.Purchasing fewer bonds, each having larger face values II.Purchasing more bonds, each having smaller face values III.Purchasing bonds with maturity dates spread over periods of time IV.Purchasing bonds all maturing on the same date

II and III

Which of the following statements regarding corporate zero-coupon bonds are TRUE? I. Interest is paid semiannually. II. The discount is in lieu of periodic interest payments. III. The discount must be accreted and is taxed annually. IV. The discount must be accreted annually with taxation deferred until maturity.

II and III

Which of the following money rates are set by banks in competition with one another for borrowers? I.Federal Funds Rate. II.Discount Rate. III.Broker Call Loan Rate. IV.Prime Rate.

III and IV

An investor wants to maximize income using debt securities. Which of the following between convertible bonds, nonconvertible bonds, and income bonds rank securities from the least suitable to the most suitable recommendation if income is the investment objective?

Income bond, convertible bond, nonconvertible bond

Rank DISCOUNT yields from highest to lowest

YTC-YTM-CY-Nominal

Treasury receipt interest is paid___________ and taxed______

at maturity; annually

Debt normally issued by big corporations with reliable credit ratings who seek to finance short-term needs best describes:

commercial paper

The result of declining inflation on outstanding bonds would be ______ prices and ________ yields.

higher prices and lower yields (Declining inflation means declining interest rates.)

Even if a corporation reports a loss, the corporation is obligated to pay interest on all of its outstanding debt except for ________________ bonds

income (adjustment)

Any increase in the general interest rate would ___________ the fund's income.

increase

CMOS: if interest rates fall, prepayments _________

increase

In a period of loose money, corporate bond prices:

increase (In a period of loose money, interest rates fall. When interest rates fall, bond prices rise.)

An investor might expect to receive the greatest gain on an investment in a corporate bond by purchasing _______-term bonds when interest rates are _____.

long;high

A callable municipal bond maturing in 30 years is purchased at 102. The bond is callable at par in 15 years. If the bond is called at the first call date, the effective yield earned on the bond is _______ than the yield to maturity.

lower

Coupon rates are usually __________ than nonconvertible bond rates of the same issuer.

lower

Holders receive a ______ interest rate for convertible bonds.

lower

CMOs pay interest _________

monthly

An investor seeking a high level of income combined with a moderate level of risk would purchase

mortgage bonds

The purchase of ________ bonds provides the investor with a constant flow of semiannual interest income until maturity

noncallable

A CMO makes an interest-only payment to an investor. This payment will be taxed as:

ordinary income

A planned amortization class (PAC) CMO offers protection from:

prepayment and extension risk.

Three 3% bonds are listed in the newspaper. One bond will mature in one year, another bond will mature in ten years, and the third bond will mature in 20 years. If interest rates are going up, which bond will have the greatest decrease in value?

the bond with the 20 year maturity (because it has the greatest interest rate)