Chapter 2 & 4 (5 questions)

Question 1

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

Answer 1

characteristic of negotiable jumbo CDs

Question 2

general creditors and, as such, have prior claim only over ______.

Answer 2

equity holders.

Question 3

If an investor pays 95.28 for a Treasury bond, how much did the bond cost?

Answer 3

$958.75

Question 4

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?

Answer 4

Interest payments of $30

Question 5

which specific risk is avoided when a U.S. resident purchases a Eurodollar bond?

Answer 5

Currency risk- Eurodollar bonds are denominated in dollars; therefore, no currency risk exists for a U.S. resident.

Question 6

A Public Library is most likely to be funded with a ________ rather than a revenue bond

Answer 6

General Obligation Bond (backed by taxes)

Question 7

Hospitals, airports, and golf courses all generate revenue and can be financed with __________ bond issues

Answer 7

revenue bond issues

Question 8

True or False:
Coupon rates are usually higher than nonconvertible bond rates of the same issuer.

Answer 8

False

Question 9

_______are always interest bearing and issued at par or face value.

Answer 9

CDs

Question 10

most significant characteristic of municipal bonds for investors is

Answer 10

their exemption from federal income tax.

Question 11

The current yield on a bond with a coupon rate of 7.5% currently selling at 105½ is approximately

Answer 11

7.11%.

Question 12

____= Annual Interest/Bond Market Price

Answer 12

Current Yield

Question 13

Current Yield

Answer 13

Annual Interest/Bond Market Price

Question 14

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?

Answer 14

$1,267

Question 15

the owner of a convertible debt issue

Answer 15

is a creditor of the issuer.

Question 16

Debt Instrument that presents low default risk

Answer 16

Municipal general obligation bonds & anything issued by the United States Government

Question 17

benefits of adding foreign debt securities to an investor’s portfolio is

Answer 17

potentially higher yields.

Question 18

An investor purchasing 10 corporate bonds at a price of 102¼ each will pay

Answer 18

$10,225.00.

Question 19

True or False: U.S Government Agency Securities offer higher yields than direct U.S. obligations

Answer 19

TRUE

Question 20

the advantages to investing in Brady bonds over those issued by countries classified as emerging economies is

Answer 20

short maturities

Question 21

When a company uses the securities of one subsidiary to collateralize a bond issue of another subsidiary, the bonds are known as _____________________.

Answer 21

collateral trust certificates.

Question 22

Par is always 1000 shares. The bond’s value is based on that. if the market price is $800 value, then that is 80% of Par. To Calculate _________, you divide Par by the given stock price, then divide the Current Value by that variable.

Answer 22

PARITY

Question 23

Coupon X (1-Tax Bracket)

Answer 23

after tax yield

Question 24

Tax-Equivalent Yield

Answer 24

Coupon X (1-Tax Bracket)

Question 25

Which type of risk is a mortgage-backed security like GNMA most likely to experience?

Answer 25

Reinvestment risk- As mortgages are paid off early and refinanced in the event of declining interest rates, the interim cash flows received from the obligation must be reinvested in lower-yielding securities. This is the practical effect of prepayment risk.

Question 26

What product is Not registered with the SEC and has Negotiated maturities and yields?

Answer 26

commercial paper- unsecured debt obligations of corporations needing short-term financing. issued with maturities of no more than 270 days

Question 27

Dividend/Stock Price

Answer 27

current yield

Question 28

current yield

Answer 28

Dividend/Stock Price

Question 29

_________are foreign bonds, denominated in U.S. dollars and issued in the United States by foreign banks and corporations

Answer 29

Yankee bonds

Question 30

__________ are issued in the United States by domestic banks and represent receipts for securities traded on foreign exchanges

Answer 30

ADRs

Question 31

___________ are issued by a borrower in a foreign country, denominated in a currency other than one native to the issuer's country

Answer 31

Eurobonds

Question 32

BB Rating at S&P (or Ba rating for Moody)

Answer 32

Junk Bond (high Yield)

Question 33

he most common collateral securing a Brady bond is

Answer 33

U.S. Treasury zero-coupon bonds with a maturity corresponding to the maturity of the individual Brady bond.

Question 34

What Agency Security is guaranteed by the U.S. Government

Answer 34

Ginnie Mae -- Other agency securities have lines of credit at the Treasury, but this credit does not constitute a full guarantee.

Question 35

10M RAN 6.6s of 32 at 67 means what

Answer 35

10,000 (10M) of the RAN Corporation bonds with a 6.6% coupon (interest rate stated on the face of the bond) that mature in 2032 (32). The price is 67, which represents 67% of $10,000, or $6,700

Question 36

For a bond selling at a discount, the yield to maturity will be ______ than the nominal Yield

Answer 36

Higher

Question 37

For a bond selling at a discount, the yield to maturity will be ______ than the Yield to Call

Answer 37

Lower

Question 38

Municipal bonds are often called tax-exempts. This refers to the exemption of their income from

Answer 38

federal income taxes. Although municipal bonds are sometimes exempt from state income tax (if issued in the state of residence of the taxpayer), all references to tax exemption refer to their exemption from federal income taxes

Question 39

the inverse relationship between the price of fixed-income investments and interest rates

Answer 39

interest rate (or money-rate) risk

Question 40

interest rate (or money-rate) risk

Answer 40

the inverse relationship between the price of fixed-income investments and interest rates

Question 41

True or False: One of the ways in which U.S. government agency issues differ from those offered directly by the U.S. Treasury is that agency issues typically carry higher returns than Treasury issues because of the lack of direct government backing.

