1 Securities Markets, Investment Securities, and Economic Factors Flashcards
(133 cards)
1
Q
An associated person
A
Any person controlling, controlled by, or in common control with that member.
2
Q
A broker
A
an Agent for a customer and charges the customer a commission for its services
3
Q
A Dealer
A
charges the customer a markup or markdown
4
Q
A member
A
Any individual, partnership, corporation, or legal entity admitted to membership in FINRA
5
Q
Outstanding stock
A
Equity securities in the hands of the public
6
Q
Authorized Stock
A
Number of shares that a corporation is permitted to issue
7
Q
Book Value
A
Current hypothetical liquidation value of a share or Hypothetical net worth of each share of common stock
8
Q
Par Value
A
Dollar amount assigned to a security by its issuer as an arbitrary accounting value
9
Q
Which of the following represent ownership (equity) in a company? I. Corporate bonds II. Common stock III. Preferred stock IV. Mortgage bonds A. I and II B. I and III C. II and III D. III and IV
A
C. II and III
Owning either common or preferred stocks represents ownership (or equity) in a corporation. The other two choices represent debt instruments. Clients purchasing corporate or mortgage bonds are considered lenders, not owners.
10
Q
Which of the following statements describe Treasury stock?
I. It has voting rights and is entitled to a dividend when declared.
II. It has no voting rights and no dividend entitlement.
III. It has been issued and repurchased by the company.
IV. It is authorized but unissued stock.
A. I and III
B. I and IV
C. II and III
D. II and IV
A
C. II and III
Treasury stock is stock a corporation has issued but subsequently repurchased from investors in the secondary market. The corporation can either reissue the stock at
a later date or retire it. Stock that has been repurchased by the corporation has no voting rights and is not entitled to any declared dividends.
11
Q
Stockholders’ preemptive rights include the right to
A. serve as an officer on the board of directors
B. maintain proportionate ownership interest in the corporation
C. purchase Treasury stock
D. examine the corporation’s books
A
B. maintain proportionate ownership interest in the corporation
Preemptive rights enable stockholders to maintain their proportionate ownership when the corporation wants to issue more stock. If a stockholder owns 5% of the outstanding stock and the corporation wants to issue more stock, the stockholder has the right to purchase enough of the new shares to maintain a 5% ownership position in the company.
12
Q
At the annual meeting of ABC Corporation, 5 directors are to be elected. Under the cumulative voting system, an investor with 100 shares of ABC would have a total of
A. 100 votes to be cast for each of 5 directors
B. 500 votes to be cast in any way the investor chooses for 5 directors
C. 500 votes to be cast for each of 5 directors
D. 100 votes to be cast for only 1 director
A
B. 500 votes to be cast in any way the investor chooses for 5 directors
With cumulative voting rights, this investor may cast 500 votes for the 5 directors in any way the investor chooses.
13
Q
Cumulative voting rights A. benefit the large investor B. aid the corporation’s best customers C. give preferred stockholders an advantage over common stockholders D. benefit the small investor
A
D. benefit the small investor
The cumulative method of voting, like the statutory, gives an investor 1 vote per share owned, times the number of directorships to be elected. For instance, if an investor owns 100 stock shares, and there are 5 directorships to be elected, the investor will have a total of 500 votes. Under cumulative voting, however, the stockholder may cast all of his votes for 1 candidate, thereby giving the small investor more voting power.
14
Q
What is the basic formula of the balance sheet? A. Assets = liabilities – net worth B. Assets + liabilities = net worth C. Assets = net worth D. Assets = liabilities + net worth
A
D. Assets = liabilities + net worth
Assets – liabilities = net worth, or
Assets = liabilities + net worth.
The basic formula of the balance sheet is assets = liabilities + net worth. By the same algebra, a company’s shareholder equity can be calculated as such: net worth = assets – liabilities.
15
Q
All of the following are privileges or benefits of stock ownership EXCEPT A. dividends B. growth C. guaranteed income D. voting rights
A
C. guaranteed income
Although stocks often pay regular dividends, they are not guaranteed. If the board decides the company cannot afford to pay a dividend this quarter, no dividend will be paid.
16
Q
Which of the following factors are disadvantages of investment in common stock, compared with fixed income securities, such as bonds? I. No assurance of return II. Lower priority of income payment III. No voting rights IV. Less inflation protection A. I and II B. I and III C. II and IV D. III and IV
A
A. I and II
Unlike bond interest, dividends on stock are not promised or ensured and need not be paid. Also, when money is to be paid out, whether as income to the investor or as return of capital at dissolution, common stock has the lowest priority. On the bright side, common stock, unlike debt instruments, gives its owner the right to vote on the important decisions of the issuing company and has historically offered better inflation protection than fixed income securities.
