STC Series 7 Progress Exam 3A
Which of the following Moody's rated bonds are considered speculative? Aaa Aa Baa Ba
Ba The top-4 Moody's ratings, Aaa, Aa, A, Baa, are termed investment-grade (basically nonspeculative or high-grade). Ratings lower than Baa (such as Ba) are considered speculative or non-investment-grade. The investment-grade category in S&P ratings includes AAA, AA, A, BBB.
Private label CMOs are more likely than government-sponsored CMOs to be subject to which of the following risks? Extension Prepayment Credit Interest-rate
Credit Private label CMOs include mortgages that are issued by banks and are subject to the creditworthiness of the issuer. By contrast, government-sponsored CMOs are supported by the government agency that backs them.
From first to last, list the order of priority of payment if a corporation declared bankruptcy. Common stockholders Preferred shareholders Convertible bondholders Unpaid workers IV, II, III, I IV, III, II, I II, III, I, IV III, II, IV, I
IV, III, II, I If a corporation goes bankrupt, salaries and wages are paid to unpaid workers first. The assets are then distributed to debenture holders (who are unsecured bondholders but still creditors such as the convertible bondholders), and common stockholders (who are equity owners, not creditors). Preferred stockholders (who are also equity owners) are paid prior to common stockholders.
The real interest rate is best defined as the: Interest earned by an investor after taxes Interest earned that is less than the rate of inflation Interest earned that exceeds the inflation rate Amount that LIBOR exceeds the fed funds rate
Interest earned that exceeds the inflation rate The real interest rate received by an investor is the amount of interest received minus the inflation rate. If an investor is receiving a 10% interest rate when inflation is at 6%, the real interest rate received is 4% (10% - 6%).
Which of the following securities will provide an investor with protection against purchasing-power risk? Treasury bills Treasury notes TIPS STRIPS
TIPS Treasury Inflation-Protected Securities (TIPS) are U.S. government securities that are inflation-adjusted based on the Consumer Price Index (CPI). With TIPS, the rate of interest is fixed. However, the principal amount on which that interest is paid will vary based on the CPI. They are usually purchased as protection against inflationary or purchasing power risk. The other choices are U.S. government securities that pay an investor either a fixed rate or a fixed amount.
When a bond is selling at a premium: The market price is greater than the par value The current yield is higher than the nominal yield It is a better quality bond than one selling at a discount The yield to maturity is greater than the current yield
The market price is greater than the par value The only true statement is that the market price is greater than the par value. When a bond is selling at a premium, the current yield is lower than the coupon rate. Bonds that are selling at a premium are not necessarily of better quality than bonds selling at a discount.
American Utility Company of Ohio is offering $750,000,000 worth of 8% bonds at a price of 99.25% of par value. An investor buying the bonds will receive yearly interest of: $80.00 per $1,000 face amount $99.25 per $1,000 face amount $750.00 per $1,000 face amount $1,000.00 per $1,000 face amount
$80.00 per $1,000 face amount The bonds have a coupon rate of 8%. The bonds pay 8% of their par value of $1,000 each year or $80 (8% of $1,000 = $80) in interest payments.
A U.S. government bond is selling in the market at 95.28. The dollar value of this bond is: $950.87 $952.80 $958.75 $9528.00
$958.75 U.S. government notes and bonds (Treasury securities) are quoted in 32nds. 95.28 is equivalent to 95 28/32nds (28/32 = .875). This is equivalent to 95.875 percent of the par value of $1,000, which equals $958.75.
An individual owns an ARF corporation 8% convertible debenture. The debenture is convertible at 20 and is currently selling in the market at 97 1/2. If ARF common stock is trading in the market at 18, at what price should the debenture sell to be at a 10% premium to parity with the common? $900.00 $965.25 $975.50 $990.00
$990.00 Since the conversion price is $20 per share, the debenture can be converted into 50 shares ($1,000 par divided by $20 per share). If converted, the stock will have a total value of $900 (50 shares x $18 per share market price). To be at a 10% premium to parity, the debenture should be trading at $990 ($900 parity plus 10% of $900).
