Unit 2
Treasury bonds mature in
10 years or more.
An investor purchases a bond at $900 with a 5% coupon and a 5-year maturity. The bond has a current yield of
5.6%
Corporate shareholder structure regarding liability is different from that of a partnership. In recognizing that, which of the following is true? A) A corporate shareholder cannot be forced to liquidate personal assets during a corporate bankruptcy. B) Neither corporate shareholders nor business partners can be held personally liable for debts of the business if bankruptcy occurs. C) A partner cannot be forced to liquidate personal assets during a partnership bankruptcy. D) Corporate shareholders and business partners are personally liable for debts of the businesses if bankruptcy occurs.
A) A corporate shareholder cannot be forced to liquidate personal assets during a corporate bankruptcy.
Money market securities can be associated with which of the following characteristics? A) Being highly liquid B) High returns relative to the general debt market C) Making interest payments at regular intervals D) Long-term maturities
A) Being highly liquid
Which of the following securities carries the greatest amount of risk in conjunction with a corporate liquidation? A) Common stock B) Corporate bonds C) Preferred stock D) Debentures
A) Common stock
Which of the following projects would be funded by general obligation (GO) bonds? A) Public schools B) Public housing C) Airports D) Sports stadiums
A) Public schools
Which of the following is true regarding money market securities? A) T-notes and T-bonds can be considered money market instruments when they have only a year left to maturity. B) Only T-notes can ever be considered money market securities. C) T-bills, notes, and bonds are all considered money market securities at the time they are issued. D) Only T-bonds can ever be considered money market securities.
A) T-notes and T-bonds can be considered money market instruments when they have only a year left to maturity.
Which of the following statements is most accurate about feature benefits? A) The call feature benefits the issuer; the put feature benefits the investor. B) The put feature benefits the issuer; the call feature benefits the investor. C) The call feature benefits both the issuer and investor. D) The put feature benefits both the issuer and investor.
A) The call feature benefits the issuer; the put feature benefits the investor.
Each of the following makes regular interest payments except A) Treasury STRIPS. B) Treasury bonds. C) Treasury notes. D) corporate bonds.
A) Treasury STRIPS.
An issuer of bonds can be A) corporate and both the federal and municipal governments. B) federal and municipal governments only. C) corporates and municipal governments only. D) corporate entities only.
A) corporate and both the federal and municipal governments.
All of the following are names for the rate stated on the face of the bond except A) current yield. B) fixed rate. C) coupon rate. D) nominal yield.
A) current yield.
A broker-dealer has engaged in a reverse repurchase (repo) agreement. How was this done?
An initial purchase is followed by a sale later, at a higher price.
A guaranteed bond is usually guaranteed by which of the following entities? A) The broker-dealer who sold it B) A parent company C) The U.S. Guarantee Association D) The U.S. government
B) A parent company
An issuer has a subordinated debt issue outstanding. Which of the following is true? A) A subordinated debenture has a claim that is senior to all other debt and senior to common stock. B) A subordinated debenture has a claim that is junior to all other debt but senior to preferred stock. C) A subordinated debenture has a claim that is senior to all other debt issues and equity issues. D) A subordinated debenture has a claim that is junior to all other debt issues.
B) A subordinated debenture has a claim that is junior to all other debt but senior to preferred stock.
Your client is about to retire and wants to rearrange his portfolio in order to have predictable income. Which of the following would not be a good investment vehicle? A) AA-rated mortgage bonds B) Adjustment bonds C) AA-rated debentures D) U.S. Treasury notes
B) Adjustment bonds
Which of the following statements regarding bond interest is true? A) The par value of a bond will increase as market interest rates fall. B) Bond prices have an inverse relationship to interest rates. C) Bond prices have a direct relationship to interest rates. D) The par value of a bond will decrease as market interest rates fall.
B) Bond prices have an inverse relationship to interest rates.
Your client has a long-term investment time horizon and is willing to accept some risk to achieve a better rate of return. Of the following, which would be the least suitable recommendation? A) Preferred stock B) T-bills and negotiable CDs C) Common stock D) Corporate bonds and T-bonds
B) T-bills and negotiable CDs
Regarding municipal general obligation (GO) bonds, which of the following is true? A) The lower the statutory debt limit, the higher the risk will be for bondholders. B) The lower the statutory debt limit, the safer for bondholders. C) The higher the statutory debt limit, the safer for bondholders. D) The higher the statutory debt limit, the less risk of excessive borrowing by the municipality.
B) The lower the statutory debt limit, the safer for bondholders.