17
Q
Which of the following types of preferred stock is most influenced by the price of an issuer’s common stock? A. Participating B. Straight C. Convertible D. Callable
A
C. Convertible
Because convertible preferred shares can be exchanged for common shares, its price can be closely linked to the price of the issuer’s common and is less influenced by changes in interest rates.
18
Q
Which of the following types of preferred stock might pay a dividend that is higher than that printed on the certificate? I. Straight preferred II. Cumulative preferred III. Participating preferred IV. Callable preferred A. I and III B. I and IV C. II and III D. II and IV
A
C. II and III
Cumulative preferred might pay dividends in arrears in addition to the fixed dividend. Participating preferred might pay part of the common dividend, over and above the fixed dividend.
19
Q
In which of the following ways does preferred stock differ from common stock as an investment?
A. Lower dividends
B. Greater sensitivity to interest rate fluctuation
C. Lower priority of dividend payment
D. Greater voting rights
A
B. Greater sensitivity to interest rate fluctuation
As a fixed income security, preferred stock has markedly greater price sensitivity to interest rates than does common stock.
20
Q
100
A
Number of shares in a standard trading unit of stock
21
Q
Preemptive right
A
Stockholders may maintain proportionate ownership by purchasing newly issued shares before they are offered to the public
22
Q
Current yield
A
Annualized dividend divided by current market price
23
Q
Quarterly
A
Typical frequency of dividend payment on common stock
24
Q
The following question identifies nearly all of the testable points on ADRs:
Which of the following statements about ADRs is TRUE?
A. Owners of ADRs have voting rights.
B. ADRs allow foreign investors to buy domestic issues of stock.
C. Owners of ADRs receive dividends in foreign currency.
D. ADR owners are subject to currency risk.
A
D. Owners of ADRs face currency risk. The exchange rate between the foreign currency of the ADR issuer and the US dollar causes the dividend pay- ment to rise and fall in dollar value. Owners of ADRs have no preemptive rights or voting rights. ADRs allow domestic investors to purchase foreign issues, not the reverse. ADR owners receive dividends in dollars.
25
ADRs are used to facilitate
A. the foreign trading of domestic securities
B. the foreign trading of US government securities
C. the domestic trading of US government securities
D. the domestic trading of foreign securities
D. the domestic trading of foreign securities
ADRs are tradable securities issued by banks, with the receipt’s value based on the underlying foreign securities held by the bank.
26
The owner of an ADR is likely to receive which of the following?
A. Dividends
B. Capital gains or losses
C. Both dividends and capital gains or losses
D. Neither dividends nor capital gains or losses
C. Both dividends and capital gains or losses
An ADR represents ownership of a foreign corporation. The ADR holder receives
a share of the dividends and capital appreciation (or capital loss) when sold.
27
Rights:
Short-term instruments, exercise price is below market price; issued to current shareholders only, who may exercise them, sell them on the open market, or let them expire
28
Warrants
Long-term instruments; exercise price is above market price at time of issue; used as sweeteners with issues of more speculative corporate bonds; also, own- ers of warrants are not entitled to dividends, though they may sell the warrant on the open market
29
Which of the following statements regarding warrants is TRUE?
A. Warrants are offered to current shareholders only.
B. Warrants have longer terms than rights.
C. Warrants do not trade in the secondary market.
D. At the time of issuance, the exercise price of a warrant is typically below the
market price of the underlying stock.
B. Warrants have longer terms than rights.
Warrants are issued with long-term maturities. They may be used as sweeteners in an offering of the issuer’s preferred stock or bonds. Warrants are not offered only to current shareholders. The exercise price of a warrant is always above the market price of the stock at the time of issue.
30
Which of the following statements about rights is TRUE?
A. Common stockholders do not have the right to subscribe to rights offerings.
B. Preferred stock is not subject to rights offerings.
C. Rights are long-term instruments.
D. The exercise price of rights is greater than the current market price of the stock at the time of issuance.
B. Preferred stock is not subject to rights offerings
Preferred stockholders have no right to maintain a percentage of ownership when new shares are issued (no preemptive rights). However, they do receive preference in dividend payment and company liquidation.
31
Rights and warrants are similar in that they
A. are both long-term instruments
B. afford access to stock under possibly favorable conditions
C. are both used to sweeten another securities offering
D. both pay relatively low dividends
B. afford access to stock under possibly favorable conditions
Rights afford access to new stock, often at a discount, before it is offered to the public. Warrants afford access to stock at a fixed price for a long period of time.
32
```
Who of the following are bearish?
I. Call buyer
II. Call writer
III. Put buyer
IV. Put writer
A. I and III
B. I and IV
C. II and III
D. II and IV
```
C. II and III
The call writer expects the stock to decrease in price, and that the call will therefore not be exercised. This permits him to keep the premium. The put buyer thinks the stock will go down in price, and thus reserves to himself the right to sell it at the higher put strike price.