A corporation has issued a bond with a 5% coupon that is convertible into common stock at $40. The stock is selling at $43.50 and the bond is selling at 109. The number of shares that will be received on conversion is: 25 23 22 20
25 The conversion price is $40. To find the conversion ratio (the number of shares of common stock received if the bond is converted), divide the par value of the bond ($1,000) by the conversion price ($40). This is equal to 25 ($1,000 divided by $40 equals 25). For every bond that is converted, the investor will receive 25 shares of common stock. The current price of the stock and bond are not relevant when calculating the conversion ratio.
An investor purchased T-bonds that mature January 1, 2020. He purchased the T-bonds on Friday, February 20, for regular-way settlement. How many days of accrued interest did the investor owe? 51 53 54 55
53 Accrued interest is calculated from the last interest payment date up to, but not including, the settlement date. The last interest payment was made January 1. (Since maturity is January 1, 2020, interest payments are every January 1 and July 1.) The settlement date is Monday, February 23. (A transaction for government securities settles on the next business day.) Government securities accrue interest on actual days elapsed. The investor, therefore, owes 31 days for January and 22 days for February (not including settlement date), for a total of 53 days.
A company has $50,000,000 par value convertible bonds outstanding. The coupon rate is 8%. The bonds are currently selling at 96. What is the current yield? 7.0% 7.5% 8.0% 8.3%
8.3% To find the current yield of the bonds, divide the yearly interest paid on the bonds by the current market value of the bonds. The yearly interest is $80. The market value of a bond is $960. Therefore, the current yield equals 8.3% ($80 divided by $960 equals 8.3%). The fact that these are convertible bonds is not relevant.
An indenture of a bond has a closed-end provision. This means that: Additional borrowing is prohibited if the bonds will have the same level of claim against assets Additional borrowing is permitted if the bonds will have the same level of claim against assets The bonds must be called before maturity A sinking fund must be established
Additional borrowing is prohibited if the bonds will have the same level of claim against assets A closed-end provision in a bond indenture means that additional borrowing against a particular source of revenue is prohibited. An open-end provision means additional borrowing against a revenue source is permitted.
A bond secured by other bonds and securities is referred to as a: Collateralized mortgage obligation Guaranteed bond Mortgage bond Collateral trust bond
Collateral trust bond A bond issued by a corporation that is secured by other bonds and securities is called a collateral trust bond. A CMO is backed by mortgages that were purchased from banks and other lenders who originated loans to homeowners.
A holder of XYZ Corporation's convertible debentures is a(n): Creditor of XYZ Corporation Common stockholder of XYZ Corporation Preferred stockholder of XYZ Corporation Equity owner of XYZ Corporation
Creditor of XYZ Corporation A holder of the convertible debentures (unsecured bonds) is a creditor of XYZ Corporation. The holder of the bonds would become a common stockholder if he decided to convert the bonds into common stock.
Which of the following statements describes the greatest risk associated with mortgage-backed securities? Borrowers might default on their mortgage payments The market for mortgage-backed securities is illiquid The market price of the bonds might fall due to a rating downgrade Falling interest rates might accelerate early repayment of principal
Falling interest rates might accelerate early repayment of principal Mortgage-backed securities are subject to prepayment risk. The early return of principal would then need to be reinvested when rates are low. Many mortgages that underlie mortgage-backed securities are backed by government guarantees or private mortgage insurance, which insulates many holders from defaults on the underlying mortgages.
A client is seeking a safe investment that pays interest on a monthly basis. Which of the following securities would be an appropriate recommendation? STRIPS Preferred stock Treasury notes GNMA modified pass-through certificates
GNMA modified pass-through certificates Interest (and principal) payments on GNMA pass-through certificates are made monthly. Treasury notes and bonds pay interest semiannually. Preferred stock dividends are paid to shareholders only when declared by the corporation's board of directors. STRIPS are a zero-coupon Treasury security (non-interest-bearing).
Which of the following statements is NOT a feature of GNMA pass-through certificates? They are backed by the U.S. government Interest is subject to federal tax but is exempt from state tax Interest and principal payments are made on a monthly basis Pools consist of fixed-rate residential mortgages
Interest is subject to federal tax but is exempt from state tax The Government National Mortgage Association (Ginnie Mae) is an agency of the United States government. It guarantees a pool of mortgages purchased by investors through Ginnie Mae pass-through certificates. These instruments pay interest and principal monthly at a stated rate on the remaining principal. The repayment of principal and interest is guaranteed by the United States government. Ginnie Mae pass-through certificates are purchased in $25,000 minimums. Interest received from Ginnie Mae pass-through certificates is subject to federal, state, and local taxes.
