Debt (3rd time)

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 7% convertible debenture is selling at 101. It is convertible into the common stock of the same corporation at $25. The common stock is currently trading at $23. If the stock were trading at parity with the debenture, the price of the stock would be:

$25.25. To determine the parity price of the common, first find the number of shares the debenture is convertible into (conversion ratio) by dividing par value by the conversion price ($1,000 / $25 = 40 shares). Next, divide the current price of the bond by the conversion ratio. The result is the parity price of the common stock. (1010 / 40 = $25.25).

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. Each $1,000 bond would allow conversion into 20 shares of stock ($1,000 divided by $50). Parity is 20 × $45 (CMV) or $900; 105% of parity is $945.

GNMA

- GNMA 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 GNMA mortgage-backed securities to investors. GNMA does not originate loans nor does it issue or sell securities. - Government National Mortgage Association (GNMA) securities are subject to both state and federal income tax and are backed by residential mortgages.

When u get paid: 1) corporate bonds. 2) Treasury bonds. 3) utility company stock . 4) GNMAs. 5) industrial development bonds. 6) municipal revenue bonds. 7) municipal General Obligation bonds. 8) debentures

- Semiannual interest: corporate bonds, treasury bonds, industrial development bonds, municipal revenue bonds, municipal General Obligation bonds, debentures - Monthly interest & principal: GNMAs pay monthly interest and principal - Quarterly Dividends: utility stocks

Different Rates (fed funds, prime, discount, call, etc)

- The discount rate is the charge on loans to member banks by the New York Federal Reserve Bank. The prime rate is the base rate on corporate loans at large U.S. money center commercial banks. The federal funds rate is the rate charged on reserves traded among commercial banks for overnight use in amounts of $1 million or more. The call rate, or broker call loan rate, is the charge on loans to brokers for margin loans.

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? 1) Conversion ratio increases. 2) Conversion ratio decreases. 3) Conversion price increases. 4) Conversion price decreases.

1) Conversion ratio increases. 4) Conversion price decreases. 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.

If an investor were to purchase a bond in the secondary market, which of the following would factor in calculating the total dollar amount paid for the bond? 1) Settlement date. 2) Dated date. 3) Coupon. 4) Scale.

1) Settlement date. 3) Coupon. Accrued interest is part of a bond transaction's total dollar amount. To calculate the accrued interest, you must know the settlement date.

A customer purchases a municipal bond on the secondary market and settles the trade in cash on August 1. If the next interest payment is September 1, which of the following statements regarding interest on this bond are TRUE? 1) The bond pays interest on March 1 and September 1 each year. 2) The seller must pay accrued interest no later than settlement day. 3) Accrued interest on this bond is computed using actual days elapsed. 4) On September 1, the buyer will receive from the issuer interest for the period March 1 through August 31.

1) The bond pays interest on March 1 and September 1 each year. 4) On September 1, the buyer will receive from the issuer interest for the period March 1 through August 31. Municipal bond accrued interest is calculated using a 30-day month and a 360-day year, with interest paid every 6 months. On settlement day, August 1, the buyer will pay the seller accrued interest from March 1 through July 31. Then on September 1, the next interest payment date, the buyer will receive 6 months' interest from the issuer.

Which of the following statements regarding auctions of U.S. Treasury bonds are TRUE? 1) Bids are submitted on a percentage of par basis. 2) Bids are submitted on a yield basis. 3) Competitive bids are always filled. 4) Noncompetitive bids are always filled.

2) Bids are submitted on a yield basis. 4) Noncompetitive bids are always filled. When U.S. Treasury bonds are sold at auction, the competitive bids filled are the most favorable bids (lowest yield) submitted by the primary dealers. These bids are submitted on a yield basis and the winning bids establish the "stop out price". Noncompetitive bids, which are made by nonprimary dealers, are guaranteed to be filled at the stop out price.

Private label CMOs 1) never use government issued securities as collateral 2) can use government issued securities as collateral 3) are considered as safe as agency issued CMOs 4) can carry greater risk than agency issued CMOs

2) can use government issued securities as collateral 4) can carry greater risk than agency issued CMOs Private label CMOs can be issued by investment banks, other financial institutions, and even home builders. They may or may not use government-issued securities as collateral. In either case, they are considered to carry greater risk than agency issued CMOs as they can only be backed by their issuer and carry no implied backing or guarantee from the government or government agency even when agency issued securities are used as collateral.

When investor confidence in the economy is increasing, a technical analyst would anticipate that: 1) yields on AAA-rated bonds will be higher than those on BBB-rated bonds. 2) yields on BBB-rated bonds will be higher than those on AAA-rated bonds. 3) the spread between yields on AAA-rated and BBB-rated bonds will increase. 4) the spread between yields on AAA-rated and BBB-rated bonds will decrease.

2) yields on BBB-rated bonds will be higher than those on AAA-rated bonds. 4) the spread between yields on AAA-rated and BBB-rated bonds will decrease. When investor confidence in the economy is increasing, yield spreads between the safest bonds and more speculative bonds decrease because investors are willing to take on greater risk. Yields on less safe bonds remain higher than those of AAA bonds. When investor confidence is declining the yield spreads will increase.

