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Flashcards in Debt Deck (33):
0

A customer wishes to invest in corporate bonds that offer minimum market risk. Which recommendation is appropriate?

A. Bonds with short-term maturities
B. High-yielding bonds
C. Guaranteed bonds with medium-term maturities
D. Bonds with long-term maturities and high call premiums
Correct answer is A. Market risk for a bondholder is the risk that the interest rate will rise forcing the price of the bond to drop. Shorter the term maturity the less market risk

1

A municipal dealer quotes a nine year, 6% term revenue bond at 1:09. The yield to maturity is what?

4.78
The formula for yield to maturity for a premium bond is:
Annual interest - annual capital loss
------------------------------------------
(Bond cost+redemption price)/2

So
$60-($90premium / 9 years to maturity)
---------------------------------------------
(1090+1000) / 2

2

A corporation has issued a 10% double a rated sinking fund debentures at par, three years later, similar issues are being offered in the primary market at 8%. Which are true statements about the outstanding 10% issue?

A. The current yield will be higher than the nominal yield.
B. The current yield will be lower than the nominal yield.
C. The dollar price of the bond will be at a premium to par.
D. The dollar price of the bond will be at a discount to par.
B and c are correct.
The bond was issued with a coupon of 10%. Currently the yield of a similar issue is 8% therefore interest rates have dropped or the credit quality of the bond has improved when interest rates drop yields on bonds already trading must also drop what causes this is a rise in the dollar price of the issue. Bond now trades at a premium

3

Which of the following are considered to be creditors of a corporation?
A. Common shareholders
B. Preferred shareholders
C. Convertible bondholders
D. Nonconvertible bondholders

C and d only

Bondholders are creditors of a company. convertible bondholders are creditors of a company as long as they keep their bonds and do not convert them to common shares. Common and preferred shareholders have equity positions

4

When the yield curve is inverted:
A. Short-term rates are higher than long-term rates
B. Long-term rates are higher than short-term rates
C. The Federal Reserve is loosening credit
D. The Federal Reserve is tightening credit

A and d
When short-term rates are higher than long-term rates this is an inverted or descending yield curve if the Federal Reserve sharply tightens credit it exerts its influence at the short end of the yield curve driving up short-term rates if the Fed really tightens then short-term rates can be driven above long-term rates long-term rates are indirectly influenced by the Fed action

5

Which of the following bonds are typically quoted on a yield to maturity basis.
A. Term bonds
B. Series bonds
C. Serial bonds
D. Short term maturities

C.
Municipal bonds are typically serial bonds which are quoted on a basis of points yields quote

6

All of the following are true about a bond that is "registered to principal only" EXCEPT:
A. The bond is negotiable
B. Interest coupons are detached from the corpus of the bond.
C. Interest payments can be redeemed by anyone.
D. At maturity the registered owner receives face amount for the bond.

Correct answer is b

7

In 2014, a customer buys five GE 10% bond. M 2034 the interest payment dates are February 1 and August 1. The current yield on the bond is 11.76% the bonds are callable as of 2024 at 1:03 the bond is trading at what?

A discount. The reason is because the current yield of 11.76% is higher than the coupon yield of 10%. This means it's trading at a discount in order for the yield to rise above stated fixed coupon rate price the bond must drop in the market

8

A customer has a discretionary account at a brokerage firm. The customer calls registered representative handling the account and states by $50,000 of low medium investment grade corporate bonds with at least five years to maturity and a minimum 8% yield to comply with the customers instructions, the registered representative must choose bonds that are rated, at a minimum of what?
Aaa
A
Baa
Ba

A.
AAA is the highest investment-grade
Aa is upper medium investment-grade
A is lower medium investment-grade
BAA is the lowest investment.
BA is the highest speculative grade

9

And outstanding bond issue which is currently trading at 1:03 and one fourth is callable starting next year at 10 2 1/2. The call premium on the bond is what?
A 3/4 of a point
B 1 3/4 points
C 2 1/2 points
D 3 1/4 points

The best answer is C
The bond call premium is simply the price above par at which the issuer has the right call in the bond from the bondholders. These bonds are callable at 102 and a half has to call premium is 2 1/2 points

10

An investor purchases a bond, which pays interest on July 1 and January 1. The trade settles on May 1 how many months of interest with a buyer see from the issuer in the next interest payment?

