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Flashcards in Midterm D Deck (125):
1

Government bonds pay interest for how many days in a month and for how many days in a year?

A. 30/365 B. Actual/365 C. 30/360 D. Actual/360

Correct Answer: B. Actual/365

Actual/365. Government bonds pay interest for the actual days elapsed and a 365-day year. Corporate and municipal bonds are 30-day months and a 360-day year. [Module 3, Government Securities, Section 6.0]

2

Which two of the following are ordinarily found in the Agreement Among Underwriters in a municipal offering?

I. Legal opinion
II. Appointment of bond counsel
III. Concession
IV. Takedown

A. I and IV B. I and II C. III and IV D. II and III

Incorrect! The correct answer is: C. III and IV

III and IV. The Agreement Among Underwriters is a private document for the selling syndicate and deals with all of the aspects of the syndicate. It determines the concession and takedown in a municipal underwriting, the type of account (Eastern or Western), and any costs that must be borne by the syndicate members. Of the answer choices given, only the concession and takedown are shown. The legal opinion is from the bond counsel and is sent to the issuer; the appointment of bond counsel is done by the issuer -- the syndicate does not have to deal with either of these issues and therefore they are not included in the syndicate agreement. [Module 6, Underwriting, Section 2.2]

3

If the SEC "clears" an issue:

A. The SEC guarantees the issue. B. The underwriter has filed a standard registration statement. C. The SEC endorses the issue. D. The SEC guarantees the accuracy of the information in the prospectus.

Incorrect! The correct answer is: B. The underwriter has filed a standard registration statement.

The underwriter has filed a standard registration statement. The registration statement has been filed and the stock can now be sold. The SEC never endorses an issue and never guarantees the issue or the statements made in the prospectus. The SEC only makes sure all requirements are met. [Module 6, Underwriting, Section 4.2]

4

An investor owns 10 corporate bonds with an 11% coupon with interest due on March 1 and September 1. If he sells the bonds so they trade on Wednesday, July 22, how many days of accrued interest will the buyer pay the seller?

A. 143 days B. 144 days C. 146 days D. 147 days

Incorrect! The correct answer is: C. 146 days

146 days. Remember, these are corporate bonds, so add three business days. In addition, there is a weekend, so add another two days. The settlement date is July 27 -- the easy way to calculate this is to subtract the last digit of the interest date from the last digit of the settlement date: 7 - 1 = 6, and then pick the only answer that ends in 6. Otherwise, the longer way is:


7/27
-3/1
4/26, or 4 months with 30 days, plus 26 more days, which equals 120 + 26 = 146.

[Module 2, Corporate Debt Securities, Section 11.1]

5

A holder of an ADR has which of the same rights as a regular stockholder?

A. Proxy rights B. The right to declared dividends C. Preemptive rights D. The right to vote

Incorrect! The correct answer is: B. The right to declared dividends

The right to declared dividends. The holder of an ADR has the right to stated dividends and the right to transfer (sell) their shares (receipts). The holder of an ADR does not have preemptive rights or the right to vote the shares. ADR holders have no say in the running of the company, the makeup of the board of directors, or any other voting rights. ADR holders only have the right to declared dividends, which are usually paid in U.S. dollars. [Module 1, Equities, Sections 11.1 & 11.2]

6

Negotiable certificates of deposit are found in which of the following groups that make up the money supply?

A. M1 B. M2 C. M3 D. They are not in the money supply groups, but have their own money supply group.

Incorrect! The correct answer is: C. M3

M3. M1 is currency in circulation and demand deposits. M2 is composed of M1 plus small time deposits, repurchase agreements (money next day), and Eurodollar deposits. M3 includes jumbo/negotiable CDs as well as institutional money funds. [Module 4, Economics & the Markets, Section 2.0]

7

Which of the following is true regarding planned amortization class tranches (PAC)?

A. They have the same prepayment risk as companion classes. B. They increase prepayment risk to holders of that tranche. C. They eliminate prepayment risk to holders of that tranche. D. They reduce prepayment risk to holders of that tranche.

Incorrect! The correct answer is: D. They reduce prepayment risk to holders of that tranche.

They reduce prepayment risk to holders of that tranche. The prepayment risk is less because the companion tranches take the prepayments, leaving the actual payments to the PAC. [Module 3, Government Securities, Sections 9.1 & 9.2]

8

The municipal placement ratio found in The Bond Buyer is calculated by which of the following methods?

A. Placements for the week compared to the 30-day visible supply B. Placements for the week compared to the new issues for the week C. Total issues compared to the new issues for the week D. New issues compared to the 30-day visible supply

Incorrect! The correct answer is: B. Placements for the week compared to the new issues for the week

Placements for the week compared to the new issues for the week. This is a very important ratio for underwriters because it tells how the new issues are selling. Be sure to know this one. [Module 6, Underwriting, Section 5.3]

9

What is a CAPM?

A. A means of comparing who is in charge of a ship B. A means of comparing the return on one investment to the return on a risk- free investment C. A means of comparing the return on one investment to the return on another investment D. A means of comparing the return of a tax-free investment to the return on a taxable investment

Incorrect! The correct answer is: B. A means of comparing the return on one investment to the return on a risk- free investment

A means of comparing the return on one investment to the return on a risk-free investment. The CAPM is the model that is used to make the comparison. The comparison is all based on the fact there is no risk on the Treasury bills, but there is risk on the comparative investment. The comparison cannot be of one investment to another, unless one of these is a risk-free investment, such as T-bills or savings accounts. [Module 4, Economics & the Markets, Section 9.4]

10

Which two of the following terms relate to the business cycle?

I. Contraction
II. GNP
III. GDP
IV. Trough

A. I and IV B. II and III C. I and III D. II and IV

Correct Answer: A. I and IV

I and IV. The business cycle has four cycles -- EPRT (Expansion, Peak, Recession, Trough, with Recovery for Expansion and Contraction for Recession). The GNP and GDP reflect how the economy is doing. In this question, you are given the basic names and both of the new names for expansion and recession. [Module 4, Economics & the Markets, Section 5.5]

11

Which two statements about prepayment on collateralized mortgage obligations are true?

I. When interest rates rise, prepayment rates rise.
II. When interest rates rise, prepayment rates fall.
III. When interest rates fall, prepayment rates fall.
IV. When interest rates fall, prepayment rates rise.

A. I and III B. II and III C. I and IV D. II and IV

Incorrect! The correct answer is: D. II and IV

II and IV. When rates rise, people do not refinance, so prepayments fall. When rates fall, people refinance their homes, so prepayments increase. Just remember that prepayments go the opposite direction of the market. [Module 3, Government Securities, Sections 9.1 & 9.2]

12

Three bonds have a 4.5% coupon and are priced at a 5.5% yield. The yield goes to a 4.00 basis. Which of the bonds would change the most in price?

A. One year to maturity B. Five years to maturity C. 15 years to maturity D. Can't tell due to lack of price

Correct Answer: C. 15 years to maturity

15 years to maturity. The longest bond to maturity must always move more in price to get the same change in yield. This is because the price has to increase or decrease more to move the same in basis (yield). In this case, the bonds were at a discount, and now are at a premium. This is because there are more years with the longer bonds that have to account for the change in price. Remember -- basis takes into consideration not only the coupon and price, but also the length of time to maturity. Refer back to the tutorial in Module 2, where a yield to maturity and a yield to call are shown. The yield to maturity has more years to amortize or accrete the premium or discount, respectively. Just remember that the longest bond always moves the most. [Module 5, Municipal Securities, Section 8.4]

13

The following four bonds all have the same maturity date. Which of the four bonds has the lowest price?

A. 12% coupon and a 14% yield B. 10% coupon and an 8% yield C. 6% coupon and a 5% yield D. 18% coupon and an 11% yield

Correct Answer: A. 12% coupon and a 14% yield

The 12% coupon and 14% yield is the bond with the lowest price. It is the only bond selling at a discount. Do a teeter-totter for each answer. You will see that the other three answers all have a price above par, or $1,000, while this bond has a price lower than par, $1,000. It must, by default, have the lowest price. Do not go for the highest coupon. [Module 2, Corporate Debt Securities, Sections 8.1 - 8.3]

14

Which two statements are true when comparing PAC CMO tranches to plain vanilla CMO tranches?

I. Holders of PAC CMO tranches have a higher prepayment risk.
II. Holders of PAC CMO tranches have a lower prepayment risk.
III. Holders of plain vanilla CMO tranches have a lower prepayment risk.
IV. Holders of plain vanilla CMO tranches have a higher prepayment risk.

A. I and III B. I and IV C. II and IV D. II and III

Correct Answer: C. II and IV

II and IV. PAC CMOs have lower prepayment risk than regular CMOs because they have the companion tranches. The plain vanilla CMOs don't have the companion tranches to take the prepayment risk and extension risk, and therefore, have a greater chance of being called early or missing payments. [Module 3, Government Securities, Sections 9.0 - 9.2]

15

Which of the following is not true regarding Eurodollar bonds?

A. The bonds do not trade on American exchanges. B. They are quoted in U.S. dollars out of the country. C. They are bonds that are issued by U.S. companies and sold to Europeans in U.S. dollars. D. At the issuer's discretion, the principal can be paid in European or U.S. currencies.

Incorrect! The correct answer is: D. At the issuer's discretion, the principal can be paid in European or U.S. currencies.

Correct answer (false statement): At the issuer's discretion, the principal can be paid in European or U.S. currencies. This is false -- Eurodollar bonds cannot be paid off with any currency. These are bonds issued and paid for with U.S. dollars and must be redeemed in U.S. dollars. The other answers are true, so be sure you know them. [Module 2, Corporate Debt Securities, Section 15.1]

16

All of the following are true of negotiable jumbo certificates of deposit, except:

A. They are issued for $1 million or more. B. They are fully insured by the FDIC. C. They are usually issued for up to six months. D. They have secondary markets that are highly liquid.