33
Upon exercise of an option, who of the following would buy stock?
A. The call buyer because he is obliged to.
B. The put seller because he is obliged to.
C. The call seller because he elects to.
D. The put buyer because he elects to.
B. The put seller because he is obliged to.
The put seller has sold another investor the right to sell stock to him at the put strike price. Thus, if the put is exercised, he will be obliged to buy the stock.
34
```
Who of the following have acquired an obligation?
I. Call buyer
II. Call writer
III. Put buyer
IV. Put writer
A. I and III
B. I and IV
C. II and III
D. II and IV
```
D. II and IV
| The call seller is obliged to sell stock, and the put seller is obliged to buy stock, should the option be exercised.
35
```
All of the following issue bonds EXCEPT
A. sole proprietorships
B. the US government
C. municipalities
D. corporations
```
A. sole proprietorships
Corporations, municipalities, and the US government issue bonds. Sole proprietorships assume debt by borrowing from a bank.
36
```
Which of the following entities are exempt from the Trust Indenture Act of 1939?
I. Any large corporation
II. The US government
III. Municipalities
IV. A corporation issuing a bond for $40 million
A. I and II
B. I and IV
C. II and III
D. II and IV
```
C. II and III
Government at the federal and municipal level are both exempt from the Trust Indenture Act of 1939. The Act applies to corporate bonds issuing for $5 million or more in a 12-month period.
37
Which of the following are found on a bond certificate?
I. Names of the chief officers of the corporation
II. The corporation’s credit rating
III. Call features, including first call date, if any
IV. Interest rate and payment dates
A. I and II
B. I and III
C. II and IV
D. III and IV
D. III and IV
Bond certificates contain basic information regarding the bond itself, such as the name of the issuing corporation, call features, the coupon rate, and the principal amount of the bond. There is no requirement that the corporation’s officers be named, or that its credit rating be given.
38
```
The excess of par over the market price of a bond is called
A. the premium
B. the discount
C. the amount owed
D. the overage
```
B. the discount
| If par is greater than (in excess over) the market price of a bond, the bond must be selling at a discount.
39
```
Which of the following bonds is considered to be the safest?
A. A rated mortgage bond
B. Baa rated equipment trust certificate
C. AA rated unsecured debenture
D. B rated funded debt
```
C. AA rated unsecured debenture
The safest of the bonds listed is the AA rated unsecured debenture. You don’t need to be concerned with the type of bond; the rating takes into ac- count all features of the security when rating the credit risk.
40
Under what economic circumstances do issuers call bonds?
Bonds are typically called when interest rates are declining. Consider the issuer’s side: would you want to pay more interest for the use of money than you need to?
Both call risk and reinvestment risk apply to callable bonds.
41
Investors who purchase callable bonds face what types of investment risk?
Call risk is the risk that the bonds will be called and the investor will lose the stream of income from the bond. Remember that bonds don’t pay interest after they have been called. The call feature also causes reinvestment risk. If interest rates are down when the call takes place, what likelihood does the investor have of reinvesting the principal received at a comparable rate?
Both call risk and reinvestment risk apply to callable bonds.
42
Which of the following would an investor prefer in a bond she is purchasing?
A. A long call protection period when interest rates are high
B. A long call protection period when interest rates are low
C. A short call protection period when interest rates are high
D. A short call protection period when interest rates are low
A. A long call protection period when interest rates are high
Investors want to lock in the highest possible rate of interest for the longest period of time. During the call protection period the issuer may not call the bonds away.
43
Account established so that an issuer has the money to redeem its bonds
D. Sinking fund
44
Contractual promise stating that the bond issue is not callable for a certain period of time
A. Call protection
45
The schedule of interest and principal payments due on a bond issue
C. Debt service
46
Difference between the higher price paid for a bond and the bond’s face amount at issue
B. Premium
47
Which of the following AA rated corporate bonds would be expected to have the market price?
A. A bond with 20 years to maturity when interest rates have risen
B. A bond with 20 years to maturity when interest rates have dropped
C. A bond with 10 years to maturity when interest rates have risen
D. A bond with 10 years to maturity when interest rates have dropped
A. A bond with 20 years to maturity when interest rates have risenMarket prices of existing bonds drop when interest rates rise. The longer the bond has to go to maturity, the greater the effect.
48
```
What is the current yield of a 6% bond trading for $800?
Current yield (CY) = annual interest ÷ current market price
```
Solution as follows:
$60 ÷ $800 = 7.5%.
Note that this bond is trading at a discount. When prices fall, yields rise. The current yield (7.5%) is greater than the nominal yield (6%) when bonds are trading at a discount.