The longest initial maturity for U.S. T-bills is:

26 weeks. Maximum initial maturity for T-bills is subject to change. Though T-bills have been issued in 1 yr (52 weeks) maturities, historically the longest initial maturity of T-bills has been 6 months (26 weeks); the shortest initial maturity is 4 weeks.

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.

Current yield on an 8-1/4% Treasury bond at 104.24 is:

7.88%. Current yield on a bond is computed by dividing the annual interest by the market price. Here, the annual interest is $82.50 and the market price of the bond is $1,047.50. Therefore, $82.50 / $1,047.50 = 7.88%. A quote of 104.24 for a T-bond represents a price of $1,047.50 computed as a percentage of par in 32nds of one bond point as follows; 104.24 is 104% of par = $1,040 and 24/32nds of one bond point ($10) = $7.50. $1040 + $7.50 = $1047.50.

Which of the statements below best describes why a normal yield curve is positively sloped? A) Investors demand higher interest when lending their money for longer periods. B) Stocks generally have lower yields than bonds, although their total returns may be higher. C) Short-term bonds generally fluctuate in price more than long-term bonds. D) Investors logically demand higher returns from government securities than they do from corporate securities.

A) Investors demand higher interest when lending their money for longer periods. When the yield curve is positively sloped (and thus normal), long-term bonds carry higher interest rates than short-term bonds of the same quality.

Because money market instruments are designed to meet the short-term cash needs of issuing institutions, which of the following is NOT a money market instrument? A) Newly issued Treasury notes issued to meet a specific government funding requirement. B) Municipal Construction Loan Note. C) Federal Farm Credit Bank note maturing in one year or less. D) Commercial paper issued by the finance corporation of a major automobile manufacturer.

A) Newly issued Treasury notes issued to meet a specific government funding requirement. A newly issued Treasury note would have a maturity of 2 to 10 years and would not be considered a money market instrument. A Federal Farm Credit Bank note maturing in one year or less is a money market instrument, as is commercial paper issued by the finance corporation of a major automobile manufacturer with a maturity of less than one year. Municipal construction loans issued to provide short-term financing for a construction project are money market securities.

PDQ Corporation has a 6-1/4% convertible preferred stock (conversion ratio of 4) outstanding. The stock has an antidilution covenant. If PDQ declares a 10% stock dividend, the antidilution covenant will adjust: A) the par to $90. B) the conversion price to $22.72. C) the conversion price to $27.50. D) the par to $110.

B) the conversion price to $22.72. The stock is convertible at $25 ($100 par / 4 shares). To determine the new conversion price, $100 / 4.4 shares = $22.72, or divide $25 by 110%.

The market price of a convertible bond depends on all of the following EXCEPT: A) the rating of the bond. B) the conversion prices of bonds from similar companies. C) the value of the underlying stock into which the bond can be converted. D) current interest rates.

B) the conversion prices of bonds from similar companies. A convertible bonds current market price will be impacted by the value of the underlying stock into which the bond can be converted, current interest rates and the rating of the bond. Conversion prices are not set in competition, therefore the conversion prices of similar bonds would be of no concern regarding price.

An investor interested in acquiring a convertible bond as part of his investment portfolio would: A) be interested in tax advantages available to convertible debt securities. B) want the safety of a fixed-income investment along with potential capital appreciation. C) want the assurance of a guaranteed dividend on the underlying common stock. D) seek to minimize changes in the bond price during periods of steady interest rates.

B) want the safety of a fixed-income investment along with potential capital appreciation. An investor who wants the safety of a fixed-income investment with the potential for capital gains would be most interested in purchasing a convertible bond. However, because convertible bonds can be exchanged for common stock, their market price tends to be more volatile during times of steady interest rates than other fixed-income securities.

Treasury STRIPS and Treasury receipts are quoted based on A) 0.03125 (1/32 of a point in dollars) B) amortization of premiums C) yield to maturity D) 0.125 (1/8 of a point in dollars)

C) yield to maturity Noninterest-bearing securities, like zeroes, are quoted based on their yield to maturity. They are sold at a discount and mature at par.

For both U.S. Treasury notes and Ginnie Maes: A) interest income is taxed at the federal level only. B) settlement is next business day. C) interest is computed on an actual-day basis. D) quotes are as a percentage of par, in 32nds.

D) quotes are as a percentage of par, in 32nds. Interest from U.S. T-notes is taxed at the federal level only, while interest on Ginnie Maes is taxed at all levels. GNMA bonds are treated like corporate bonds in many ways. T-notes settle next day; Ginnie Maes normally settle T+3. Interest on T-notes is computed on an actual day basis; Ginnie Mae interest is computed on a 30 day month/360 day year basis. Both Ginnie Maes and T-notes are quoted in 32nds.

Of the following system characteristics which can be associated with TRACE (Trade Reporting and Compliance Engine)? I. Both sides of the transaction must report. II. Only the buyer is required to report . III. Municipal securities are excluded from the reporting system. IV. It is an execution and trade reporting system.

I. Both sides of the transaction must report. III. Municipal securities are excluded from the reporting system. The Trade Reporting and Compliance Engine (TRACE) is the FINRA approved trade reporting system for corporate bonds, asset backed securities, and collateralized mortgage obligations trading in the OTC secondary market. Municipal securities and new issues (primary market) among others are specifically excluded from the TRACE reporting requirements. Trace is not an execution system.

