SIE Unit 3
An investor purchases an 8% corporate bond at 93. The bond is scheduled to mature in 2028. What will the investor receive at maturity?
$1,040
An investor owns a bond with a 3.5% nominal yield making semiannual interest payments. On each interest payable date, the investor can expect to receive how much?
$17.50
An investor holds a 4% corporate bond with a yield to maturity of 2.75%. How much will be received in interest on each of the scheduled interest payment dates?
$20.00
An investor holds a 5% corporate bond with a yield to maturity of 2.75%. How much will be received in interest on each of the scheduled interest payment dates?
$25
A bond with a 3% stated yield and a $1,000 par value would pay how much in annual interest?
$30
An investor has purchased a bond with a 5% coupon. This investor will receive
$50 annual interest until maturity
With money market securities, the risks are
- a lower return than with longer term instruments. -the potential reinvestment of principal at different rates over short periods of time.
For Treasury bills, which of the following are true? I. T-bills are issued at a discount to par. II. T-bills have maturities of 1-10 years III. Most T-bill issues are callable and convertible. IV. T-bills are a direct obligation of the U.S. government.
. T-bills are issued at a discount to par. T-bills are a direct obligation of the U.S. government.
Commercial paper issued by corporations can have maturities as short or as long as
1 day or 270 days
Money market debt instruments typically have maturities of
1 year or less
In what order would claimants receive payment in the event of a corporate bankruptcy?
1. Holders of secured debt 2. General creditors 3. Holders of subordinated debt instruments 4. Preferred stockholders
A basis point is valued at
1/100th of 1%
Treasury bonds mature in
10 years or more
Which of the following bonds likely carries the highest risk to the investor?
10% D-rated corporate bond
Which of the following debt securities has interest that is subject to federal income tax but not state income tax?
10-year STRIP
Which of the following debt securities has interest that is subject to federal income tax but not state income tax?
26-week Treasury bill
Which of the following debt securities has interest that is subject to federal income tax but not state income tax?
30-year Treasury bond
How many basis points are in a yield of 4.35%?
35
Each year a bond pays semiannual interest payments of $20. This bond has a nominal yield of
4%
Which of the following bonds would be considered a high-yield bond?
4% BB-rated corporate bond maturing in 10 years
6% XYZ debentures are trading for $1,200 while similarly rated bonds are being offered at 4.5%. What is the current yield on the 6% XYZ debentures?
5%
Which of the following debt securities has interest that is subject to federal income tax but not state income tax?
5-year Treasury note
An investor purchases a bond at $900 with a 5% coupon and a 5-year maturity. The bond has a current yield of
5.6%
Which of the following is not a T-bill maturity?
56 weeks
A registered representative speaks to a customer about a particular 6% municipal bond quoted on a 6.5% basis. What does this mean?
6% is the bond's coupon, while 6.5% is the bond's yield to maturity
A bond has a 7% coupon and is currently offered at a price of 102. Which of the following yields could be the yield to maturity (YTM) for this bond?
6.55%
The current yield on a bond with a coupon (nominal) rate of 7.5% currently selling at 105 1/2 is approximately
7.1%
Regarding different types of debt security maturities available to issuers, which of the following is accurate?
A balloon maturity uses elements of both serial and term maturities.
Which of the following statements regarding put and call features on debt securities is not correct?
A callable bond is likely to be called when interest rates are rising
Which of the following is a reason an investor might choose to invest in a corporate bond?
A corporation is legally obligated to pay interest on its bonds.
Which of the following funds would likely fall the most in a rising interest rate environment?
A long-term corporate bond fund
Which of the following securities pays interest that is taxable at the state level and tax free at the federal level?
A municipal bond issued from a state other than the customer's residence
Which of the following would be funded by general obligation (GO) bonds?
A new city hall
A guaranteed bond is usually guaranteed by which of the following entities?
A parent company
A financial institution, in order to raise cash on a short-term basis, sells some of the securities it owns, with an agreement to buy them back at a later date at a slightly higher price. This is known as
A repurchase agreement
A bond that is structured so that a portion of the principal is scheduled to mature at intervals over several years is
A serial bond
An issuer has a subordinated debt issue outstanding. Which of the following is true?
A subordinated debenture has a claim that is junior to all other debt but senior to preferred stock.
Which of the following credit ratings are placed in order from highest to lowest?
Aa, A, Ba, B
Which of the following is the highest bind rating?
Aaa
Which of the following is an unsecured debt instrument?
