SIE/Series 7 Debt
An investor in the 31% tax bracket buys a 7% municipal bond quoted on a 6.25 basis. To calculate the equivalent taxable yield: A divide 6.25% by 69% Bmultiply 6.25% by 69% Cdivide 7% by 69% Dmultiply 7% by 69%
The best answer is A.
Reports of corporate bond trades are made through: A TRACE B RTRS CNetwork A Tape DNetwork C Tape
The best answer is A.
Which CMO tranche receives no payments until maturity? A Z-Tranche BCompanion Tranche CPAC tranche DTAC tranche
The best answer is A. A Z-tranche is a "Zero" tranch. It gets no payments until all prior tranches are retired. Then it is paid off at par. It acts like a long-term zero-coupon bond, so it is most susceptible to interest rate risk. The other tranches receive payments earlier in their life, so they are less susceptible to interest rate risk.
A municipal bond which is secured by taxes OTHER than ad valorem taxes is a(n): A Special tax bond BIndustrial revenue bond CMoral obligation bond DGeneral obligation bond
The best answer is A. A municipal bond which is secured by taxes other than ad valorem taxes is a special tax bond.
Accrued interest on a new issue corporate bond is calculated from: A dated date to settlement date Bdated date to first interest payment Csettlement date to first interest payment Dtrade date to settlement date
The best answer is A. Accrued interest on a new issue is calculated from the dated date till settlement date. A new issue is bought from the underwriter. The customer pays the underwriter the price of the bond plus any accrued interest. This interest accrues from the dated date of the issue (the date of legal issuance) until the date the customer settles the purchase with the underwriter.
When comparing an ETN to a structured product, which statement is TRUE? A ETNs can be traded at any time while structured products cannot BETNs offer current income while structured products do not CETN income is taxable at higher rates than income from structured products DETNs are equity securities that are exchange listed
The best answer is A. An ETN is an Exchange Traded Note. It is a type of structured product offered by banks that gives a return tied to a benchmark index. The note is a debt of the bank, and is backed by the faith and credit of the issuing bank. They are not an equity security - they are a debt instrument. ETNs are listed on an exchange and trade, so they have minimal liquidity risk. In comparison, a regular structured product is non-negotiable and, if redeemed prior to maturity, imposes an early-redemption penalty. ETNs make no interest or dividend payments. Their value grows as they are held based on the growth of the benchmark index, with any gain at sale or redemption currently taxed at capital gains rates. Thus, they are tax-advantaged as compared to other structured debt products.
Which of the following trades settle in "clearing house" funds?I General Obligation Bonds II U.S. Government Bonds III Agency Bonds IV GNMA Pass-Through Certificates A I only BI and II CII and IV DIII and IV
The best answer is A. Corporate and municipal bond trades settle in clearing house funds. These are funds payable at a registered clearing house, which are usually not good funds for three business days. These trades are settled through NSCC - the National Securities Clearing Corporation. U.S. Government and agency bond trades settle in Federal Funds, which are good funds the business day of the funds transfer (next business day for regular way settlement of government securities). Ginnie Mae Pass-Through certificates are U.S. Government guaranteed, so trades settle in Fed Funds. These trades are settled through GSCC - the Government Securities Clearing Corporation.
Homeowners will prepay mortgages: I when interest rates fall II when interest rates rise III so they can refinance at lower rates IV so they can refinance at higher rates A I and III B I and IV C II and III D II and IV
The best answer is A. Homeowners will prepay mortgages when interest rates fall, so they can refinance at more attractive lower current rates. They tend not to prepay mortgages when interest rates rise, since there is no benefit to a refinancing.
An analysis of yield curves of U.S. Government and lower medium quality corporate bonds shows the yield spread to be widening over the last 4 months. Based upon investor expectations as evidenced by the widening of the yield spread, an appropriate investment is: A U.S. Government bonds B Medium quality corporate bonds C Long term discount bonds D Long term premium bonds
The best answer is A. If the yield "spread" between Government bonds and lower medium quality corporate bonds is widening, this means that yields on lower grade corporate bonds are higher than normal relative to yields on Government bonds. This occurs because an excess of investors are buying Governments, pushing their yields down; or an excess of investors are selling lower grade corporate bonds, pushing their yields up. This behavior is typical when investors expect a recession. When a recession is expected, there is a "flight to quality." Investors liquidate holdings that are vulnerable in a recession (low grade corporate bonds) and put the money into safe havens such as government bonds.
Which statements are TRUE regarding reverse repurchase agreements? I The bank dealer is the buyer of the underlying securities II The bank dealer is the seller of the underlying securities III The Federal Reserve is the buyer of the underlying securities IV The Federal Reserve is the seller of the underlying securities A I and IV BII and III CI and II DIII and IV
The best answer is A. In a reverse repurchase agreement, the Federal Reserve drains reserves from dealer banks, tightening credit. It does this by selling eligible securities to the banks, who buy them for cash. Thus the banks are drained of excess cash and credit levels are reduced.
Municipal bonds would not be an appropriate investment for which of the following? A Individual Retirement Accounts BIndividuals CCasualty Companies DBank Holding Companies
The best answer is A. It makes no sense to place "federally tax exempt" municipal bonds into a "tax deferred vehicle" such as an IRA or Keogh account. Since the account is tax deferred, one would place securities earning the highest "before tax" return, such as corporates or governments, into the account. Tax is due only when the positions are liquidated and the funds withdrawn from the account. Individuals in high tax brackets buy municipal bonds for their federal income tax exemption; insurance companies buy municipal issues as part of their portfolios; and banks buy municipals as part of their investment portfolio (for example, they purchase "bank qualified" municipal issues that give the bank a large tax advantage).
Which statement is TRUE about bond price changes that result from interest rate movements? A Short term bond prices move slower than long term bond prices BLong term bond prices move slower than short term bond prices CBoth short term and long term prices move at equivalent rates DNo relationship exists between short term and long term bond price movements
The best answer is A. Long term bond prices are more volatile than short term bond prices as interest rates move. Thus, short term bond prices are more stable (move more slowly) as interest rates change compared to long maturities.
Moody's ratings measure: A default risk of debt issues Bdefault risk of equity issues Cmarket risk of debt issues Dyields of debt issues
The best answer is A. Moody's measures default risk of debt issues. Moody's only rates bonds, not equity securities.