Correct Answer: B. They are fully insured by the FDIC.

Correct answer (false statement): They are fully insured by the FDIC. They are not fully insured by the FDIC; the FDIC only insures them up to $250,000. They are issued in denominations of $1 million and up, are normally issued for six months, and have a secondary market available to make them liquid. Jumbo CDs are different from normal CDs that are not negotiable in that the maturities rarely go beyond six months, while bank CDs have three- and five-year maturities, as well as longer maturities. [Module 2, Corporate Debt Securities, Section 14.2]

17

An equipment trust certificate is most likely issued by which of the following industries?

A. Automotive B. Tobacco C. Durable goods D. Transportation

Correct Answer: D. Transportation

Transportation. This is the best answer of those given. An equipment trust certificate is a corporate debt security that is issued to pay for the manufacturing of equipment used by a company that transports people (airlines, trains, buses), goods (trucks, trains), or animals (trucks, trains). It is called "rolling stock," since it moves things from one place to another. [Module 2, Corporate Debt Securities, Section 5.1]

18

An investor has $300,000 of UAL 8% convertible bonds. The bonds are convertible into shares of stock at $20 per share. At what price quote are the bonds selling at a premium if the stock is selling at $18?

A. 88 B. 89 C. 90 D. 91

Incorrect! The correct answer is: D. 91

91. This is the price at which the bonds are at a premium. You need to do the conversion formula. Remember, this takes two steps:


Step 1
Shares x Share Price = Bond Price
_____ x $20 = $1,000
50 x $20 = $1,000

Step 2
Shares x Parity Price = Market Value
50 x $18 = ___
50 x $18 = $900

The first step finds the conversion ratio of 25 shares per bond; the second step finds the parity price. A market value of $900 means that the bond is selling at 90% of par. Thus, to sell at a premium, the bond must be selling at higher than 90% of par. Now, among the answer choices, find the only number higher than the quote of 90. The only answer that is higher than 90 is 91. That is the price that the bond is at a premium.
[Module 2, Corporate Debt Securities, Sections 10.1 - 10.3]

19

An investor has purchased a corporate bond at a discount. Which of the following is not needed to calculate the compounded accreted value (CAV)?

A. Dated date B. Amount of principal originally paid for the bond C. Current yield D. Maturity date

Incorrect! The correct answer is: C. Current yield

Current yield. The current yield is not needed to calculate the compounded accreted value of a corporate discount bond. Don't get confused by the wording of the question -- it is simply asking you how to find the accreted value. The unnecessary calculation is the current yield. You do need the purchase date, or if the bond is a new issue, the dated date and the maturity date, to determine the number of years over which to accrete the discount. The current yield has nothing to do with the calculation; in fact, if the bond is a zero-coupon bond, it has no interest and thus no current yield. [Module 2, Corporate Debt Securities, Section 16.3]

20

A customer is interested in purchasing a collateralized mortgage obligation. His main concern is safety, yet he wants some yield and only wants to go eight years. Which of the following is the safest tranche?

A. Companion tranche B. PAC tranche C. TAC tranche D. Extension tranche

Incorrect! The correct answer is: B. PAC tranche

The PAC main tranche is the safest, since it has both prepayment and extension risk protection. TACs do not have protection from extension risk. The companion tranche could be an extension risk companion tranche or a prepayment companion risk tranche, but in either case, they are far more risky than the main tranches of either the PAC or TAC. [Module 3, Government Securities, Sections 9.1 & 9.2]

21

An investor is looking at collateralized mortgage securities and is interested in their maturities. You tell the customer that CMOs have weighted average maturities, but can also have longer than expected maturities. You would tell him the expected maturities for the tranches from shortest to longest are:

I. Planned amortization class tranche
II. Z tranche
III. Targeted amortization class tranche

A. I, II, III B. III, II, I C. I, III, II D. III, I, II

Incorrect! The correct answer is: C. I, III, II

I, III, II. Expected maturities from shortest to longest are the PAC, then the TAC, and the Z tranche as the longest. The PAC has extension risk companion securities that will be extended if enough payment is not available. The TAC does not have that extension risk companion security, so the tranche could be extended and the TAC will be paid late. The Z tranche is always the longest, since it is not paid in a particular year until the main tranche and all companion securities are paid -- THEN the Z tranche will be paid. [Module 3, Government Securities, Sections 9.1 & 9.3]

22

Which of the following best describes the Bond Buyer's Index?

A. A weekly list that identifies the types of investors most actively participating in municipals B. The average yield of a list of 20-year GO municipal bonds on a given day C. The ratio of investors' acceptance to new issues, using par value offered versus par value unsold D. The average yield of a list of 20-year government, municipal, and corporate bonds completed once a week

Incorrect! The correct answer is: B. The average yield of a list of 20-year GO municipal bonds on a given day

The average yield of a list of 20-year GO municipal bonds on a given day. There are five indexes: GO 20, Revenue 30, GO 11, GO 40 (not tested), and the Government Index. Remember the first two, GO 20, an index with 20 general obligation bonds with 20 years to maturity, and the REV 30, the index with 25 revenue bonds with 30 years to maturity. The question did not ask for a specific index, but the only one given is the GO 20. Don't get confused and think it includes government and corporate bonds. [Module 6, Underwriting, Section 5.3]

23

What does an "unqualified" legal opinion mean?

A. The lawyer is not qualified to give the legal opinion. B. The issue is not qualified to be issued under tax-exempt status. C. There are no qualifying conditions on the opinion. D. The bond is not qualified to certain areas of opinion.

Incorrect! The correct answer is: C. There are no qualifying conditions on the opinion.

There are no qualifying conditions on the opinion. To qualify the legal opinion means to put a restriction on it before it is a tax-exempt bond. When the bond counsel gives an unqualified legal opinion, nothing can take the tax-exempt status away, no matter what the issuer does within the limits of the bond. School bonds are always unqualified, except that the bond counsel always "qualifies" the opinion with "under present federal and state taxes," in the event that Congress changes the tax law. Revenue bonds almost always have a qualified opinion to cover some unforeseen aspect that could make the interest taxable, such as the bond money not being used as stated. [Module 6, Underwriting, Section 5.8]

24

When a bond is fully registered, this means that the bond has been issued:

A. With both the bond and the coupons registered in the name of the owner B. In the name of the owner without coupons attached C. In no name with coupons attached D. In the name of the owner but with bearer coupons attached

Correct Answer: B. In the name of the owner without coupons attached

In the name of the owner without coupons attached. Fully-registered bonds have the bondholder's name registered with the trustee for both the principal and the interest. If no name is on the bond, they are bearer bonds. If the bonds are issued in the name of the owner but with bearer coupons attached, they are considered registered to principal only. The bonds are never in the name of the issuer -- they are in the name of either the investor or the trustee holding the bonds. [Module 2, Corporate Debt Securities, Section 3.0]

25

A customer has 300 shares of 4% nonconvertible preferred stock (par $100) of UAL. If the company only paid $2 per share in 2010, $1 in 2011, and $3 in 2012, how much must it pay the preferred stockholders in 2013 to give the common stockholders a $.25 dividend in 2013?

A. 0 B. $4 per share C. $6 per share D. $10 per share

Correct Answer: B. $4 per share

$4 per share. This question deals with noncumulative preferred stock. Therefore, these customers do not receive any cumulative dividends. Unless dividends are specified as "cumulative," all past dividends that were unpaid will not be paid. In this case, the company should have been paying $4 each year -- the 4% preferred. In the past three years, the company missed dividends of $2 in 2010, $3 in 2011, and $1 in 2012, but these will not be made up because the stock is noncumulative. The preferred shareholders just receive the latest dividend of $4 before the common shareholders receive their dividend. [Module 1, Equities, Section 4.2]

26

Who assesses the tax-exempt status of a municipal bond?

A. SEC B. IRS C. Bond counsel D. Underwriter

Correct Answer: C. Bond counsel

Bond counsel. The bond counsel assesses the tax-exempt status after the IRS determines the tax-exempt status. In actuality, the IRS has rules and regulations set forth, and the bond counsel studies them to see that the bond satisfies all of the qualifications. If the bond does satisfy the IRS rules and regulations, the bond counsel then gives the assessment of tax-exempt. [Module 6, Underwriting, Section 5.8]

27

The FOMC, which goes into the open market to do transactions for the federal government, primarily trades in:

A. Government bonds B. Federal agency bonds C. T-bills D. Project notes

Correct Answer: C. T-bills

T-bills. T-bills are the most common means of influencing the money supply because they are bought and sold at the weekly auction. The FOMC is constantly buying and selling T-bills because their maturities are so short and the Fed can control the money supply and do transactions for the government much easier with T-bills. [Module 3, Government Securities, Section 1.1]

28

A broker/dealer has a control relationship with a municipality after helping the municipal become solvent. The broker/dealer is now bringing a new issue to market for the city. When must the broker/dealer have to disclose the control relationship with the municipality?

A. Never B. After executing a trade with a customer in the securities of the municipality C. Before entering into a trade with a customer in the securities of the municipality D. Only if the customer requests information on the broker/dealer's involvement with the municipality

Incorrect! The correct answer is: C. Before entering into a trade with a customer in the securities of the municipality

Before entering into a trade with a customer in the securities of the municipality. The disclosure must be in writing prior to entering into the trade. If the disclosure is oral, then the disclosure must be in writing at or at the same time as the trade is settling. This is a full disclosure requirement of municipalities and broker/dealers to let the customer know of all relationships that could affect the broker/dealer's interest is distributing of the bonds. [Module 5, Municipal Securities, Section 11.5]

29

An underwriter is determining a bid for a new general obligation bond to be issued by the city of Madison, WI. What is not needed to determine the underwriting bid using the total interest cost method?