Aaa/AAA-rated debentures
A company reorganizing with the intent to emerge from a bankruptcy is likely to issue which of the following type of bonds to accomplish that goal?
Adjustment bonds
Your client is about to retire and wants to rearrange his portfolio in order to have predictable income. Which of the following would not be a good investment vehicle?
Adjustment bonds
Which of the following is true for debt instruments issued by the U.S. Treasury?
All are issued in book-entry form.
All of the following are considered money market instruments except
American Depositary Receipts (ADRs)
An income bond is known as
An adjustment bond and is unsecured
A broker-dealer has engaged in a reverse repurchase (repo) agreement. How was this done?
An initial purchase is followed by a sale later, at a higher price.
What is the relationship between bond values and overall interest rates?
An inverse relationship
Which one of the following best describes a debenture?
An unsecured corporate debt obligation
Which of the following expressions describes the current yield of a bond?
Annual interest (coupon) payment divided by current market price
The repayment or maturity date of a banker's acceptance is normally which of the following?
As short as 1 day or as long as 270 days
Most municipals pay interest that is tax free at the federal level. Which one of the following is a taxable municipal bond?
BABs
Which of the following is the highest noninvestment grade debt rating?
BB
Which of the following is the lowest investment grade debt rating?
BBB
Which of the following is the highest noninvestment grade debt rating?
Ba
Which of the following is considered an investment-grade debt rating?
Baa
Which of the following is the lowest investment grade debt rating?
Baa
An investor holds a bond in which the issuer is scheduled to repay small portions of the principal at intervals over a few years and the majority in the final year. This investor is holding a
Balloon bond
Which of the following securities is most often used to fund international trade?
Banker's acceptance (BAs)
Money market securities can be associated with which of the following characteristics?
Being highly liquid
Which of the following is not one of the three major credit rating agencies?
Best & Best Co., Inc.
Distinguishing by the issue's term to maturity for those securities issued by the U.S. federal government, which of the following is correct?
Bills represent short-term issues
Which of the following statements regarding bond interest is true?
Bond prices have an inverse relationship to interest rates
T-notes are delivered in
Book entry
Which of the following is a characteristic shared by both corporate debentures and income bonds?
Both must pay principal as it comes due.
Your customer is a resident of the state of New York. Which of the following debt issues would generate interest that would be taxable to your customer at the state level but not taxable at the federal level?
Bridgeport, Connecticut, general obligation bond
Which of the following regarding capital and money markets is true?
Capital markets provide intermediate to long-term financing.
Which of the debt issued listed here would produce tax-free interest at all levels?
City of San Juan, Puerto Rico, general obligation bond
Which of the following corporate bonds is backed by the securities of other corporations or those of a subsidiary?
Collateral trust bond
A corporation deposits 20-year Treasury bonds into a trust in order to secure a loan. The loan for this type of arrangement would be facilitated by the corporation issuing
Collateral trust bonds
Which of the following securities carries the greatest amount of risk in conjunction with a corporate liquidation?
Common stock
Rank the investors from lowest to highest priority in liquidation
Common stock Preferred stock Subordinate debentures Debentures Secured debt
If a bond is trading at a discount, which of the following rates is correctly ranked from low to high?
Coupon rate, current yield, yield to maturity, yield to call
If a bond is trading at a premium, which of the following rates is correctly ranked from high to low?
Coupon rate, current yield, yield to maturity, yield to call
All of the following are true concerning convertible bonds except
Coupon rates are usually higher than nonconvertible bond rates of the same issuer.
Which of the following is not true regarding convertible bonds?
Coupon rates are usually higher than nonconvertible bond rates of the same issuer.
If a callable bond is priced at par, which of the following is true?
Current yield (CY) equals yield to call (YTC).
Your customer holds a callable bond currently trading at $935. Which of the following is true?
Current yield (CY) is lower than yield to maturity (YTM)
Your customer holds a callable bond currently trading at $955. Which of the following is true?
Current yield (CY) is lower than yield to maturity (YTM).
A bond having an 8% coupon is selling with an 8.25% yield to maturity. Which of the following statements are true?
Current yield is higher than nominal yield. Nominal yield is lower than yield to maturity (YTM).
Which of the following is an unsecured corporate debt security?
Debenture
Which of the following is an example of an unsecured debt security?
Debenture Income bond
A guaranteed bond is
Debt backed by another company, such as parent company
Regarding a corporate bankruptcy and the liquidation priority, which of the following is accurate?
Debt securities claims are satisfied before equity securities claims
A court has ordered a corporation to liquidate all assets under a federal bankruptcy proceeding. Which of the following is TRUE?