All of the following securities would be used as "collateral" for a collateralized mortgage obligation EXCEPT: A "Sallie Maes" B"Freddie Macs" C"Ginnie Maes" D"Fannie Maes"
The best answer is A. Only mortgage backed pass-through certificates are used as the backing for CMOs - and Ginnie Mae (Government National Mortgage Assn.), Fannie Mae (Federal National Mortgage Assn.), and Freddie Mac (Federal Home Loan Mortgage Corp.) all issue pass-throughs. Sallie Mae issues debentures, and uses the funds to make a secondary market, buying student loans from originating lenders (Sallie Mae stands for Student Loan Marketing Association).
The "interest" received from a zero-coupon corporate bond is: A accreted and taxed annually B accreted and tax deferred until maturity C not accreted and not taxed annually D not accreted and taxed as capital gain at maturity
The best answer is A. The "interest" earned on a zero-coupon bond is the annual accretion of the discount. This amount is taxed annually by the IRS, even though no physical interest payment is received from the issuer. The only way to avoid annual taxation of the accretion amount is to hold the securities in a tax deferred retirement plan account
The obligor on a municipal bond issue is the: A borrower of the bond proceeds Blender of the bond proceeds Cguarantor of the payment of debt service on the bond issue Dfiduciary acting for the benefit of the bondholders
The best answer is A. The "obligor" on a bond issue is the party having the obligation to pay the debt service on the bonds. This is the "legal" name for the borrower or debtor.
Which of the following information would be found in a municipal bond resolution? I Any restrictive covenants to which the issuer must adhere II Any call provisions providing for redemption prior to maturity as specified in the contract III The credit rating assigned to the issue by a nationally recognized ratings agency IV The compensation received by the underwriters for selling the issue to the public A I and II only BIII and IV only CI, II, III DI, II, III, IV
The best answer is A. The Bond Resolution is the contract between the issuer and the bondholder. In the resolution will be found all covenants made by the issuer, including any call provisions. The credit rating is given by the ratings agencies (e.g., Moody's or Standard and Poor's); and is found in their publications. The underwriter's compensation is disclosed to investors in new negotiated municipal bond offerings in the Official Statement (the disclosure document, similar to a prospectus, for new municipal issues).
Ford Motor Company has issued 8% convertible debentures, convertible at a 50:1 ratio. Currently the debenture is trading at 110. The stock is trading at 21. What is the conversion price of the stock? A $20 B$21 C$22 D$50
The best answer is A. The bond is convertible into common at a 50:1 ratio, based on the par value of the bond. The conversion price formula is: $1,000/50 = $20
The current yield of a bond will: I increase as bond prices fall II decrease as bond prices rise III remain unchanged as bond prices fall IV remain unchanged as bond prices rise A I and II BIII and IV CI and IV DII and III
The best answer is A. The current yield is the stated rate of interest as a percentage of the bond's market value. As bond prices fall, the current yield increases; as bond prices rise the current yield decreases.
A municipal dealer offers bonds to another dealer "firm for one-half hour with a five minute recall." This means that the: I selling dealer cannot change the price for one-half hour II selling dealer cannot change the price for the next five minutes III selling dealer has the right to contact the other dealer during the half hour to change the quote if a transaction does not take place in the next five minutes IV buying dealer must call back the selling dealer in five minutes if it wishes to purchase the bonds A I and III BI and IV CII and III DII and IV
The best answer is A. The selling dealer offering the bonds "firm" means that for a stated time period the price will not be changed. These bonds are offered firm for one-half hour; during this time period the buying dealer can try and round up a customer for the bonds before actually purchasing them. The selling dealer also specifies a "five minute recall." This means that during the half hour, the selling dealer can recontact the buying dealer to tell him that he has five minutes to buy the bonds at the offered price or else the quote will be changed.
For bonds trading at a discount, rank the yield measures from lowest to highest? A Nominal; Current; Yield to Maturity; Yield to Call BYield to Call; Yield to Maturity; Current; Nominal CYield to Maturity; Nominal; Yield to Call; Current DCurrent; Nominal; Yield to Call; Yield to Maturity
The best answer is A. When bonds are trading at a discount, the stated (nominal) yield will be lowest. The current yield will be higher, since it is based on the discounted market price - not par value. The yield to maturity will be the next highest, since it includes the portion of the discount earned annually as part of the annual return in addition to the interest received. Finally, yield to call will be highest, since the discount would be earned over a shorter period of time, increasing the annual yield on the security.
Series EE bonds: A are issued at a discount to face Bare redeemed at par plus interest earned Cpay interest semi-annually Dare actively traded in the secondary market
The best answer is B.
Moody's Investment Grade (MIG) rating is used for: A Municipal long term bonds BMunicipal short term notes CCorporate long term bonds DCorporate short term notes
The best answer is B. "MIG" stands for Moody's Investment Grade and is the rating used for short term municipal notes. Short term corporate obligations are rated "P" (Prime). Both long term corporate and municipal offerings are rated on an "ABC" scale.
An outstanding bond issue which is currently trading at 103 1/4 is callable starting next year at 102. The call premium on the bond issue is: A 3/4 points B 2 points C 2 1/2 points D 3 1/4 points
The best answer is B. A bond "call premium" is simply the price above par at which the issuer has the right to call in the bonds from the bondholders. These bonds are callable at 102, hence the call premium is 2 points.
All of the following statements are true regarding a bond that is "registered to principal only" EXCEPT: A the bond is negotiable B interest coupons are detached from the corpus of the bond C interest payments can be redeemed by anyone D at maturity, the registered owner receives the face amount of the bond
The best answer is B. A registered to principal only bond has a physical certificate with the bond's face amount registered in the owner's name, but interest coupons are attached which are payable to the "bearer." Bearer coupons can be redeemed by anyone. The bonds are negotiable. No new issues have been sold in the U.S. since 1983 - after this point only fully registered or book entry bonds have been issued. However, these bonds still trade in the market (at least until 2023, if the bond had 40 years to maturity).
A rising rate of inflation would lead to: I lower bond prices II higher bond prices III lower bond yields IV higher bond yields A I and III BI and IV CII and III DII and IV
The best answer is B. A rising rate of inflation will lead to higher interest rates. If interest rates rise, then bond prices will drop.
Which statements are TRUE about ETNs? I ETNs are a structured product II ETNs are an investment company product III ETNs are suitable for investors seeking income IV ETNs are suitable for investors seeking long-term capital gains A I and III BI and IV CII and III DII and IV
The best answer is B. An ETN is an Exchange Traded Note. It is a type of structured product offered by banks that gives a return tied to a benchmark index. The note is a debt of the bank, and is backed by the faith and credit of the issuing bank. ETNs make no interest or dividend payments, so they are not suitable for an investor seeking income. Their value grows as they are held based on the growth of the benchmark index, with any gain at sale or redemption currently taxed at capital gains rates. Thus, they are tax-advantaged as compared to conventional debt instruments.