Which of the following statements BEST describes an indenture? It is a written agreement between the issuer of a bond and an underwriter It is a written agreement between the underwriter and investors when a new bond is issued It is a contract between the issuer of a bond and the trustee for the benefit of the holder of the bonds It is a contract between the issuer of stock and shareholders of a corporation
It is a contract between the issuer of a bond and the trustee for the benefit of the holder of the bonds An indenture is a written contract between the issuer of bonds and the trustee under which bonds and debentures are issued. Listed in the indenture are the maturity date, the coupon rate, other terms for the benefit of the bondholder, and obligations of an issuer of a bond.
Which of the following statements best defines the term duration? It is a measure of a fixed-income security's relative interest-rate risk It is a measure of a fixed income portfolio's average yield It is the period before a fixed-income security will be called It is the measure of volatility that compares an equity security to the S&P 500 Index
It is a measure of a fixed-income security's relative interest-rate risk Duration measures price sensitivity for fixed-income securities given changes in interest rates. For example, a bond with a 7-year duration would experience a 7 percent change in price for every one percent change in market interest rates.
Which of the following statements is NOT TRUE regarding commercial paper? It is issued by a corporation for cash flow purposes It is usually not backed by any of the corporation's specific assets It is considered an exempt security if it matures in more than 270 days It may be sold to the public by a broker-dealer or the issuer
It is considered an exempt security if it matures in more than 270 days Commercial paper is unsecured corporate debt with a maximum maturity of 270 days. Commercial paper is usually marketed through certain dealers but some corporations market their paper directly. Some issues are interest bearing (have a stated interest rate) but most are discount instruments. Corporations issue commercial paper to satisfy a short-term need for cash.
Which of the following would increase most in price if interest rates decline? Short-term bonds selling at a discount Long-term bonds selling at a discount Short-term bonds selling at a premium Long-term bonds selling at a premium
Long-term bonds selling at a discount When interest rates decline, bond prices rise. The longer maturities rise more in price than the shorter maturities due to market risk. Bonds selling at a discount rise more sharply in price than those selling at a premium. A bond with a high coupon would tend to trade at a premium and a bond with a low coupon would tend to trade at a discount. The bond with the high coupon will repay an investor sooner than a bond with a low coupon since the investor will be earning more money from the coupon on a bond selling at a premium. Therefore, bonds that have longer maturities and/or lower coupon rates will have a higher degree of interest rate risk. Due to this fact, if interest rates decline, the long-term bond selling at a discount will increase (in percentage terms) more than the long-term bond selling at a premium. Another way of looking at this is a $50 price change to a long-term bond selling at $900 is equal to a 5.55% change in price whereas a $50 price change in a long-term bond selling at $1,200 is equal to a 4.17% change in price.
A municipality will refund a revenue bond issue for all of the following reasons, EXCEPT to: Reduce interest charges Issue new bonds at lower interest rates Reduce the market value of outstanding bonds that are not refunded Eliminate restrictions in the bond resolution
Reduce the market value of outstanding bonds that are not refunded A municipality will refund a revenue bond issue if interest rates declined to reduce interest charges, to issue new bonds at lower interest rates, and to eliminate restrictions in the bond resolution. The municipality would not refund an issue to reduce the market value of the outstanding bonds. The market value of the outstanding bonds is determined by supply and demand and by the general level of interest rates.
A quote of 5.90 - 5.75 is a quote for which of the following securities? Treasury bills Treasury notes Treasury bonds A mortgage-backed security
Treasury bills Treasury bills are quoted on a discount yield basis while the other choices are quoted at a price. Since yield is inversely related (moves opposite) to price, the higher yield (5.90) represents the lower price and is the bid. The lower yield (5.75) represents the higher price and is the ask (offer). The other securities are all quoted as a percentage of par in 32nds.
Which of the following securities trade without accrued interest? Municipal bonds Treasury bills Debentures Convertible bonds
Treasury bills Treasury bills do not trade with accrued interest. They are issued at a discount and mature at par.