Debtholders are paid before stockholders.
Which of the following is considered the primary risk of owning a corporate bond?
Default risk
Federal, state, and local income tax would be due on the interest from which of the following issues?
FHLMC certificate
Federal, state, and local income tax would be due on the interest from which of the following issues?
FNMA certificate
The United States Congress has authorized all of the following enterprises to issue securities except
Federal Deposit Insurance Corporation (FDIC)
A customer receives interest from a T-note. They will likely owe income taxes on this income at what levels?
Federal but not state
A Federal Reserve member bank's deposits in excess of the amount required to be on reserve known as
Federal funds
Of the following government sponsored entities, which is backed by the full faith and credit of the U.S. government?
GNMA
Federal, state, and local income tax would be due on the interest from which of the following issues?
GNMA certificate
Your customer is interested in receiving monthly income from a security that is guaranteed for principal and interest by the federal government of the United States. Which of the following securities best meets this request?
GNMA certificate
Your customer has a portfolio consisting entirely of municipal-issued securities. Therefore, the entire portfolio would have to consist of
General obligation and revenue bonds
Which of the debt issues listed here would produce tax-free interest at all levels?
General obligation bond issued by Guam
Which of the debt issued listed here would produce tax-free interest at all levels?
General obligation bond issued by Puerto Rico
Which of the following obligations is backed by the full faith and credit of the United States government?
Government National Mortgage Association (GNMA)
Which of the debt issues listed here would produce taxable interest at all levels?
Government National Mortgage Association certificate fully backed by the Treasury
If a customer is interested in monthly income, which of the following securities would meet that need?
Government National Mortgage Association certificates (GNMA)
If a bond is purchased at a discount, the yield to maturity is
Higher than the nominal yield
Of the debt and equity holders listed here, in what order would claimants receive payment in the event that a corporate bankruptcy liquidation needed to occur? Holders of secured debt Holders of subordinated debentures General creditors Preferred stockholders
Holders of secured debt General creditors Holders of subordinated debentures Preferred stockholders
Which of the following statements regarding a bond issued with a 4 3/4% coupon and now trading in the secondary market is true?
If interest rates drop, the coupon will remain at 4 3/4%
Which of the following statements regarding a bond issued with a 6% coupon and now trading in the secondary market is true?
If interest rates rise, the coupon will remain at 6%.
If investors have income listed as their investment objective, they would NOT hold which of the following securities in their portfolio?
Income bonds
Which of the following statements regarding Treasury receipts are true?
Interest is paid at maturity They are sold at a discount.
For revenue bonds issued by a state or municipality, which of the following is TRUE?
Interest will be paid only if the enterprise owned and operated by the state or municipality has sufficient earnings to cover the interest payments or the debt service reserve.
The U.S. federal government is the nation's
Largest borrower and considered the best credit risk
Regarding filing for corporate bankruptcy, which of the following is true?
Liquidation means that property will be taken and sold to repay all debts.
If a bond is purchased at a premium, the yield to maturity is
Lower than the nominal yield
Which of the following is not considered a money market instrument?
Money market funds
A customer has a short-term investment time horizon and a fairly certain need for funds she wishes to invest. Which of the following might meet those two investment objectives?
Money market instruments
If a company files for bankruptcy, which of the following investors would be most likely to be paid first?
Mortgage bonds
Which of the following require voter approval?
Municipal general obligation (GO) bonds
Water and sewer facilities are most likely to use what kind of debt financing to fund expansion plans?
Municipal revenue bonds
Being secured by no physical asset and backed only by a bank's good faith and credit, a bank's promise to pay principal and interest can be evidenced in which of the following securities that are traded in the secondary market?
Negotiable CDs
Your customer is a resident of Las Vegas, Nevada. Which of the following debt issues would generate interest that would be taxable to your customer at the state level but not taxable at the federal level?
Nevada City, California, Municipal Water District revenue bond
Your customer is a resident of the State of New Jersey. Which of the following debt issues would generate interest that would be taxable to your customer at the state level but not taxable at the federal level?
New York City Transportation Authority revenue bond
Which of the following are fixed at the time a bond is issued?
Nominal yield
A bond with 10 years to maturity and callable in five years at par is sold at a discount. Rank the following yields from lowest to highest. I. Nominal yield II. Current yield III. Yield to call (YTC) IV. Yield to maturity (YTM)
Nominal yield Current yield Yield to maturity Yield to call (YTC)
When interest rates in the marketplace move up, what happens to the coupon rate on existing bond?
Nothing; it does not change.