A. Dated date B. The coupon C. The par value at maturity D. The number of bond years

Incorrect! The correct answer is: A. Dated date

Correct answer (false statement): Dated date. The dated date has nothing to do with submitting a bid for an underwriting. The dated date is the date the interest will start to accrue, and therefore, only has an effect on the initial buyers of the bonds. The coupon (nominal yield) is important, as it is what the issuer will pay the bondholder. The par value at maturity is necessary, as it is how much the issuer will have to pay each maturity year. The number of bond years is used to calculate the amount of interest the issue will cost the municipality. [Module 6, Underwriting, Section 5.30]

30

Which of the following ratings of Moody's are ranked in descending order?

A. Aa, A1, A, Baa B. Aa2, Aa, Baa, A1 C. Baa, Baa1, A, A1 D. Aa, A, A1, Baa

Incorrect! The correct answer is: A. Aa, A1, A, Baa

Aa, A1, A, Baa. This is the proper descending order. Remember that A1 is always higher than A, and all A-rated bonds are always higher than B-rated bonds. [Module 5, Municipal Securities, Section 5.6]

31

Which of the following is used to find net debt per capita?

A. Net municipal debt over city population B. Net municipal debt over county population C. Net municipal debt over state population D. Net municipal debt plus overlapping debt over city population

Incorrect! The correct answer is: D. Net municipal debt plus overlapping debt over city population

Net municipal debt plus overlapping debt over city population. The question asks for NET DEBT, which includes overlapping debt. If the question asked for NET DIRECT DEBT, you would not include the overlapping debt. It is always over city population, since it is the cities on which we are checking the debt coverage. [Module 5, Municipal Securities, Section 9.1]

32

In an inverted yield scale, it can be said:

A. Nearer maturities have unrelated yields to later maturities. B. Nearer maturities have higher yields than later maturities. C. Nearer maturities have lower yields than later maturities. D. The yields are the same.

Correct Answer: B. Nearer maturities have higher yields than later maturities.

Nearer maturities have higher yields than later maturities. An inverted yield curve is when rates are very high and expected to come down. To reward those going short term and not locking in high yields, the short-term rates are higher. This happened in the 1980s and again in 2000. [Module 5, Municipal Securities, Section 8.4]

33

Which of the following imposes penalties upon member firms and registered reps when violations of the 1934 Act occur?

A. MSRB B. NYSE C. FINRA D. SEC

Incorrect! The correct answer is: D. SEC

SEC. The SEC imposes the penalties when member firms or registered reps violate the Securities Exchange Act of 1934. The SEC enforces the 1934 Act, and FINRA enforces MSRB rules. FINRA monitors the firms and reps for MSRB rules, and imposes penalties for those violations, but the SEC enforces the 1934 Act, as well as brings charges in fraudulent cases. [Module 5, Municipal Securities, Section 11.0]

34

What constitutes an arbitrage?

A. Buy at 50 on the NYSE and sell at 55 in Chicago B. Buy at 50 on the NYSE and sell short at 55 in Chicago C. Buy at 70 on the NYSE and sell short at 70 on the NYSE D. Sell at 50 on the NYSE and sell short at 50 in Chicago

Correct Answer: B. Buy at 50 on the NYSE and sell short at 55 in Chicago

Buy at 50 on the NYSE and sell short at 55 in Chicago. The correct answer must include buying on one exchange and selling short on another. The sale is always a short sale when doing an arbitrage in two markets. It is a technicality that the market requires, so accept it. Answer (a) is almost an arbitrage, but it is not because the order is not a "sell short." [Module 4, Economics & the Markets, Section 9.0]

35

Robem Blind Securities, a municipal underwriting firm, has won the negotiations to underwrite a new San Rafael revenue bond. The bond is a $20 million, 20-year, 4% serial bond with maturities each year of $1 million. Which two of the following are ways that the bonds would be offered?

I. On a yield scale
II. On a price scale
III. At par
IV. By coupon

A. II and III B. I and IV C. I and III D. II and IV

Incorrect! The correct answer is: C. I and III

I and III. The bonds are offered "at par" if they are priced at par; if the bonds are not priced at par, they are offered in yields to maturity as shown in a yield scale. A yield scale is used if the price is at a discount or premium to par, thus the bonds have a YTM for each maturity instead of a price that is not at par. If the yield scale is a normal yield scale, the early maturities will usually be priced at a premium, but are shown as a YTM. In the later years, the bonds are usually priced at par but continue the yield scale with their coupon. The coupon for each maturity is shown, and if the bond is at par, the quote price of 100 will show instead of a yield, since the coupon and the YTM are the same. Serial bonds are never priced on a price scale. [Module 6, Underwriting, Section 5.5]

36

A muni bond with a 6% coupon is bought at a 7.80 basis point. This bond is selling:

A. Above par B. At par C. Below par D. None of the above

Incorrect! The correct answer is: C. Below par

Below par. Since the basis is higher than the coupon, the price must be below par. Remember the inverse relationship of bond prices to bond yields. And also remember that basis is YTM basis. [Module 5, Municipal Securities, Sections 8.3 - 8.5]

37

An investor purchases two municipal bonds. Bond A is purchased at a discount and Bond B is purchased at a premium. If the investor holds both bonds to maturity, the tax consequences will be:

A. Capital gain on A; no capital loss on B B. Ordinary income on A; no capital loss on B C. Capital gain on A; capital loss on B D. Capital loss on A; capital loss on B

Incorrect! The correct answer is: B. Ordinary income on A; no capital loss on B

Ordinary income on A; no capital loss on B. Premium bonds receive much more interest than losses, so they have no capital loss. Congress has taken away the capital gain from discount bonds; even though they have low interest rates, the discount is still taxed. The worst part is that it is fully taxed as ordinary income. [Module 5, Municipal Securities, Section 10.1]

38

A corporate bond is being sold with warrants by the issuing corporation. For what purpose would the company attach warrants to the bonds?

A. To increase the amount of money the issuer will realize B. To increase the desirability C. To hedge against the stock price dropping D. To increase the amount of money for the underwriter

Incorrect! The correct answer is: B. To increase the desirability

To increase the desirability. This is the main reason that corporations attach warrants to their bonds -- they entice investors who want the warrants that allow them to buy the stock at a set price. Generally, the exercise price of the warrants is higher than the stock price at the time the bond and warrant are issued, but with the additional capital from the bond, the investors hope the stock will rise in price and then the warrants will have value. When bonds come with warrants attached, they have a lower interest-rate coupon than other bonds issued at that time. [Module 1, Equities, Section 8.0]

39

A municipal broker/dealer is part of a joint account that is offering a block of bonds. The broker/dealer firms that are part of the joint account could do which two of the following during the time the bonds are being offered?

I. Publish advertisements in local newspapers showing the account members and the bonds that are being offered
II. Offer the bonds to special clients of the firm for a price that is at a discount from the offering price set by the municipal joint account manager
III. Send advertisements to all of their clients showing the bonds as being offered by that firm
IV. Publish advertisements in national newspapers showing the price of the bonds as set by the municipal joint account manager

A. I and II B. III and IV C. II and III D. I and IV

Incorrect! The correct answer is: D. I and IV

I and IV. Individual members cannot deviate from the parameters set by the manager. When a firm is part of a municipal joint account, it must always offer the bonds at the price set by the manager during the time the joint account is in force. When the account breaks up, the bonds can be sold at any price. This question specifically asks for "during the time the bonds are being offered." In addition, all names of the joint account members must be shown on advertisements sent to clients, and in newspaper and tombstone advertisements. The firm cannot send, even to its own clients, advertisements with only that firm offering the bonds. Individual letters, emails, or phone calls do not need to name all members, but sales literature and advertisements must publish all names. [Module 5, Municipal Securities, Section 11.4]

40

For whom will a "broker's broker" do trades?

A. Individuals B. Broker/dealers and banks C. Corporations D. Themselves

Correct Answer: B. Broker/dealers and banks

Broker/dealers and banks use a "broker's broker" to help find bonds, sell bonds where the B/D/bank does not do business, and keep the buyer anonymous. Broker's brokers do not trade for individuals or corporations, and they rarely buy for their own account -- they are a "broker," meaning they trade for others. [Module 5, Municipal Securities, Section 7.1]

41

In which of the following ways does a PAC CMO compare with a plain vanilla CMO?

A. Both the PAC CMO tranche and the plain vanilla CMO tranche have low prepayment risk. B. Both the PAC CMO tranche and the plain vanilla CMO tranche make prepayments in sequential order. C. The PAC CMO tranche has both low prepayment risk and low extension risk, while a plain vanilla CMO tranche only has low prepayment risk. D. Both a PAC CMO tranche and the plain vanilla CMO tranche have the same extension risk.

Incorrect! The correct answer is: B. Both the PAC CMO tranche and the plain vanilla CMO tranche make prepayments in sequential order.

Both the PAC CMO tranche and the plain vanilla CMO tranche make prepayments in sequential order. All CMOs make all payments sequentially, meaning the earliest ones are paid first. This is the opposite of municipal serial bonds, which are called in inverse chronological order. The plain vanilla CMO tranche does not lower prepayment risk -- it has high prepayment risk, since there is no companion tranche to take the prepayments. The PAC CMO tranche has very low prepayment risk. [Module 3, Government Securities, Sections 9.1 & 9.2]

42

Which of the following statements is true regarding a TAC (Targeted Amortization Class) mortgage obligation?

A. A TAC is a just like a PAC, except that it has a higher degree of prepayment risk. B. A TAC is a just like a PAC, except that it has a higher degree of extension risk. C. A TAC is a just like a PAC, except that it has a lower degree of prepayment risk. D. A TAC is a just like a PAC, except that it has a lower degree of extension risk.

