Unit 13 - 65
Your client is interested in investing in preferred stocks in an effort to receive dividend income. The client's target goal is a 6% current return on investment (ROI). If the RIF Series B preferred stock is paying a quarterly dividend of $.53, your client's goal will be achieved if the RIF can be purchased at A) $35.33 B) $50.00 C) $8.83 D) $22.55
A) $35.33
An investor in the 25% federal income tax bracket is considering the purchase of some fixed-income instruments. Which of the following would provide the investor with the greatest after-tax return? A) 7% Ba rated corporate bond B) 5% U.S. Treasury bond C) 4.8% AAA rated insured municipal bond D) 6% FDIC-insured CD
A) 7% Ba rated corporate bond
One popular method of determining the value of certain securities is discounted cash flow. Using the DCF with the current discount rate at 3%, which of the following would be expected to have the highest market value? A) ABC Corporation debenture maturing in 25 years with a 5% coupon B) U.S. Treasury bond maturing in 20 years with a 4% coupon C) XYZ Corporation mortgage bond maturing in 10 years with a coupon of 4.5% D) Bay Area Rapid Transit Authority 4% revenue bond maturing in 15 years
A) ABC Corporation debenture maturing in 25 years with a 5% coupon
Although there are a number of risks to owning a debt security that are common to all investors, which specific risk is avoided when a U.S. resident purchases a Eurodollar bond? A) Currency risk B) Interest rate risk C) Inflation risk D) Default risk
A) Currency risk
Securities issued by which of the following issuers have the direct backing of the U.S Treasury? A) Government National Mortgage Association (Ginnie Mae) B) Federal Home Loan Mortgage (Freddie Mac) C) Federal National Mortgage Association (Fannie Mae) D) Federal Agricultural Mortgage Corporation (Farmer Mac)
A) Government National Mortgage Association (Ginnie Mae)
Rank the following bonds in order of shortest to longest duration. ABC 8s of 2040 DEF 9s of 2041 GHI 5s of 2039 JKL zeros of 2035 A) II, I, III, IV B) I, II, IV, III C) IV, II, I, III D) III, I, II, IV
A) II, I, III, IV
Which of the following is NOT a money market instrument? A) Newly issued Treasury notes B) Banker's acceptances C) Commercial paper D) Treasury bills
A) Newly issued Treasury notes
Which of the following projects is most likely to be financed by a general obligation rather than a revenue bond? A) Public library B) Public golf course C) Expansion of an airport D) Municipal hospital
A) Public library
An analyst wishes to assess the value of a fixed income security by taking the income payments scheduled to be received over a given future period and adjusting that for the time value of money. This analytical tool is known as A) discounted cash flow B) yield to maturity C) future value D) duration
A) discounted cash flow
Probably the most significant characteristic of municipal bonds for investors is A) their exemption from federal income tax B) their exemption from registration on the state and federal level C) their safety D) that their coupon yields are higher than comparably rated corporate issues
A) their exemption from federal income tax
Which of the following would be most likely to increase a bond's liquidity? A) A longer maturity B) A higher rating C) No call protection D) A lower rating
B) A higher rating
When comparing a time deposit account and a demand deposit account, you would expect A) FDIC insurance on the time deposit account but not on the demand deposit account B) a higher rate of interest paid on the time deposit account C) lower penalties for withdrawing funds from a time deposit account D) easier access to the funds in a time deposit account
B) a higher rate of interest paid on the time deposit account
In general, among the advantages to investing in Brady bonds over those issued by countries classified as emerging economies is A) higher yields B) increased liquidity C) greater risk D) shorter maturities
B) increased liquidity
The owner of a convertible debt issue A) generally expects a higher current return than with a nonconvertible bond of the same quality and maturity B) is a creditor of the issuer C) is generally in a senior position to other bondholders D) has the choice of receiving the bond's interest or dividends on the underlying stock, whichever is higher
B) is a creditor of the issuer
One of the benefits of adding foreign debt securities to an investor's portfolio is A) receiving income in foreign currency B) potentially higher yields C) reduced taxation D) potentially higher risk
B) potentially higher yields
The current yield on a bond with a coupon rate of 7.5% currently selling at 105½ is approximately A) 7.50% B) 6.50% C) 7.11% D) 8.00%
C) 7.11% A bond with a coupon rate of 7.5% pays $75 of interest annually. Current yield equals annual interest amount divided by bond market price, or $75 ÷ $1,055 = 7.109%, or approximately 7.11%
Which of the following statements regarding convertible bonds is NOT true? A) If there is no advantage to converting the bonds into common stock, they would sell at a price based on their market value without the convertible feature. B) Convertible bondholders are creditors of the corporation. C) Coupon rates are usually higher than nonconvertible bond rates of the same issuer. D) The conversion rate is set at issuance and does not change.
C) Coupon rates are usually higher than nonconvertible bond rates of the same issuer.
