SIE 02: Debt Securities
Which of the following best describes the nominal yield on a bond?
the interest stated on the face of the bond
When mortgages are pooled together to create a CMO product,
the mortgages are said to be securitized.
The best way to "lock in" interest payments is to purchase
the non-callable bond
If the basis (yield to maturity) is higher than coupon
the bond price is below par
6 1/2's of '19 means:
$65 annual interest maturing in 2019
6 1/2's at '19 means:
$65 annual interest with a quote of 190
In what order do the following receive payments in the event of a corporate liquidation?
1. Taxes 2. Senior lien bondholders 3. Debenture holders 4. Preferred stockholders
What is the current yield on a corporate bond trading at 103 with a 7% coupon?
70/1,030=6.8%
Which of the following is a corporate bond quote?
75 1/2
Which of the following callable bonds currently trading at an 8% basis would most likely be refunded?
8 1/2% of 2035, callable at 100
A debt security that can be backed by various assets such as auto loans, mortgages, or credit card debt is called a(n)
A CDO (Collateralized Debt Obligation)
Which of the following is NOT permitted in a CMO advertisement?
A comparison of the risks of investing in CDs vs. CMOs.
Which of the following would represent a quote for a railroad bond?
A railroad bond quote would be a corporate bond. Corporate bonds are quoted in eighths only (1/8) ex. 106 1/2
An investor's portfolio includes 10 corporate bonds and 200 shares of common stock. If both securities decline in value by ½ point the dollar loss is
A ½ point on a stock equals $ .50 A ½ point on a bond equals $5.00 Therefore, 200 shares x $ .50 per share = $ 100 decline 10 bonds x $5.00 per bond = $ 50 decline $150 Total decline in value
Which of the following is the implied credit rating on a Collateralized Mortgage Obligation (CMO)
AAA
Place the following types of bonds in order of highest coupon rate to lowest coupon rate, assuming all mature at the same time.
AAA Corporate bonds, US Government bonds, AAA Municipal bonds
What of the following would be the effect on a collateralized mortgage obligation (CMO) if interest rates declined?
An increase in the market price of the CMO
When an investment grade corporate bond is downgraded to a Junk bond, it is referred to as a:
Fallen Angel
Collateralized Mortgage Obligations (CMOs) may be collateralized by which of the following?
Fannie Maes
Which of the following statements is generally accurate regarding securities issued by agencies of the U.S. Government?
Both the principal and interest payments are considered to be safe.
What is the key factor that determines which CMO tranches receive principal payments from mortgages?
By maturity date
Which of the following would a company most likely issue in order to stabilize cash flow?
Commercial paper
Which of the following securities may offer convertible features that allow the holders to exchange the securities for other issues of the company?
Corporate bonds
The two issuance formats used when Corporate Bonds are issued, are Serial Form and Series Form. In describing Series Form, the issue would have
Different issuance dates and the same maturity dates
CMO pools are issued and collateralized (secured with collateral) with mortgage loans from:
Ginnie Mae, Fannie Mae, Freddie Mac, FHA Mortgage Loans, Conventional / Private Mortgage Issuers NOT Sally Mae
Investors should consider bonds with long-term maturities when interest rates
Have been high but are expected to drop
CMO tranches that pay a variable rate of interest which is usually measured against the:
LIBOR (London Interbank Offered Rate)
When comparing low quality bonds to higher quality bonds, the low quality bonds would have
Lower prices and higher yields
Which of the following is issued by state and local governments and pays interest, typically semi-annually?
Municipal Bonds
The Alternative Minimum Tax (AMT) may be applied to shareholders of a mutual fund that has which of the following securities contained within?
Municipal bonds issued for private industry purposes
Which of the following statements are true regarding registered bonds?
Ownership of the bond is transferable only upon proper endorsement. Principal payments are sent directly to the registered owner of the bond.
ABC Corporation wants to issue $20,000,000 of debentures each of which would be convertible in 20 shares of common stock. How many common shares are issued if all the debentures are converted?