Incorrect! The correct answer is: B. A TAC is a just like a PAC, except that it has a higher degree of extension risk.

A TAC is a just like a PAC, except that it has a higher degree of extension risk. A PAC has both prepayment companion tranches and extension risk companion tranches. A TAC only has prepayment companion tranches and therefore still has the extension risk of a regular collateral mortgage security. [Module 3, Government Securities, Sections 9.1 & 9.2]

43

An investor purchases $50,000 of a 15-year EGG zero-coupon bond for $550 per bond. One year later, she sells the bond for $600. How is the gain treated?

A. Capital gain B. Ordinary income C. Interest and ordinary income D. Capital gains and ordinary income

Incorrect! The correct answer is: D. Capital gains and ordinary income

Capital gains and ordinary income. Since the bond is a zero-coupon, the discount must be amortized over the life of the bond. That amount will be the taxable interest the investor must claim each year. In this case, the bond is at a $450 discount for 15 years ($1,000 - $550 purchase price = a $450 discount), or $30 per year. But the investor sells it after the first year, so the $30 is ordinary income and the remaining $20 of appreciation for the year is a long-term capital gain. [Module 2, Corporate Debt Securities, Section 16.2]

44

The Yellow Sheets give which of the following?

A. All bonds sold OTC B. Listed bonds sold OTC C. Unlisted bonds sold OTC D. All bonds except government and exempt bonds sold OTC

Correct Answer: C. Unlisted bonds sold OTC

Unlisted bonds sold OTC. The company, the market maker, and possible quotes can be found in the Yellow Sheets. Not all stocks and bonds shown in the Pink Sheets (for stock) and the Yellow Sheets (for bonds) have prices by the market makers. Often there is too little trading in those stocks and bonds to have a quote that could relate to a price at which the trade may occur. Listed bonds are found on the floor of the exchanges, even those available OTC. [Module 2, Corporate Debt Securities, Section 9.0]

45

Rank the following in order from highest to lowest when a bond is selling at a premium:

I. Current yield
II. Nominal yield
III. Basis

A. I, III, II B. II, I, III C. III, I, II D. I, II, III

Incorrect! The correct answer is: B. II, I, III

II, I, III. Always start with the nominal yield. No other information is given on the bond other than that it is selling at a premium; in some instances, the current will be lower than the basis, and in others the basis will be lower than the current. Do not worry about this, just remember -- always start with the nominal yield. This also holds true if the bond is selling at a discount and the question asks for the highest to lowest order. [Module 5, Municipal Securities, Section 8.4]

46

Which of the following rates is the least volatile?

A. Prime rate B. Federal funds rate C. Passbook savings account rate D. Discount rate

Incorrect! The correct answer is: C. Passbook savings account rate

Passbook savings account rate. Passbook savings account rates are usually the least volatile. Banks rarely change this rate because the rate the bank pays out for passbook savings is based on the discount rate, and is the amount the bank earns on money it pays to borrow from the Fed and the amount they have to pay for the savings accounts. It is all about arbitraging the interest rates, paying one rate to the lenders, the passbook accounts, and what they earn on the loans to businesses. 101.25 [Module 4, Economics & the Markets, Section 1.7]

47

The concession is 1/4% plus 1/8% additional takedown. What is the discount to a syndicate member on $100,000 of bonds?

A. $125 B. $250 C. $375 D. $500

Correct Answer: C. $375

$375. Since the problem gives the concession and the additional takedown, add them together to get 3/8. This is really 3/8% of $100,000 or .375% of $100,000, which is $375. The easy way is to add the percentages together (1/4 + 1/8) to equal 3/8 and divide it out (3 divided by 8) to get $375. [Module 6, Underwriting, Section 6.2]

48

Your customer has just purchased $25m of an EGG zero-coupon bond that is quoted at 78.70. The bond will mature in 2020. Which two of the following statements are true regarding this bond?

I. At maturity, the investor will have no capital gain.
II. At maturity, the investor will have a capital gain of $213 per bond.
III. The investor will not have to claim any income until maturity and will be taxed on it at that time.
IV. Each year an accreted amount of the bond will be claimed as income and taxed each year.

A. I and III B. II and III C. I and IV D. II and IV

Incorrect! The correct answer is: C. I and IV

I and IV. At maturity, the investor will have no capital gain because each year an accreted amount of the bond will be claimed as income and taxed. This is a zero-coupon bond. Unless the bond is purchased in a tax-deferred account (an IRA or Keogh), the accretion must be claimed each year. Therefore, there is no capital gain at maturity -- only one year's interest accretion will be claimed. The person is taxed each year on this income as ordinary income, not capital gain, and it must be claimed. The bondholder may not elect to wait until maturity. [Module 2, Corporate Debt Securities, Sections 1.1 & 16.3]

49

The economic theory that says the government should use tax increases and government spending to influence the business cycle and create a healthy economy is called:

A. Keynesian B. Supply-side C. Macroeconomics D. Monetarist

Incorrect! The correct answer is: A. Keynesian

Keynesian. The Keynesian theory subscribes to increased taxes and government spending -- the more the government taxes, the more it can spend, and therefore, more will end up in the hands of the public. Supply-side theory subscribes to tax cuts and spending cuts -- the more people have in their pockets, the more they will spend. Monetarists believe that the Fed can control the economy through changes in the money supply. Macroeconomics is the general study of the economy. [Module 4, Economics & the Markets, Sections 4.1 - 4.3]

50

Regarding the present economy, which of the following methods of influencing the economy would the FRB least use to change the money supply?

A. Change the discount rate B. Open the discount market C. Change the margin requirement D. Change the reserve requirement

Incorrect! The correct answer is: C. Change the margin requirement

Of the choices given, changing the margin requirement is the least used method to influence the economy. Once in a while, the Fed changes the margin requirement but most often uses "moral suasion" to influence the banks to keep more money in the reserve account, or allow the banks to loosen the requirement and have less money in the reserve account without really changing it. Once changed, it can be difficult to return to, but if suggested or allowed, the Fed can come back even in singular cases. [Module 4, Economics & the Markets, Sections 1.1 - 1.5]

51

Which would not be included in a special assessment tax?

A. Gasoline tax B. Income tax C. Ad valorum tax D. Sales tax

Incorrect! The correct answer is: B. Income tax

Correct answer (false statement): Income tax. This is not included in a special assessment tax. Special assessment bonds are backed by taxes that are specifically targeted to certain populations. The gasoline tax is used where highways will be improved, and thus, only people in that area will have certain sales taxes added to their gasoline (such as Silicon Valley in California in the 1990s). Sales taxes are assessed to certain locales where a project will be built (such as California after the earthquake in Los Angeles in 1995). Ad valorum taxes are added to property taxes in new housing developments where a bond is passed to pay for the infrastructure (e.g., streets, electric, gas, sidewalks) -- only the people living in that housing area will pay for the bond. The ad valorum taxes do not go into the general fund, but rather to a specific fund for that housing area. [Module 5, Municipal Securities, Sections 2.1 & 2.2]

52

All of the following are causes for the dollar to be devalued, except:

A. Trade deficits B. Industrialization has moved to other countries C. Labor for manufacturing is cheaper offshore D. Trade surpluses

Incorrect! The correct answer is: D. Trade surpluses

Correct answer (false statement): Trade surpluses. Trade surpluses strengthen the dollar, not weaken it. Trade deficits cause the dollar to be devalued due to more goods coming into the country than are being exported. The biggest factor that causes this is labor costs --manufacturing has moved to countries such as China, Mexico, Brazil, and many other developing countries with cheap labor. [Module 4, Economics & the Markets, Section 3.0]

53

The news services have been laboring over the economy and the concern is when the economy will turn around. The news services have been reporting that there have been two months of decline. Which of the following are these news reports referring to?

A. CCI B. Employment C. CPI D. GDP

Incorrect! The correct answer is: D. GDP

GDP. The GDP, or gross domestic product, is used in the U.S. to calculate the movement of the economy. Up until 1988, the economists were using the GNP, gross national product, but today all countries are using the GDP. The GDP measures the economy and how it is doing, while the CCI and employment foretell of what the economy will do in the future, or at least was thought to do so until 2007. Now the University of Michigan has dropped CC1 from being a leading indicator. The CPI measures the changes in price levels of consumer goods. [Module 4, Economics & the Markets, Sections 5.1 - 5.5]

54

Which of the following are found in the capital market?

A. Commercial paper B. CDs C. Banker's acceptances D. Federal Home Loan Bank bonds

Incorrect! The correct answer is: D. Federal Home Loan Bank bonds

Federal Home Loan Bank bonds. The capital market is money that is raised for a long period of time. The bonds by the Federal Home Loan Bank are long-term issues. All the others are short-term. A good way to determine the answer here is by asking, "Which is the odd man out?" [Module 2, Corporate Debt Securities, Sections 14.2 - 14.5; Module 3, Government Securities, Section 2.2]

55

ABC Corporation has issued 8 million shares of stock, all of which are still outstanding. An investor owns 800,000 shares of ABC. Now, ABC is going to issue 2 million additional shares. Under the preemptive rights of the corporate charter, how many rights does the investor have, and how many shares will she be able to purchase?

A. 200,000 rights and 20,000 new shares B. 200,000 rights and 200,000 new shares C. 800,000 rights and 20,000 new shares D. 800,000 rights and 200,000 new shares

Incorrect! The correct answer is: D. 800,000 rights and 200,000 new shares

800,000 rights and 200,000 new shares. The stockholder owns 800,000 shares and thus has 800,000 rights -- one right for every share owned. Since this stockholder owns 10% of the company, the rights offering allows this person to maintain their proportionate amount of the company, so the stockholder can purchase 10% of the new shares, or 200,000 shares. [Module 1, Equities, Section 7.1]

56

National Appliances, Inc., a U.S. corporation, is purchasing televisions from Japan. Which of the following instruments is the most likely to be used to facilitate the transaction?