Which of the following would be least likely to directly impact a bonds yield?
Number of bonds in the issue
How do zero coupons pay interest and how are they taxed?
Pays at maturity Taxed annually
Your customer is a resident of the state of California. Which of the following debt issues would generate interest that would be taxable to your customer at the state level but not taxable at the federal level
Phoenix, Arizona, Municipal Water District revenue bond
Subordinate debentures are senior to which of the following fixed income securities?
Preferred stock
Which of the following is the most junior security?
Preferred stock
An investor purchased a corporate bond at 98 5/8 and sold the bond at 101 3/4. How much money did he make or lose on this transaction?
Profit of $31.25
Which of the following statements regarding put and call features on debt securities is correct?
Put features benefit the bondholder
Twelve years ago your client purchased at par $150,000 of GO bonds maturing in 15 years from now and callable in six months. Interest rates have gone down over the last 5 years. Which of these should your client do?
Recognize that the bonds have a high probability to be called Expect the bonds are trading at a small premium
For municipal debt issues, which of the following is true?
Revenue bonds are self-supporting, while GO bonds are backed by the municipality's good faith and credit.
All of the following are U.S. government agency debt securities except
STRIPS
A bank issues and guarantees certificates of deposit, and those that are negotiable are considered money market instruments. What makes a CD negotiable?
Secondary market trading
A corporate bankruptcy liquidation took place. Of the following—general creditors, secured bondholders, subordinated debenture holders, accrued taxes—who was paid first and who was paid last?
Secured bondholders first, subordinated bondholders last
The BBB Corporation is liquidating under a Chapter 7 bankruptcy. What is the order of payout?
Secured bondholders, senior bondholders, subordinated bondholders, and then common shareholders
If the Midlands Pencil Corporation has issued several different debt securities, an investor would expect the lowest income stream from
Secured debt
List the order of payment from first to last in the event of a corporate liquidation
Secured debt Unsecured debt Preferred shareholders Common shareholders
Regarding corporate bond issues, which of the following statements best describes secured debt and unsecured debt?
Secured debt is asset backed, while unsecured debt is not.
Rank the following in order of payment at the time of a corporate liquidation, from first to last.
Secured debtholders Debentures Subordinated debentures Preferred stock
BBB Corporation is liquidating under a Chapter 7 bankruptcy. What is the order of payout?
Secured, not senior bondholders, general creditors, preferred stock holders, and common shareholders
T-notes pay interest
Semiannually
A corporation has issued a single bond having successive maturity dates set from 2020 through 2030. This is known as what type of bond?
Serial
A maturity schedule that has relatively equal portion of the issue maturing at regular intervals over a multiyear period most likely has which type of bond?
Serial bond
When a corporation issues a mortgage bond, the issue's total value
Should be less than that of the real estate it is backed by
Regular way settlement for Treasury bills is
T + 1
Regular way settlement for Treasury bonds is
T + 1
Regular way settlement for Treasury notes is
T + 1
A new customer tells you that her objective is to incur little risk because she is anticipating a new home within the next 12 months. Which of the following would be a suitable recommendation?
T-bills
All of the following pay interest except
T-bills
Which of the following are considered money market securities at the time of issue?
T-bills
Which of the following earn interest but don't pay interest?
T-bills
Your client has a long-term investment time horizon and is willing to accept some risk to achieve a better rate of return. Of the following, which would be the least suitable recommendation?
T-bills and negotiable CDs
List the following Treasury securities from the longest to the shortest maturities
T-bonds, T-notes, T-bills
Which of the following is true regarding money market securities?
T-notes and T-bonds can be considered money market instruments when they have only a year left to maturity.
A bond has been structured so that the principal of the entire issue matures on a single date. This is what type of bond?
Term
Your customer owns four corporate bonds, all maturing in 10 years. They have different bond ratings. Which likely pays the least interest?
The A-rated bond
Your customer owns four corporate bonds, all maturing in 10 years. They have different bond ratings. Which likely pays the highest interest?
The C-rated bond
A customer buys a 10% bond with a current yield of 12% and holds the bond until one year before maturity. The bond is sold when current interest rates are 8%. Which of the following statements are correct?
The bond was purchased at a discount. The bond was sold at a premium.
Which of the following statements regarding $1,000 par value 6.5% bond trading offered at 110 is true?
The bond's current yield equals $65 ÷ $1,100 or 5.9%.
A bond certificate represents
The borrower's obligation to repay the amount it borrowed plus interest
Which of the following statements is most accurate about feature benefits?
