Unit Two Checkpoint Exam

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) guarantee trust bonds. B) collateral trust certificates. C) equipment trust certificates. D) secured income notes.

B) collateral trust certificates.

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) $1,344 B) $1,300 C) $1,267 D) $1,240

C) $1,267

Which of the following debt instruments generally presents the least amount of default risk? A) High-yield corporate bonds B) Convertible senior debentures C) Municipal general obligation bonds D) Municipal revenue bonds

C) Municipal general obligation bonds

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) $125.00 per share. B) $64.00 per share. C) $156.25 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) $95.28 B) $950.28 C) $9,528.00 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) 104 B) 110 C) 106 D) 102

D) 102

The current yield on a bond with a coupon rate of 7.5% currently selling at 105½ is approximately A) 6.50%. B) 8.00%. C) 7.50%. D) 7.11%.

D) 7.11%.

Which of the following is not a money market instrument? A) Treasury bills B) Banker's acceptances C) Commercial paper D) Newly issued Treasury notes

D) Newly issued Treasury notes

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) Default risk C) Interest rate risk D) Inflation 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 Agricultural Mortgage Corporation (Farmer Mac) C) Federal National Mortgage Association (Fannie Mae) D) Federal Home Loan Mortgage Corporation (Freddie Mac)

A) Government National Mortgage Association (Ginnie Mae)

A bond issued by the GEMCO Corporation has been rated BBB by a major bond-rating organization. This bond would be considered A) an investment-grade corporate bond. B) secured. C) a high-yield corporate bond. D) callable.

A) an investment-grade corporate bond.

An investor purchasing 10 corporate bonds at a price of 102¼ each will pay A) $10,202.50. B) $1,022.50. C) $10,225.00. D) $1,020.25.

C) $10,225.00.

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 $0.53, your client's goal will be achieved if the RIF can be purchased at A) $8.83. B) $22.55. C) $35.33. D) $50.00.

C) $35.33.

Which of the following are general characteristics of negotiable jumbo CDs? A) Typically pay interest on a monthly basis B) Trade only in the primary market C) Issued in amounts of $100,000 to $1 million D) Always mature in one to two years with a prepayment penalty for early withdrawal

C) Issued in amounts of $100,000 to $1 million

Which of the following would be most likely to increase a bond's liquidity? A) A longer maturity B) A lower rating C) No call protection D) A higher rating

D) A higher rating

The owner of a convertible debt issue A) is generally in a senior position to other bondholders. B) has the choice of receiving the bond's interest or dividends on the underlying stock, whichever is higher. C) generally expects a higher current return than with a nonconvertible bond of the same quality and maturity. D) is a creditor of the issuer.

D) is a creditor of the issuer.

One of the advantages of owning a corporation's debentures is that you have prior claim over A) preferred stockholders. B) employees. C) general creditors. D) secured creditors

A) preferred stockholders.

Which of the following projects is most likely to be financed by a general obligation rather than a revenue bond? A) Public golf course B) Public library C) Expansion of an airport D) Municipal hospital

B) Public library

One of the benefits of adding foreign debt securities to an investor's portfolio is A) potentially higher risk. B) reduced taxation. C) potentially higher yields. D) receiving income in foreign currency.

C) potentially higher yields.

You are meeting with a relatively unsophisticated investor who doesn't understand very much about stocks and bonds. The investor asks, "Can you list the advantages of owning common stock as compared to bonds?" Among other reasons, you could reply that A) bonds must be surrendered at maturity or at a call while the owner of common stock can hold the investment as long as desired. B) bonds have priority over any equity security in the event of liquidation. C) income payments are more reliable. D)

A) bonds must be surrendered at maturity or at a call while the owner of common stock can hold the investment as long as desired

In general, among the advantages to investing in Brady bonds over those issued by countries classified as emerging economies is A) higher yields. B) greater risk. C) shorter maturities. D) increased liquidity.

D) increased liquidity

Probably the most significant characteristic of municipal bonds for investors is A) their exemption from registration on the state and federal level. B) their exemption from federal income tax. C) that their coupon yields are higher than comparably rated corporate issues. D) their safety.

B) their exemption from federal income tax.

Which of the following statements regarding U.S. government agency securities is true? A) Interest received on agency securities is exempt from federal income tax. B) They generally offer higher yields than direct U.S. obligations. C) They are direct obligations of the U.S. government. D) They generally trade on the major stock exchanges.

B) They generally offer higher yields than direct U.S. obligations

A bond with a par value of $1,000 and a coupon rate of 6% paid semiannually 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) Future value of $1,200 B) Present value of $1,050 C) 15 payment periods D) Interest payments of $30

D) Interest payments of $30

Which of the following statements regarding convertible bonds is not true? A) Convertible bondholders are creditors of the corporation. B) The conversion rate is set at issuance and does not change. C) 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. D) Coupon rates are usually higher than nonconvertible bond rates of the same issuer.

D) Coupon rates are usually higher than nonconvertible bond rates of the same issuer.

The GHIJ Corporation has a 3% convertible debenture outstanding with a conversion price of $40. The bond's current market price is 126. The most probable reason for this is A) interest rates have risen since the debenture was issued. B) the current market price of the GHIJ common stock is approximately $35 per share. C) GHIJ's earnings have risen since the debenture was issued. D) the current market price of the GHIJ common stock is approximately $50 per share.

D) the current market price of the GHIJ common stock is approximately $50 per share.

Which of the following would you not expect to see issued at a discount? A) Zero-coupon bond B) Commercial paper C) Bank jumbo CD D) Treasury bill

C) Bank jumbo CD

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) DEF High-Yield Bond Fund C) ABC Growth and Income Fund D) JKL Municipal Bond Fund

B) DEF High-Yield Bond Fund