A. Banker's acceptances B. Eurodollars C. Commercial paper D. ADRs

Incorrect! The correct answer is: A. Banker's acceptances

Banker's acceptances. Banker's acceptances are used to facilitate foreign trade. They are letters of credit that have been extended until the imported goods are sold, or at least for a reasonable amount of time for the buyer to sell the goods. It keeps the cash flow for the corporation (the importer) while allowing the manufacturer to be paid. [Module 1, Equities, Section 11.1; Module 2, Corporate Debt Securities, Sections 14.2 - 14.5]

57

Mr. Dodger lives in San Diego, California. He is in a 28% federal income tax bracket, and his California state income tax is 15%. He owns 100 Treasury notes with a 9% coupon rate. What is his tax liability on his interest income?

A. $1,170 B. $1,350 C. $2,520 D. $3,870

Incorrect! The correct answer is: C. $2,520

$2,520. The investor only pays federal taxes, since this is a U.S. government bond. It is exempt from state taxes. So in this case, 100,000 x 9% x 28% = $2,520. [Module 3, Government Securities, Section 5.0]

58

An investor purchases a 6% 2020 government bond quoted at 107.20. What is the actual price quoted for purchasing the bond?

A. $1,070.20 B. $1,070.63 C. $1,072.00 D. $1,076.25

Correct Answer: D. $1,076.25

$1,076.25. To find this, remember that you first write down the whole number -- in this case 107 -- and then add a blank line, dot, line, line to look like this: 107_ . _ _. Now divide 20 by 32 (government bonds are in 1/32nds, and in this case it is 20/32, or 5/8) to get .625. Now fill in the blanks to get $1,076.25. [Module 3, Government Securities, Section 4.0]

59

An investor is interested in purchasing reverse convertible bonds. All of the following are true of the bonds, except:

A. Reverse convertible bonds usually have yields that are higher than comparable bonds that are not convertible. B. The issuers of reverse convertible bonds have the obligation to convert the bonds into shares of the issuing company. C. The issuer has the right to convert the bonds into debt securities of other companies. D. Reverse convertible bonds are normally short-term securities.

Correct Answer: B. The issuers of reverse convertible bonds have the obligation to convert the bonds into shares of the issuing company.

Correct answer (false statement): The issuers of reverse convertible bonds have the obligation to convert the bonds into shares of the issuing company. The issuer can convert into shares of the company, but does not have an obligation to do so. The issuer can convert the bonds into bonds of other companies, stock of other companies, or into cash. The bonds are short-term and have higher yields than other bonds. [Module 2, Corporate Debt Securities, Section 10.4]

60

Cisco Systems, Inc. has 47 million shares issued. The balance sheet shows there are 4 million shares of treasury stock. How many shares of stock are outstanding?

A. 4 million B. 43 million C. 47 million D. 51 million

Correct Answer: B. 43 million

43 million. Since 4 million shares of treasury stock are issued but not outstanding, they must be subtracted from the total outstanding. [Module 1, Equities, Section 3.0]

61

Which of the following is the minimum maturity at issue to qualify a negotiable CD to be quoted as a money market instrument on the Nasdaq system?

A. 14 days B. 30 days C. 90 days D. One year

Incorrect! The correct answer is: A. 14 days

14 days. This is the minimum maturity in order for the issue to be listed on Nasdaq. Any fewer and the issue will not be shown. [Module 2, Corporate Debt Securities, Section 14.2]

62

A customer purchases a muni bond on Tuesday, June 6. If the interest payments are March 15 and September 15, the accrued interest will be paid for how many days?

A. 81 days B. 82 days C. 83 days D. 84 days

Incorrect! The correct answer is: D. 84 days

84 days. This is a municipal bond, not a government bond. The trade settles in three business days, so settlement is 6/6 + 3 (no weekend) = 6/9. Now the easy way is to just subtract the 5 in the 15 from 9, the last digit in the settlement date. Therefore, 9 - 5 = 4 and the only number with a 4 at the end is 84 days. The other way to calculate the number of days of accrued interest is:


6/6 + 3 = 6/9
6/9 = 5/39 when borrowing 1 month
-3/15 = last interest date
2/24 = 2 months at 30 days plus 24 days = 60 + 24 = 84

[Module 5, Municipal Securities, Section 8.6]

63

Historically, the buyers of municipal bonds are which two of the following?

I. Charitable organizations
II. Retirement plans
III. Insurance companies
IV. Individuals

A. II and IV B. II and III C. III and IV D. I and IV

Incorrect! The correct answer is: C. III and IV

III and IV. Municipal securities are only good for those looking for tax breaks and relief from taxes. Charitable organizations and retirement plans do not need the tax break, so they do not buy municipal securities. They want the most income they can get. However, there is a very large individual investor market, and always has been, since the interest is tax free. Insurance companies also use them for their guaranteed money required for annuities and insurance, and thus the tax-free money is well received. [Module 5, Municipal Securities, Section 10.2]

64

When the FOMC buys or sells securities, which of the following interest rates is first affected?

A. Fed funds rate B. Prime rate C. 30-year government bond rate D. Discount rate

Correct Answer: A. Fed funds rate

The fed funds rate is the most volatile of all rates. It changes daily, and at times, even by the minute. It is the rate that one bank charges another for use of federal funds, the money being held at the Federal Reserve Bank to meet the reserve requirement. However, the FOMC tells the banks the range it wants for the rate, and usually this is indicative of where the FOMC is going with other rates. In general, you can tell what the Fed is going to do with interest rates by watching the fed funds rate. [Module 4, Economics & the Markets, Sections 1.2 - 1.7]

65

An RR would like to send out a report that he has developed concerning a municipal bond along with the preliminary official statement to a client that he thinks would be interested in the issue. Regarding this action, which of the following statements is true?

A. The RR must obtain approval from his BOM. B. He can never do this. C. He can do this with the approval of the underwriter. D. He can do this with the approval of the issuer.

Incorrect! The correct answer is: A. The RR must obtain approval from his BOM.

The RR must obtain approval from his BOM. Anything sent to a customer must have the approval of the BOM, or branch manager. Since this is a municipal offering, the RR can send anything with the preliminary official statement. If this had been a corporate offering, nothing but the preliminary prospectus can be sent during the quiet period. [Module 5, Municipal Securities, Section 11.2; Module 6, Underwriting, Section 5.9]

66

An investor purchases a 26-week Treasury bill for a 4.25% yield. She holds the T-bill to maturity. What does she have at maturity?

A. $0 B. Short-term gain C. Long-term gain D. Ordinary income

Incorrect! The correct answer is: D. Ordinary income

Ordinary income. Treasury bills are purchased at a discount. The discount is the interest for the T-bill. It is taxed as ordinary income at the Federal level and is tax exempt at the state and local levels. [Module 3, Government Securities, Section 1.1]

67

U.S. government debt securities that mature in 1-10 years are called:

A. T-notes B. Treasury strips C. T-bills D. Treasury stock

Correct Answer: A. T-notes

T-notes. Treasury notes mature in 1-10 years. Treasury bills are issued with maturities of less than one year in duration. Treasury STRIPS are Treasury bonds that have the interest payments separated from the principal. Treasury stock is stock that is repurchased by a company and is not issued by the U.S. government -- don't be fooled. [Module 3, Government Securities, Section 1.1]

68

Which of the following statements is true about Treasury STRIPS?

A. The STRIPS are guaranteed by the U.S. government. B. The STRIPS are guaranteed by a broker/dealer. C. The STRIPS are backed by a broker/dealer that owns U.S. government securities. D. There is no backing or guarantee.

Incorrect! The correct answer is: C. The STRIPS are backed by a broker/dealer that owns U.S. government securities.

The STRIPS are backed by a broker/dealer that owns U.S. government securities. The B/D owns the bonds as backing for the STRIPS that are being issued. The name is a misnomer in that they are referred to as Treasury STRIPS, anticipating the investors will think of them as backed and guaranteed by the U.S. government, but they are not. They are only guaranteed by the B/D issuing the STRIPS; however, the B/D does own the U.S. government bonds and has put an amount of the bonds or notes that equals the amount of STRIPS that were issued. The government securities are the actual backing for the STRIPS. [Module 3, Government Securities, Section 1.1]

69

A municipal bond underwriting broker/dealer sees a notice of sale in The Bond Buyer regarding a new issue that is to be brought to market for the city of Des Moines, Iowa. It is a general obligation bond and the bid is to be made on a total interest cost method to the issuer. Which of the following is not needed for the underwriter to determine the total interest cost?

A. The coupon that is assigned to each maturity B. The par value at maturity C. The dated date D. The bond years

Incorrect! The correct answer is: C. The dated date

Correct answer (false statement): The dated date. The dated date is determined once the bidding is over, the underwriter has been chosen, and the issue is ready to be sold. Then, depending on the date the bond will be brought to market, the dated date (the date the interest starts to accrue) will be determined. Therefore, the dated date has no bearing on the bidding process. The coupon is mandatory, since the issuer wants to know what they will be paying each year, as well as the total amount of interest that will be paid over the life of the bond. The par value at maturity is also necessary when looking at whether the bond is issued at a discount or premium. The discount or premium adds to or subtracts from the total interest cost. The bond years are the amount of interest that will be paid per year the bond is outstanding -- this is very important. [Module 6, Underwriting, Section 5.3]

70

Which two of the following provide for the income for the payment of a PHA bond?