49
What is the current yield of a 6% bond trading for $1,200?
$60 ÷ $1,200 = 5%. This bond is trading at a premium. Price is up, so the yield is down. The current yield (5%) is less than the nominal yield (6%) when bonds are trading at a premium.
50
YTM is greater than coupon.
Discount
51
CY is less than coupon.
Premium
52
YTM is greater than CY.
Discount
53
YTM is equal to nominal.
Par
54
CY is less than YTM.
Premium
55
YTM is less than coupon.
Discount
56
YTM is equal to CY.
Par
57
Percentage return reflecting the annualized return of the bond if held to maturity
Yield to maturity
58
Stated on the face of the bond certificate
Nominal yield
59
Annual interest divided by today’s market price
Current yield
60
Bondowner’s name stored in records kept by the issuer or transfer agent
Book entry
61
Bonds rated BBB/Baa or above
Investment grade
62
```
A new bond contains a provision that it cannot be called for 5 years after the date of issuance. This call protection would be most valuable to a recent purchaser of the bond if interest rates are
A. falling
B. rising
C. stable
D. fluctuating
```
A. falling
Call protection is most valuable to a purchaser when interest rates are falling. Bonds tend to be called in a falling interest rate environment.
63
What is the calculation for determining the current yield on a bond?
A. Annual interest ÷ par value
B. Annual interest ÷ current market price
C. Yield to maturity ÷ par value
D. Yield to maturity ÷ current market price
B. Annual interest ÷ current market price
64
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A customer purchased a 5% US government bond yielding 6%. A year before the bond matures, new US government bonds are being issued at 4%, and the customer sells the 5% bond. The customer probably
I. bought it at a discount
II. bought it at a premium
III. sold it at a discount
IV. sold it at a premium
A. I and III
B. I and IV
C. II and III
D. II and IV
```
B. I and IV
The customer purchased the 5% bond when it was yielding 6%, therefore at a discount. The customer sold the bond when other bonds of like kind, quality, and maturity were yielding 4%. The bond is now at a premium because the 5% coupon is attractive to other investors. The customer, therefore, made a capital gain on the investment.
65
Which yield to maturity would be higher?
A. 10% nominal yield bond with a premium price
B. 10% nominal yield bond with a discount price
C. 10% nominal yield bond with a price at par
D. 10% current yield bond with a price at par
B. 10% nominal yield bond with a discount price
With the same nominal yield, the discount bonds will generate higher yields. In addition to the interest payments received on an ongoing basis, the investor receives the amount of the discount at maturity.
66
In a comparison of long-term bonds with short-term bonds, all of the following are characteristics of long-term bonds EXCEPT
A. they usually have higher yields than short-term bonds
B. they usually provide greater liquidity than short-term bonds
C. they are more likely to be callable
D. they will fluctuate in price more than short-term bonds in response to interest rate changes
B. they usually provide greater liquidity than short-term bonds
Long-term bonds are not as liquid as short- term obligations.
67
```
When interest rates are falling or rising, the price fluctuations of which of the fol- lowing will be the greatest?
A. Short-term bonds
B. Long-term bonds
C. Money market instruments
D. Common stock
```
B. Long-term bonds
Long-term debt prices fluctuate more than short-term debt prices as interest rates rise and fall. Common stock prices are not directly affected by interest rates.
68
Treasury bill
Marketable US government debt with a maturity of one year or less
69
GNMA pass-through certificate
Security representing an interest in a pool of mortgages that is guaranteed by the full faith and credit of the US government
70
Collateralized mortgage obligation
Mortgage-backed corporate security that attempts to return interest and principal at a predetermined rate
71
Separate Trading of Registered Interest and Principal of Securities (STRIPS
Zero-coupon bond issued and backed by the Treasury Department
72
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CMOs are backed by
A. mortgages
B. real estate
C. municipal taxes
D. full faith and credit of US government
```
A. mortgages
73
```
The term tranche is associated with which of the following investments?
A. FNMA
B. CMO
C. GNMA
D. SLMA
```
B. CMO
74
True or False?
| Municipal securities are issued by federal and state governments.
False
| Municipal securities are issued by state and local governments.
75
True or False?
| Capital gains from the profitable sale of municipal securities are not exempt from taxation.
True
| Capital gains from the profitable sale of municipal securities are not exempt from taxation.
76
True or False?
| Municipal revenue bonds are generally backed by taxes collected by the municipality.
False
| Revenue bonds are self-supporting and are backed by income from the use of the facility. GOs are backed by taxes.
77
True or False?
| The interest on IDRs is typically taxable at the federal level.
True
| The interest on IDRs is typically taxable at the federal level.
78
True or False?
| Bonds issued by school, road, and park districts are examples of GOs.