Which of the following securities has the highest level of credit risk? A General Obligation Bond BIndustrial Development Bond CEquipment Trust Certificate DMortgage Bond
The best answer is B. An industrial development bond is backed by the rents paid by a corporation, and the guarantee of that corporation. However, there is no actual collateral pledged to back the issue. If the corporation defaults, the bondholders cannot claim any assets to satisfy the debt. Equipment trust certificates have lower credit risk because the equipment is pledged as collateral and mortgage bonds have lower credit risk because real property has been pledged as collateral. These assets can be claimed by the bondholders in the event of a default. General obligation bonds have lower credit risk because they are backed by broad based taxing power, compared to the backing of a single corporation (remember, corporations can, and do, go bankrupt; it is virtually impossible for states and towns to go bankrupt).
Regarding Ginnie Mae Pass Through Certificates: I The certificates pay holders on a monthly basis II The certificates pay holders on a semi-annual basis III Each payment consists of interest only IV Each payment consists of a combination of interest and principal A I and III BI and IV CII and III DII and IV
The best answer is B. Ginnie Mae Pass Through Certificates "pass through" monthly mortgage payments to the certificate holders. Each payment is a combination of both interest and principal paid from the underlying mortgage pool.
In 2020, a customer buys 5 GE 10% debentures, M '40. The interest payment dates are Feb 1st and Aug 1st. The current yield on the bonds is 11.76%. The bonds are callable as of 2030 at 103. The bond is trading: A at a premium Bat a discount Cat par Din the money
The best answer is B. If the bond's current yield (11.76%) is higher than the coupon yield (10%), the bond is trading at a discount. In order for the yield to rise above the stated fixed coupon rate, the price of the bond must drop in the market.
During a period when the yield curve has a normal ascending shape, which statement is TRUE? A Short term bond prices are more volatile than long term bond prices BLong term bond prices are more volatile than short term bond prices CBoth short term and long term prices are equally volatile DNo relationship exists between long term and short term bond price movements
The best answer is B. Long term bond prices are more volatile than short term bond prices as interest rates move. Thus, short term bond prices are more stable (move more slowly) as interest rates change compared to long maturities.
The manager of a pension plan would most likely invest in which of the following debt issues?I Corporate Bonds II Municipal Bonds III Government Bonds A I only BI and III only CII and III only DI, II, III
The best answer is B. Pension plans are "tax qualified" retirement plans. Earnings on securities held are tax deferred; so there is no benefit to investing in municipals, which have lower interest rates because their interest income is exempt from Federal income tax. Investments would be made in corporate and government bonds, both of which have higher interest rates because their interest income is taxable by the Federal government.
Which of the following statements are TRUE when comparing the "Planned Amortization Classes" (PAC tranches) to the Companion Classes of a CMO? I Principal repayments made later than expected are applied to the PAC class prior to being applied to the Companion II Principal repayments made later than expected are applied to the Companion class prior to being applied to the PAC III The PAC has a higher level of extension risk if interest rates rise IV The Companion class has a higher level of extension risk if interest rates rise A I and III BI and IV CII and III DII and IV
The best answer is B. Principal repayments made earlier than that required (earlier than expected) to retire the PAC at its maturity are applied to the Companion class; while principal repayments made later than expected are applied to the PAC maturity before payments are made to the Companion class. Thus, the PAC class is given a more certain maturity date; while the Companion class has a higher level of prepayment risk if interest rates fall; and a higher level of so-called "extension risk" - the risk that the maturity may be longer than expected, if interest rates rise.
The purchase price of each of the following can be negotiated EXCEPT: A Commercial Paper BSavings Bond CCertificate of Deposit DBanker's Acceptance
The best answer is B. Savings bonds are non-negotiable - they do not trade. Commercial paper, certificates of deposit, and banker's acceptances are all money market instruments that are negotiable (i.e., trade in the market).
The current yield on a bond is: A stated interest rate / bond par value Bstated interest rate / bond market value Cmarket interest rate / bond par value Dmarket interest rate / bond market value
The best answer is B. The current yield is the sta
Which bond will exhibit the greatest price volatility? A 8-year bond; 6% coupon; 7% yield; duration of 6.41 B 7-year bond; 0% coupon; 7% yield; duration of 7.00 C 3-year bond; 2% coupon; 3% yield; duration of 2.93 D 2-year bond; 1% coupon; 3% yield; duration of 1.98
The best answer is B. The longer the expiration, the more volatile a bond's price movements, which narrows the Choices to either A or B. The lower the coupon, the more volatile the bond's price movements, with the lowest coupon being "0." A 7-year zero coupon bond will actually be more volatile in price movements than a slightly longer maturity bond (8 years) with a fairly high coupon (6% in this case). The higher coupon means that more of the bond's value is represented by the interest stream than comes in early and this stabilizes the bond's price as market interest rates move. Duration is a concept that is tested as a "basic" idea on Series 7. It represents the amount of time that it will take for an investor to recoup his or her purchase price. The longer the duration, the longer it will take for an investor to get his or her money back and longer term bonds are more volatile. So the higher the duration number, the greater the bond volatility, and duration is often used as a measure of bond price volatility.
A debt issue is commonly referred to as "junk" if its credit rating is BELOW: A A B BBB C B D CCC
The best answer is B. The lowest investment grade is BBB. Any securities below this rating are considered to be speculative - and are commonly known as "junk" issues.
The most commonly used measure to evaluate the ability of a revenue bond issuer to pay interest and repay principal is the ratio of: A Gross Revenues / Debt Service B Net Revenues / Debt Service C Overall Net Debt / Population D Overall Net Debt / Assessed Value
The best answer is B. The ratio used to analyze revenue bonds is the Debt Service Coverage Ratio. It is the ratio of Pledged Revenues to Debt Service cost. Almost all revenue bonds have a net revenue pledge, where "net revenues" are pledged to the bondholders (net revenues are gross revenues minus operation and maintenance costs). Thus, the most commonly used ratio to analyze revenue bonds is the ratio of Net Revenues / Debt Service.
A "blue chip" corporation experiencing a short term cash flow shortage could issue: A banker's acceptances Bcommercial paper Cmoney market certificates Dsubordinated debentures
The best answer is B. The short term money market instrument issued by corporations is commercial paper.