I. Rents
II. Payments from HUD
III. U.S. government
IV. The local municipality

A. I and II B. I and III C. III and IV D. II and IV

Correct Answer: A. I and II

I and II. Only rents on the units and payments from HUD generate the payments for the PHA bond. The government and the municipality have no obligation to these bonds -- they just issue the bond and the project note, respectively. Payments from HUD may be from the government, but this is not required. [Module 5, Municipal Securities, Section 2.1]

71

In what order are muni bonds allocated in a new muni bond offering?

A. Pre-sale, member orders at the takedown, designated orders, net sales to the group B. Net sales to the group, pre-sale, designated orders, member orders at the takedown C. Pre-sale, net sales to the group, member orders at the takedown, designated order D. Pre-sale, net sales to the group, designated orders, member orders at the takedown

Correct Answer: D. Pre-sale, net sales to the group, designated orders, member orders at the takedown

Pre-sale, net sales to the group, designated orders, member orders at the takedown. Just remember, Pretty Girls (Guys) Drive Mercedes for Pre-sale, Group net, Designated, and Member orders at the takedown. [Module 6, Underwriting, Section 5.11]

72

Which two of the following are subject to foreign taxation on securities of a company that is in the foreign country?

I. Cash dividends
II. Stock dividends
III. Interest
IV. Capital distributions

A. I and II B. II and IV C. I and III D. III and IV

Incorrect! The correct answer is: C. I and III

I and III. Cash dividends and interest are both subject to foreign taxation on securities of a company in that country. Both interest and cash dividends are sent to the stockholders, and thus can be taxed by the foreign country in that tax year. Stock dividends have no value until the stock is sold, which could be years in the future. Capital distributions are just returning an investor's cost in the shares of the company. Therefore, neither stock dividends (more shares of stock) nor capital distributions (returning money spent on the shares) are taxed. The tax is only on the money received by the investor. [Module 1, Equities, Section 11.2]

73

Microsoft is paying a quarterly dividend of $.16. The present price of Microsoft is 88.50. What is the yield for a buyer of Microsoft stock?

A. .18% B. 1.81% C. .72% D. 13.83%

Incorrect! The correct answer is: C. .72%

.72%. Don't forget that the dividend shown is a quarterly dividend, or $.16 x 4 quarters = $.64. Then, yield is always the dividend or interest ? the going market price. In this case, .64 ? 88.50 = .00723 = .72%. [Module 1, Equities, Section 5.2]

74

The Department of Commerce considers which of the following a leading indicator?

A. The S&P 500 B. Gross National Product C. Bankrupt businesses D. Consumer Price Index

Incorrect! The correct answer is: A. The S&P 500

The S&P 500 is the only leading indicator shown here. The GNP and the CPI are shown and discussed, but are not considered leading indicators. They are more of a current snapshot of what is happening. Bankrupt businesses are a lagging indicator, but again, this is a reported item, not really an indicator. [Module 4, Economics & the Markets, Sections 5.1 - 5.4]

75

Corporate bond prices are quoted as a percentage of:

A. Stated value B. Conversion value C. Par value D. Market value

Incorrect! The correct answer is: C. Par value

Par value. All corporate and government bond quotes are a percent of par value. Corporate bonds are in fraction form and government bonds are in decimal form that are in 1/32nds of a point. An example of a corporate bond quote is 98.24, or $982.40; an example of a government bond quote is 98.24 or 98 24/32, which is 98.75, or $987.50. [Module 2, Corporate Debt Securities, Sections 9.0 & 9.1]

76

Rubbermaid Products, Inc. has issued a convertible bond that is convertible at $40. If the current market value of the bond is $1,200, what is the parity price of the stock?

A. $25 B. $30 C. $48 D. $50

Correct Answer: C. $48

$48. Determining the parity price takes two steps:


Step 1
Shares x Share Price = Bond Price
_____ x $40 = $1,000
25 x $40 = $1,000

Step 2
Shares x Parity Price = Current Market Value
25 x ___ = $1,200
25 x $48 = $1,200

The first step finds the conversion ratio of 25 shares per bond, the second step finds the parity price.
[Module 2, Corporate Debt Securities, Sections 10.1 - 10.3]

77

San Rafael has issued serial bonds that are redeemable prior to maturity. How does the city determine which bonds in a sinking fund are to be selected?

A. The bonds are picked by random lot. B. The bonds are picked by decreasing numerical order. C. The bonds are picked by inverse chronological order. D. The bonds are picked by the ones with the highest coupon rate.

Incorrect! The correct answer is: C. The bonds are picked by inverse chronological order.

The bonds are picked by inverse chronological order. Because these bonds are serial, they have different maturities. Therefore, the longest ones are called first, for two reasons. One, they usually have the highest coupons and are paying the highest interest. Second, this helps retire the debt earlier. If this had been a term bond, San Rafael would have to call in the bonds using random lot. They all mature on the same date, so they all have an equal chance of being called. Remember -- look to see what kind of bond the question is referring to. [Module 5, Municipal Securities, Section 8.7]

78

An 8 3/4% bond is priced at 101.8. What is the current yield on the bond?

A. 8.59% B. 8.64% C. 7.93% D. 7.97%

Incorrect! The correct answer is: B. 8.64%

8.64%. Current yield is the yearly interest divided by the price of the bond. In this case, the bond is a government bond, as can be determined by the decimal in the quote, 101.8. The bond is 8 3/4% priced at 101.8, so we do this:


8.75% = 87.50 per year; 101.8 (8/32) = 101.25 = 1,012.50. Now we do this:
87.50 ? 1,012.50 = .0864, or 8.64%

[Module 2, Corporate Debt Securities, Section 7.2]

79

All of the following statements are true regarding CMOs, except:

A. CMOs are subject to a lower level of prepayment risk than conventional mortgage obligations. B. CMOs are available in $1,000 denominations. C. CMOs only make monthly payments to holders. D. CMOs receive the same credit rating as the underlying pass-through securities held in trust.

Incorrect! The correct answer is: C. CMOs only make monthly payments to holders.

Correct answer (false statement): CMOs only make monthly payments to holders. This is false -- CMOs can make monthly, quarterly or semiannual payments. Because CMOs are mortgages broken up into specific maturity schedules, the chance of prepayment is lessened on some of the later maturities. They are available in $1,000 denominations and the rating of the underlying mortgage issuer is the rating of the CMO. However, the CMOs have a volatility rating that is more stringent. [Module 3, Government Securities, Sections 9.0 - 9.2]

80

What type of bond is characterized by decreasing interest costs?

A. Term bond B. Revenue bond C. Limited tax bond D. Serial bond

Incorrect! The correct answer is: D. Serial bond

Serial bond. All serial bonds have a decreasing interest cost because less principal is outstanding each year due to part of the issue maturing each year. A term bond has the same interest each year, unless some of the bonds have been called, a point not given in the question. Both the revenue and limited tax bonds may or may not have decreasing interest costs each year, depending on whether they are serial bonds (yes) or term bonds (no). [Module 5, Municipal Securities, Sections 3.1 - 3.3]

81

Which of the following does not rate commercial paper?

A. Best's B. S&P C. Moody's D. Fitch's

Incorrect! The correct answer is: A. Best's

Correct answer (false statement): Best's does not rate commercial paper, it rates insurance companies. All three of the rating agencies of corporate and municipal bonds also rate commercial paper. [Module 5, Municipal Securities, Section 5.6]

82

Which of the following indexes is composed of stocks all found on the NYSE, Amex, and Nasdaq?

A. The Dow Jones Index B. The Wilshire Index C. The Advance/Decline Index D. The Odd-Lot Index

Incorrect! The correct answer is: B. The Wilshire Index

The Wilshire Index, which is the Wilshire 5,000. It actually comprises more than 6,000 stocks, but for historical reasons, it is still called the Wilshire 5,000. It is also the broadest index of the market. [Module 4, Economics & the Markets, Section 5.10]

83

Which of the following is true regarding cumulative voting for the directors of a company by the common shareholders?

A. If the shareholders do not vote, their vote carries over to the next election. B. The minority shareholders get a chance to elect a director. C. The shareholders must vote for more than one director. D. The shareholders only get to vote one vote per share for each director being elected.

Incorrect! The correct answer is: B. The minority shareholders get a chance to elect a director.

The minority shareholders get a chance to elect a director. This is one of the benefits of cumulative voting -- the shareholders can put all of their votes to one director or to any number of directors. In this way, the large minority shareholders can vote for the director of their choice and elect that director to a seat. Statutory voting allows the shareholders to only vote their amount of shares for each director being elected. [Module 1, Equities, Section 6.2]

84

A fundamental analyst uses all of the following to determine if a particular stock is a good investment, except:

A. The financials of the company B. A saucer stock movement C. The latest earnings and dividends paid out D. The management within the company

Incorrect! The correct answer is: B. A saucer stock movement

Correct answer (false statement): A saucer stock movement. A stock that has been decreasing and is not starting to rise is called a "saucer movement" in the stock price. This is used by technical analysts, and rarely by fundamental analysts. Fundamentalists look at the company, the financials (the balance sheet, income statement, and annual reports), the earnings and dividends being paid out, and the management of the company as a whole. [Module 4, Economics & the Markets, Sections 5.6 & 6.5]

85

Linda Lorton is looking at two municipal bonds. One is a 7% bond callable in five years and the other is a 7% bond callable in 10 years. They are both selling at a 5.65% basis. If they both drop 10 basis points, which of them would have the greatest increase in price?

A. The one with the longer term to call date B. The one with the shorter term to call date C. They would decrease the same amount D. They would increase the same amount

Incorrect! The correct answer is: A. The one with the longer term to call date

The one with the longer term to call date. This is because the price has to increase or decrease more to move the same in basis (yield). You can see this if you do a yield to maturity on a short- and a long-term bond, but it is not necessary to do so. Just remember -- the longest bond always moves the most. [Module 5, Municipal Securities, Section 8.4]

86

A municipality has a net revenues pledge listed in the indenture of the bond. Which of the following is paid first?