Which of the following statements is true of income bonds? A) Unlike other bonds, they pay income monthly. B) Unlike other bonds, they don't pay income unless declared by the board of directors. C) Unlike other bonds, they pay income quarterly. D) Unlike other bonds, they pay income annually.
B) Unlike other bonds, they don't pay income unless declared by the board of directors.
If a bond is trading at a premium, rank the following rates from low to high. A) Nominal yield, yield to maturity, current yield, coupon rate B) Yield to call, yield to maturity, current yield, nominal yield C) Yield to call, current yield, nominal yield, coupon rate D) Coupon rate, current yield, yield to maturity, yield to call
B) Yield to call, yield to maturity, current yield, nominal yield
When selling a bond, the issuer is taking A) an equity position. B) a borrower's position. C) a loaners position. D) a creditors position.
B) a borrower's position.
Treasury bond (T-bond) interest is stated as A) a discount to the face value. B) a percentage of par value. C) a premium over the price paid. D) a percentage of the purchase price.
B) a percentage of par value.
Money market instruments can be associated with all of the following except A) short-term debt instruments. B) high-yielding debt instruments. C) highly liquid debt instruments. D) nonvolatile and safe debt instruments.
B) high-yielding debt instruments.
Bondholders should expect that interest payments would always be forthcoming for all of the following except A) subordinated debentures. B) income bonds. C) debentures. D) convertible bonds.
B) income bonds.
Short-term securities that generate funds for a municipality that expects alternate longer-term financing include all of the following except A) tax anticipation notes (TANs). B) real estate investment trusts (REITs). C) bond anticipation notes (BANs). D) revenue anticipation notes (RANs).
B) real estate investment trusts (REITs).
Treasury bills (T-bills) are A) intermediate-term debt obligations issued weekly. B) short-term debt obligations issued weekly. C) short-term debt obligations issued monthly. D) intermediate-term debt obligations issued monthly.
B) short-term debt obligations issued weekly.
An investor pays 102 ($1,020) for a $1,000 par value bond. At maturity, A) the discount received increases the return. B) the premium paid decreases the return. C) the discount received decreases the return. D) the premium paid increases the return.
B) the premium paid decreases the return.
It would be expected that a repurchase (repo) agreement contract would include A) the rate of return and maturity date. B) the repurchase price and the maturity date. C) the maturity date only. D) the repurchase price and the rate of return.
B) the repurchase price and the maturity date.
Which of the following is an unsecured debt instrument? A) Collateral trust certificates B) Junior lien mortgage bonds C) Aaa/AAA-rated debentures D) Equipment trust certificates
C) Aaa/AAA-rated debentures
Which of the following securities is most often used to fund international trade? A) Negotiable certificate of deposit B) Federal funds C) Banker's acceptance (BAs) D) Real Estate Investment Trust (REIT)
C) Banker's acceptance (BAs)
Money market securities can be associated with which of the following characteristics? A) Long-term maturities B) Making interest payments at regular intervals C) Being highly liquid D) High returns relative to the general debt market
C) Being highly liquid
The United States Congress has authorized all of the following enterprises to issue securities except A) Government National Mortgage Association (GNMA). B) Federal National Mortgage Association (FNMA). C) Federal Deposit Insurance Corporation (FDIC). D) Federal Home Loan Mortgage Corporation (FHLMC).
C) Federal Deposit Insurance Corporation (FDIC).
Which of the following earn interest but don't pay interest? A) T-notes B) None of these C) T-bills D) T-bonds
C) T-bills
Which of the following statements regarding $1,000 par value 6.5% bond trading offered at 110 is true? A) The bond is offered at a discount. B) The bond's yield to maturity (YTM) and stated yield are the same. C) The bond's current yield equals $65 ÷ $1,100 or 5.9%. D) The bond's current yield is lower than its yield to maturity (YTM).
C) The bond's current yield equals $65 ÷ $1,100 or 5.9%.
A municipality wants to issue general obligation (GO) bonds that will put it over its statutory debt limit. Which of the following is true? A) They may do so with the approval of their state senators. B) This is statutorily forbidden. C) They may do so with voter approval. D) This is prohibited by the federal government.
C) They may do so with voter approval.
Which of the following is a debt instrument that pays no periodic interest? A) Corporate bonds B) Treasury bonds C) Treasury STRIPs D) Treasury notes
C) Treasury STRIPs
All of the following securities are backed by the full faith and credit of the U.S. government except A) Treasury bonds. B) Treasury notes. C) Treasury receipts. D) Treasury STRIPS.
C) Treasury receipts.
