series 7 unit 2 debt securities

Which of the following bonds trade flat?

income bonds Bonds that trade flat do not trade with accrued interest. These include income bonds (also known as adjustment bonds), zeroes, bonds in default, and bonds that settle on an interest payment date.

An investor who has purchased a CMO

is subject to federal, state, and local taxation Interest on CMOs is subject to federal, state, and local taxation. CMOs pay interest monthly and yield more than Treasury securities. They are issued by financial institutions, including banks and broker/dealers, and are not backed by the U.S. government.

In treasury auctions a bidding system known as a Dutch auction is used. With this auction process the winning bid is the

lowest yield at which all of the securities can be sold the price paid by bidders who bid at or below the winning yield bid

All of the following are money market instruments EXCEPT

newly issued Treasury notes Money market securities have a maximum maturity 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.

You observe that a yield curve that was previously flat is moving toward having short- term interest rates lower than long-term interest rates. This new yield curve is considered to be

normal

Prices quoted for immediate payment and delivery of currencies are known as

spot prices Spot rates or prices are those quoted for immediate payment and delivery of foreign currencies. Settlement for actively traded currencies will take place in 1 business day and for less actively traded currencies in 2 business days.

A bond is convertible at $25. The market value of the stock is $30. What is the parity price of the bond?

$1,200 If a bond is convertible at $25, each $1,000 bond will convert to 40 shares. Forty shares × $30 = $1,200 parity of the bond.

An investor's portfolio includes 10 bonds and 200 shares of common stock. If both positions increase by one point, what is the appreciation?

$300 The gain would be $100 for the bonds (one point for one bond is $10 × 10 bonds) and $200 for the common stock (one point is $1 × 200 shares). The total portfolio gain is $300.

A bond purchased at $900 with a 5% coupon and a 5-year maturity has a current yield of

5.6% Current yield is determined by dividing annual interest payment by the current market price of the bond ($50 / $900 = 5.6%). Years to maturity is not a factor in calculating current yield.

Which of the following callable debentures is least likely to be called?

6% maturing in 2017, callable at 102 The bond with the shortest maturity is the least likely to be called, because it will cost the issuer the least in net interest over the life of the bond. When determining which bonds to call, the comparison in order of priority is: (1) years to maturity, (2) coupon rate, (3) call premiums.

The federal funds rate is which of the following?

Computed daily The rate charged in bank-to-bank lending The federal funds rate is computed daily, is lower than the discount rate, and is the rate charged in bank-to-bank lending. The only interest rate the Federal Reserve directly sets is the discount rate. It does not set the federal funds rate, although it heavily influences its level.

Which of the following investments is most suitable for an investor seeking monthly income?

GNMA GNMA is the most suitable investment for an investor seeking monthly income. Zero-coupon bonds, growth stocks, and mutual funds which invest in small-cap issues offer higher long-term growth potential, but they are not designed to provide monthly income.

Which of the following scenarios would be TRUE about a step-down CD?

Initially purchased the CD at a higher rate Later the interest rate adjusts to a lower rate than when it was purchased With a step-down CD the interest rate will pay a higher rate in the earlier months and adjust downward in later months to pay a lower rate than when it was initially purchased.

Which of the following characteristics describe Treasury bills?

Issued at a discount Pay all interest on maturity Treasury bills are issued at a discount and pay all interest at maturity.

Which of the following statements regarding the federal funds rate is NOT true?

It tends to fluctuate in response to the prime rate. The federal funds rate is charged by banks with excess reserves on overnight loans made to meet reserve requirements. It is determined by supply and demand of federal funds between Federal Reserve member banks. It is considered the most volatile rate in the economy and generally fluctuates on a daily basis. The federal funds rate is set by the market, not the banks.

All of the following statements regarding CMOs are true EXCEPT

TACs provide protection against extension risk PACs provide protection against both prepayment and extension risk while TACs provide protection against prepayment risk only.

Which of the following statements regarding put and call features of bonds are TRUE?

The put feature would likely be exercised if interest rates rise The issuer will likely call bonds if interest rates fall.

If your customer wants to set aside $40,000 for when his child starts college, but does NOT want to endanger the principal, you should recommend

Treasury STRIPS Treasury STRIPS are guaranteed by the U.S. government so there is no chance of default. They are zero-coupon bonds and offer no current income, which is appropriate for a client who wants 100% return paid at a future date for college expenses.

When the U.S. dollar is devalued

U.S. products become more competitive abroad foreign products become less competitive in the U.S.

Of the following bonds, which has the greatest price volatility?

Zero-coupon bond with 15 years to maturity The longer the duration of a bond, the greater the volatility will be of its market price when interest rates change. Because zero-coupon bonds do not make interest payments but are priced at a deep discount to par value, they are more volatile than coupon-bearing bonds.

Accrued interest on a bond confirmation is

added to the buyer's contract price added to the seller's contract price The accrued interest calculation is made to determine the seller's share of the upcoming interest payment. It is added to the buyer's contract price (the buyer pays), and it is added to the seller's contract price (the seller receives).

A debt instrument, which may or may not be exchange traded, where the final payment at maturity is based on the return of a single stock, a basket of stocks, or an equity index is known as

an equity- or index-linked note (ELN or ILN) Equity-linked notes are debt instruments where the final payment at maturity is based on the return of a single stock, a basket of stocks, or an equity index. Some, but not all, are exchange traded and those that are can be referred to as exchange-traded notes (ETNs).

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

at a discount The YTM is greater than the nominal yield, or coupon yield. Therefore, the bond is trading at a discount.

Which of the following is NOT a risk to a U.S. resident owning a eurodollar bond?

currency risk

When a customer purchases a new municipal bond, the accrued interest is calculated

from the dated date up to, but not including, the settlement date