True
| Bonds issued by school, road, and park districts are examples of GOs.
79
True or False?
| Municipals generally pay less interest than corporate issuers.
True
| Municipals generally pay less interest than corporate issuers.
80
True or False?
| Corporate bonds are quoted in points and 1/8s.
True
| Corporate bonds are quoted as a percentage of par. One point is $10, and 1⁄8 of a point is $1.25.
81
True or False?
| T-bills are short-term obligations.
True
| T-bills are issued with maturities of 4, 13, and 26 weeks. Anything 1 year or less is considered short term.
82
True or False?
| T-bonds pay interest quarterly.
False
| T-bonds pay interest semiannually.
83
True or False?
| STRIPS are zero-coupon bonds issued by the Treasury.
True
| STRIPS are issued by the Treasury in strippable form, for sale by broker/dealers to the public.
84
True or False?
| Treasury receipts are backed directly by the Treasury.
False
Treasury receipts, while originally issued by the Treasury, are directly backed by the broker/dealer that sells them, not the Treasury.
85
Claims are junior to those of other creditors
Subordinated debenture
86
Party other than the issuing corporation promises to maintain payments of principal and interest
Guaranteed bonds
87
Dollar amount at which a convertible security is equal in value to its cor- responding stock
Parity
88
Investor receives Form 1099 and reports interest for taxation even though no interest income has been received
Zero-coupon bonds
89
Debt obligation secured by a pledge of real property
Mortgage bond
90
Debenture that can be exchanged for common stock at specified prices or rates
Convertible
91
Secured bond backed by stocks or bonds of another issuer
Collateral trust bond
92
Interest payment must be declared by issuer’s board of directors and only if earnings are enough to support the payment
Income bond
93
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ABC, Inc., has filed for bankruptcy. Parties will be paid off in which order?
I. Holders of secured debt
II. Holders of subordinated debentures
III. General creditors
IV. Preferred stockholders
A. I, III, II, IV
B. III, I, II, IV
C. I, II, III, IV
D. IV, I, II, III
```
A. I, III, II, IV
The order in a liquidation is as follows: wages, the IRS (and other government agencies), secured debt holders, unsecured debt holders, general creditors (in most cases, unsecured debt holders are given
a slight priority over all but the largest creditors), holders of subordinated debt, preferred stockholders, and then common stockholders.
94
```
Moody’s Bond Page lists the following: GMAC ZR ’32 54 1⁄4
Ogden 5s ’33 78 7⁄8
The annual interest on 50 Ogden bonds is
A. $93
B. $500
C. $930
D. $2,500
```
D. $2,500
Ogden 5s means 5% bonds. Five percent of $1,000 par = $50 interest per bond annually. For 50 bonds, the annual interest is $2,500.
95
Which of the following statements regarding convertible bonds is NOT true?
A. Coupon rates are usually higher than nonconvertible bond rates of the same issuer.
B. Convertible bondholders are creditors of the corporation.
C. Coupon rates are usually lower than nonconvertible bond rates of the same
issuer.
D. If the underlying common stock should decline sharply, the bonds will sell at
a price based on their inherent value as bonds, disregarding the convertible feature.
A. Coupon rates are usually higher than nonconvertible bond rates of the same issuer.
Coupon rates are not higher; they are lower because of the value of the conversion feature. The bondholders are creditors, and if the stock price falls, the conversion feature will not influence the bond’s price.
96
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A bond is convertible to common stock at $20 per share. If the market value of the bond is $800, what is the parity price of the stock?
A. $12
B. $16
C. $25
D. $40
```
B. $16
| The calculations are: $1,000 ÷ $20 = 50 shares for one bond. $800 bond price ÷ 50 shares = $16 parity price.
97
```
A convertible bond is purchased at a discount and is convertible at $125. What is the conversion ratio?
A. 2
B. 8
C. 12
D. 20
```
B. 8
| $1,000 par ÷ $125 conversion price = 8 shares per bond.
98
What is the source for short-term financing and long-term financing
The money market is the source for short-term financing, while the capital market is the source for medium- to long-term financing. Money market funds are short-term, liquid debt obligations.
99
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All of the following are money market instruments EXCEPT
A. Treasury bills
B. municipal notes
C. commercial paper
D. newly issued Treasury bonds
```
D. newly issued Treasury bonds
Newly issued Treasury bonds have a minimum maturity of 10 years. Money market instruments have a maximum maturity of one year.
100
```
The maximum maturity of commercial paper is how many days?
A. 90
B. 180
C. 270
D. 360
```
C. 270
| Commercial paper is normally issued for a maximum period of 270 days.
101
```
Which of the following statements regarding negotiable CDs are TRUE?