A 5 year 3 1/2% Treasury Note is quoted at 101-4 - 101-8. The note pays interest on Jan 1st and Jul 1st. If a customer buys 5 T-Notes on Friday, April 4th, when does the settlement occur? A Friday, April 4th B Monday, April 7th C Tuesday, April 8th D Wednesday, April 9th
The best answer is B. Trades of U.S. Government and agency securities settle "regular way" on the next business day. Trades of corporate and municipal securities settle "regular way" 2 business days after trade date.
Which statements are TRUE about the risks associated with federal agency securities? I Agency securities have market risk II Agency securities have virtually no market risk III Agency securities have credit risk IV Agency securities have virtually no credit risk A I and III BI and IV CII and III DII and IV
The best answer is B. U.S. Government Agency Bonds (as with any fixed income security), have market risk. If interest rates rise, their prices will drop, with longer maturity and lower coupon issues dropping much faster than shorter maturity and higher coupon issues. Agencies also have virtually no credit risk since they are implicitly backed by the U.S. Government (with the exception of Ginnie Mae issues which are directly backed).
The first use of funds under a "gross lien revenue pledge" is to pay the: A operation and maintenance fund Bdebt service fund Cdebt service reserve fund Dmaintenance reserve fund
The best answer is B. Under a gross revenue pledge, bondholders have claim to the gross revenues of the facility. After the debt service is paid, then operation and maintenance is paid. Contrast this with a "net revenue pledge." Under this pledge, bondholders only have claim to net revenues after operation and maintenance is paid. In this case, the first use of funds is to pay operation and maintenance.
Pitter Patter Water Authority "Flow of Funds" Statement 20XX Water Charges:$6,000,000 Interest on Reserve Funds:$2,000,000 Gross revenues:$8,000,000 Operation and Maint:$4,000,000 Net Revenues:$4,000,000 Debt Service:$2,000,000 Addition to Reserves:$2,000,000 If the bonds were issued under a net revenue pledge, how much in funds were available to pay the bondholders for this year? A $2,000,000 B$4,000,000 C$6,000,000 D$8,000,000
The best answer is B. Under a net revenue pledge, only the net revenues after operation and maintenance are paid are pledged to the bondholders. This water authority has $4,000,000 of net revenues, which would be the amount pledged to the bondholders under a net revenue pledge.
For bonds trading at a premium, rank the yield measures from lowest to highest? A Nominal; Current; Yield to Maturity; Yield to Call B Yield to Call; Yield to Maturity; Current; Nominal C Current; Nominal; Yield to Call; Yield to Maturity D Yield to Maturity; Current; Yield to Call; Nominal
The best answer is B. When bonds are trading at a premium, the yield to call will be the lowest measure since the annual return is reduced by the annual amortized portion of the premium that will be "lost" over the life of the bond to the call date. The next highest yield will be the yield to maturity, since the premium will be lost over a longer "life" than if the bond is called early. Current yield will be higher than yield to maturity, since it does not include the annual premium
When comparing the effect of changing interest rates on prices of a CMO issues versus the prices of regular bond issues, which of the following statements are TRUE? I When interest rates rise, mortgage backed pass through certificates fall in price faster than regular bonds of the same maturity II When interest rates rise, mortgage backed pass through certificates fall in price slower than regular bonds of the same maturity III When interest rates fall, mortgage backed pass through certificates rise in price faster than regular bonds of the same maturity IV When interest rates fall, mortgage backed pass through certificates rise in price slower than regular bonds of the same maturity A I and III B I and IV C II and III D II and IV
The best answer is B. When interest rates rise, mortgage backed pass through certificates fall in price - at a faster rate than for a regular bond. This is true because when the certificate was purchased, assume that the expected life of the underlying 15 year pool (for example) was 12 years. Thus, the certificate was priced as a 12 year maturity. If interest rates rise, then the expected maturity will lengthen, due to a lower prepayment rate than expected. If the maturity lengthens, then for a given rise in interest rates, the price will fall faster. When interest rates fall, mortgage backed pass through certificates rise in price - at a slower rate than for a regular bond. This is true because when the certificate was purchased, assume that the expected life of the underlying 15 year pool (for example) was 12 years. Thus, the certificate was priced as a 12 year maturity. If interest rates fall, then the expected maturity will shorten, due to a higher prepayment rate than expected. If the maturity shortens, then for a given fall in interest rates, the price will rise slower.
A bond trade that is "flat" means that: A the bond pays interest more often than the typical semi-annual schedule Bthe issuer of the bond has called the issue Cno accrued interest is added to the price of the trade Dthe price of the trade excludes a commission charge
The best answer is C.
Which industry is most susceptible to swings in market interest rates? A Consumer Goods BAuto Manufacturer CPublic Utility DTechnology
The best answer is C.
Which of the following is an example of a derivative product? A common stock Bcorporate bond Ccollateralized mortgage obligation Dmutual fund
The best answer is C.
Which statements are TRUE about PO tranches? I Payments are larger in the early years II Payments are smaller in the early years III Payments are larger in the later years IV Payments are smaller in the later years A I and III BI and IV CII and III DII and IV
The best answer is C. A PO is a Principal Only tranche. This is a tranche that only receives the principal payments from an underlying mortgage, and it is created with a corresponding IO (Interest Only) tranche that only receives the interest payments from that mortgage. The principal portion of a fixed rate mortgage makes smaller payments in the early years, and larger payments in the later years. Because of this payment structure, it is most similar to a long-term bond, which pays principal at the end of its life. These are issued at a deep discount to face. Its price moves just like a conventional long term deep discount bond. When market interest rates rise, the rate of prepayments falls (extension risk) and the maturity lenghtens. Because the principal is being paid back at a later date, the price falls. Conversely, when market interest rates fall, the rate of prepayments rises (prepayment risk) and the maturity shortens. Because the principal is being paid back at an earlier date, the price rises.
A Prime Banker's Acceptance is one: A rated AAA by Moody's Brated P-1 by Moody's Celigible for trading with the Federal Reserve Deligible for trading with commercial banks
The best answer is C. A Prime BA is of sufficient quality to be an eligible for Fed trading.
A declining rate of inflation would lead to: I lower bond prices II higher bond prices III lower bond yields IV higher bond yields A I and III BI and IV CII and III DII and IV
The best answer is C. A declining rate of inflation will lead to lower interest rates. If interest rates drop, then bond prices will rise.