Which of the following are general characteristics of negotiable jumbo CDs? A) Typically pay interest on a monthly basis B) Always mature in 1 to 2 years with a prepayment penalty for early withdrawal C) Issued in amounts of $100,000 to $1 million D) Only trade in the primary market
C) Issued in amounts of $100,000 to $1 million
Which of the following debt instruments generally present the least amount of default risk? A) Municipal revenue bonds B) Convertible senior debentures C) Municipal general obligation bonds D) High-yield corporate bonds
C) Municipal general obligation bonds
One of the advantages of owning a corporation's debentures is that you have prior claim over A) employees B) secured creditors C) preferred stockholders D) general creditors
C) preferred stockholders
Which of the following would you NOT expect to see issued at a discount? A) Commercial paper B) Zero-coupon bond C) Treasury Bill D) Bank jumbo CD
D) Bank jumbo CD
Which of the following statements regarding U.S. government agency securities is TRUE? A) They generally trade on the major stock exchanges. B) They are direct obligations of the U.S. government. C) Interest received on agency securities is exempt from federal income tax. D) They generally offer higher yields than direct U.S. obligations.
D) They generally offer higher yields than direct U.S. obligations.
You are meeting with a relatively unsophisticated investor who doesn't understand very much about stocks and bonds. When asked, "can you list the advantages of owning common stock as compared to bonds?" among other reasons, you could reply A) there is limited liability B) bonds have priority over any equity security in the event of liquidation C) income payments are more reliable D) bonds must be surrendered at maturity or at a call while the owner of common stock can hold the investment as long as desired
D) bonds must be surrendered at maturity or at a call while the owner of common stock can hold the investment as long as desired
A TIPS bond is issued in the principal amount of $1,000, paying 3.5%. Over the security's 5-year term, the annual inflation rate is 6%. What is the principal value of the bond at the end of 4 years? A) $1,267 B) $1,344 C) $1,300 D) $1,240
A) $1,267
The best time for an investor seeking returns to purchase long-term, fixed-interest-rate bonds is when A) long-term interest rates are high and beginning to decline B) long-term interest rates are low and beginning to rise C) short-term interest rates are low and beginning to rise D) short-term interest rates are high and beginning to decline
A) long-term interest rates are high and beginning to decline
A bank is advertising a no-cost DDA. Your client asks you to describe what that is. You would respond that DDA stands for A) deferred deposit account B) demand deposit account C) digital deposit account D) direct deposit account
B) demand deposit account
A bond issued by the GEMCO Corporation has been rated BBB by a major bond rating organization. This bond would be considered A) callable B) secured C) an investment-grade corporate bond D) a high-yield corporate bond
C) an investment-grade corporate bond
If the coupon rate on a bond increases, the duration of the bond will A) remain unchanged B) increase C) decrease D) change in an unpredictable fashion
C) decrease
The DERP Corporation has an outstanding convertible bond issue with a conversion price of $125 per share. If the current market price of the bond is 80, the parity price of the stock is A) $156.25 per share B) $125.00 per share C) $64.00 per share D) $100.00 per share
D) $100.00 per share
If an investor pays 95.28 for a Treasury bond, how much did the bond cost? A) $950.28 B) $95.28 C) $9,528 D) $958.75
D) $958.75
MNO is planning to raise capital through an offering of 30-year bonds. Which call price would be most beneficial to MNO? A) 106 B) 104 C) 110 D) 102
D) 102 MNO would benefit most from the ability to call bonds at the lowest possible price. The call feature enables MNO to buy the bonds before maturity to reduce their fixed interest costs. A call price of 102 requires the lowest call premium of the options shown.
Some analysts use the discounted cash flow to determine the theoretical value of a debt security. Under DCF, the bond price can be summarized as the sum of the A) present value of the par value repaid at maturity plus the future value of the coupon payments B) future value of the par value repaid at maturity plus the future value of the coupon payments C) present value of the par value repaid at maturity plus the present value of the coupon payments D) future value of the par value repaid at maturity plus the present value of the coupon payments
C) present value of the par value repaid at maturity plus the present value of the coupon payments
A client has indicated that his primary objective is maximizing current income regardless of the risk. Which of the following mutual funds would probably be most suitable for achieving that goal? A) GHI Index Fund B) ABC Growth and Income Fund C) JKL Municipal Bond Fund D) DEF High-Yield Bond Fund
D) DEF High-Yield Bond Fund
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) collateral trust certificates B) guarantee trust bonds C) equipment trust certificates D) secured income notes
A) collateral trust certificates
A bond with a par value of $1,000 and a coupon rate of 6% paid semi-annually, is currently selling for $1,200. The bond is callable in 15 years at 105. In the computation of the bond's yield to call, which of these would be a factor? A) 15 payment periods B) Future value of $1,200 C) Present value of $1,050 D) Interest payments of $30
D) Interest payments of $30
An investor purchasing 10 corporate bonds at a price of 102¼ each will pay A) $10,225.00 B) $1,022.50 C) $1,020.25 D) $10,202.50
A) $10,225.00 At 102¼, each bond cost $1,022.50 (102 = 1,020 and ¼ of $10 = $2.50). There are 10 bonds so the total is $1,022.50 × 10 = $10,225.