An investor has purchased bonds having a put feature attached. With this put feature, it is likely that these bonds were issued with A) a coupon that need not reflect the impact of the call feature. B) a higher coupon than similar bonds without the feature. C) a lower coupon than similar bonds without the feature. D) a coupon that will be called away by the issuer before maturity.
C) a lower coupon than similar bonds without the feature.
Regarding bankruptcy proceedings, A) liquidation of assets must occur first before the courts can offer protection from creditors. B) a plan for reorganization must be submitted first before the courts can offer protection from creditors. C) courts protect both corporate and individual filers from creditors. D) the procedure is only available to individuals seeking protection from creditors and not business entities.
C) courts protect both corporate and individual filers from creditors.
All of the following are corporate secured bonds except A) equipment trust certificates. B) mortgage bonds. C) debentures. D) collateral trust certificates.
C) debentures.
Two benefits of owning preferred stock over common stock are A) priority over subordinate bonds at liquidation and of dividends. B) priority for payment of dividends ahead of wages and taxes and liquidation priority over wages. C) priority at liquidation and payment of dividends. D) rising interest rates are a positive for market value and dividends are guaranteed.
C) priority at liquidation and payment of dividends.
Which of the following expressions describes the current yield of a bond? A) Yield to maturity divided by par value B) Annual interest (coupon) payment divided by par value C) Yield to maturity divided by current market price D) Annual interest (coupon) payment divided by current market price
D) Annual interest (coupon) payment divided by current market price
Which of the following corporate bonds is backed by the securities of other corporations or those of a subsidiary? A) Equipment trust certificate B) Mortgage bond C) Debenture D) Collateral trust bond
D) Collateral trust bond
Rank the following investors from highest to lowest priority in liquidation. A) Preferred stock, debentures, subordinate debentures, secured debt, common stock B) Common stock, preferred stock, subordinate debentures, debentures, secured debt C) Debentures, secured debt, preferred stock, common stock, subordinated debt D) Secured debt, debentures, subordinate debentures, preferred stock, common stock
D) Secured debt, debentures, subordinate debentures, preferred stock, common stock
Which of the following is true for U.S. Treasury-issued securities? A) T-notes are purchased at a discount to par, while T-bonds are purchased as a percentage of par. B) T-bills and T-bonds pay interest semiannually. C) T-notes and T-bills pay interest annually. D) T-bills are purchased at a discount, while T- bonds are purchased as a percentage of par
D) T-bills are purchased at a discount, while T- bonds are purchased as a percentage of par
Interest is best described as A) the amount that an investor lends to a borrower. B) the amount the borrower receives from a lender. C) a specific rate of return the lender pays the borrower over the life of the loan. D) a specific rate of return the borrower pays the investor for use of the funds.
D) a specific rate of return the borrower pays the investor for use of the funds.
Municipal revenue bonds are A) subject to statutory debt limits, which is why they require voter approval. B) subject to statutory debt limits but do not require voter approval. C) not subject to statutory debt limits but must still have voter approval. D) not subject to statutory debt limits and do not require voter approval.
D) not subject to statutory debt limits and do not require voter approval.
All of the following are types of maturities for debt instruments except A) serial. B) balloon. C) term. D) series.
D) series.
When a corporation issues a mortgage bond, the issue's total value A) must equal the value of the real estate by which it is backed. B) should be greater than that of the real estate it is backed by. C) is unrelated to the value of the real estate because it is an unsecured debt instrument. D) should be less than that of the real estate it is backed by.
D) should be less than that of the real estate it is backed by.
The two classifications of chapters for corporate bankruptcies are I. liquidations. II. reorganizations. III. bankruptcy. IV. failures.
I & II
A registered representative speaks to a customer about a particular 6% municipal bond quoted on a 6.5% basis. Which of the following is correct? I. 6% is the bond's coupon. II. 6% is the bond's current yield. III. 6.5% is the bond's yield to maturity. IV. 6.5% is the bond's current yield.
I & III
When an issuer has equipment trust certificates outstanding, title to the assets backing the certificates are held in trust. I. the equipment is held in trust. II. the assets can be repossessed and sold by the trustee. III. the certificates are unsecured because they represent the debt IV. owed on the assets.
I & III
A bond with 10 years to maturity and callable in five years at par is sold at a discount. Rank the following yields from lowest to highest. I. Nominal yield II. Current yield III. Yield to call (YTC) IV. Yield to maturity (YTM)
I, II, IV, III
List the order of payment from first to last in the event of a corporate liquidation. I. Secured debt II. Preferred shareholders III. Unsecured debt IV. Common shareholders
I, III, II, IV
Given bonds are interest-rate sensitive, which of the following statements regarding put and call features for bonds are true? I. The put feature would likely be exercised if interest rates fall. II. The put feature would likely be exercised if interest rates rise. III. The issuer will likely call bonds if interest rates fall. IV. The issuer will likely call bonds if interest rates rise.