The call feature benefits the issuer; the put feature benefits the investor.
A "D" rating from Moody's indicates which of the following?
The issuer is in default
A "D" rating from Standard & Poor's indicates which of the following?
The issuer is in default
Regarding municipal obligation (GO) bonds, which of the following is true?
The lower the statutory debt limit, the safer for bondholders
Given bonds are interest-rate sensitive, which of the following statements regarding put and call features for bonds are TRUE?
The put feature would likely be exercised if interest rates rise. The issuer will likely call bonds if interest rates fall.
XYZ Corporation is guaranteeing a debt issue for the IHG Company. Regarding these bonds, which of the following is true?
These bonds are unsecured, with the value of the guarantee being as good as the strength of XYZ.
Which of the following regarding federal funds is true?
These funds may be loaned from one Federal Reserve Board (FRB) member bank to another.
Which of the following regarding Treasury STRIPS, receipts, bills, notes and bonds is true?
They all mature at par value.
Which of the following are true of municipal revenue bonds?
They are not subject to statutory debt limits & They are backed by a facilities ability to generate revenue
A municipality wants to issue general obligation (GO) bonds that will put it over its statutory debt limit. Which of the following is true?
They may do so by increasing the debt limit and with voter approval
A brokerage firm places U.S. Treasury notes and bonds in a trust at a bank and then issues securities collateralized by either the principal or interest payments those notes and bonds represent. These new securities the broker-dealer is offering are
Treasury Receipts
Which of these is not backed by the full faith and credit of the U.S. government?
Treasury Receipts
Each of the following makes regular interest payments except
Treasury STRIPS
U.S. government deposits securities with a trustee against which certificates are sold representing principal only with no regular interest payments. These are known as
Treasury STRIPS
For Treasury receipts and STRIPS, which of the following is TRUE?
Treasury STRIPS are backed in full by the U.S. government. Treasury receipts are not.
Which of the following is a debt instrument that pays no periodic interest?
Treasury STRIPs
Rank the following government issued securities from shortest to longest maturity
Treasury bills, notes, and bonds
Rank the following government-issued securities from shortest to longest maturity
Treasury bills, notes, and bonds
Which of the following securities pays interest that is taxable at the federal level and tax free at the state level?
Treasury bond
Debt instruments put up for auction by the U.S. Treasury department that offer intermediate maturities best describes
Treasury notes
All of the following are backed by the full faith and credit of the U.S. government except
Treasury receipts
All of the following securities are backed the full faith and credit of the U.S. government except
Treasury receipts
Which of the following are securities representing other securities held on deposit with a trustee where the principal and interest payments have been separated?
Treasury receipts and STRIPS
Your customer purchased a general obligation bond issued by the state of New York in the secondary market at a price of 102.5. When is the investor required to deliver the funds to complete this transaction?
Two business days following the trade
Your customer purchased a revenue bond issued by the Metropolitan Water District of Los Angeles in the secondary market at a price of 102.5. When is the investor required to deliver the funds to complete this transaction?
Two business days following the trade
In safety of principal, municipal bonds are considered second only to
U.S. government and agency bonds
Which of the following statements is true of income bonds?
Unlike other bonds, they don't pay income unless declared by the board of directors.
Commercial paper is
Unsecured debt with a maximum maturity of nine months
T-bills are issued (auctioned) by the U.S. Treasury Department how often?
Weekly
A customer buys a callable 5% coupon bond at par that will mature in 10 years. Which of the following statements is true?
Yield to call (YTC) is the same as yield to maturity (YTM).
If a bond is trading at a discount, which of the following rates is correctly ranked from high to low?
Yield to call, yield to maturity, current yield, nominal yield
If a bond is trading at a premium, rank the following rates from low to high.
Yield to call, yield to maturity, current yield, nominal yield
Five years ago your client purchased at par $100,000 of New Brunswick City GO bonds maturing in 20 years from now and callable in six months. Interest rates have gone down over the last five years. Which of these should your client do?