I. The issuing bank guarantees them.
II. They are callable.
III. Minimum denominations are $1,000.
IV. They can be traded in the secondary market.
A. I and II
B. I and IV
C. II and III
D. III and IV
```
B. I and IV
| Negotiable certificates of deposit are issued primarily by banks and are backed by, or guaranteed, by the issuing bank.
102
Commercial paper is
A. a secured note issued by a corporation
B. a guaranteed note issued by a corporation
C. a promissory note issued by a corporation
D. none of the above
C. a promissory note issued by a corporation
| Commercial paper is a short-term promissory note issued by a corporation.
103
```
Which money market instrument finances imports and exports?
A. Eurodollars
B. Bankers’ acceptances
C. ADRs
D. Commercial paper
```
B. Bankers’ acceptances
Bankers’ acceptances are used in international trade to finance imports and exports. Euro-dollars and ADRs are not money market instruments.
104
The study of supply and demand
Economics
105
Money loses buying power
Inflation
| Inflation is a general, continual increase in prices at the consumer level.
106
Contraction lasting at least 6 consecutive months
Recession
107
Followed by expansion
Trough
108
Quantifies price changes
CPI
Consumer Price Index (CPI). The CPI measures the rate of increase or decrease in a range of consumer prices (e.g., food, housing, transportation, medical care, clothing, electricity, entertainment, and services). The CPI is the most commonly used tool to measure the rate of inflation.
109
```
When the FOMC purchases T-bills in the open market, which of the following
scenarios are likely to occur?
I. Secondary bond prices will rise
II. Secondary bond prices will fall
III. Interest rates will rise
IV. Interest rates will fall
A. I and III
B. I and IV
C. II and III
D. II and IV
```
B. I and IV
When the Federal Open Market Committee purchases T-bills in the open market, it pays for the transaction by increasing the reserve accounts of member banks, the net effect of which increases the total money supply and signals a period of relatively easier credit conditions. Easier credit means interest rates will decline and the price of existing bonds will rise.
110
Which of the following situations could cause a fall in the value of the US dollar in relation to the Japanese yen?
I. Japanese investors buying US Treasury securities
II. US investors buying Japanese securities
III. Increase in Japan’s trade surplus over that of the United States
IV. General increase in US interest rates
A. I and III
B. I and IV
C. II and III
D. II and IV
C. II and III
US money being invested abroad would weaken the dollar, as would a negative economic event, such as an unfavorable balance of trade.
111
To tighten credit during inflationary Periods, the Federal Reserve Board can take
any of the following actions EXCEPT
A. raise reserve requirements
B. change the amount of US government debt held by institutions
C. sell securities in the open market
D. lower taxes
D. lower taxes
To curb inflation, the Fed can sell securities in the open market, thus changing the amount of US government debt institutions hold. It can also raise the reserve requirements, discount rate, or margin requirements. The Fed has no control over taxes, which are raised or lowered by Congress.
112
The effective federal funds rate is:
A. the daily average rate charged by the largest money center banks
B. the daily rate charged by Federal Reserve member banks
C. the weekly average rate charged by the largest money center banks
D. the weekly average rate charged by Federal Reserve member banks
B. the daily rate charged by Federal Reserve member banks.
The federal funds rate reflects the rate charged by member banks lending funds to member banks that need to borrow funds overnight to meet reserve requirements.
113
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Which of the following interest rates is considered the most volatile?
A. Discount rate
B. Federal funds rate
C. Prime rate
D. LIBOR
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B. Federal funds rate
The federal funds rate is the interest rate that banks with excess reserves charge other banks that are associated with the Federal Reserve System and that need overnight loans to meet reserve requirements. Because the federal funds rate changes daily, it is the most sensitive indicator of interest rate direction.
114
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Which of the securities listed below is issued without a stated rate of return?
A. Treasurybond
B. Treasury bill
C. Preferred stock
D. Treasury note
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B. Treasury bill
Treasury bills are not issued with a stated coupon rate. Instead, they are sold through auctions at a discount to their par value of $1,000. They then mature to their face amount and the discount represents the interest earned. Treasury bonds and Treasury notes are issued with a stated rate of interest, and interest is paid semiannually. Preferred stock has a stated rate of dividend; however, it is not guaranteed. The stated rate of dividend is only paid if declared by the board of directors.
115
Which of the following statements describing current yield is TRUE?
A. The terms current yield and total return are identical.
B. Current yield is calculated by dividing the annual interest or dividend received from an investment by its current market price.
C. Current yield compares an investment’s current price to its price at the end of the previous year.
D. Current yield can be used to express the income return on a bond but not on a stock or a mutual fund.
B. Current yield is calculated by dividing the annual interest or dividend received from an investment by its current market price.