All of the following are sources of income that can be used for debt service on municipal revenue bonds EXCEPT: A User Fees B Special Taxes C Capitalized Interest D Lease Rentals
The best answer is C. A revenue bond is defined as a debt where payment of interest and principal is derived from a source other than ad valorem taxes. Thus, revenue bonds can be paid off by lease rental fees, user fees, and special taxes (such as excise taxes). Capitalized interest is not an income source; rather it is part of the cost of a construction project that is included in the total financing needs when building a facility.
A bond issue with a single issue date and differing maturities is a: A term bond offering Bseries bond offering Cserial bond offering Dcombined serial and term bond offering
The best answer is C. A serial bond offering is one with all bonds issued on the same date, but with differing maturities. This compares to a term bond issue, where all the bonds are issued on the same date; and all the bonds mature on the same date. Most municipal bond issues and corporate equipment trust certificates are serial bonds. It allows issuers to schedule principal repayment as an annual budget item.
Types of funds used to back revenue bond issues include all of the following EXCEPT: A excise taxes Blease rentals Cad valorem taxes Denterprise activity income
The best answer is C. Ad valorem taxes back general obligation bonds. Revenue bonds can be backed by any source of revenue other than ad valorem taxes. These sources include revenue from facility operations, grants, excise taxes, or other non-ad valorem taxes, like sales and income taxes.
Which of the following money market instruments is issued by corporations? A Treasury Bill B Repurchase Agreement C Commercial Paper D Prime Banker's Acceptances
The best answer is C. Commercial paper is corporate money market debt which is NOT eligible for Fed trading. Treasury bills are issued by the U.S. Government. Repurchase agreements are entered into between Government securities dealers; and banker's acceptances are issued by commercial banks.
Which CMO tranche has the least certain repayment date? A Planned Amortization Class B Plain Vanilla C Companion Class D Targeted Amortization Class
The best answer is C. Companion classes are "split off" from the Planned Amortization Class (PAC) and act as buffers absorbing prepayment and extension risk prior to this risk being applied to the PAC tranche. The PAC, which is relieved of these risks, is given the most certain repayment date. The Companion, which absorbs these risks first, has the least certain repayment date. A Targeted Amortization Class (TAC) is like a PAC, but is only buffered for prepayment risk by the Companion; it is not buffered for extension risk.
Corporate bonds are usually: A serial bonds and are quoted on a percentage of par basis Bserial bonds and are quoted on a yield basis Cterm bonds and are quoted on a percentage of par basis Dterm bonds and are quoted on a yield basis
The best answer is C. Corporate bonds are usually term bonds - all bonds of an issue having the same interest rate and maturity. Term bonds are quoted on a percentage of par basis in 1/8ths, which is the same as a "dollar" quote.
The primary risk associated with investing in ETNs is: A market risk Bliquidity risk Ccredit risk Dlegislative risk
The best answer is C. ETNs are "Exchange Traded Notes." They are an equity index linked structured product, that is listed and trades on an exchange. Because they trade, the liquidity risk aspect of structured products is eliminated. What is not eliminated, however, is credit risk. These products are only as good as the guarantee of the issuing bank. They typically have a 7 year life - and a lot can go wrong in 7 years (just ask anyone who purchased Lehman Brothers structured products or ETNs).
Which statements are TRUE about Eurodollar bonds? I The bonds are issued in bearer form II U.S. corporate issuers are not subject to foreign currency risk III Foreign corporate issuers are not subject to foreign currency risk IV Trading is centered in the European market A I and II only BII and III only CI, II, IV DI, II, III, IV
The best answer is C. Eurodollar bonds are issued in bearer form outside the U.S. Trading is centered in London. Because the bonds are payable only in dollars, U.S. based issuers do not run any foreign currency risk. If foreign currency values rise, it has no effect on the issuer who pays in dollars. On the other hand, foreign issuers of Eurodollar bonds are subject to foreign currency risk. For example, if a British corporation issues Eurodollar bonds, and the British Pound declines in value relative to the dollar, then it will cost the British company more (in Pounds) to pay the debt service on the bonds.
Which of the following statements are TRUE when comparing CMO PAC tranches to Companion tranches? I Principal repayments made earlier than expected are applied to the PAC before being applied to the Companion class II Principal repayments made earlier than expected are applied to the Companion class before being applied to the PAC III Principal repayments made later than expected are applied to the PAC before being applied to the Companion class IV Principal repayments made later than expected are applied to the Companion class before being applied to the PAC A I and III BI and IV CII and III DII and IV
The best answer is C. Interest payments on CMOs are made pro-rata to all tranches, but principal repayments that are made earlier than the PAC maturity are made to the Companion classes before being applied to the PAC (this would occur if interest rates drop); while principal repayments made later than anticipated are applied to the PAC maturity before payments are made to the Companion class (this would occur if interest rates rise). Thus, the PAC is given a more certain repayment date; while the CMO is given the least certain repayment date.
A municipal "broker's broker" does which of the following? I Executes trades as agent for institutional clients II Executes trades as agent for other dealers III Trades for the firm's own account IV Obtains quotes from other dealers A I and II only BIII and IV only CI, II, IV DI, II, III, IV
The best answer is C. Municipal broker's brokers act as agents handling large municipal orders, usually for institutions. These firms do not act as market makers and do not take inventory positions.
Which of the following municipal securities would be quoted on a bid/ask price basis? A Serial general obligation bond BTax and revenue anticipation note CTerm revenue bond DSerial lease rental bond
The best answer is C. Municipal term bonds are generally quoted on a dollar price basis (so-called "dollar bonds"). Serial bonds and short term municipal notes are quoted on a yield basis.
Constitutional debt limits are imposed on the issuance of: A revenue bonds Bmoral obligation bonds Cgeneral obligation bonds Dindustrial development bonds
The best answer is C. Municipalities impose debt ceilings on the dollar amount of bonds that can be issued backed by ad valorem taxing power (G.O. bonds). To raise this limit requires a public referendum. Debt limits do not apply to self supporting debt such as revenue bonds or industrial revenue bonds. They also do not apply to moral obligation bonds, which the issuer does not legally have to pay (though the issuer is "morally" obligated to pay).
Seventy five basis points are equal to :I $ .75 per $1,000 II $7.50 per $1,000 III .75% IV 7.5% A I and III B I and IV C II and III D II and IV
The best answer is C. One basis point is .01% of interest. 100 basis points equals 1% of interest. 75 basis points equals .75%, which is the same as $7.50 per $1,000 face amount on a bond.
