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Chapter 2 & 4 (5 questions) Flashcards

Characteristics of Fixed Income (67 cards)

1
Q

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

A

characteristic of negotiable jumbo CDs

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2
Q

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

A

equity holders.

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3
Q

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

A

$958.75

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4
Q

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

Interest payments of $30

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5
Q

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

A

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

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6
Q

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

A

General Obligation Bond (backed by taxes)

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7
Q

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

A

revenue bond issues

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8
Q

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

A

False

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9
Q

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

A

CDs

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10
Q

most significant characteristic of municipal bonds for investors is

A

their exemption from federal income tax.

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11
Q

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

A

7.11%.

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12
Q

____= Annual Interest/Bond Market Price

A

Current Yield

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13
Q

Current Yield

A

Annual Interest/Bond Market Price

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14
Q

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

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15
Q

the owner of a convertible debt issue

A

is a creditor of the issuer.

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16
Q

Debt Instrument that presents low default risk

A

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

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17
Q

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

A

potentially higher yields.

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18
Q

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

A

$10,225.00.

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19
Q

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

A

TRUE

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20
Q

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

A

short maturities

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21
Q

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

A

collateral trust certificates.

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22
Q

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.

A

PARITY

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23
Q

Coupon X (1-Tax Bracket)

A

after tax yield

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24
Q

Tax-Equivalent Yield

A

Coupon X (1-Tax Bracket)

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25
Which type of risk is a mortgage-backed security like GNMA most likely to experience?
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.
26
What product is Not registered with the SEC and has Negotiated maturities and yields?
commercial paper- unsecured debt obligations of corporations needing short-term financing. issued with maturities of no more than 270 days
27
Dividend/Stock Price
current yield
28
current yield
Dividend/Stock Price
29
_________are foreign bonds, denominated in U.S. dollars and issued in the United States by foreign banks and corporations
Yankee bonds
30
__________ are issued in the United States by domestic banks and represent receipts for securities traded on foreign exchanges
ADRs
31
___________ are issued by a borrower in a foreign country, denominated in a currency other than one native to the issuer's country
Eurobonds
32
BB Rating at S&P (or Ba rating for Moody)
Junk Bond (high Yield)
33
he most common collateral securing a Brady bond is
U.S. Treasury zero-coupon bonds with a maturity corresponding to the maturity of the individual Brady bond.
34
What Agency Security is guaranteed by the U.S. Government
Ginnie Mae -- Other agency securities have lines of credit at the Treasury, but this credit does not constitute a full guarantee.
35
10M RAN 6.6s of 32 at 67 means what
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
36
For a bond selling at a discount, the yield to maturity will be ______ than the nominal Yield
Higher
37
For a bond selling at a discount, the yield to maturity will be ______ than the Yield to Call
Lower
38
Municipal bonds are often called tax-exempts. This refers to the exemption of their income from
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
39
the inverse relationship between the price of fixed-income investments and interest rates
interest rate (or money-rate) risk
40
interest rate (or money-rate) risk
the inverse relationship between the price of fixed-income investments and interest rates
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.
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.
42
coupon rate of a municipal bond by the complement of tax rate
tax-equivalent yield of a municipal bond
43
tax-equivalent yield of a municipal bond
coupon rate of a municipal bond by the complement of tax rate tax rate (1 – the investor's tax bracket)
44
When inflation is on the rise, interest rates often rise. When interest rates increase, bond prices may be expected to _____________.
Decline
45
The current yield of any security, equity, or debt is always the income return (dividend or interest) divided by the ______________.
current market price
46
Issuers tend to call bonds with _________ coupons.
higher
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
$18.67.
48
when describing equity straddle options, he option buyer is looking for _________.
market volatility -- option buyers need price movement
49
when describing equity straddle options, The option seller is looking for ______________.
market stability-- option sellers make money from stability
50
if you are a producer who will have product to deliver, ____________are likely to be more appropriate than futures
forwards
51
Standardized equity options are issued by
the Options Clearing Corporation (OCC).
52
An investor purchases two PMJ Dec 16 calls at $0.85. If the commission charge is $8, the total cost is
178.
53
True or false: Options contracts are not issued by the underlying asset. Technically, listed options are issued by the Options Clearing Corporation (OCC).
True
54
___________is the industry term describing the buyer of a futures contract.
Long
55
____________ is the industry term describing the seller of the futures contract
Short
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
$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?
57
Writing _______________ provides unlimited liability and the most risk.
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.
58
European-style options are exercisable only at _________.
expiration
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
$20,000
60
Writing ________options on a long stock position (a covered ______) is a common strategy for generating additional income from a stock holding.
call
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?
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.
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.
forward contract
63
LEAPS
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
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.
Call Options
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
an inverted yield curve.
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
inverted, or negative
67
A(n) _____ yield curve results when the yields increase as maturities do. LO 6.b
positive, or normal