Par Value / Conversion Price = Conversion Ratio OR Par Value/Conversion Ratio = Conversion Price => 1000 / 20 = $50 conversion price. Then we take Total Par Value / Conversion Price = Total shares => 20,000,000 / 50 = 400,000.
Which of the following represents an equity interest in a corporation?
Preferred stock
when the Yield To Maturity or Basis is less than the Coupon Rate/Nominal Yield
Premium
Which of the following statements is TRUE about agency CMOs v. private CMOs?
Private CMOs can contain agency CMOs in their portfolios.
Fannie Mae commonly securitizes which of the following forms of debt to create CMO products?
Residential mortgages
Which of the following describe two classifications associated with municipal bonds issued by state and local governments?
Revenue and General Obligation
Which of the following is TRUE of a bond selling above par?
The current yield is lower than the nominal yield. The yield-to-maturity is lower than the nominal yield. The nominal yield always remains fixed.
Which of the following are correct with regard to the Current Yield and Coupon Rate on a bond?
The current yield of a bond fluctuates depending on the price of the bond. The coupon rate is set for the life of the bond.
If a bond is selling at premium
The face value is lower than the market price.
A guaranteed bond is a bond in which?
The payment of interest and principal of a subsidiary corporation is guaranteed by a parent corporation.
Which of the following factors is the LEAST important in analyzing the investment quality of a mortgage bond?
The trustee bank holding the title to the collateral
The Trust Indenture Act of 1939 regulates corporate debt issues and requires the designation of a trustee. What duty does this trustee have?
The trustee is charged with acting on behalf of bondholders and ensuring that the rights of these bondholders are not infringed upon.
Which of the following statements are true regarding equipment trust certificates?
They are normally serial issues, They are most often issued by transportation companies, They are secured by specific corporate assets.
In a normal market, when there is a change in interest rates how do the yield to maturity and the current yield of a bond react?
They move in the same direction
Long term bonds:
Usually provide a greater return than short term bonds, Dollar value is more affected by interest rate fluctuations, more often callable, Long term bonds tend to be less liquid than short term bonds
Which of the following bonds pay all of their interest at maturity?
Zero coupon bonds
US Government Securities are generally brought to market using
a competitive bidding auction
If a customer believes that interest rates will decline substantially, she should invest in
a long term Corporate Bond with a coupon rate of 10% at a 12% basis, non callable.
If a corporation is in liquidation, the holder of a subordinated debenture would be paid at what time?
after bank loans and after general creditors
Junk Bonds or High Yield Bonds
are issued by companies that have little or no track record of sales and earnings. These bonds would be rated BB or lower or not rated at all.
Equipment Trust certificates
are issued by corporations and are fully taxable.
Call features
are less desirable to the investor so the bonds usually sell for a lower price.
If a municipal bond decreases in price, its yield to maturity will
increase
"Junk Bonds" can also be called a corporate bond which:
is a non rated bond, Has a rating of BB or lower. Are also referred to as "high yield" bonds.
The nominal yield of a bond:
is found by multiplying the bond's coupon rate by the bond's par value and is the same as the coupon rate printed on the bond
The interest rate in a collateralized mortgage obligation:
is paid at the coupon rate over the life of a bond
Lesser quality issues that have the same face value, maturity, and coupon will exhibit which two of the following in comparison to high quality debt issues?
low market price and higher yields
An investor who purchases a CMO (Collateralized Mortgage Obligation) can expect distributions of cash how frequently?
monthly basis
An XYZ Corporation Debenture pays annual interest to its bondholders. The interest is taxable to the bondholders as
ordinary income subject to federal and state taxes.
Interest on bonds is paid
semi-annually
An investor who wishes to minimize market risk should buy
short term bonds
Monthly interest received from collateralized mortgage obligations (CMOs) is
taxable at the federal, state, and local levels.
A corporation may issue refund bonds
to retire an existing bond issue, to reduce its interest costs, To take advantage of a substantial drop in interest rates