The correct answer is six months since bonds to pay fixed semiannual interest payments. In this example the buyer will receive six months worth of interest payments from the issuer but the buyer will have paid for months of accrued interest to the seller on the settlement thus the buyer correctly only owns the net amount of two months of interest corresponding to the period that here she held the bond however six months worth of total interest will be paid

11

All of the following bonds trade "flat" except which?
A defaulted bonds
B adjustment bonds
C income bonds
D reset bonds

The correct answer is D

12

All of the following statements are true regarding mortgage bonds accept which?
A mortgage bonds are issued in term maturities
B default of mortgage bonds is common during recessionary periods
C mortgage bonds are commonly issued by utilities
D mortgage bonds are secured by real property

The correct answer is B as a means of lowering the interest cost to the issuer bondholders forgive any lien on all real property of the utility in theory if the issuer default and the bondholders could sell the real property to repay the outstanding debt balance historically mortgage bonds defaults have been very low

13

A new issue corporate bond has a dated date of September 1. The bond is assigned by the issuer to the underwriter on August 31. Accrued interest of the bond will be calculated based on how many days in a year?

The correct answer is 360

14

Which of the following statements are true regarding both treasury bills and treasury receipts?
A. Both securities are sold at a discount
B. Both securities are issued by the United States government
C. Both securities pay interest at maturity
D. Both securities are money market instruments?

A and c.

15

All of the following are true statements regarding revenue bonds except which?
A. Issuance of the bonds is dependent on earnings requirements
B. The bonds may be double-barreled with backing by ad valorem taxes
C. Revenue bonds are only suitable for investors willing to assume higher-level of risk.
D. Yields for revenue bond issues are generally higher than yields for comparable GO issues

The correct answer is C

16

The yield to maturity of a bond will:
A. Increase as bond prices fall
B. Decrease as bond prices raise
C. Remain unchanged as bond prices fall.
D. Remain unchanged as bond prices raise

Answer is both a and B

17

Common dividends are paid how?
A. Quarterly
B. Semi annually
C. On issued shares
D. On outstanding shares

A and D are the correct answers.
Common dividends are usually declared and paid quarterly. Dividends are only paid on outstanding shares, this is defined as issued shares minus treasury stock

18

When comparing the statutory voting method to the cumulative voting method which statement is true?
A. Minority shareholders have the same voting effectiveness in both methods
B. Minority shareholders have greater voting effectiveness with cumulative voting
C. Minority shareholders have greater voting effectiveness with statutory Voting.
D. Minority shareholders have limited voting powers under the statutory and full voting powers under cumulative.

The best answer is B

19

Income from which of the following securities is partially tax exempt to a corporate investor?
A. Common stock
B. Preferred stock
C. Preferred stock mutual fund
D. Convertible bonds

The best answer is a B and C.
Corporations that receive dividends from investments held generally are allowed to exclude 70% of the dividends received from taxation. This exclusion does not apply to individual investors

20

When the price of a bond increases, which of the following statements regarding yields are true?
A. Current yield increases
B. Current yield decreases
C. Yield to maturity increases
D. Yield to maturity decreases

The correct answers Are b and d.
When the price of a bond increases, yield to maturity, yield to call, and current yield all decrease. The only yield that never changes is the nominal yield or stated interest rate

21

All of the following statements are true regarding Government national mortgage Association pass through certificates except which?
A. GNMA securities are guaranteed by the US government
B. Dealers typically quote GNMA securities at 50 basis points over equivalent maturity US government bonds.
C. Credit risk for GNMA is the same as for equivalent maturity US government bonds
D. Reinvestment risk for GNMA is the same as for equivalent maturity US government bonds

The correct answer is D
GNMA securities are guaranteed by the US government. Dealers typically "agency securities including these on a basis points differential to equivalent maturing US governments. Reinvention risk is greater for Genie maes then for US governments.