The collateral backing private CMOs consists of: A private placements offered under Regulation D B mortgage bonds issued by corporations C mortgage backed securities issued by government agencies and the bank-issuer D mortgages on privately owned homes and apartments
The best answer is C. Private CMOs (Collateralized Mortgage Obligations) are also called "private label" CMOs. Instead of being backed solely by mortgages guaranteed by Fannie, Freddie or Ginnie, they are backed by a mix of these agency mortgages and "private label" mortgages - meaning mortgages that do not qualify for sale to these agencies (either because the dollar amount of the mortgage is above their purchase limit or they do not meet Fannie, Freddie or Ginnie's underwriting standards). If the bank issuer wants to offer a CMO with a higher yield, it will increase the proportion of "private label" mortgages included in
A 5 year 3 1/4% Treasury Note is quoted at 101-4 - 101-8. The note pays interest on Jan. 1st and Jul. 1st. If a customer buys 5 T-Notes on Friday, April 4th in a regular way trade, how many days of accrued interest are owed to the seller? (It is not a leap year.) A 94 B95 C96 D97
The best answer is C. Since settlement is next business day, the trade note settles on Monday, April 7th. Accrued interest is calculated for Governments on an actual day month / actual day year basis, with interest accruing from the last interest payment date of January 1st. Thus, accrued interest due is: 31 days for January, 28 days for February, 31 days for March and 6 days for April (up to but not including the settlement date of April 7th) = 96 days.
Which of the following statements are TRUE about structured products? I Structured products offer an index-linked return and a fixed maturity II Structured products are principal protected III Structured products are highly liquid and actively traded IV Structured products have a credit rating based on that of the issuing bank A I and II only BIII and IV only CI, II, and IV DI, II, III, IV
The best answer is C. Structured products are a derivative security created by different banks such as Barclays, J.P. Morgan Chase, Deutsche Bank, etc. They are "bond-like" but they are not bonds. Simple versions of structured products are offered with a notional value of $1,000 (just like a bond). They offer a rate of return linked to a well known index, such as the S&P 500 Index (but this rate can be capped to an annual maximum). At the maturity date, say is 3 - 7 years, they are "redeemed" at par, but the redemption is based on the fact that there is an embedded option in the product. As long as they are held to maturity - because of the embedded option, they are principal protected. There is little standardization to these products - each bank's version has different features. Thus, these are "buy and hold" securities - there is almost no trading market. The credit rating of each structured product is based on the credit rating of the issuing bank.
All of the following are necessary to calculate the total purchase price of a municipal bond traded on a yield basis in the secondary market EXCEPT: A coupon rate Byield to maturity Cissue date Dtrade date
The best answer is C. The issue date has no bearing on the calculation of the purchase price of a municipal bond trading in the secondary market. In order to calculate the bond's price, a bond calculator would be used. The calculation requires the coupon rate, yield to maturity, and years to maturity. The trade date is necessary to compute the amount of accrued interest that is due.
The ratio of net direct debt plus overlapping debt to assessed valuation of property is used to:I analyze general obligation bondsII evaluate the issuer's creditworthinessIII evaluate the issuer's overall ability to service its debt burdenIV evaluate the issuer's ability to collect taxes owed A I only BIII and IV only CI, II, III DI, II, III, IV
The best answer is C. The ratio of overall debt to
Which of the following investments gives a rate of return that cannot be affected by "reinvestment risk"? A Treasury Notes BTreasury Stock CTreasury Strips DTreasury Bonds
The best answer is C. Treasury "STRIPS" are bonds which have been stripped of coupons - essentially they are zero coupon Treasury obligations. The rate of return on the bonds is "locked in" at purchase since the discount represents the compounded yield to be earned over the life of the bond. Because no interest payments are
Which of the following does not trade "flat" ? A Treasury Bills BTreasury STRIPS CTreasury Bonds DTreasury Receipts
The best answer is C. Treasury Bills are short term original issue discount obligations, with the discount earned being the "interest." Treasury Receipts and Treasury STRIPS are essentially zero-coupon obligations. Because all of these obligations do not make periodic interest payments, they trade "flat" - that is, without accrued interest. Treasury Bonds pay interest semi-annually, so they trade with accrued interest.
When does an investor receive payment of interest and principal on a Capital Appreciation Bond (CAB)?I Interest is paid semi-annually II Interest is paid at maturity III Principal is paid semi-annually IV Principal is paid at maturity A I and III BI and IV CII and III DII and IV
The best answer is D. A Capital Appreciation Bond (CAB) is a municipal zero coupon bond with a "legal" twist to it. A conventional zero coupon G.O. bond is counted against an issuer's debt limit at par value because the discount is treated as "principal." If a new issue discount bond is legally crafted as a CAB, then the principal counted against the issuer's debt limit is the discounted principal amount and the discount earned is considered to be interest income. The bond is purchased at the discounted price and then par is returned at maturity, with the 2 components of that par payment being the return of the discounted purchase price (the "principal"
Which of the following statements are TRUE about CMOs? I CMO issues have a serial structure II CMO issues are rated AAA III CMO issues are more accessible to individual investors than regular pass-through certificates IV CMO issues have a lower level of market risk than regular pass-through certificates A I and II only B III and IV only C I, II, III D I, II, III, IV
The best answer is D. All of the statements are true about CMOs. CMOs have a lower level of market risk (risk of price volatility due to movements in market interest rates) than do mortgage backed pass-through certificates. Because CMO issues are divided into tranches, each specific tranche has a more certain repayment date, as compared to owning a mortgage backed pass-through certificate. Thus, the price movement of that specific tranche, in response to interest rate changes, more closely parallels that of a regular bond with a fixed repayment date. As interest rates rise, CMO values fall; as interest rates fall, CMO values rise. When interest rates rise, mortgage backed pass through certificates fall in price - at a faster rate than for a
Quotes for which of the following are found in Bloomberg?I General obligation bondsII Revenue bondsIII Industrial development bondsIV Corporate bonds A I only BII and III CI, II, III DI, II, III, IV
The best answer is D. Aside from listing dealer offerings of all municipal bonds, Bloomberg also lists dealer offerings of corporate bonds.
Which of the following statements are TRUE about commercial paper? I Commercial paper has a maximum maturity of 90 days II Commercial paper has a maximum maturity of 270 days III Commercial paper is quoted on a dollar price basis IV Commercial paper is quoted on a yield basis A I and III BI and IV CII and III DII and IV
The best answer is D. Commercial paper has a maximum maturity of 270 days. Commercial paper is quoted on a yield basis (as is all money market debt).
