SIE Chapter Two
What type of security would a company most likely issue in order to stabilize cash flow?
Commercial paper; Commercial paper is unsecured, short-term corporate debt which has a maximum maturity of 270 days.
Bob heard that municipal bonds are tax-free investments. He wants to reduce his tax burden associated with investments, so he thinks it would be a good idea to liquidate all of his US Government Securities positions and invest everything in a wide variety of municipal bonds. Which of the following would be important considerations for Bob's agent to discuss with him prior to the liquidation of other investments and full investment in municipal bonds? 1. Bob's agent should discuss the tax consequences of liquidating his positions as well as the transaction costs for re-distributing all of his funds. 2. Bob's agent should discuss the fact that only municipal bond interest is tax-free at the federal level and can be taxable at the state and local level, depending upon the situation. 3. Bob's agent should discuss the fact that he doesn't get as much in commissions and transaction costs associated with trades in municipal bonds. 4. Bob's agent should discuss the fact that municipal bonds often carry more risk than US Government Securities.
1, 2, & 4; Each of the items listed would be important aspects of Bob's desire to invest in munis EXCEPT for the reduction in commissions or transaction costs that would be received by Bob's agent. Most municipal bond interest is tax-free at the federal level and can be tax-free at the state and local levels, depending on the situation. If Bob sells all of his securities to buy munis, he will have significant consequences in terms of taxation and transaction costs which should be a part of the consideration. Last, munis do carry more risk than US Government Securities, so that should also be a point discussed with Bob.
During a discussion with a client, the client indicates that she feels interest rates will go lower soon. If the client wishes to invest according to this assumption, which of the following recommendations should the registered representative give to the client? 1. The client should begin a pattern of swapping her existing bonds for bonds selling at a premium. 2. The client should attempt to increase the overall level of call protection on her bond portfolio. 3. The client should attempt to extend the overall maturity on her bond portfolio. 4. The client should attempt to shorten the overall maturity on her bond portfolio.
2 & 3; If the client feels that interest rates are going to go down, the client should attempt to lock in the longest maturities possible in her portfolio. This calls for extending the overall maturity of the bond portfolio. The client should also attempt to eliminate the possibility of early calls of her bonds, so she should increase the call protection for her portfolio. In order to achieve this, the client should make changes to her portfolio by selling bonds with the shortest maturities and buying bonds with longer maturities. Also, she should sell bonds that are callable now or soon to be callable and buy new ones with callable dates that are much further out.
A decrease of 10 basis points for a $1,000 bond would represent which of the following decreases in the price of the bond?
A basis point is equal to $.10 in dollar value of a bond: therefore, a change of 10 basis points would equal a $1.00 in value.
A corporation may issue refund bonds to accomplish any of the following EXCEPT: [A]To increase the capitalization of the company [B]To retire an existing bond issue [C]To reduce its interest costs [D]To take advantage of a substantial drop in interest rates
A refund is a new bond issue that is used to retire an existing bond issue. Capitalization is the corporation's long term debt, stock and net worth. The capitalization of the corporation would remain unchanged because the amount of the debt would remain unchanged. Refund bonds are frequently issued when there is a substantial drop in interest rated to reduce interest costs.
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
Most CMOs carry what credit rating?
AAA
When evaluating investments for a client, a municipal bond portfolio would be MOST appropriate for which of the following investors? [A]A young investor who has few liabilities who is seeking growth and needs no income [B]A middle-aged investor in a high tax bracket who is seeking income but looking to reduce tax burden [C]A middle-aged investor in a middle tax bracket who is investing funds in their retirement plan [D]A senior investor in a low tax bracket looking for a combination of income and growth
B; Municipal bonds and municipal bond funds are most appropriate for investors who are seeking income from the fixed-income securities, but also looking to reduce their tax burden, since munis are not subject to federal income tax. These would not be appropriate for investors with no need for income or for investment in retirement plans, since retirement plans are tax-deferred and higher rates of growth from other taxable securities would be more appropriate. A muni bond portfolio would not be appropriate for someone seeking both income and growth, as fixed-income securities don't provide high levels of growth.
A bond selling at a premium to its par value means
Bond yields and prices have an inverse relationship meaning that as one increases the other would decrease. Therefore, if a bond is selling at a premium (above par), its current yield would have to be lower than its nominal (or par) yield.
An investor buys two bonds: a 7.5% bond and a 8.5% bond, maturing in 2030, and at a 6.00 basis (ytm). The price of both of the bonds moves to 90.5. Which bond is likely to have the most price appreciation? [A]The 7.5% bond [B]The 8.5% bond [C]Both will appreciate by the same amount. [D]Neither, because the market price decreased.
D, neither because the market price decresaed
When general level of interest rates increase, the price of high-grade bonds will
fall. The price of high-grade bonds moves in opposition to interest rates.
corporate mortgage bond is considered what when comparted to flower bonds, municipal bonds, & U.S. treasury notes
funded debt