A. Operations and maintenance B. Debt service C. Surplus accounts D. Replacement account

Incorrect! The correct answer is: A. Operations and maintenance

Operations and maintenance are paid first in a net revenues pledge indenture. If this had been a gross revenues pledge, the debt service would be paid first. Notice that it says "pledge," meaning how the debt service is pledged. "Net" means net after operations and maintenance. "Gross" means debt service is paid first. [Module 5, Municipal Securities, Section 9.2]

87

How are new issues of Treasury bills sold to the public?

A. Through a broker/dealer that is an underwriter B. Through a broker/dealer that is not an underwriter C. Through a private placement by member banks of the Fed D. Through an auction method on a weekly basis

Incorrect! The correct answer is: D. Through an auction method on a weekly basis

Through an auction method on a weekly basis. Every Monday, the Fed auctions 13-week and 26-week T-bills. On Tuesday, the Fed auctions 4-week T-bills. Underwriters are only used for corporate and municipal bonds. Private placements are limited partnerships, and are sold to the investor at a discount. [Module 6, Underwriting, Section 7.0]

88

Which two of the following are true of treasury stock?

I. It is authorized stock, but it has not been issued.
II. It is stock that has been issued to change the voting rights of the board of directors.
III. It is issued stock that has no voting rights and has no right to dividends.
IV. It is previously issued stock that has been bought back by the company.

A. II and IV B. III and IV C. I and III D. I and II

Incorrect! The correct answer is: B. III and IV

III and IV. Treasury stock has been issued but has been repurchased by the corporation. The corporation cannot resell the stock, but the company can reissue it in stock dividends, stock splits, stock option plans in the company, and as incentive for hiring and paying employees. Since the company owns the stock, the shares have no voting rights, nor do they have the right to any declared and/or paid dividends. [Module 1, Equities, Section 2.1]

89

A "double-barreled bond" is defined as:

A. A bond that is exempt from both federal and state taxes B. A corporate bond that pays interest from ordinary income and revenue received from operating a facility for a municipality C. A municipal bond that has principal and interest backed by revenues of a facility and the general taxing authority of a municipality D. A bond of a foreign issuer that is backed by the U.S. government, with interest payable either in dollars or foreign currency

Incorrect! The correct answer is: C. A municipal bond that has principal and interest backed by revenues of a facility and the general taxing authority of a municipality

A municipal bond that has principal and interest backed by revenues of a facility and the general taxing authority of a municipality. This is the definition of a double-barreled bond. Think of two barrels of a gun to "shoot out the payments." If one barrel fails, there is always the second one. These bonds are often used for sports arenas, toll roads, bridges, and other public facilities. [Module 5, Municipal Securities, Section 2.3]

90

Which of the following have a fixed rate of interest when issued?

I. U.S. government bonds
II. U.S. government notes
III. U.S. government Treasury bills
IV. U.S. government STRIPS

A. I and II B. II and IV C. I and III D. III and IV

Correct Answer: A. I and II

I and II. U.S. government bonds and notes have a fixed rate of interest when issued. T-bills are sold at a discount and have no interest. STRIPS are zero-coupon bonds sold at a discount. The amount of the discount is the total interest to be received, which is amortized over the life of the bond. [Module 3, Government Securities, Section 1.1]

91

Which two of the following are considered advertising under MSRB rules?

I. The official statement
II. Market letters
III. Preliminary official statement
IV. Summary of official statement

A. I and III B. II and III C. II and IV D. I and IV

Incorrect! The correct answer is: C. II and IV

II and IV. Advertising is any item sent to a customer, or anything published and used to induce sales that is not created by the issuer. The issuer writes both the official statement and the preliminary OS, and thus they are considered fact sheets, not advertising. The market letter is for inducing sales, as are the abstracts/summaries of the OS and circulars/reports put out by a B/d. Anything prepared by the B/D is advertising. The principal must sign off on these materials before they are sent. [Module 5, Municipal Securities, Section 11.4]

92

Where are the priorities set by the manager in a municipal underwriting?

A. In the account settlement letter B. In the notice of sale C. In the account letter D. In the official statement

Incorrect! The correct answer is: C. In the account letter

In the account letter. The account letter is better known as the syndicate letter. The account settlement letter is sent after the bonds have been sold, and tells how the syndicate distributed the bonds. [Module 6, Underwriting, Sections 2.2 & 5.11]

93

The spread on a competitive bid new issue municipal underwriting is the difference between the:

A. Highest and lowest re-offering yields B. Highest and lowest bond coupons C. Additional takedown and concession D. Syndicate bid and re-offering yields

Incorrect! The correct answer is: D. Syndicate bid and re-offering yields

Syndicate bid and re-offering yields. This is a municipal issue -- the syndicate has bid the issue and is now "re-offering" it to the public. The difference in the amount and/or prices is the spread. [Module 6, Underwriting, Section 6.2]

94

Which two of the following are fundamental analysis tools that a technical analyst would use to determine if a particular stock is a good investment?

I. Saucer movement in the stock price
II. Financial ratios regarding the company
III. Advance decline line
IV. Annual reports and earnings reports

A. I and II B. III and IV C. II and IV D. I and III

Incorrect! The correct answer is: C. II and IV

II and IV. The question is asking for fundamental analysis tools. The question does refer to a technical analyst, but it is asking which fundamental analysis tools the technician will use. Technical analysis is all about the market, while fundamental analysis is all about the company. The fundamental analysis tools are the financial ratios, annual reports, and earnings reports. A technician uses these to make sure the company is solid. In addition to these fundamental means of analysis, the technician will use technical analysis such as the market price, the saucer movement showing that a stock has hit a new low (or a new high if there were an inverted saucer movement), the advance decline line, short interest theory, and other market indicators. However, the question is asking for fundamental analysis tools. [Module 4, Economics & the Markets, Sections 5.6 & 6.5]

95

A business has filed to be incorporated. The new company has authorized 20 million shares. What does authorized mean?

A. The shares have been issued to interested individuals who want to be owners of the company. B. The shares have been issued and some have been repurchased. C. The shares have been approved by the board of directors and must be sold immediately. D. The shares have been approved by the board of directors and can be sold now or in the future.

Correct Answer: D. The shares have been approved by the board of directors and can be sold now or in the future.

The shares have been approved by the board of directors and can be sold now or in the future. Authorized does not mean the shares have been sold. The shares have been "authorized to be able to be sold" and may or may not ever be sold. This company has 20 million shares authorized. They could have an underwriter issue 5 million shares, so those shares are "authorized, issued, and outstanding" while the rest of the 15 million shares are still only authorized and have not been sold. Please note the difference between authorized vs. authorized and issued. [Module 1, Equities, Section 2.1]

96

All of the following might cause the bond counsel for a municipal revenue issue to qualify his legal opinion, except:

A. A pending major change in the Internal Revenue Code B. A lack of clarity in state statutes C. Interpretive court ruling D. Good title to the authority's property

Incorrect! The correct answer is: D. Good title to the authority's property

Correct answer (false statement): Good title to the authority's property. This would never cause the bond counsel to qualify the opinion. The title to the property can only make the bond better or not as good. To "qualify" the issue, the bond counsel would have to be concerned with the tax-exempt status of the bond issue. [Module 6, Underwriting, Section 5.8]

97

A municipal bond rating service uses which of the following when evaluating the creditworthiness of a general obligation bond?

A. Competitive projects B. Net debt per capita C. Taxpayers' attitudes towards debt D. Operating revenues

Incorrect! The correct answer is: B. Net debt per capita

Net debt per capita. This ratio is used to determine the amount of GO bond indebtedness per person that a city, county, or other taxing entity has encumbered on its property holders. The attitudes have nothing to do with the evaluation since the taxpayers vote for the bond issues. Remember, all GO bonds must be voted on. Competitive projects and operating revenues are for revenue bonds. [Module 5, Municipal Securities, Section 9.1]

98

The dollar supply of new bonds to be issued in a month is found in which of the following?

A. The Bond Buyer B. Blue List C. 30-Day Visible Supply D. Muni Bond Buyer's Financial Advisers Service

Incorrect! The correct answer is: C. 30-Day Visible Supply

30-Day Visible Supply. This is the place to find the bonds that will be issued in the next month (30 days). This list is found in The Bond Buyer on Mondays only, and is very important for underwriters to see the competition and other bonds coming to market shortly. The 30-Day Visible Supply is found in The Bond Buyer, but only in Monday's issue; therefore, The Bond Buyer answer is only partially correct. [Module 6, Underwriting, Section 5.3]

99

A 12-year serial bond is selling at a premium. It is callable in seven years. How is the bond quoted?

A. Yield to maturity B. Nominal yield C. Current yield D. Yield to call

Incorrect! The correct answer is: D. Yield to call

Yield to call. Any municipal bond that is selling at a premium and callable at par has to be quoted on the "yield to call." This is because the rules require that municipal bonds be quoted on the lesser of the yield to maturity or the yield to call. The only time a bond will be quoted on a yield to call is if the call price is lower than the purchase price. For the test, remember that discount bonds are never quoted on yield to call. Premium bonds callable at a premium could be quoted on the yield to call, but they are usually not. All premium bonds callable at PAR are quoted on the yield to call. [Module 5, Municipal Securities, Section 7.2]

100

Which of the following quotes must be for a 10-year AA-rated corporate bond?

