SERIES 7: Debt Securities
Which of the following are money market securities? I. Commercial paper II. Treasury bonds III. ADRs IV. Negotiable certificates of deposit A. I and III B. I and IV C. II and III D. II and IV
B. I and IV Commercial paper and negotiable certificates of deposit are short-term debt securities and are considered money market securities.
A dealer that quotes a concession of 1/2 to another dealer means A. $5 per $1,000 of par B. 1/2% of the market price C. 1/2% of the dealer's price D. a 50% commission split
A. $5 per %1,000 of par A concession between broker/dealers on secondary market transactions is a discount from the yield that the broker/dealer is quoting. It is common for a broker/dealer to offer bonds to other broker/dealers at a price less the concession. The net price becomes the purchase price for the buying broker/dealer. If simultaneously sold to a retail account, the markup is from the net price paid...
Which of the following securities trades with accrued interest? A. Negotiable certificate of deposit B. Banker's acceptance C. Commercial paper D. Treasury bill
A. Negotiable certificate of deposit Negotiable CDs are traded with interest Bankers' acceptances, commercial paper and T-bills are issued at a discount and traded without accrued interest (flat).
Which of the following is NOT a money market instrument? A. Newly issued Treasury notes B. Commercial paper C. Treasury bills D. Banker's acceptances
A. Newly issued Treasury notes Commercial paper, Treasury bills, and banker's acceptances are debt instruments with maturities of 1 year or less and are therefore money market instruments. A newly issued Treasury note would have a maturity of 2 to 10 years and therefore would not be a money market instrument.
Which of the following securities is sold at auction? A. T-bills B. Ginnie Maes C. Corporate bonds D. Freddie Macs
A. T-bills 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.
The result of declining inflation on outstanding bonds would be A. higher prices and lower yields B. lower prices and higher yields C. higher prices and higher yields D. lower prices and lower yields
A. higher prices and lower yields Declining inflation means declining interest rates. If interest rates decline, bond prices rise.
The longest initial maturity for US T-bill is A. 13 weeks B. 26 weeks C. 39 weeks D. 1 year
B. 26 weeks The longest initial maturity of T-bills is 6 months (26 weeks); the shortest initial maturity is 4 weeks. Maximum initial maturity for T-bills is subject to change.
Which of the following bonds would appreciate the most if the interest rates fell? A. 15-year discount B. 30-year discount C. 15-year premium D. 30-year premium
B. 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. Further, discounted bonds respond more favorably to falling rates than to premium bonds. Thus, the 30-year discounted bond will move faster than the others.
Current yield on 8-1/4% Treasury bond at 104.24 is A. 7.75% B. 7.88% C. 7.91% D. 8.08%
B. 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 because Treasury bonds are quoted as a percentage of par, but in increments of 1/32. $82.50/$1,047.50 = 7.88%.
US Treasury bills are issued for all of the following maturities EXCEPT A. 4 weeks B. 8 weeks C. 13 weeks D. 26 weeks
B. 8 weeks US Treasury bills are issued with 4-, 13- and 26- week maturities. There have been in 52-week T-bills in the past, but there are no 8-week T-bills.
One of your clients owns 2 different 6% corporate bonds maturing in 15 years. The first bond is callable in 5 years, while the second one has 10 years of call protection. If interest rates begin to fall, which bond is likely to show a greater increase in price? A. Bond with the 5-year call B. Bond with the 10-year call C. Both will increase by the same amount D. Both will decrease by the same amount
B. Bond with 10-year call As interest rates fall, the investor benefits from having the highest interest rate for as long as possible. The price change will not be the same for both bonds. The greater the call protection, the more likely a bond will appreciate if rates fall.
Which of the following is a direct obligation of the US government? A. Treasury receipts B. Ginnie Maes C. Fannie Maes D. Government bond mutual funds
B. Ginnie Maes Ginnie Maes are backed by the full faith and credit of the United States. Treasury receipts are zero-coupons that are based on US government debt instruments but are stripped by broker/dealers and, therefore, are not considered direct obligations of the government. Fannie Maes are backed by the Federal Mortgage Association's credit. Government bond mutual funds are not backed by the US government.
If an investor is anticipating that the yield between the US government and BBB-rated corporate bonds will widen, the investor is expecting the US economy to A. expand over the coming months B. enter a recession over the coming months C. remain flat over the coming months D. experience volatility over the coming months
B. enter a recession over the coming months If investors anticipate a recession, they tend to flee to quality. In this case, they would likely sell lower quality corporate bonds (forcing prices down and yields up) and use the proceeds to buy higher quality US government bonds (forcing prices up and yields down). Thus, the yield spread would widen between corporate and government bonds...
If general interest rates increase, the interest income of an open-end bond fund will A. decrease B. increase C. remain unchanged D. It cannot be determined from the information given
B. 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.
An investor purchasing long-term AAA-rated bonds assumes A. default risk B. inflation risk C. marketability risk D. no risk
B. inflation risk The major risk assumed by any investor in long-term high-quality bonds is inflation or purchasing power risk. AAA-rated debt securities have virtually no risk of default and are easily marketable due to their great safety.
If all of the following bonds mature on September 1, 2020, which would have the highest price? A. 5-1/2% coupon at 5.50 B. 5-3/4% coupon at 5.85 C. 6-1/4% coupon at 6.10 D. 6-3/4% coupon at 6.80
C. 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. All other bonds shown are trading at a discount (their yield to maturity is higher than the coupon rate).