Your client should recognize that the bonds have a high probability to be called Your client should expect the bonds are trading at a small premium
Your customer is a resident of the state of Utah. They would pay tax on interest produced by all of the following securities except
a Richfield, Utah, general obligation bond
A bond that is structured so the at the issuer pays off a portion of the principal before the final maturity but pays off a major portion of the bond at the final maturity date is
a balloon bond
An investor has purchased a bond where the issuer will repay part of the bond's principal before the final maturity date, and then pay off the major portion of the debt principal at final maturity. This is
a balloon maturity schedule
An investor has purchased a bond where the issuer will repay the bond's principal in a series of substantially equal portions representing 10% of the issue over a period of five years, then the remaining 50% in the final year. This is
a balloon maturity schedule
A certificate stating a borrower's obligation to pay back a specific amount of money on a specific date to an investor is
a bond
A convertible feature for a corporate bond allows
a bondholder to convert a debt instrument into securities that give the investor ownership rights
A put feature attached to a bond allows
a bondholder to put a bond back to the issuer for redemption at times that will benefit the bondholder
When selling a bond, the issuer is taking
a borrower's position
An investor holds a debt security backed by ad valorem taxes. This security is issued by
a city or local municipality
An investor who is seeking income might choose a corporate bond because
a corporate bond pays a steady income and are generally reliable.
A written promise made by a corporation to pay the principal at its due date and interest on a regular basis on one of its debt issues but backed by no physical assets or titles to assets could only be
a debenture --
An issuer has issued bonds with a call feature. It is likely that these bonds have
a higher coupon than similar bonds without the feature.
With money market securities held in one's portfolio, relative to other, longer-term debt securities, an investor should expect
a higher degree of safety with lower returns.
A balloon maturity for an issuer's debt securities is most accurately described as
a later final maturity within a serial issue of bonds that contains a disproportionately large percentage of the principal amount of the original issue
A company has issued bonds (debt securities) to investors. For these investors, these securities represent
a loan to the issuing company
An investor has purchased bonds having a put feature attached. With this put feature, it is likely that these bonds were issued with
a lower coupon than similar bonds without the feature ---
An unsecured promissory note issued by a bank that can be traded in the secondary market is known as
a negotiable CD
Treasury bond (T-bond) interest is stated as
a percentage of par value
Treasury note (T-note) interest is stated as
a percentage of par value
Assuming $1,000 par value, a bond priced at $1,200 is trading at
a premium
Interest is best described as
a specific rate of return the borrower pays the investor for use of the funds
A bond that is structured so that the principal of the whole issue matures at once is
a term bond
A bondholder has invested in a certificate backed by equipment that the issuer owns and utilizes in its daily operations. This issuer is most likely
a transportation company
Yield to call (YTC) calculations reflect the early redemption date and:
acceleration of the discount gain if the bond was originally purchased at a discount accelerated premium loss if the bond was originally purchased at a premium
Accrued interest on U.S. government bonds is calculated using
actual days in each month and actual days in the year.
Municipal bonds are issued by all of the following government entities except
agencies
In the event that a liquidation needs to occur, subordinated debtholders
agree to be paid back last of all debtholders
Treasury bills pay
all interest at maturity
A call feature attached to a bond allows
an issuer to call in a bond before maturity at times that will benefit the issuer
A bond with a 4.5% stated yield might make
annual interest payments of $45 semiannual interest payments of $22.50
T-bonds and T-notes
are both priced as a percentage of par
Treasury bills
are issued at a discount without a stated interest rate
A municipal bond has a coupon of 4.25%, and at the present time, its yield to maturity is 4.75%. From this information it can be determined that the municipal bond is trading
at a discount
At the time of maturity, an investor realizes that the overall return on the investment was actually greater than the coupon rate stated on the bond when purchased. This most likely would have occurred because the bond had initially been purchased
at a discount
A zero-coupon bond pays interest
at maturity and is taxed annually
An investor holding a corporate- issued mortgage bond is holding a debt security that is
backed by real estate and therefore considered secured
Money market instruments guaranteed by a bank that are used to provide capital for international trade are called
bankers' acceptances (BAs)
When interest rates in the open market move up or down, a bond's coupon rate will
be unaffected by the open-market interest rates
Securities issued by the U.S. government are classified as
bills, notes, and bonds
Which of the following shows Treasury bills, Treasury bonds, and Treasury notes listed in ascending order of maturity?
bills, notes, bonds
A corporation wanting to raise cash to finance accounts receivable and seasonal inventory needs is likely to issue any of the following except
bonds
STRIPS are delivered in
book entry
T-bills are delivered in
book entry
T-bonds are delivered in
book entry
The time to maturity for debt instruments
can be any length of time
A bond having a call feature
can be redeemed before maturity at the issuer's option
A corporation deposits T-bonds it owns into a trust in order to secure a loan. The loan for this type of arrangement would be facilitated by the corporation issuing
collateral trust bonds
A corporation has issued debt securities backed by the shares of another corporation that it owns. These debt securities are known as
collateral trust bonds
Promissory notes are a form of
commercial paper issued by corporations
All of the following may be callable except
common stock
The risk of being the last to get paid in a corporate liquidation is characteristic of which of the following?
common stock
One of your new clients explains that she prefers investments paying income with a fixed rate of return, but also allows for the possibility of realizing greater gain potential. She would likely favor investments in
convertible bonds
If the Midlands Pencil Corporation has issued several different debt securities, an investor would expect the lowest income stream from
convertible debentures
An issuer of bonds can be
corporate and both the federal and municipal governments
Regarding bankruptcy proceedings
courts protect both corporate and individual filers from creditors
All of the following are corporate secured bonds except
debentures.