Current yield is calculated by dividing the annual income distribution from an investment (interest for bonds and dividends for stock or mutual funds) by the current market value (price) of the security. The current return calculation does not factor price movement over time or reinvestment of distributions, and thus does not express an investment’s total return.
116
Where are securities that are NOT listed on an exchange traded?
A. Only through INSTINET
B. On the over-the-counter market
C. On a regional exchange in the same state
where the security was issued
D. All securities must be listed in order to trade
publicly
B. On the over-the-counter market
Securities not listed on an exchange are traded on the over-the-counter market. INSTINET is used by institutional investors for fourth-market trades. The location of the issue has no bearing on whether the issue is listed on a regional exchange.
117
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Which of the following types of preferred stock may pay a single dividend that is greater than the dividend stated on the face of the certificate?
I. Straight
II. Cumulative
III. Convertible
IV. Participating
A. I and II
B. I and III
C. II and III
D. II and IV
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D. II and IV
Cumulative preferred stockholders have the right to receive skipped dividends of the corporation and can receive a dividend in arrears plus the current year’s dividend. Participating preferred stockholders have the right to receive a share of the common dividend.
118
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An investor purchased a corporate bond for 97 3⁄8. If the bond is sold for 99 3⁄8, the investor has a profit of
A. $.20
B. $2
C. $20
D. $200
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C. $20
This investor has a profit of two points, or $20. Bond points are worth $10 each. The actual dollar prices of the bonds are computed as follows: 973⁄8 = 970 + 3.75 (3⁄8 of $10) = $973.75; 993⁄8 = 990 + 3.75 = $993.75.
119
The Federal Open Market Committee is con- cerned with rising inflation. To counteract this concern the FOMC should
A. increase the reserve requirement
B. sell US Treasury securities in the open market
C. increase the federal funds rate
D. increase the discount rate
B. sell US Treasury securities in the open market
The FOMC buys and sells US Treasury securities to impact the money supply. To counteract inflation, the FOMC needs to remove dollars from the money supply. By selling US Treasury securities, the FOMC requires payment which removes money from the economy, causing interest rates to rise. The FOMC does not set the reserve requirement or the discount rate; these are tools of the Federal Reserve Board (FRB). The federal funds rate is determined by market supply and demand of excess reserves between banks.
120
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All of the following types of securities trade in the secondary market EXCEPT
A. debentures
B. EE bonds
C. common stock
D. municipal bonds
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B. EE bonds
| EE bonds do not trade on the secondary market.
121
Which of the following are characteristics of a corporate zero-coupon bond?
I. The bond pays interest on a semiannual basis.
II. The bond is purchased at a discount from its
face value.
III. The investor has locked in the rate of return.
IV. Income tax is paid only at the bond’s maturity.
A. I and III
B. I and IV
C. II and III
D. II and IV
C. II and III
Zero-coupon bonds are bought at a discount from their face value. The investor has locked in a rate of return because the maturity value of the bond is known at the time of purchase. A corporate zero-coupon bond pays no interest each year but is taxed as if it did.
122
Which of the following statements about bid and asked prices are TRUE?
I. Market makers buy at the bid and sell at the asked.
II. Market makers buy at the asked and sell at the bid.
III. Customers buy at the bid and sell at the asked.
IV. Customers buy at the asked and sell at the bid.
A. I and III
B. I and IV
C. II and III
D. II and IV
B. I and IV
Customers buy stock at the asked price, which means that market makers must sell at the asked price. Customers sell to market makers at the bid price, which is the price that a market maker will pay to buy the customer’s stock. Remember that customers buy at the ask. Then remember that market makers do the opposite and easily solve questions like this.
123
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Which of the following generally provides the right to buy a corporation’s stock for the longest period of time?
A. Warrant
B. Long put
C. Long call
D. Preemptive right
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A. Warrant
A warrant allows an investor a long-
term right to buy an issuer’s stock. The expiration period of a warrant is generally
5 years. Long calls are options that give the holder the right to buy stock, but typically expire within 9 months. Preemptive rights are short-term rights to buy stock and usually expire within 30–45 days. Long puts are rights to sell.
124
An investor owns 100 shares of common stock in ABC Corporation. ABC Corporation allows for statutory voting in board of directors elections. If there are 5 positions to be voted on for the board, the investor has
A. 500 votes for each of the positions
B. a total of 500 votes which may be cast in any
manner
C. 100 votes for each of the 5 positions
D. 20 votes for each of the 5 positions
B. a total of 500 votes which may be cast in any
manner.
Statutory voting allows investors 1 vote for each share of stock they own per open-director position. This investor has 100 votes for each of the 5 voting positions on the board of directors.
125
Which of the following would be considered money market instruments?