CMO Targeted Amortization Classes (TACs) have: A lower prepayment risk, but the same extension risk as a Planned Amortization Class Bhigher prepayment risk, but the same extension risk as a Planned Amortization Class Cthe same level of prepayment risk but a lower level of extension risk than a Planned Amortization Class Dthe same level of prepayment risk but a higher level of extension risk than a Planned Amortization Class
The best answer is D. Companion classes are "split off" from the Planned Amortization Class (PAC) and act as buffers absorbing prepayment and extension risk prior to this risk being applied to the PAC tranche. The PAC, which is relieved of these risks, is given the most certain repayment date. The Companion, which absorbs these risks first, has the least certain repayment date. A Targeted Amortization Class (TAC) is like a PAC, but is only buffered for prepayment risk by the Companion; it is not buffered for extension risk. Thus, a TAC has the same level of prepayment risk as the PAC; but the TAC has a higher level of extension risk than the PAC.
Trades of all of the following securities settle in Fed Funds EXCEPT: A U.S. Government bonds BU.S. Agency bonds CGNMA Pass-Through certificates DGeneral Obligation bonds
The best answer is D. Corporate and municipal bond trades settle in clearing house funds. These are funds payable at a registered clearing house in three business days. These trades are settled through NSCC - the National Securities Clearing Corporation. U.S. Government and agency bond trades settle in Federal Funds, which are good funds the business day of the funds transfer (next business day for regular way settlement of government securities). Ginnie Mae Pass-Through certificates are U.S. Government guaranteed, so trades settle in Fed Funds. These trades are settled through GSCC - the Government Securities Clearing Corporation. .
Which of the following statements are TRUE about Eurodollar bonds? I The bonds are issued in the U.S. II The bonds are issued outside the U.S. III The purchasers are U.S. residents IV The purchasers are foreign residents A I and III B I and IV C II and III D II and IV
The best answer is D. Eurodollar bonds are issued outside the U.S. and are purchased by foreigners. These bonds are denominated in, and make payment in, U.S. dollars. The bonds are not registered for sale in the U.S.
When analyzing a general obligation bond, all of the following ratios would be evaluated EXCEPT the: A collection ratio Bdebt per capita ratio Cdebt to value ratio Ddebt service coverage ratio
The best answer is D. General obligation bonds are backed by faith, credit, and taxing power of the issuer. To analyze these bonds, it is important to examine the issuer's collection ratio (taxes collected / taxes assessed) to ascertain if the issuer is truly collecting all the taxes necessary to service the debt. The ratio of debt per capita would also be used to evaluate the relative debt burden per resident of one municipality as compared to another. The ratio of debt to assessed value of property would also be examined, since most G.O. bonds are backed by ad-valorem (property) tax collections. The debt service coverage ratio (ratio of pledged revenues to debt service requirements) is used to evaluate a revenue bond issue - not G.O. bonds.
When evaluating the credit of a general obligation bond, the most important consideration would be growth in a municipality's: A sales tax revenue Bemployment rate Cpopulation Dproperty tax collections
The best answer is D. General obligation bonds of political subdivisions are principally backed by property tax collections.
All of the following statements are true about a Credit Default Swap (CDS) EXCEPT: A The buyer of the CDS pays an annual premium to the seller BThe seller of the CDS agrees to pay the face amount of the loan to the buyer if the reference loan defaults CThe contract can be traded in the OTC market DThe buyer of the CDS must be the creditor on the reference loan
The best answer is D. In a Credit Default Swap (CDS), the buyer pays a premium to the seller, where the seller agrees that if the reference loan defaults, the seller will pay the face amount of the loan to the buyer. The buyer pays an annual "insurance-like" premium for this. If the loan does not default, the seller wins - collecting the premiums without having to make a payout. If the loan does default, the buyer wins - since the seller must pay the buyer the face amount of the loan in cash. Credit default swaps originated as a way from lenders to buy "insurance" against a possible default by a borrower. As the market matured, CDS contracts between buyer and seller originated without the buyer actually making the reference loan. These so-called "naked CDSs" are contracts that allow the buyer to speculate, betting that the reference loan will default during the life of the contract. The seller, on the other hand, is betting that the contract will not default over the life of the contract.
Which of the following statements are TRUE regarding a tender offer? I The underwriter sets the price of the tender offer II The issuer sets the price of the tender offer III The underwriter is offering to buy back a portion or all of the issue IV The issuer is offering to buy back a portion or all of the issue A I and III BI and IV CII and III DII and IV
The best answer is D. In a tender offer, the issuer of the securities is offering to buy back either a portion or all of the issue at a stated price. The price of the tender offer is set by the issuer, typically using the advice of a securities firm acting as "financial advisor" in the offer.
Which of the following statements are TRUE about PAC tranches?I PAC tranche holders have lower prepayment risk than companion tranche holders II PAC tranche holders have lower extension risk than companion tranche holders III If prepayment rates slow down, the PAC tranche will receive its sinking fund payment prior to its companion tranches IV If prepayment rates rise, the PAC tranche will receive its sinking fund payment after its companion tranches A I and II only B III and IV only C I, II, IV D I, II, III, IV
The best answer is D. Newer CMOs divide the tranches into PAC tranches and Companion tranches. The PAC tranche is a "Planned Amortization Class." Surrounding this tranche are 1 or 2 Companion tranches. Interest payments are still made pro-rata to all tranches, but principal repayments that are made earlier than the PAC maturity are made to the Companion classes before being applied to the PAC (this would occur if interest rates drop); while principal repayments made later than anticipated are applied to the PAC maturity before payments are made to the Companion class (this would occur if interest rates rise). Thus, the PAC class is given a more certain maturity date and hence lower prepayment risk; while the Companion classes have a higher level of prepayment risk if interest rates drop; and they have a higher level of so-called "extension risk" - the risk that the maturity may be longer than expected, if interest rates rise.
Which risk is NOT associated with Long Term Negotiable Certificates of Deposit? A Market risk BCall risk CReinvestment risk DPrepayment risk
The best answer is D. Prepayment risk is the risk that, as interest rates fall, homeowners will pay off their mortgages earlier than anticipated and refinance at lower rates. This risk is applicable to mortgage-backed securities. It is not applicable to Long-term Certificates of Deposit. Long-term negotiable Certificates of Deposit (over 1 year maturity) are subject to market risk, as are any long-term fixed rate debt instruments. Market risk for fixed income securities is the risk that if market interest rates rise, securities prices, as a whole, will fall, dragging down both good and bad investments. Long-term CDs can be callable, so they are subject to call risk in a declining interest rate environment. Interest is paid semi-annually and, again in a declining interest rate environment, if these payments are reinvested in new CDs, the rate of return on reinvested monies will decline - thus Long Term CDs have reinvestment risk.
