Unit 1
To secure the debt that a subsidiary is offering, a railroad holding company transfers to a trustee the common stock of another subsidiary. The offering is one of: A) secured income notes. B) equipment trust certificates. C) guarantee trust bonds. D) collateral trust certificates.
D) collateral trust certificates.
A bond offered at par has a coupon rate: A) less than its yield to maturity. B) greater than its yield to maturity. C) less than its current yield. D) equal to its current yield.
D) equal to its current yield. Par means nominal rate, current yield, and yield to maturity are all equal
If a client who holds a convertible preferred stock believes the company may go bankrupt within the next 3 years, what would you advise the client to do with the stock?
sell the stock- all debt holders have priority over equity holders in claims on the assets of the corporation in liquidation
A bond with a basis, or yield to maturity, greater than its coupon is trading at a discount, or below par.
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All Treasury securities are issued in book entry form
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Bonds selling at a premium have higher coupons than those selling at par
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GNMA = directly backed
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GNMA securities are taxed on ALL LEVELS
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In the secondary market, the rate of inflation has the greatest influence on all bond prices.
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An investment in which of the following would expose the investor to the greatest capital risk? A) Debentures. B) Common stock. C) Mortgage bonds. D) Preferred stock.
B) Common stock. Come last in liquidation.
Treasury securities!!!
Book entry form!!!
If a customer buys 1 US Treasury 7-½% due Dec 2019 at 102, which of the following statements regarding this bond is TRUE? A) It has a nominal yield of less than 7-½%. B) Interest paid on it is subject to state and local taxes. C) Interest paid on it is subject to federal income tax. D) It has a yield to maturity of more than 7-½%.
C) Interest paid on it is subject to federal income tax. Think: it is subject to it's own but exempt from others
All of the following are redeemable securities EXCEPT: A) mutual funds. B) unit investment trusts. C) REITs. D) variable annuities.
C) REITs. A redeemable security has no secondary market.
Ginnie Mae pass-throughs will pay back both principal and interest: A) annually. B) quarterly. C) monthly. D) semiannually.
C) monthly (think monthly mortgage payments)
A high-coupon bond is selling at a premium. Call of this bond is most beneficial to the: A) issuer. B) broker/dealer. C) underwriter. D) bondholder.
C) underwriter. When selling at a premium, IR must be low.
Your client in the 35% federal income tax bracket currently owns some corporate bonds with a coupon yield of 7%. In order to receive the same income after taxes, he would need to buy municipal bonds with a coupon of: A) 9.45%. B) 7.00%. C) 4.55%. D) 2.45%.
Coupon yield = 70 bucks 70 bucks x .35 = 24.50 70 - 24.50 = 45.50 or 4.55%
An investor may expect to receive dividends from a(n): A) call option. B) put option. C) warrant. D) ADR.
D) ADR
Securities issued by which of the following agencies offer direct government backing? A) Federal Intermediate Credit Bank. B) Federal National Mortgage Association. C) Student Loan Marketing Association (Sallie Mae). D) Government National Mortgage Association.
D) GNMA
In order to receive the same income after taxes
Find coupon yield, apply tax bracket, subtract from coupon
Which two of the following investments would offer your clients the best chance of minimizing inflation risk? I. Common stock. II. Cumulative preferred stock. III. Money market mutual funds. IV. TIPS.
I & IV.
most closely resembles bonds and is the most sensitive to interest rates among the alternatives listed.
Preferred stock
Taxable equivalent yield
coupon rate / 100 - bracket
common stock whose dividends are guaranteed by another corporation.
guaranteed common stock
A client of yours owns some convertible preferred stock. She notices an article in the business section of her local newspaper that reports the company is going to pay a 20% stock dividend on their common stock. She wants to know how this will affect her? A) she will also receive 20% more shares because preferred stock has a priority claim ahead of common. B) if there is an anti-dilution clause, her conversion privilege will permit her to acquire 20% more shares than before the stock dividend. C) more than likely, the price of the preferred stock will rise. D) there will be no effect.
if there is an anti-dilution clause, her conversion privilege will permit her to acquire 20% more shares than before the stock dividend.
The DERP Corporation has an outstanding convertible bond issue that is convertible into 8 shares of stock. If the current market price of the bond is 80, the parity price of the stock is: A) $64 per share. B) $100 per share. C) $80 per share. D) $125 per share.
price of bond = 800 convertible at 8 price of bond / convertible = $100 per share
YTM = BASIS
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Prices of zero-coupon bonds tend to be more volatile than prices of interest-bearing bonds because of their longer duration.
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The greatest after-tax return is provided by the instrument listed that, after subtracting 25% for income tax, leaves the investor with the greatest amount.
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Bond is trading at a premium, YTC ___ YTM
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Bond is trading at a discount, YTC ___ YTM
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Which of the following statements represents an advantage of a municipal general obligation bond over a revenue bond? A) A GO bond generally involves less risk to the investor. B) A GO bond is not charged against the municipality's borrowing limits. C) A GO bond issuer is required to conduct a feasibility study. D) Only a facility's users pay for a GO bond.
A) A GO bond generally involves less risk to the investor.
A common stockholder's rights include all of the following EXCEPT: A) the right to determine the par value of the stock. B) preemptive rights. C) the receipt of dividends if declared by the board of directors. D) electing the board of directors.
A) the right to determine the par value of the stock (determined by the company- not voted on by shareholders)
ADR owners have all the following rights EXCEPT: A) the right to sell the ADR in the foreign market. B) the right to receive dividends in U.S. dollars. C) the right to sell in the secondary market. D) the right to receive the underlying foreign security.