Freddie Mac does which of the following? I. Issues pass-through securities. II. Purchases student loans. III. Purchases conventional residential mortgages from financial institutions. IV. Issues securities backed directly by the full faith and credit of the U.S. government.

I. Issues pass-through securities. III. Purchases conventional residential mortgages from financial institutions. Freddie Mac is a publicly owned and traded U.S. government agency that issues pass-through securities based on a pool of conventional residential mortgages purchased from financial institutions. Ginnie Mae is the only U.S. agency that issues securities backed by the full faith and credit of the U.S. government.

A convertible bond has a conversion price of $40 per share. If the market value of the bond rises to a 12½ point premium over par, which of the following are TRUE? I.Conversion ratio is 25:1. II.Conversion ratio is 28:1. III.Parity price of the common stock is $42. IV.Parity price of the common stock is $45.

I.Conversion ratio is 25:1. IV.Parity price of the common stock is $45. The conversion ratio is computed by dividing par value by the conversion price ($1,000 par / $40 = 25). Parity price of the common stock is computed by dividing the market price of the convertible bond by the conversion ratio ($1,125 / 25 = $45). Or, 112½% × $40 = $45.

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.Discount notes. II.Debentures. FICB (Federal Intermediate Credit Banks) is one of the associations in the Federal Farm Credit Bank system that issues notes and bonds. Since the bonds are not backed by the government or by any specific assets, they are considered debentures backed only by the faith and credit of the bank issuer or issuers.

PACs

PACs reduce but cannot eliminate prepayment risk for tranche holders (CMO). The companion tranches will have higher prepayment risk than the PAC, as they were designed to absorb the bulk of the prepayment risk. Also extension risk. TAC is just prepayment

A customer purchases ten 8% Treasury notes at 101-16. What is the dollar amount of this purchase?

$10,150. Though the denomination of the T-notes purchased is not given, always assume par ($1,000) unless told differently in the question. Remember that government notes and bonds are quoted in 32nds. Therefore, a quote of 101-16 means 101 plus 16/32. 101 plus 1/2 = $1,015; $1,015 × 10 bonds = $10,150.

A customer purchases an ABC 6-½% convertible preferred stock at $80. The conversion price is $20. If the common stock is trading 2 points below parity, the price of ABC common is:

$14. The conversion ratio is computed by dividing par value by the conversion price ($100 par / $20 = 5). Parity price of the common stock is computed by dividing the market price of the convertible by the conversion ratio ($80 / 5 = $16). $16 − 2 = $14.

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 investors attention? 1) Liquidations needed to be made before maturity may expose one to interest rate risk. 2) The strategy can not be used to reduce investment risk. 3) This strategy is best suited for someone with an income objective. 4) This strategy is best suited for someone with a growth objective.

1) Liquidations needed to be made before maturity may expose one to interest rate risk. 3) This strategy is best suited for someone with an income objective. Bond laddering reduces both interest rate risk and reinvestment risk because it spreads investments made in smaller bond denominations over time. This lends itself to smaller bonds maturing with proceeds needing to be reinvested at set intervals. It is most suitable for those seeking protection of principal and income from the bond's interest payments. However, if unexpected liquidations need to be made, the ill-timed liquidations could expose the portfolio to heightened interest rate risk if rates happen to be high at the time. This would deflate the prices of the bonds being liquidated.

If all of the following bonds mature on September 1, 2020, which would have the highest price? A) 6-1/4% coupon at 6.10 B) 5-¾% coupon at 5.85 C) 5-½% coupon at 5.50 D) 6-¾% coupon at 6.80

A) 6-1/4% coupon at 6.10 A bond that is trading at a premium has a yield to maturity that is lower than its coupon rate. Of the choices given, only the 6-1/4% coupon with a 6.10 yield to maturity is trading at a premium. The other bonds shown are either trading at a discount (their yield to maturity is higher than the coupon rate) or at par (their yield to maturity is equal to the coupon rate).

The minimum face amount of a negotiable CD is: A) $100,000. B) $25,000. C) $50,000. D) $10,000

A) $100,000. Negotiable CDs are issued in the minimum face amount of $100,000. These are called jumbo CDs and are traded in blocks of $1 million.

Which of the following statements regarding callable municipal bonds is TRUE? A) Bond call premiums generally compensate the bondholder for interest payments lost if the bond is called. B) As interest rates rise, callable bonds trading at a premium will generally rise in value. C) Noncallable bonds usually yield more than callable bonds. D) Bonds are typically called when interest rates are rising.

A) Bond call premiums generally compensate the bondholder for interest payments lost if the bond is called. As callable bonds represent more risk to the investor, they generally trade at higher yields than comparable noncallable bonds. Bonds are called when rates are falling or have fallen, allowing the issuer to replace the called issue with one with a lower coupon. As rates rise, bond prices fall. The call premium on a callable bond, which represents the difference between the call price and par, compensates bondholders for lost interest if the bond is called.

Your customer is interested in purchasing a brokered CD and asks how they trade in the event he would want to sell it before it matures. Which of the following statements best describes how brokered CDs trade? A) Brokered CDs trade at a market driven price that typically moves inversely to the movement of interest rates. B) Brokered CDs always trade at a discount to par value. C) Brokered CDs always trade at a premium to par value. D) Brokered CDs trade at the original issue price until they mature, with no price fluctuation.