The type of municipal bond issue that would be used to finance the construction of public schools would be a: A revenue bond Bspecial tax bond Cmoral obligation bond Dgeneral obligation bond Explanation
The best answer is D. Public schools do not produce revenue and thus are not funded by revenue bond issues. Rather, school bond issues are general obligations of the issuer. Special tax bonds pledge collected "special taxes," such as excise taxes, to pay for the financing of a project. For example, a road improvement district bond issue could be financed by a special gasoline tax. A moral obligation bond is only issued in times of municipal distress, when the municipality does not have enough taxing power or revenue generating ability to sell a normal bond issue. To bail out the local municipal issuer, the state can morally obligate itself to pay if the municipal issuer cannot.
A municipality has floated a $100,000,000 revenue bond issue. The annual level debt service requirement is $10,000,000. In the first fiscal year, the municipality has collected revenues of $12,500,000. The "Coverage Ratio" is: A $10,000,000 / $100,000,000 B$12,500,000 / $100,000,000 C$10,000,000 / $12,500,000 D$12,500,000 / $10,000,000
The best answer is D. The Coverage Ratio is:
The bond counsel will review which of the following to ascertain if a municipal issuer has the authority to sell bonds? I State constitution II Validity of the signatures of the issuer's representatives III Enabling legislation IV Local statutes and judicial opinions A I and II B III and IV C I, III, IV D I, II, III, IV
The best answer is D. The bond counsel will review all of the choices given to ascertain if a municipal issuer has the authority to sell bonds - the State constitution which gives those powers; any enabling legislation which affects the issuance of new bonds; any court opinions that are relevant; and the counsel will ascertain that the issuer's representatives are authorized to sell the bonds.
A selling dealer offering municipal bonds "firm for 1/2 hour with a 5 minute recall" means all of the following EXCEPT: A prices for bonds that are offered can't be changed for a stated period B the selling dealer has specified that he can recontact the buying dealer to reinstate a different price within a certain time period C the buying dealer can try and "round up" a customer for the bonds before the dealer actually purchases the bonds D the selling dealer has the right to rescind the price at any time
The best answer is D. The selling dealer offering the bonds "firm" means that for a stated time period the price will not be changed. These bonds are offered firm for one-half hour; during this time period that buying dealer can try and round up a customer for the bonds before actually purchasing them. The selling dealer also specifies a "five minute recall." This means that during the half hour, the selling dealer can recontact the buying dealer to tell him that he has five minutes to buy the bonds at the offered price or else the quote will be changed.
Itsy Bitsy Water Authority "Flow of Funds" Statement 20XX Water Charges:$9,000,000 Interest on Reserve Funds:$1,000,000 Gross revenues:$10,000,000 Operation and Maint:$6,000,000 Net Revenues:$4,000,000 Debt Service:$2,000,000 Addition to Reserves:$2,000,000 If the bonds were issued under a gross lien revenue pledge, how much in funds were available to pay the bondholders for this year? A $2,000,000 B$4,000,000 C$9,000,000 D$10,000,000
The best answer is D. Under a gross revenue pledge, all revenues from all sources (including investment income) are pledged to pay the bondholders prior to the payment of operation and maintenance. This water authority collected $10,000,000 in gross revenues - which would be the amount available to pay the bondholders under a gross revenue pledge.
Which of the following statements are TRUE regarding convertible bond issues? I At the time of issuance, the conversion price is set at a premium to the stock's current market price II When the stock price is at a premium to the conversion price, the conversion feature has intrinsic value. III For the conversion feature to have value, the stock's price must move up in the market after issuance IV Convertible bonds usually have lower yields than bonds without the conversion feature A I and II only BIII and IV only CI, III, IV DI, II, III, IV
The best answer is D. When convertible bonds are issued, it is normal for the conversion price to be set at a premium to the current market price. Assume that a convertible bond is issued with a conversion price of $40 when the market price of the common is $30. Thus, the market price must rise to the conversion price before the conversion feature has any value. If the market price rises above the conversion price, then the conversion feature has "intrinsic value." For example, if the conversion price is set at $40 and the market price rises to $50 per share, there is $10 per share of "intrinsic value." Once the stock's market price moves above the conversion price, for every dollar that the stock price now moves, the bond will move by an equivalent amount as well. The securities are termed "equivalent." For the conversion feature to be worth something, the stock's price must move up in the market after issuance. Due to the value of the conversion feature (or rather, the potential value if the stock price goes up), convertible bonds are saleable at lower yields than bonds without the conversion feature.
Which of the following statements are TRUE when comparing CMO PAC tranches to Companion tranches? I The PAC class is given a more certain maturity date than the Companion class II The Companion class is given a more certain maturity date than the PAC class III The PAC class has a lower level of prepayment risk than the Companion class IV The Companion class has a lower level of prepayment risk than the PAC class A I and III BI and IV CII and III DII and IV
he best answer is A. Principal repayments that are made earlier than the PAC maturity are made to the Companion classes before being applied to the PAC (this would occur if interest rates drop); while principal repayments made later than anticipated are applied to the PAC maturity before payments are made to the Companion class (this would occur if interest rates rise). The PAC class is given a more
Which statement is TRUE about a Certificate of Participation (COP)? A COPs are subject to statutory debt limits BCOPs are backed by a pledge of lease revenues CCOPs have a higher credit rating than G.O. bonds of the same issuer DCOPs are full faith and credit obligations of the issuer
he best answer is B. As municipalities reached their debt limits with G.O. bond issuance, they found it harder and harder to get voter approval to raise limits to sell additional G.O. bonds (think of Proposition 13 in California that capped property taxes to almost no increase unless the property was sold). To get around this, the COP - Certificate of Participation - was invented and COP issuance is now greater than G.O. bond issuance in many states.A COP is issued by a state entity where lease revenues are pledged to back the issue. The lease payments are received from a project such as a university dormitory, prison,
What is NOT a characteristic of investing in domestic bonds? A Price movement in the market similar to that of preferred stock B Business risk C Purchasing power risk D Political risk
he best answer is D. Domestic securities do not have political risk. Political risk is associated with investing in Third World countries (foreign investing) that have weak political systems. Investing in those securities does not have the legal protections of investing in developed counties. If market interest rates rise (which happens in times of inflation), bond prices fall, so bonds have purchasing power risk. Any corporate security has business risk - the risk that the company goes bankrupt and cannot repay its security holders.