A) the right to sell the ADR in the foreign market * The purpose of the ADR is to facilitate trading in U.S. markets
To find parity price:
A. Par value / conversion price B. find what bond is currently selling at, compare
All of the following are characteristics of a rights offering EXCEPT: A) the subscription price is below the current market value. B) it is issued to current stockholders. C) the subscription period is up to 2 years. D) the rights are marketable.
C) the subscription period is up to 2 years (they are usually very short lived)
GNMA mortgage-backed securities are: A) exempt from federal income tax for the interest payments received by the bondholders. B) a direct obligation of the US government. C) backed exclusively by a pool of mortgages. D) available to investors through a minimum purchase of $5,000.
B) a direct obligation of the US government
Which of the following is NOT a risk to a U.S. resident owning a eurodollar bond? A) Interest rate risk. B) Currency risk. C) Inflation risk. D) Default risk.
B) currency risk. they are denominated in dollars
All of the following are true of negotiable, jumbo certificates of deposit EXCEPT: A) they are usually issued in denominations of $100,000 to $1 million. B) they are secured obligations of the issuing bank. C) they usually have maturities of 1 year or less. D) they are readily marketable.
B) they are secured obligations of the issuing bank. FALSE because they are only general obligations.
A new convertible bond has a provision that it cannot be called for five years after the issue date. This call protection is most valuable to a recent purchaser of the bond if: A) interest rates are falling. B) interest rates are rising. C) the market price of the underlying common stock is increasing. D) interest rates are stable.
C) the market price of the underlying common stock is increasing (convertible bonds are more sensitive to the value of the underlying stock than interest rates)
One of the benefits of receiving incentive stock options from your employer rather than non-qualified stock options is: A) the exercise price is usually below the current market price. B) it is not necessary to hold ISOs as long as NSOs. C) the opportunity to receive long-term capital gains tax treatment. D) that more shares are generally available through ISOs than NSOs.
C) the opportunity to receive long-term capital gains tax treatment.
One of the features of convertible preferred stock is that: A) the holder is able to select the conversion price. B) the dividend is paid ahead of all other securities. C) the owner has the opportunity to participate in the growth of the company. D) convert the stock into the issuer's bonds.
C) the owner has the opportunity to participate in the growth of the company.
U.S. Treasury bills are issued for all of the following maturities EXCEPT: A) 13 weeks. B) 26 weeks. C) 8 weeks. D) 4 weeks.
C. 8 weeks THERE ARE NO 8 WEEK MATURITY T-BILLS
The most common collateral securing a Brady Bond is A) the credit standing of the banking institution acquiring the Brady Bond B) an asset, or group of assets, pledged by the borrowing entity C) the credit standing of the sovereign nation issuing the Brady Bond D) US Treasury zero-coupon bonds with a maturity corresponding to the maturity of the individual Brady bond
D) US Treasury zero-coupon bonds with a maturity corresponding to the maturity of the individual Brady bond
In the secondary market, Treasury bond prices are most influenced by the: A) Treasury department. B) primary dealers. C) prime rate. D) inflation rate.
D) inflation rate
If a group of money managers were having a discussion and the term LIBOR was mentioned, the topic would most likely be: A) contract negotiations with the employee's union. B) current economic conditions in Liberia. C) long-term borrowing rates. D) short-term borrowing rates.
D) short-term borrowing rates
Which of the following is true of a zero-coupon bond? I. The rate of return is locked in. II. There is no reinvestment risk. III. The imputed interest is taxed as ordinary income on an annual basis. IV. A check for the interest is paid at maturity.
I, II, III
From first to last, in what order would claimants receive payment in the event of bankruptcy? I. Holders of secured debt. II. Holders of subordinated debentures. III. General creditors. IV. Preferred stockholders
I, III, II, IV
Bail Bonds, Inc., might issue warrants in connection with a bond issue for which of the following reasons? I. As an inducement to make the bonds more marketable. II. To lower their interest cost on the issue. III. To increase the marketability of their common stock. IV. To increase the number of common shares outstanding.
I. & II.
Which of the following are characteristics of a REIT? I. It is traded on an exchange or over the counter. II. It is professionally managed. III. It passes through both gains and losses to investors. IV. It is a type of limited partnership.
I. & II.
Which of the following are characteristics of negotiable jumbo CDs? I. Issued in amounts of $100,000 to $1 million. II. Typically pay interest on a monthly basis. III. Always mature in 1 to 2 years with a prepayment penalty for early withdrawal. IV. Trade in the secondary market.
I. & IV.
Currently, a company issues 5% Aaa/AAA debentures at par. Two years ago, the corporation issued 4% AAA-rated debentures at par. Which of the following statements regarding the outstanding 4% issue are TRUE? I. The dollar price per bond will be higher than par. II. The dollar price per bond will be lower than par. III. The current yield on the issue will be higher than the coupon. IV. The current yield on the issue will be lower than the coupon.
II. & III.
Which of the following are characteristics of commercial paper? I. Backed by money market deposits. II. Negotiated maturities and yields. III. Issued by insurance companies. IV. Not registered with the SEC.
II. & IV.
Which of the following statements regarding nonqualified (nonstatutory) stock options (NSOs) are CORRECT? I. There is one specified manner in which NSO stock option plans may be designed. II. There are no nondiscrimination rules to apply when establishing one of these plans. III. This is one type of stock option in which participating employees can actually suffer a loss. IV. When the employee purchases shares, the employer must withhold and pay federal income taxes with respect to the "bargain element" of the shares purchased.
II. & IV. There are no nondiscrimination rules to apply when establishing one of these plans and When the employee purchases shares, the employer must withhold and pay federal income taxes with respect to the "bargain element" of the shares purchased.