Answer 41

TRUE: agencies, with only a few exceptions (GNMA being one), do not carry the direct backing of the U.S. Treasury. While they are quite safe, that lack of direct backing causes their yields to be somewhat higher. Agencies are never traded on the stock exchanges and their float is almost always smaller than Treasuries. Both are taxable on the federal level.

Question 42

coupon rate of a municipal bond by the complement of tax rate

Answer 42

tax-equivalent yield of a municipal bond

Question 43

tax-equivalent yield of a municipal bond

Answer 43

coupon rate of a municipal bond by the complement of tax rate tax rate (1 – the investor's tax bracket)

Question 44

When inflation is on the rise, interest rates often rise. When interest rates increase, bond prices may be expected to _____________.

Answer 44

Decline

Question 45

The current yield of any security, equity, or debt is always the income return (dividend or interest) divided by the ______________.

Answer 45

current market price

Question 46

Issuers tend to call bonds with _________ coupons.

Answer 46

higher

Question 47

A client approaches the investment adviser representative handling the advisory account with a request to find a preferred stock that will offer a 6% income return. The investment adviser representative suggests a stock paying a $0.28 quarterly dividend. That stock will exactly meet the income objective if it has a current market price of

Answer 47

$18.67.

Question 48

when describing equity straddle options, he option buyer is looking for _________.

Answer 48

market volatility -- option buyers need price movement

Question 49

when describing equity straddle options, The option seller is looking for ______________.

Answer 49

market stability-- option sellers make money from stability

Question 50

if you are a producer who will have product to deliver, ____________are likely to be more appropriate than futures

Answer 50

forwards

Question 51

Standardized equity options are issued by

Answer 51

the Options Clearing Corporation (OCC).

Question 52

An investor purchases two PMJ Dec 16 calls at $0.85. If the commission charge is $8, the total cost is

Answer 52

178.

Question 53

True or false: Options contracts are not issued by the underlying asset. Technically, listed options are issued by the Options Clearing Corporation (OCC).

Answer 53

True

Question 54

___________is the industry term describing the buyer of a futures contract.

Answer 54

Long

Question 55

____________ is the industry term describing the seller of the futures contract

Answer 55

Short

Question 56

An investor purchased a Mosaks, Inc., put option with a strike price of $105. If Mosaks' stock price is $115 at expiration, the value of the put option is

Answer 56

$0.00 --- The put has a value of $0 because it will not be exercised. Why would you want to exercise (sell the stock) at $105 per share when the current market value is $115?

Question 57

Writing _______________ provides unlimited liability and the most risk.

Answer 57

naked calls -- Writing naked puts risks only the difference between the strike price and zero, less any premium received-- so not unlimited. Buying a put is a bearish strategy with risk limited to the amount paid for the put.

Question 58

European-style options are exercisable only at _________.

Answer 58

expiration

Question 59

An investor owns five DEF call options with a strike price of $40. The options are European style. If the holder exercises, the cost will be

Answer 59

$20,000

Question 60

Writing ________options on a long stock position (a covered ______) is a common strategy for generating additional income from a stock holding.

Answer 60

call

Question 61

An investor has been following the price movements of ABC common stock and believes that the stock is positioned for a significant upward move in the very near term. If the investor's goal is capital gains, which of the following would be the most appropriate position for this investor to take?

Answer 61

Buy ABC call options -- When an investor is expecting the price of a security to rise, we say that investor has a bullish outlook. Bulls buy call options, especially when the expected market move is anticipated shortly.

Question 62

Although the market price probably will change, the delivery price is always agreed upon at the time of the contract, as is the method, location, and time of delivery of a ____________ contract.

Answer 62

forward contract

Question 63

LEAPS

Answer 63

long-term equity anticipation securities: -have expiration dates that can run more than three years compared with the nine months for standard option contracts - the longer the time until expiry, the greater the potential time value

Question 64

When an investor is expecting the price of a security to rise, we say that investor has a bullish outlook. Bulls buy ________options, especially when the expected market move is anticipated shortly.

Answer 64

Call Options

Question 65

A bond analyst is plotting a yield curve and notices that short-term maturities have higher yields than intermediate and long-term maturities. This is an example of

Answer 65

an inverted yield curve.

Question 66

A(n) ____________, yield curve is one that results when debt with short-term maturities has higher yields than those with maturities that are longer

Answer 66

inverted, or negative

Question 67

A(n) _____ yield curve results when the yields increase as maturities do. LO 6.b

Answer 67

positive, or normal