A) Brokered CDs trade at a market driven price that typically moves inversely to the movement of interest rates. A brokered CD trades at market driven prices. Similar to how a debt instrument typically trades, their price will fluctuate inversely to the movement in interest rates. This is one of the risks associated with selling a brokered CD before it matures. Rising interest rates along with limited liquidity may result in a significant loss of principal.

Which of the following securities is considered the most junior? A) Common stock. B) Debenture. C) Prior lien preferred stock. D) Mortgage bond.

A) Common stock. In the event of a company's bankruptcy, common stock owners have the lowest priority in claims against corporate earnings and assets. This identifies common stock as the most junior security.

Which of the following is the most sensitive/volatile short-term interest rate? A) Federal funds rate. B) Broker call loan rate. C) Prime rate. D) Discount rate.

A) Federal funds rate. The federal funds rate is considered to be the most volatile of all short-term interest rates.

Which of the following statements regarding Series EE bonds is NOT true? A) They earn tax-free interest. B) They are issued at 100% of face value. C) They are an accrual-type security. D) They are no longer exchangeable for Series HH bonds.

A) They earn tax-free interest. The interest earned on U.S. government securities is generally taxable at the federal level only. Series EE bonds are issued at 100% of face value. The interest earned is added to the purchase price (an accrual-type security) to establish a redemption value. The interest earned is not taxable until sale or redemption. Also, Series EE bonds can no longer be exchanged for Series HH bonds.

ABC Corporation has outstanding a 7-¾% convertible debenture currently trading at 102. The bond is convertible into common stock at $40. ABC stock is trading $45 per share. Which of the following statements is TRUE? A) To profit in this situation, the investor should buy the bonds and short the stock. B) An arbitrage opportunity does not exist in this situation. C) To profit in this situation, the investor should buy the stock and short the bonds. D) The bond is at parity with the stock.

A) To profit in this situation, the investor should buy the bonds and short the stock. With a conversion price of $40, the bond is convertible into 25 shares of ABC common stock ($1,000 / $40 = 25 shares). As the common stock is currently trading at $45 per share, the value of the stock as converted would be $1,125 (25 shares × $45 = $1,125), which is greater than the current price of the bond ($1,020). Therefore, the bond and the stock are not at parity. An investor could profit in this situation by shorting the stock and buying an equivalent number of bonds. A bond could be purchased for $1,020 and immediately converted into stock worth $1,125, a risk-free profit opportunity.

When a higher interest rate is predicted for the future, a municipality will issue: A) a long-term bond. B) none of these. C) a short-term bond. D) an intermediate bond.

A) a long-term bond. When interest rates are predicted to rise, a municipality will issue a long-term bond, because it can take advantage of the current lower rate.

The result of declining inflation on outstanding bonds would be: A) higher prices and lower yields. B) lower prices and lower yields. C) lower prices and higher yields. D) higher prices and higher yields.

A) higher prices and lower yields. Declining inflation means declining interest rates. If interest rates decline, bond prices rise.

If an investor watches the latest T-bill auction fall to 4.71% from 4.82%, the best interpretation is that: A) investors who purchased bills at this auction paid more for them than purchasers last week. B) investors who purchased T-bills 12 weeks ago paid less than subsequent purchasers. C) the federal funds rate and other short-term interest rate indicators are probably rising. D) the decline in yields indicates the Federal Reserve Board has raised the discount rate.

A) investors who purchased bills at this auction paid more for them than purchasers last week. The rates on the T-bills fell, so prices rose and the investor paid more for the bills this week than last week. The decline in yields indicates there was good demand for the securities because the price rose, driving the yields down. The question does not indicate the price of T-bills 12 weeks ago; it is unclear if the investor paid less for the T-bills then. The federal funds rate and other short-term interest rates would decline, not rise, in line with those of T-bills.

All of the following statements regarding commercial paper are correct EXCEPT: A) it is quoted as a percentage of par. B) interest is received at maturity. C) it is quoted on a discount yield basis. D) it is unsecured.

A) it is quoted as a percentage of par. Commercial paper is short-term, unsecured corporate debt. It is issued and traded at a discount of face value and does not pay periodic interest. Like all zeroes, it is quoted on a discounted yield basis.

The best time for an investor seeking returns to purchase long-term, fixed-interest-rate bonds is when: A) long-term interest rates are high and beginning to decline. B) long-term interest rates are low and beginning to rise. C) short-term interest rates are high and beginning to decline. D) short-term interest rates are low and beginning to rise.

A) long-term interest rates are high and beginning to decline. The best time to buy long-term bonds is when interest rates have peaked. In addition to providing a high initial return, as interest rates fall, the bonds will rise in value.

A home builder has issued a collateralized mortgage obligation (CMO) using government agency mortgage pass-through securities, mortgage loans and letters of credit as collateral. This would be known as what type of CMO? A) private-label B) inverse floater C) agency-issued D) agency-backed

A) private-label When private institutions such as finance agencies, investment banks or home builders issue CMOs they are known as "private-label" CMOs. They are the sole obligation of their issuer and often have as collateral non-agency issued securities such as letters of credit and mortgage loans or pools of mortgage loans.

Which of the following is a characteristic shared by debentures and income bonds? A) Both must pay interest semiannually. B) Both must pay principal as it comes due. C) Both are secured by assets of the corporation. D) Both are a type of mortgage bond.