II & III
Which of the following statements regarding Treasury receipts are true? I. Interest is paid annually. II. Interest is paid at maturity III. They are sold at a discount. IV. They are sold at par.
II & III
A bond having an 8% coupon is selling with an 8.25% yield to maturity. Which of the following statements are true? I. Nominal yield is higher than yield to maturity (YTM). II. Current yield is higher than nominal yield. III. Nominal yield is lower than yield to maturity (YTM). IV. Current yield is lower than nominal yield.
II and III
Income from an investment in debt securities is known as
Interest
T-notes pay interest
Semiannually
Regular way settlement for Treasury bonds is
T+1
A bond has been structured so that the principal of the entire issue matures on a single date. This is what type of bond?
Term
A bond that is structured so that the principal of the whole issue matures at once is
Term Bond
Debt instruments put up for auction by the U.S. Treasury Department that offer intermediate maturities best describes
Treasury notes.
T-bills are issued (auctioned) by the U.S. Treasury Department how often?
Weekly
A bond that is structured so that the issuer pays off a portion of the principal before the final maturity but pays off a major portion of the bond at the final maturity date is
a balloon bond
A put feature attached to a bond allows
a bondholder to put a bond back to the issuer for redemption at times that will benefit the bondholder.
A written promise made by a corporation to pay the principal at its due date and interest on a regular basis on one of its debt issues but backed by no physical assets or titles to assets could only be
a debenture.
Treasury note (T-note) interest is stated as
a percentage of par value.
A bond that is structured so that a portion of the principal is scheduled to mature at intervals over several years is
a serial bond.
In the event that a liquidation needs to occur, subordinated debtholders
agree to be paid back last of all debtholders.
Treasury bills pay
all interest at maturity.
An income bond is also known as
an adjustment bond and is unsecured.
At the time of maturity, an investor realizes that the overall return on the investment was actually greater than the coupon rate stated on the bond when purchased. This most likely would have occurred because the bond had initially been purchased
at a discount
The time to maturity for debt instruments
can be any length of time
Promissory notes are a form of
commercial paper issued by corporations
A company's board of directors (BOD) approves a dividend payment. When this occurs it is recognized as the
declaration date.
A bank trustee holds the titles to assets a corporation has purchased and utilizes in its day-to-day business. The corporation issues debt securities backed by these assets. These securities are
equipment trust certificates.
Par value for a bond is also known as
face value or the amount a bond will be redeemed for at maturity.
Your customer has a portfolio consisting entirely of municipal-issued securities. Therefore, the entire portfolio would have to consist of
general obligation and revenue bonds.
An investor is able to purchase a bond at $725, well below par value. Buying the bond so cheaply tells us that the investors return at maturity
increases.
When the interest rates in the marketplace moves up or down, the price of all bonds move
inversely
An individual invested in a company by purchasing 1,000 shares of common stock. The company has, unfortunately, gone bankrupt. This investor
may lose all that was invested but is not liable for any corporate debts that cannot be satisfied during the dissolution process.
Repurchase agreements and reverse repurchase agreements are
money market instruments.
Secured corporate debt includes
mortgage debt
The coupon on a bond can be described as its
nominal yield
Regarding CDs and negotiable CDs issued by banks,
only negotiable CDs are considered money market instruments
An investor holding T-bonds will receive interest payments
semiannually
Treasury bonds pay interest
semiannually and mature at par value.
T-bills are the U.S. government's
short-term debt of 1 year or less.
Municipal securities can be issued by
states and local governments
In order to meet federal budget needs, the types and quantity of government securities to be issued are determined by
the U.S. Treasury Department.
Federal funds represent
the amount by which a bank exceeds its required deposits to be held on reserve at the Federal Reserve Board (FRB).
A bond certificate represents
the borrower's obligation to repay the amount it borrowed plus interest.
The coupon rate on a debt security represents
the interest rate the issuer has agreed to pay the investor
Treasury receipts are backed by
the issuing broker-dealer
An investor lending money to an entity receives back the principal amount of the loan on
the maturity date
Once a corporate liquidation proceeding in court is underway, common shareholders know that
they are not guaranteed to be paid back any amount.
An investor holds a Treasury note with a stated interest of 6%. The investor will receive
two $30 interest payments per year.
Interest on a 7% corporate bond would be paid to the investor as
two semiannual checks for $35 each.
Commercial paper is
unsecured debt with a maximum maturity of nine months.
