Series 66 unit 2
When an income-oriented investor wishes to compute the current yield of a specific investment, which one of these items would not be considered?
NPV
commercial papers
The short-term debt instruments that are issued by large banks and reputed corporations
A customer buys a 5% bond at par. The bond is callable in 5 years at par and matures in 10 years. Which of the following statements is true?
YTC is the same as YTM.
When comparing a time deposit account and a demand deposit account, you would expect
a higher rate of interest paid on the time deposit account.
Debenture
an unsecured debt, usually with a maturity of 10 years or more
Order if highers yield when bond is trading at a premium
nominal yield, current yield, YTM, and YTC.
ABC Corporation's 5% mortgage bond is currently trading at a premium. The bond is callable at par in 10 years and matures in 15 years. When comparing the returns available to an investor, it would be accurate to state
the yield to maturity is higher than the yield to call. Whenever a bond is selling at a premium, the return—in descending order—is nominal yield, current yield, YTM, and YTC. It is the reverse order when the bond is selling at a discount. When the bond is at par, all are the same (if the call is at par).
A money market mutual fund would be likely to invest in which of the following assets?
A money market mutual fund typically invests in money market instruments—those with a maturity date not exceeding 397 days. Treasury notes are issued with maturity dates of 2-10 years.
A company has two outstanding bond issues, both with a coupon rate of 10%. Bond A will mature in 3 years while Bond B will mature in 20 years. If interest rates were to decrease to 8%, which of the following statements is correct?
Bond B will be selling at a greater premium than Bond A.
A client of yours owns some convertible preferred stock. She notices an article in the business section of her local newspaper that reports the company is going to pay a 20% stock dividend on their common stock. How will this affect her?
If there is an antidilution clause, her conversion privilege will permit her to acquire 20% more shares than before the stock dividend.
A bond with a par value of $1,000 and a nominal yield of 6% paid semiannually is currently selling for $1,300. The bond matures in 25 years and is callable in 15 years at $1,080. In the computation of the bond's yield to call, which of these would be a factor?
Interest payments of $30 The YTC computation involves knowing the amount of interest payments to be received, the length of time to the call, the current price, and the call price. With a 15-year call, there are only 30 semiannual interest payment periods, not 50. The present value is $1,300 and the future value is $1,080, the reverse of the numbers indicated in the answer choices.
A municipal bond has a coupon of 6.25%, and at the present time, its yield to maturity is 6.75%. From this information, it can be determined that the municipal bond is trading
The YTM is greater than the nominal yield, or coupon yield. Therefore, the bond is trading at a discount.
demand deposit account
a type of checking account that pays no interest on your balance (DDA)
The current yield of a callable bond selling at a premium is calculated
as a percentage of its market value.
Several years ago, an investor purchased an investment-grade bond with a 6% coupon. Today, that bond is priced to yield 4.6% to maturity in five years. If the bond is called at par in one year, the bond's yield will be
less than 4.6%. Let's take things in order. If a bond with a 6% coupon is showing a YTM below 6%, the bond must be selling at a premium. When bonds selling at a premium are called in advance of the maturity date, the loss (the difference between the premium and the par value) is recognized sooner than expected. This results in a yield to call (YTC) that is less than the YTM.
The bond document that states the issuer's obligation to pay the investor a specific rate of interest for the use of the funds as well as any collateral pledged as security for the loan and all other pertinent details might be referred to by all of these terms except
the debenture.
Indenture
the written agreement between the corporation and the lender detailing the terms of the debt issue
Treasury notes maturity Dates
2-10 years
time deposit account
A savings account that requires money to be left in the account for a certain period of time Ex- CD
Current Yield Formula
Annual Interest / Current Market Price
Which of the following expressions describes the current yield of a bond?
Annual interest payment divided by current market price
A company with 20 million shares outstanding paid $36 million in dividends. If the current market value of the company's shares is $36, the current yield is
5% The current yield formula is annual dividends per share divided by current market price. The dividends per share are $36 million ÷ 20 million shares = $1.80 per share. Current yield is $1.80 ÷ $36.00 = 5%.
Cheracteristics of commercial paper
Negotiated maturities and yields, Not registered with the SEC
DERP Corporation has issued 5% convertible debentures maturing in 2040. The conversion price is $40 and the common is currently trading at $48 per share. One would expect the DERP debentures to be selling somewhat
The first step here is to compute the parity price. A conversion price of $40 means the debenture is convertible into 25 shares of the common stock (par of $1,000 divided by $40 = 25 shares). With a current market price of $48 per share, the parity price of the convertible would be $1,200 (25 × $48). Because convertible securities generally sell at a slight premium over their parity price, the debentures should have a current market value a bit higher than $1,200.
An investor purchases a Treasury note and the confirmation shows a price of $102.25. Rounded to the nearest cent, the investor's cost, excluding commissions, is
Treasury notes are quoted in 32nds, where each 32nd equals $0.3125. The 102 in the quote equals $1,020 and the 25/32 is an additional $7.81, bringing the total to $1,027.81.
Which of the following are subject to the holding period requirements of Rule 144 of the Securities Exchange Act of 1934?
Unregistered securities held by a noncontrol person, Unregistered securities held by a control person
What is the name of the bond document that states the issuer's obligation to pay back a specific amount of money on a specific date?
The indenture
A European corporation seeking a short-term loan would probably be most concerned about an increase to
Secured Overnight Financing Rate (SOFR) or London Interbank Offered Rate—commonly known as LIBOR
Assume that a corporation issued a 5% Aaa/AAA rated debenture at par. Two years later, similarly rated debt issues are being offered in the primary market at 5.5%. Which of the following statements regarding the outstanding 5% debenture are true?
The current yield on the debenture will be lower than 5%., The dollar price per bond will be lower than par.
A corporation has issued a 4% $60 par convertible stock with a conversion price of $20. With the preferred stock selling at $66 per share, an investor holding 100 shares of this stock will benefit by converting if the price of the common stock is
22 With a conversion price of $20 and a par value of $60, this preferred stock is convertible into three shares of the company's common stock. We divide the current price of the preferred ($66) by the three shares to arrive at the parity price of $22. If the common stock is selling for more than the parity price, the investor can benefit by converting and selling the stock in the marketplace.
A client approaches the investment adviser representative handling the advisory account with a request to find a preferred stock that will offer a 6% income return. The investment adviser representative suggests a stock paying a $0.28 quarterly dividend. That stock will exactly meet the income objective if it has a current market price of
18.67 The first thing to do is annualize the dividend by multiplying the $0.28 by 4. Once we have the annual dividend of $1.12, divide by 6% and the result is $18.6666, or $18.67 properly rounded. If you left your math skills at home, all you have to do is multiply each of the choices by 6% to see which one is closest to $1.12.
BFJ Corp.'s 5% convertible bond is trading at 120. The bond is convertible at $50. An investor buying the bond now and immediately converting into common stock would receive
20 shares. The conversion ratio always uses the par value ($1,000), never the current market price. With a par value of $1,000 and a conversion price of $50 per share, this bond is convertible into 20 shares ($1,000 / $50). Remember, the number of shares in a conversion never changes. When the market price changes, the parity price changes, but that isn't relevant to this question.