B) Both must pay principal as it comes due. All bonds must pay principal when due. Income bonds, however, are not required to pay interest when due unless the earnings of the issuer are deemed to be sufficient by the board.

A customer expresses the need to invest a fixed dollar sum now that will return a fixed dollar sum in 10 years. He mentions several investments. Of those listed which would not be a suitable recommendation for his objective? A) A high-yield corporate bond maturing in 10 years B) Collateralized mortgage obligations (CMOs) C) A zero-coupon bond maturing in 10 years D) Treasury Inflation Protection Securities (TIPS)

B) Collateralized mortgage obligations (CMOs) Due to the interest rate sensitivity of mortgage-backed securities and the possibility of high prepayment risk (receiving the invested funds back earlier than anticipated) CMOs would not be suitable. TIPs, designed to protect against inflation, and the high yield corporate bond if held to maturity, could each meet the objective. Zero coupon bonds are specifically designed to meet the objective of investing a fixed sum now and realizing a fixed sum later and in this regard would be the most suitable of those listed.

Which of the following is NOT part of the Federal Farm Credit System (FFCS)? A) Federal Intermediate Credit Bank. B) Federal Home Loan Bank. C) Bank For Cooperatives. D) Federal Land Bank.

B) Federal Home Loan Bank. The Federal Land Bank, Bank for Cooperatives, and Federal Intermediate Credit Bank are all parts of the FFCS. The Federal Home Loan Bank is not part of the FFCS.

Which of the following is NOT true regarding Treasury Receipts? A) They pay interest at maturity. B) Interest income is taxed at maturity. C) They are not backed by the faith and credit of the U.S. government. D) Treasury securities held in trust collateralize the Receipts.

B) Interest income is taxed at maturity. Unlike Treasury STRIPS, which are issued directly by the U.S. government, Treasury Receipts are indirect obligations of the government. Treasury Receipts are issued by investment bankers who buy Treasury securities, place them in trust at a bank, and sell separate receipts against the principal and interest payments. Like most zeroes, interest must be accreted and taxed annually even though it is not received until maturity.

During periods when the yield curve is normal, as market interest rates change, which is TRUE? A) There is no relationship between the relative price movements of short-term and long-term bonds. B) Long-term bond prices move more sharply. C) Both short-term and long-term bond prices move equally. D) Short-term bond prices move more sharply.

B) Long-term bond prices move more sharply. Long-term bond prices are more volatile than similar short-term prices, in large part due to the added risk of owning a longer-term debt security.

A primary dealer has its bid on Treasury bills filled at the weekly auction. Settlement between the dealer and the Treasury will be: A) next business day. B) Thursday of that week. C) regular way. D) same day.

B) Thursday of that week. Settlement for the weekly Treasury bill auction normally occurs on the Thursday of the same week as the auction.

A Treasury bond is quoted in "The Wall Street Journal" as follows: Bid 100:15 Asked 100:17 Bid Chg. -1 Yield 7.9 From this information, you know that the nominal yield is: A) less than 7.9%. B) greater than 7.9%. C) 7.9%. D) 7.89%.

B) greater than 7.9%. The "Bid" and "Asked" prices show that the Treasury bond is being quoted at a premium (above par), with a yield to maturity of 7.9%. When bonds are trading at a premium, the nominal yield (coupon rate) is greater than the yield to maturity.

All of the following are characteristics of Treasury receipts EXCEPT: A) the certificates may represent either the principal or the interest portion of the securities that were deposited with a trustee. B) accumulated interest is not subject to federal taxation. C) they are zero-coupon bonds. D) they are stripped bonds.

B) accumulated interest is not subject to federal taxation. Treasury receipts are zero-coupon instruments, which are purchased at a discount and mature at face value. Although interest is not paid annually on receipts, investors receive a 1099 Original Issue Discount (OID) that reports the amount of interest imputed for that year. This interest must be reported to the IRS as taxable income.

If ABC Corporation reports a loss for the year, it is obligated to pay interest on all of the following EXCEPT: A) variable rate bonds. B) adjustment bonds. C) nonconvertible bonds. D) convertible bonds.

B) adjustment bonds. Even if a corporation reports a loss, the corporation is obligated to pay interest on all of its outstanding debt except for income (adjustment) bonds. Income, or adjustment bonds, require interest to be paid only if declared by the board of directors.

The current yield of a callable bond selling at a premium is calculated: A) as a percentage of its par value. B) as a percentage of its market value. C) as a percentage of its call price. D) to its maturity date.

B) as a percentage of its market value. Current yield for any security is always computed on the basis of the current market value.

All of the following are derivative securities EXCEPT: A) warrants to purchase publicly traded common stock. B) general obligation bonds. C) equity options. D) collateralized mortgage obligations.

B) general obligation bonds. A derivative security is one whose value is dependent on (derived from) the value of another security. The value of an equity option is derived from the value of the underlying stock as is the value of a warrant. The value of a CMO is derived from the values of the underlying mortgages.

In a period of loose money, corporate bond prices: A) stay the same. B) increase. C) decrease. D) fluctuate.

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

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: A) not determinable. B) lower than the yield to maturity. C) the same as the yield to maturity. D) higher than the yield to maturity.

B) lower than the yield to maturity. If the bond is trading at a premium and it is called before maturity, the loss of the premium is compressed into a shorter period of time. This reduces the effective yield on the bond. If the bond is called, the effective yield is the yield to call.