I. A Treasury bond with 11 months to maturity
II. 10 shares of preferred stock sold within 270
days
III. An American depository receipt (ADR) held
for less than 1 year
IV. A $200,000 negotiable certificate of deposit
A. I and III
B. I and IV
C. II and III
D. III and IV
B. I and IV
Money market securities are high grade and liquid debt securities with less than 1 year to maturity. Preferred stock and ADRs are equity securities. The T-bond with less than 1 year to maturity and a negotiable CD are money market instruments.
126
Which of the following are characteristics of gen-
eral obligation (GO) municipal bonds?
I. They are backed by the revenue generated from the facility that was built with the proceeds of the bond issue.
II. Interest paid is taxfree at the federal level.
III. They are issued by agencies of the federal
government.
IV. They are backed by the taxing power of the
issuing municipality.
A. I and III
B. I and IV
C. II and III
D. II and IV
D. II and IV
General obligation bonds are backed
by the full faith and credit (and taxing authority) of the issuing municipality. The interest that is paid on municipal bonds is exempt from taxation at the federal level. Municipal revenue bonds are backed by revenues generated from the use of the facility. Municipal bonds are issued by government levels other than the federal government.
127
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A convertible corporate bond that has an 8% coupon yielding 7.1% is available but may be called some time this year. Which feature of this bond would probably be least attractive to your client?
A. Convertibility
B. Coupon yield
C. Current yield
D. Near-term call
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D. Near-term call
The near-term call would mean that no matter how attractive the bond’s other features, the client may not have very long to enjoy them.
128
All of the following statements about preferred stock and bonds are true EXCEPT
A. they are both debt instruments
B. they both have a fixed rate of return
C. they are both senior to common stock at the
dissolution of a corporation
D. the prices of both are directly influenced by
interest rates
A. they are both debt instruments
Preferred stock is an equity instrument because it represents an ownership interest in a corporation. However, because of its fixed dividend rate, the price of preferred stock (like the price of bonds) is directly influenced by changes in interest rates. Debt securities and preferred stock are senior to common stock in corporate dissolutions.
129
Which of the following statements about collater- alized mortgage obligations (CMOs) are TRUE?
I. CMOs are backed by the US government.
II. CMOs are financial institution-sponsored
pools of mortgages.
III. CMOs are exempt from taxation at the federal
level.
IV. CMOs cannot include municipal issues.
A. I and III
B. I and IV
C. II and III
D. II and IV
D. II and IV
CMOs are financial institution-sponsored mortgage pools and are not backed by
the US government. Like other corporate instruments, they are subject to taxation at all levels. Regulations prohibit CMOs from including municipal issues.
130
Which of the following statements regarding Gin- nie Maes are TRUE?
I. They are not taxable at the state level.
II. They are directly backed by the federal
treasury.
III. The minimum certificate at issue is $1,000.
IV. Investors receive a monthly check
representing both interest and a return of principal.
A. I and III
B. I and IV
C. II and III
D. II and IV
D. II and IV
Government National Mortgage Association (GNMA) pass-through certificates are directly backed by the federal treasury. Each monthly check is part interest, part principal. The minimum certificate at issue is $25,000 and the interest portion of the check is taxable at both the federal and the state level.
131
An investor owns a 9% convertible bond issued by the XYZ Corporation, a subsidiary of the ABC Corporation. The bond is convertible at $25. This investor may convert the bond into
A. 4 shares of common stock of the ABC Corporation
B. 4 shares of common stock of the XYZ Corporation
C. 40 shares of common stock of the ABC Corporation
D. 40 shares of common stock of the XYZ
Corporation
D. 40 shares of common stock of the XYZ
Corporation
To calculate the number of shares that a bond is convertible into, divide the bond’s par value ($1,000) by the conversion price ($25). Because the bond was issued by the XYZ Corporation, this bond is convertible into 40 shares of XYZ Corporation’s common stock.
132
Importers enjoy the greatest profits when
A. their own currency is strong and foreign currencies are weak
B. their own currency is strong and foreign currencies are strong
C. their own currency is weak and foreign currencies are weak
D. their own currency is weak and foreign currencies are strong
A. their own currency is strong and foreign currencies are weak
If domestic currency is strong, then foreign currencies are weak by comparison and vice versa. Importers, who order foreign goods, would like those goods to be priced as low as possible, which is another way of saying they would like the foreign currency to be weak and their own currency to be strong.
133
If the Swiss franc has depreciated relative to the US dollar, then goods produced in
I. Switzerland become less expensive in
the United States
II. Switzerland become more expensive in the United States
III. the United States become less expensive in Switzerland
IV. the United States become more expensive in Switzerland
A. I and III
B. I and IV
C. II and III
D. II and IV
B. I and IV
If the Swiss franc falls in value relative to the US dollar, goods produced by the United States become more expensive in Switzerland. Goods produced in Switzerland become less expensive in the United States.