Municipal revenue bonds
do not require voter approval are not subject to statutory debt limits
With interest rates in the marketplace at 7%, it could be expected that in the secondary market, a bond carrying a 5% coupon would trade
downward in price
Negotiable jumbo CDs are characterized by all of the following except
each issue generally matures in 5-10 years.
A bond offered at par has a yield to maturity
equal to its coupon rate
A bond offered at par has a yield to maturity
equal to its current yield
An investor purchases a bond offered at par. The bond has a coupon rate
equal to its current yield
A bank trustee holds the titles to assets a corporation has purchased and utilizes in its day-to-day business. The corporation issues debt securities backed by these assets. These securities are
equipment trust certificates ---
Par value for a bond is also known as
face value or the amount a bond will be redeemed for at maturity
To the benefit of the issuer, a callable bond is likely to be called when interest rates
fall
Money market instruments are typically
fixed income (debt) securities with short term maturities
If the dollar price of a municipal bond is 101 and the basis is 6.10, the nominal yield is
greater than 6.10
A customer buys a 4% Treasury bond, maturing in 10 years, at a price of $96.08. The yield to maturity (YTM) is
greater than nominal yield
Money market instruments can be associated with all of the following except
high-yielding debt instruments
Bondholders should expect that interest payments would always be forthcoming for all of the following EXCEPT
income bonds
Which of the following bonds trade flat (without interest) unless interest payments are declared by the board of directors (BOD)?
income bonds
An investor is able to purchase a bond at $725, well below par value. Buying the bond so cheaply tells us that the investors return at maturity
increases
Income from an investment in debt securities is known as
interest
T-notes are the U.S. government's
intermediate-term debt of 2-10 years.
U.S. Treasury notes are U.S. government-issued
intermediate-term debt securities with maturities of 2-10 years
If interest rates are changing, which of the following terms would best describe the relationship between prices and yields for corporate bonds?
inverse
The relationship between fixed-income prices and prevailing interest rates is
inverse
When the interest rates in the marketplace moves up or down, the price of all bonds move
inversely
Treasury bills (T-bills) are
issued at a discount to par, paying interest at maturity
A statutory debt limitation imposed on a municipality restricts its authority regarding
issuing general obligation (GO) bonds.
All of the following are true of negotiable commercial paper except
it is typically issued by banks
An investor holds a 4% bond, callable in 8 years, and maturing in 12 years. The bond's current yield (CY) measures its annual coupon payment relative to
it's market price
An investor holds a 5% bond callable in six years and maturing in eight years. The bond's current yield (CY) measures its annual coupon payment relative to
it's market price
An investor holds a 6% callable bond purchased at 105. If the issuer calls the bond before maturity, the yield to call realized by the investor would be
less than the coupon
The two classifications of chapters for corporate bankruptcies are
liquidations and reorganizations
T-bonds are the U.S. government's
long-term debt of over 10 years.
When a bond is purchased at a premium the current yield will be
lower than the coupon rate.
A secured debt security can be backed by a corporation's
manufacturing facilities
Bonds can be issued with additional features attached, making them more attractive to investors. All of the following can be considered such features except
maturity
Repurchase agreements and reverse repurchase agreements are
money market instruments
Secured corporate debt includes
mortgage debt
Once issued, a corporate bond's current yield
moves in the same direction as current interest rates
A state government has outstanding debt that it issued to finance toll roads, sports facilities, and public housing projects. All of these issues are examples of
municipal revenue bonds
The coupon on a bond can be described as its
nominal yield
The stated coupon on a bond is its
nominal yield
An investor anticipates that a fall in interest rates is imminent. This investor, now wanting to purchase bonds in order to lock in interest income, would likely buy
noncallable bonds
Municipal revenue bonds are
not subject to statutory debt limits and do not require voter approval
Regarding CDs and negotiable CDs issued by banks,
only negotiable CDs are considered money market instruments
The coupon for a bond is calculated as a percentage of
par value, usually $1,000 for a bond
A serial bond is best described as
portions of bond principal scheduled to mature at intervals over a period of years until the entire balance has been repaid
Two benefits of owning preferred stock over common stock are
priority at liquidation and payment of dividends.