An investor purchases $10,000 worth of Treasury bills on November 27 and holds them until they mature on March 30 of the following year. For purposes of taxation, the interest from those Treasury bills is treated as: A) partially ordinary income and partially capital gain. B) ordinary income subject to federal income tax. C) tax-free income. D) a short-term gain.

B) ordinary income subject to federal income tax. Interest on Treasury bills, notes, and bonds is taxable as ordinary income at the federal level. It is exempt from state and local taxation.

ETFs

Because equity-linked exchange-traded notes are traded on an exchange, they can be easily invested in and divested of, like other exchange traded products. However, equity-linked exchange traded notes are unsecured debt instruments where credit risk associated with the issuer will be a suitability factor for anyone wishing to avoid such risk. They do not offer current interest payments or a fixed return at maturity as other debt instruments do, but instead have a final payment based on the return of single stock or a basket of stocks like an index.

A condition in which long-term debt instruments have higher yields than short-term debt instruments is also called a: A) inverted curve. B) negative yield curve. C) positive yield curve. D) flat yield curve.

C) positive yield curve. A chart showing a curve with long-term debt instruments having higher yields than short-term debt instruments is often referred to as a positive yield curve.

Two $1,000 par bonds are issued with coupons of 5.2% and 5.4%, respectively. The 20-basis-point difference is: A) $10.00. B) $100.00. C) $2.00. D) $20.00.

C) $2.00. One basis point is .01%. The difference between 5.20% and 5.40% is .20%, which is equal to 20 basis points. The bond with a 5.2% coupon rate pays interest of $52. The bond with a 5.4% coupon rate pays interest of $54. The difference is $2.

A 7% convertible debenture is selling at 101, and it is convertible into the common stock of the same corporation at $25. The common stock is currently trading at $23. What must the market price of the debenture be to be at parity with the common?

C) $920.00. To determine the parity price of the bond, first find the number of shares the debenture is convertible into (conversion ratio) by dividing par value by the conversion price ($1,000 / $25 = 40 shares). Next, multiply the current price of the common by the conversion ratio. The result is the parity price of the bond (40 shares × $23 = $920).

The current yield on a bond with a coupon rate of 7.5% currently selling at 105-½ is approximately: A) 7.5%. B) 8%. C) 7.1%. D) 6.5%.

C) 7.1%. A bond with a coupon rate of 7.5% pays $75 of interest annually. Current yield equals annual interest amount divided by bond market price, or $75 / $1,055 = 7.109%, or approximately 7.1%.

Which of the following statements regarding convertible bonds is NOT true? A) Convertible bondholders are creditors of the corporation. B) Coupon rates are usually lower than nonconvertible bond rates of the same issuer. C) Coupon rates are usually higher than nonconvertible bond rates of the same issuer. D) If there is no advantage to converting the bonds into common stock, they would sell at a price based on their market value without the convertible feature.

C) Coupon rates are usually higher than nonconvertible bond rates of the same issuer. Coupon rates are not higher; they are lower because of the value of the conversion feature. The bondholders are creditors. If the stock price falls, the conversion feature will not influence the bond's price.

A quote of 6.20 bid 6.18 offered would most likely be a quote on a: A) GO bond. B) Ginnie Mae bond. C) T-bill. D) T-bond.

C) T-bill. Discounted instruments (such as T-bills) are quoted on a discount yield basis. Even though the number representing the bid is higher than the ask, it would be lower when converted into dollars. The greater the yield, the lower the price. T-bill: minimum denominations of $100

An inverted yield curve is the result of: A) investors moving from debt instruments to equity instruments. B) investors buying short-term bonds and selling long-term bonds. C) investors buying long-term bonds and selling short-term bonds. D) investors moving from equities to debt instruments.

C) investors buying long-term bonds and selling short-term bonds. When investors believe that interest rates may decline soon, they seek to lock in the current rate of return by buying long-term bonds. Increased demand increases the price and causes the yields on long-term debt instruments to fall. In addition, selling short-term bonds depresses prices, causing yields to rise. As a result, the yield curve takes on a negative slope. Short-term yields are then higher than long-term yields, which is the definition of an inverted curve.

An investor purchases an ABC Corporation convertible bond at 98 on June 18, 1997. The bond is convertible at $25 and the investor converts his bond into the stock on June 19, 1998, when the common stock is trading at $26 per share. For tax purposes, these transactions will result in: A) a $40 capital gain. B) a $40 capital loss. C) neither gain nor loss. D) a $60 capital gain.

C) neither gain nor loss. Converting a bond into shares of common stock does not result in tax consequences. For a taxable gain or loss to exist, the shares received as a result of the conversion must be sold.

When assets are pooled into financial instruments such as Collateralized Mortgage Obligations (CMOs) to better facilitate selling them to the general public, the process is known as: A) best efforts. B) structuring. C) securitization. D) diversification.

C) securitization. Asset backed securities represent a pool of assets that were combined into a financial instrument such as a CMO for the purpose of better facilitating sales to the general investing public. The process of pooling assets into a single financial instrument for this purpose is known as securitization.

ABC Corporation has an outstanding 8% convertible bond that is callable at 102. Currently, the bond is trading at 101. The conversion price is $40, and the common stock is currently trading at $39.50. ABC announces a call at 102. To realize the greatest profit, a bondholder should: A) convert the bonds into common and sell the converted shares. B) continue to hold the bonds. C) tender the bonds. D) sell the bonds at the current market price.