22

Treasury notes:
A. Are government obligations
B. Are agency obligations
C. Have a maximum maturity of 10 years
D. Have a maximum maturity of 30 years

The correct answer is a and C
Treasury notes are government obligations with a maximum maturity of 10 years

23

A "double-barreled" municipal issue has which?
A. Primary backing of a general obligation pledge.
B. Primary backing of a revenue pledge
C. Secondary backing of a general obligation pledge
D. Secondary backing of a revenue pledge

The correct answer is B and C
A double-barreled bond is a municipal revenue bond was principal and interest payments are backed by a revenue pledge however if the revenues are insufficient to cover the debt service requirements the municipality will use it Ad Valorem taxing power to meet the deficit

24

A basis quote for a $10,000 municipal bond with one year left to maturity has just been raised by 20 basis points. The bonds change in price will be what?
A. $20 increase
B. $20 decrease
C. $200 increase
D. $200 decrease

The correct answer is B
One basis point equals .01% equals $.10 therefore 20 basis points equals .20% of par
If interest rates rise by 20 points this bond with 1 year to maturity should decrease in value by $20.

25

All of the following callable municipal bonds are trading at a 5% basis which is most likely to be called?
A. 3 3/4% coupon rate callable at 103 in 2014.
B. 4 1/2% coupon rate callable at 103 in 2014
C. 5% coupon rate callable at 100 in 2014
D. 6 3/4% coupon rate callable at 100 in 2014

The best answer is D
An issuer is most likely to call bonds which have high interest rates and low call premiums

26

Which of the following statements are true regarding overnight repurchase agreements?
A. A dealer who needs cash will "sell" some of its inventory overnight to other dealers
B. A dealer who needs cash will "buy" inventory overnight from another dealer
C. The investment has interest rate risk
D. The investment has no interest rate risk

The correct answer is a and C
Overnight repurchase agreements are typically affected between government securities dealers. A dealer who needs cash will "sell" some of its inventory overnight to another dealer, with an agreement to buy the position back the next day. These repurchased agreements do come with some level of interest rate risk

27

All of the following statements are true regarding Eurodollar bonds except which?
A. US issuers of eurodollar bonds are not subject to foreign currency risk.
B. Euro dollar bond issues are sold all over the world, including the United States.
C. Non-US issuers of euro dollar bonds are subject to foreign currency risk.
D. Euro dollar bonds are denominated in US currency

The best answer is B.
Euro dollar bond issues are sold overseas in Europe but pay in US dollars. They are not registered with the S EC and thus are not sold in the United States. Multinational US issuers tap the Eurodollar bond market if interest rates are lower in this market then those available in the us. Foreign issuers may also sell Eurodollar issues for US issuers there is no currency exchange risk since payments are made in US dollars however foreign issuers are exposed to currency risk

28

A municipal variable rate demand note:
A. Is considered to be a short-term issue
B. Is considered to be a long-term issue
C. Gives the issuer the right to call the bond from the holder on preset dates
D. Gives the holder the right to put the bond to the issuer on preset dates

The correct answer is B and D
In municipal variable rate demand note is a long-term municipal security because it has no stated maturity, but it is issued at short-term lower interest rates, because the holder has the right to "put" the bond to the issuer at par at each interest payment date. The interest rate is reset, usually weekly at the interest payment date, to an index rate for the next week.

29

A municipality is at its debt limit and wishes to sell additional bonds. Voter approval is required for the municipality to sell which?
A. General obligation bonds
B. Revenue bonds
C. Industrial revenue bonds

The correct answer is A
Voter approval is needed for a municipality to sell general obligation bonds because they are non-self-supporting debt.

30

Which of the following statements are true about commercial paper?
A. Commercial paper has a maximum maturity of 90 days
B. Commercial paper has a maximum maturity of 270 days
C. Commercial paper is quoted on a dollar price basis
D. Commercial paper is quoted on a yield basis

The correct answer is B and D
Commercial paper has a maximum maturity of 270 days. And is quoted on a yield basis as is all money market debt

31

To smooth out cash flow, a corporation will issue which?
A. TANs
B. RANs
C. BANs
D. Commercial paper

The correct answer is D
Commercial paper is a short-term unsecured I told you issued by corporations. The other three possible answers are issued by municipalities

32

Eurodollar bonds:
A. Are issued in bearer form
B. Are issued in fully registered form
C. Pay interest which is subject to US withholding taxes
D. Pay interest which is not subject to US withholding taxes

The correct answer is a and D
Eurodollar bonds are not offered in the US and are issued in bearer form remember that the US has made it illegal to issue domestic bearer bonds these bonds are not subject to withholding taxes once again because they are not offered in the US