US 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 A. I and III B. I and IV C. II and III D. II and IV
C. II and III US government securities that are deposited with a trustee and against which certificates are sold representing principal payments only on the securities are referred to as Treasury STRIPS. These are zero-coupon bonds issued by the U.S. government and are subject to annual taxation on the per-year accreted amount.
A customer buys a longer term, 10% Treasury bond with a current yield of 12% and holds the bond until 1 year before maturity. She sells the bond when the short-term bill rate is 8%. Which of the following statements are CORRECT? I. The bond was purchased at a premium. II. The bond was purchased at a discount. III. The bond was sold at a premium. IV. The bond was sold at a discount. A. I and III B. I and IV C. II and III D. II and IV
C. II and III When the yield is higher than the coupon, it always means the bond was purchased at a discount. Since the question tells us the T-bills are now yielding 8% and she has a bond maturing within a 10% coupon, she would be able to sell that bond at a premium.
Which of the following are characteristics of commercial paper? I. Backed by money market deposits II. Negotiated maturities and yields III. Issued by commercial banks IV. Not registered with the SEC A. I and II B. I and III C. II and IV D. III and IV
C. II and IV Commercial papers represents the unsecured debt obligations of corporations needing short-term financing. Both yield and maturity are open to negotiation. Because commercial paper is issued with maturities of less than 270 days, it is exempt from registration under the Act of 1933.
What happens to outstanding fixed-income securities when market interest rates drop? A. Yields increase B. Coupon rates increase C. Prices increase D. Short-term fixed-income securities are affected most
C. Prices increase When the interest rates drop, the price of outstanding bonds rises to adjust the lower yields on bonds of comparable quality.
Which of the following statements regarding Series EE bonds is NOT true? A. They are issued at 50% of face value. B. They are no longer exchangeable for Series HH bonds. C. They earn tax-free interest. D. They are an accrual-type security
C. They earn tax-free interest. The interest earned on US government securities is generally taxable at the federal level only. Series EE bonds are issued at 50% par 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.
Corporate bonds that are guaranteed are A. insured by AMBAC B. required to maintain a self-liquidating sinking fund C. guaranteed as to payment of principal and interest by another corporation D. guaranteed as to payment of principal and interest by the US government
C. guaranteed as to payment of principal and interest by another corporation A guaranteed corporate bond is one guaranteed by another corporation that typically has a higher credit rating that the issuing corporation.
All of the following statements regarding commercial paper are correct EXCEPT A. interest is received at maturity B. it is unsecured C. it is quoted as a percentage of par D. it is quoted on a discount yield basis
C. it is quoted as 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.
Transactions in all of the following are effected in the money market, as opposed to the capital market, EXCEPT A. US Treasury bills B. commercial paper C. municipal revenue bonds D. federal funds
C. municipal revenue bonds The money market is the marketplace for short-term (less than one year) debt obligations. The capital market is where long-term capital is raised. The only answer that is not a money market instrument is municipal bonds.
Repurchase agreements are issued by I. the US Treasury II. the Federal Home Loan Bank III. the commercial banks IV. the Federal Reserve board A. I and III B. I and IV C. II and IV D. III and IV
D. III and IV The Federal Reserve Board uses repurchase agreements to affect the money supply. To drain money, the FRB will sell Treasuries with repurchase agreements to commercial banks and do the opposite to expand the money supply.
All of the following are characteristics of certificates of deposit EXCEPT: A. A CD can be negotiable or nonnegotiable B. A CD may be payable to the bearer or registered in the name of the investor C. A CD is often issued by a bank D. The Federal Deposit insurance Corporation (FDIC) provides insurance for CDs to $500,000
D. The Federal Deposit insurance Corporation (FDIC) provides insurance for CDs to $500,000 The FDIC provides insurance for CDs up to $100,000 ($250,000 for retirement accounts held at banks). All the other characteristics are applicable to CDs.
Your customer wishes to lock in a long-term yield with minimal risk and is not interested in regular income. Which of the following securities should you recommend? A. Treasury Bill B. Corporate A-rated coupon bond C. Treasury Bond D. Treasury STRIPS
D. Treasury STRIPS The Treasury STRIPS is long-term, no-interim income, and has a locked-in yield since it is purchased at a discount from par. The T-bill is short term, the T-bond provides semiannual interest and the corporate zero is riskier than the STRIPS.
All of the following are money market instruments EXCEPT A. Treasury bills B. jumbo CDs C. commercial paper D. newly issued Treasure notes
D. newly issued Treasury notes Money market securities have a maximum of 1 year. Treasury notes are issued with maturities of 2 to 10 years. Treasury bills are money market instruments with maturities of 6 months or less. Jumbo CDs are issued by banks and have maturities of 1 year or less. Commercial paper (issued by corporations) is unsecured short-term debt with maturities of 270 days or less.
If interest rates increase, the interest income payable on the outstanding corporate bonds will A. increase B. decrease C. change according to the inverse payout theory D. remain unchanged
D. remain unchanged The interest income payable is the same as the nominal yield, which is stated on the face of the bond, and is the percentage of face value the bond will pay each year regardless of the prevailing interest rates in the market.