C) tender the bonds. The investor would realize the greatest sales proceeds by tendering the bond to the corporation for 102. Selling the bond at its current market value of 101 is not an attractive option. Converting the bond to common stock would result in 25 shares ($1,000 par converted at $40 = 25 shares) sold at $39.50 per share (39.50 × 25 = $987.50).

Treasury bills (T-bills) are auctioned by the U.S. Treasury A) bi-monthly B) only when the U.S. Treasury Department deems it necessary C) weekly D) monthly

C) weekly Treasury bills (T-bills) are auctioned by the U.S. Treasury weekly.

CMO

CMOs are corporate mortgage-backed bonds that separate mortgage pools into different maturity classes called tranches. CMO interest is taxed at all levels, and there is no government backing on CMOs. Changing interest rates may affect prepayment rates and therefore the average life of the security, tax considerations (CMOs are taxable at all levels), and the relationship between actual mortgage loans and mortgage-backed securities.

Collateral trust bonds

Collateral trust bonds are backed by a portfolio of other securities; mortgage bonds are backed by real estate. Equipment trust certificates are backed by equipment. Debentures are backed only by the company's promise to pay.

KLM Company has 10 million convertible bonds outstanding that are convertible at $25. The bonds contain an anti-dilution feature. If KLM declares a 10% stock dividend, the new conversion price will be: A) $50.00. B) $22.50. C) $45.45. D) $22.73.

D) $22.73. Before the stock dividend, an investor would have received 40 shares of stock for each $1,000 bond ($1,000 / $25). A 10% stock dividend would now give an investor 44 shares on conversion (40 shares + 10% = 4 shares more). $1,000 / 44 shares = $22.73 per share for the new conversion price.

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

D) 30-year discount. The general rule of thumb is that bonds with long-term maturities will have greater fluctuations in price than will short-term maturities, given the same move in interest rates. Furthermore, discounted bonds respond more favorably to falling rates than do premium bonds. Thus, the 30-year discounted bond will move farther than the others.

Which of the following does NOT issue commercial paper? A) Finance company. B) Corporation. C) Broker/dealer. D) Commercial bank.

D) Commercial bank. Commercial banks do not issue commercial paper. The commercial paper market was developed to circumvent banks so that corporations could lend to, and borrow from, each other more economically. Commercial paper is unsecured, short-term corporate debt.

All of the following statements regarding the Federal National Mortgage Association (FNMA) are true EXCEPT A) interest on FNMA certificates is taxable at all levels B) FNMA is a publicly held corporation C) FNMA pass-through certificates are not guaranteed by the U.S. government D) FNMA is owned by the U.S. government

D) FNMA is owned by the U.S. government FNMA is a publicly held corporation. The interest income on all mortgage-backed securities is fully taxable. Though a government agency, FNMA pass through certificates are not guaranteed by the US government. The only U.S. agency whose securities are considered direct obligations of the U.S. government is the Government National Mortgage Association (GNMA). - The FNMA buys FHA, VA, and conventional mortgages and uses them to back the issuance of debt securities. FNMA currently issues debentures, mortgage-backed securities, and certificates.

If a customer sells a zero-coupon bond before maturity, gain or loss will be the difference between sales proceeds and: A) discounted value. B) original cost. C) par value. D) accreted value.

D) accreted value. Zero-coupon bonds must be accreted for tax purposes. Each year, the annual accretion is taxable to the holder. In addition, the customer may adjust the cost basis of the zero upward by the amount of the annual accretion.

If general interest rates increase, the interest income of an open-end bond fund will: A) It cannot be determined from the information given. B) decrease. C) remain unchanged. D) increase.

D) increase. Most mutual funds do not have 100% of their assets in securities and they continually receive new money from investors. Any increase in the general interest rate would allow the fund to purchase new, higher-yielding, lower-cost instruments, which would increase the fund's income.

All of the following statements regarding CMOs are true EXCEPT: A) CMOs are a derivative security. B) principal repayments are applied to earlier tranches first. C) interest payments are distributed pro rata when received. D) interest is paid semiannually.

D) interest is paid semiannually. CMO holders are paid interest monthly. As payments are received from the underlying mortgages, interest is paid pro rata to all tranches, but principal repayments are paid to the first tranche until it is retired. Subsequent principal repayments are then applied to the second tranche until it is retired, and so on. CMOs are a derivative security because the value of each tranche is derived from the timing of principal repayments to that tranche.

DMF Company has $50 million of convertible bonds (convertible at $50) outstanding. The current market value of DMF's stock is $42. The bond indenture contains a nondilution feature. If DMF declares a 10% stock dividend, the new conversion price will be: A) $50. B) the stock's current market price. C) higher than $50. D) lower than $50.

D) lower than $50. With an antidilution feature, the issuer will increase the number of shares available upon conversion if the company declares a stock split or stock dividend. This means the bondholder must be able to convert it to more shares, which requires a lower conversion price.

All of the following trade flat EXCEPT: A) commercial paper. B) bankers' acceptances. C) T-bills. D) negotiable CDs.

D) negotiable CDs. While most money-market securities are zeroes and trade flat, negotiable CDs do trade with accrued interest.