Which of the following projects would be funded by general obligation (GO) bonds?
public schools
A bond is trading at a price of $1,150 in the secondary market. If purchased at this price and held to maturity, this will
reduce the investor's return.
A bond is trading at a price of $1,200 in the secondary market. If purchased at this price and held to maturity, this will
reduce the investor's return.
To the benefit of the bondholder, a puttable bond is likely to be put back to the issuer when interest rates
rise
The first investors to get paid in corporate liquidations are holders of
secured debt
An investor holding T-bonds will receive interest payments
semiannually
Treasury bonds pay interest
semiannually and mature at par value
All of the following are types of maturities for debt instruments except
series
All of these are debt-security-maturity schedules except
series
Treasury bills (T-bills) are
short-term debt obligations issued weekly
Banker's acceptances are
short-term time drafts issued by banks to corporations
Which of the following projects would most likely be funded with a revenue bond?
sports stadium
Bonds can typically be issued with
term, serial, or balloon maturities
All of the following are considered to be major credit rating agencies except
the U.S. Treasury Credit Agency
In order to meet federal budget needs, the types and quantity of government securities to be issued are determined by
the U.S. Treasury Department
U.S. government securities are issued by
the U.S. Treasury in book-entry form.
Federal funds represent
the amount by which a bank exceeds its required deposits to be held on reserve at the Federal Reserve Board (FRB)
A corporate bond has a stated yield set at the time of issuance. This stated yield is also known as
the coupon rate or nominal yield
An investor purchases a T-bill for $9,925 that will mature at $10,000. The difference between the $9,925 paid and the $10,000 that will be received is
the discount to par and will be considered interest received at maturity
The coupon rate on a debt security represents
the interest rate the issuer has agreed to pay the investor.
Treasury receipts are backed by
the issuing broker-dealer
With a balloon maturity
the major portion of the principal debt is paid on the final maturity date
An investor lending money to an entity receives back the principal amount of the loan on
the maturity date
A corporate bond has a stated yield set at the time of issuance. This stated yield is also known as
the nominal yield
The City of Chicago issued $200 million in GO debt five years ago. The bonds were issued with a 20-year maturity and carry a 5% coupon. Your client, who purchased one of these bonds on the initial offering, calls you to get a current quote. You respond that the bonds are selling at a slight premium. This means that
the nominal yield is higher than the yield to maturity.
The City of Philadelphia issued $100 million in GO debt three years ago. The bonds were issued with a 20-year maturity and carry a 5% coupon. Your client, who purchased one of these bonds on the initial offering, calls you to get a current quote. You respond that the bonds are selling at a slight premium. This means that
the nominal yield is higher than the yield to maturity.
All of the following statements about a bond selling above par value are true except
the nominal yield is lower than the current yield
All of the following statements about a bond selling above par value are true except
the nominal yield is lower than the yield to maturity
An investor pays 102 ($1,020) for a $1,000 par value bond. At maturity,
the premium paid decreases the return.
An investor owns a bond carrying a 4% coupon. Interest rates in the marketplace have been moving downward and are currently at 2.5%. Given the current interest rates in the marketplace, this investor should see
the price of the bond move higher ---
The market forces that typically drive the price of a bond trading in the secondary market would include all of the following except
the price of the issuer's stock.
It would be expected that a repurchase (repo) agreement contract would include
the repurchase price and the maturity date
For collateral trust bonds, all of the following are true EXCEPT
these are unsecured debt securities
Once a corporate liquidation proceeding in court is underway, common shareholders know that
they are not guaranteed to be paid back any amount ---
One of the major benefits of municipal bonds is
they are tax-free at the federal level
When an issuer has equipment trust certificates outstanding,
title to the assets backing the certificates are held in trust the assets can be repossessed and sold by the trustee
An investor holds a Treasury note with a stated interest of 6%. The investor will receive
two $30 interest payments per year.
Interest on a 7% corporate bond would be paid to the investor as
two semiannual checks for $35 each
A bond backed by a corporation's full faith and credit is
unsecured not backed by any assets
All of the following are money market instruments except
warrants expiring within three months.
Holders of subordinated debt instruments know that in the case of a corporate liquidation, they
will be paid back last of all debtholders.
For a callable bond priced at a discount,
yield to maturity (YTM) will be lower than the yield to call (YTC).