All of the following statements regarding government and agency securities are true EXCEPT: A) they are considered safer than corporate debt securities. B) interest paid is always subject to federal income tax. C) they are authorized by Congress. D) they are always directly backed by the federal government.

D) they are always directly backed by the federal government. Only GNMAs are directly backed by the federal government. FNMAs and FHLMCs are only indirectly backed but are still considered less risky than corporate debt. All are subject to federal taxation, and all were authorized by Congress.

Eurodollar bonds

Eurodollar bonds are issued in bearer form, pay interest once a year, and are not subject to withholding taxes. They are issued outside the United States and are therefore not subject to SEC registration.

FNMA securities and GNMA pass-through certificates trade OTC. ______________ is the only agency whose securities are direct U.S. government obligations.

GNMA.

I bonds

I bonds are nonmarketable U.S. government securities which have a variable semiannually adjusted inflation rate that is based on the Consumer Price Index (CPI). They were designed for investors wishing to protect the purchasing power of their investment. They are sold at face value and they grow in value with the addition of the inflation-adjusted interest.

What securities are sold at auction?

T-bills, T-notes, and T-bonds are sold through auction. These auctions award securities to the most competitive bids. Agency securities are sold through selling groups appointed by the agency.

If an investor keeps $100,000 invested in U.S. Treasury bills at all times during a 10-year period, he is subject to which of the following? I.Stable principal. II.Unstable principal. III.Stable interest. IV.Unstable interest.

I.Stable principal. IV.Unstable interest. Treasury bills are purchased at a discount and mature at face value. This feature provides principal stability to investors who own them. The discount on bills is determined by current market interest rates and fluctuates accordingly.

Which of the following statements are TRUE regarding Sallie Mae debentures? I. Interest is generally paid monthly. II. Interest is generally paid semiannually. III. Interest is exempt from state and local taxation. IV. Interest is not exempt from state and local taxation.

II. Interest is generally paid semiannually. III. Interest is exempt from state and local taxation. As a general rule, debentures pay interest every six months. Further, interest on nonmortgage-backed government securities is taxable at the federal level and exempt from state and local taxation.

Currently, a company issues 5% Aaa/AAA debentures at par. Two years ago, the corporation issued 4% AAA-rated debentures at par. Which of the following statements regarding the outstanding 4% issue are TRUE? I. The dollar price per bond will be higher than par. II. The dollar price per bond will be lower than par. III. The current yield on the issue will be higher than the coupon. IV. The current yield on the issue will be lower than the coupon.

II. The dollar price per bond will be lower than par. III. The current yield on the issue will be higher than the coupon. Interest rates in general have risen since the issuance of the 4% bonds, so the bond's price will be discounted to produce a higher current yield on the bonds. Remember that as interest rates go up, the price of outstanding debt securities goes down.

Which of the following statements are TRUE of Ginnie Maes? I.They are quoted in 1/8ths. II.They are quoted in 1/32nds. III.They are traded with an accrued interest computed on an actual day basis. IV.They are traded with an accrued interest computed on a 30/360 basis.

II.They are quoted in 1/32nds. IV.They are traded with an accrued interest computed on a 30/360 basis. Like governments, Ginnie Maes are quoted in 32nds, but, like corporates, Ginnie Maes compute accrued interest on a 30/360 day basis.

A repurchase agreement is usually initiated by which of the following? I. U.S. Treasury. II. Federal Home Loan Bank. III. Commercial bank. IV. Federal Reserve Board.

III. Commercial bank. IV. Federal Reserve Board. Repurchase agreements are typically initiated by commercial banks or the Federal Reserve Board. They enable banks to meet reserve requirements through the sale of securities (often overnight) with an agreement to buy them back at an agreed-on price.

Inverse floater CMO

Inverse floater CMO tranche types are considered to be highly volatile and suitable only for sophisticated investors willing to assume high levels of risk. As interest rates rise, principal payments to the investor may decrease. The reduction in repayment of principal extends the maturity date which is known as extension risk.

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

The Federal Reserve Board (FRB)

Public Securities Association (PSA)

The Public Securities Association (PSA) uses historical data and projections of mortgage prepayments to estimate yield and maturity of different CMO tranches.

Order of payment at liquidation

When a corporation is liquidated, employee wages are paid first, followed by taxes, secured debt, debentures and general creditors, unsecured debt, subordinated debt, preferred stock, and common stock.

Are stripped Treasury bonds backed by the fed govt?

YES

T-bills trade and are quoted on an ____________________ basis.

annualized discount yield

All Treasury securities are issued in ____________ form.

book entry. Treasury bills are always issued at a discount and are never callable.

Banker's Acceptacnes provide short-term financing for _________________________.

importers and exporters.

Libby sees a tombstone advertisement for a new issue of Southwest Barge subordinated convertible debentures. The bonds will carry an 11-1/4% coupon, are convertible into common stock at $10.50, and are being issued to the public at 100. The proceeds of the issue will be used specifically for purchasing new Southwest barges. Libby's concerns about the issue could include:

the issue may be junior-in-lien to another security issue. The word "subordinated" is the key to the question. A subordinated bond has other debt holders ahead of it in the event of liquidation. The barges do not serve as collateral as the bonds are identified as debentures, and having to convert to common stock is not a threat since she is the one that will, if she desires, exercise the conversion privilege.