A. 105.75 B. 96.1 C. 9.50 D. 109.5

Incorrect! The correct answer is: A. 105.75

105.75. Corporate bonds are now quoted in decimals. Remember that government bonds are quoted in 32nds, in decimal form, so the highest fractional number would be 31/32. All single digits after the decimal must be a government bond; therefore, the quotes of 96.1 and 109.5 could only be government bonds because they end in single digits -- .1 and .5, which are equivalent to 1/32 and 5/32. The 9.50 is a municipal bond because the whole number is so low -- a corporate bond would not trade at $95, so it must be a municipal quote. That leaves only the 105.75, which translates into $1,057.50, a corporate bond. [Module 2, Corporate Debt Securities, Section 9.1]

101

All of the following statements are true regarding PAC tranches, except:

A. If prepayment rates rise, the PAC tranche will receive its payment after its companion securities. B. If prepayment rates drop, the PAC tranche will receive its payment before its companion securities. C. PAC tranche holders have higher extension risk than the companion securities holders. D. PAC tranche holders have lower extension risk than the companion securities holders.

Incorrect! The correct answer is: C. PAC tranche holders have higher extension risk than the companion securities holders.

Correct answer (false statement): PAC tranche holders have higher extension risk than companion securities holders. PAC tranche holders do not have higher extension risk than companion tranche holders -- they have a lower extension risk than the companion tranches. The extension risk companion securities give protection to the tranche holders by being paid after the tranche. The tranche holders are paid first and if there is not sufficient money, the holders of the extension risk companion securities are the ones that are not paid. Therefore, they have the greater risk of extension of time before payment. [Module 3, Government Securities, Sections 9.1 & 9.2]

102

A 9% Treasury bond with interest payment dates of March 1 and September 1 is purchased for settlement on Wednesday May 24. How many days of accrued interest must the buyer pay the seller?

A. 83 B. 84 C. 85 D. 86

Correct Answer: B. 84

84 days. Remember that this is a Treasury bond, a government bond, which means that all the days are counted, not just business days. Don't be fooled into adding one day to arrive at the settlement date, because the settlement date is given. If you do this the quick way, the settlement is given (the 24th): 24 -1 = 23. Since March has 31 days, but April only has 30, add 1 to 23 to get 24, so the answer must end in 4. Otherwise, the longer way to calculate is 5/24 - 3/1 = 2/23, or 2 months and 23 days = 83 days. Now add 1 day for March to get a total of 84 days. [Module 3, Government Securities, Section 6.0]

103

Municipal securities that are partially mutilated would be in good delivery form if all of the following were legible, except:

A. The bond numbers B. The CUSIP numbers C. The coupon rate D. The maturity date

Incorrect! The correct answer is: B. The CUSIP numbers

Correct answer (false statement): The CUSIP number does not need to be legible or even on the bond. This is just an identifying number that can be obtained using the issuer, coupon, and maturity date. It is unnecessary. [Module 5, Municipal Securities, Section 11.1]

104

Which of the following industries is the most cyclical?

A. Natural gas B. Tobacco C. Food stores D. Appliances

Incorrect! The correct answer is: D. Appliances

Appliances are the most cyclical of the choices given. Do not confuse cyclical with the seasons, as in the natural gas. That is a steady stock. Cyclical means "will do well in good times and poorly in bad times." These types of stocks are usually with consumer products that are only purchased when the economy is good. The other three are considered defensive stocks. [Module 1, Equities, Sections 12.3 - 12.5]

105

Eurodollars are issued for which of the following?

I. American corporations
II. Japanese corporations
III. European corporations
IV. State and local governments

A. I and II B. II and IV C. I and III D. I, II, III, and IV

Incorrect! The correct answer is: D. I, II, III, and IV

I, II, III, and IV. All these corporations use Eurodollar bonds, especially if they can get a better interest rate. Some state governments have used the Eurodollar market when their market is "too expensive," meaning rates are too high and are better in the Euromarket than at home. [Module 2, Corporate Debt Securities, Section 15.1]

106

An investor purchased a 5% corporate put bond four years ago. She calls you about the put feature and wonders how she can take advantage of it. You tell her that it is best to send the bond in to exercise the put feature when which of the following is true?

A. She can send it in anytime. B. She should send the bond to the issuer when the price is at a discount to par. C. She should send the bond to the issuer when the price is at a premium to par. D. She should send the bond to the issuer when the price is at par.

Incorrect! The correct answer is: B. She should send the bond to the issuer when the price is at a discount to par.

She should send the bond to the issuer when the price is at a discount to par. If the bond is at a discount, then other bonds are being issued with higher coupons. Therefore, she should put the bond to the issuer, receive par for the bonds, and purchase new, higher yielding bonds. If the bonds are at a premium, then her bond would be the highest of interest rates -- why turn in a high interest-rate bond just to purchase a new lower yielding bond? Not a good move. If the bonds are at par, there is no sense in turning it in, since the put bond is as good as a new bond. She cannot send it in anytime, only once the put period has started. [Module 2, Corporate Debt Securities, Section 6.4]

107

Which two of the following are true of an already outstanding municipal bond selling at a discount?

I. Interest is exempt from federal taxes.
II. Capital gains are subject to both federal and state taxes.
III. The yield to maturity will be greater than the yield to call on the bond.
IV. The yield to an investor will be less than if the investor had bought the bond at its par value.

A. I and II B. II and III C. III and IV D. II and IV

Incorrect! The correct answer is: A. I and II

I and II. Interest is exempt from federal but not state taxes other than in the state of issue. Capital gains are always subject to taxes unless bought at an original issue discount. The yield to call is greater than the yield to maturity for discount bonds, while the yield to call is less than the yield to maturity for premium bonds. This is why premium bonds are quoted on yield to call, since the yield to call is lower, and is also why discount bonds are quoted on yield to maturity, since the yield to call is higher on a discount bond. Since the bond is purchased at a discount, the yields from lowest to highest are: Nominal, current, YTM, and YTC. Therefore, the yield to an investor purchasing the bonds is higher, not lower, if the bond is purchased at par.
[Module 5, Municipal Securities, Section 10.1]

108

The Federal Reserve Board has told the Department of the Treasury to sell $90 billion of Treasury bills and Treasury notes over the next month. How will this affect interest rates?

A. Interest rates will rise. B. Interest rates will fall. C. The sale will have no effect on interest rates. D. It cannot be determined until the sales occur.

Incorrect! The correct answer is: A. Interest rates will rise.

Interest rates will rise. The Fed is selling, which causes prices to fall and interest rates to rise. Just remember the stock market -- more sellers, prices down. More buyers, prices up. The last two choices are not relevant. [Module 4, Economics & the Markets, Sections 1.0 & 2.0]

109

Revenue bonds are issued by the University of California Board of Regents. Which of the following are true concerning the payment of the principal amount due at the maturity of the bonds?

I. It is guaranteed by the state of California.
II. It is supported by the California state sales tax.
III. It is only an obligation of the university system and is paid from fees collected from the use of university facilities.
IV. It will be paid by fees from students attending schools in the university system.

A. III and IV B. I and II C. I and III D. II and IV

Incorrect! The correct answer is: A. III and IV

III and IV. This is a revenue bond; therefore, it is only paid by user fees. The bonds are not guaranteed or supported by the state of California. The only revenues mentioned in the answer choices are the enrollment fees and the user fees of university facilities. [Module 5, Municipal Securities, Section 9.2]

110

Which of the following is a high rating for an MIG-rated security?

A. Aaa B. Baa C. 1 D. 3

Correct Answer: C. 1

1.MIG 1 is the highest Moody's rating for municipal notes. MIG 3 is the lowest Moody's rating for municipal notes. Aaa is the highest Moody's rating for both municipal and corporate bonds. Baa is the lowest of Moody's "bank qualified" bond ratings, while Aaa is its highest bond rating. [Module 6, Underwriting, Section 2.1]

111

An underwriter is bringing more shares of a corporation that is trading on Nasdaq. The SEC has not yet released the issue, but a registered rep is telling a customer about it. What can the registered rep of the firm underwriting the issue do?

A. Take orders for the issue B. Take indications of interest for the issue C. Take checks from customers in anticipation of entering an order D. Send a prospectus to interested customers

Incorrect! The correct answer is: B. Take indications of interest for the issue

Take indications of interest for the issue. Reps cannot take orders for unreleased issues; orders have to be filled, while indications of interest do not have to be filled. No checks can be taken until the securities are released. It would have a preliminary prospectus, not a prospectus. [Module 6, Underwriting, Section 4.2]

112

What does a Fannie Mae do?

A. Provide a secondary market for commercial mortgages B. Provide a secondary market for FHA- and VA-insured mortgages C. Issue conventional and federally insured mortgages D. Guarantee timely payments of mortgages

Incorrect! The correct answer is: B. Provide a secondary market for FHA- and VA-insured mortgages

Provide a secondary market for FHA- and VA-insured mortgages. FNMAs (Fannie Mae) provide a secondary market for FHA- and VA-issued mortgages, as well as conventional mortgages. The difference between FNMA and GNMA is that FNMA is actually a corporation that issues conventional mortgages, while GNMA is a government agency that ONLY issues FHA and VA loans. [Module 3, Government Securities, Section 2.2]

113

Which two of the following entities normally invest in commercial paper?

I. Mutual funds
II. Individual investors
III. Trust companies for individual trust accounts
IV. Pension plans

A. I and III B. I and IV C. II and III D. II and IV

Incorrect! The correct answer is: B. I and IV

I and IV. Large institutions are the majority of the buyers of commercial paper. This is especially true of pension plans, money market mutual funds, and other mutual funds or institutional investors who want to be in a cash position for a short time. Generally, individual investors do not invest in commercial paper because the minimum amount they must purchase is so great. Most individual trust accounts do not have large amounts of money either, and therefore normally do not invest in commercial paper. However, very wealthy investors invest in commercial paper and their trustees do as well. [Module 2, Corporate Debt Securities, Section 14.4]

114

Which of the following indices has the largest sampling of stocks to represent an indication of the market trend?

A. Dow Jones Index B. S&P Index C. Nasdaq Index D. Wilshire Index

Incorrect! The correct answer is: D. Wilshire Index

Wilshire Index. Wilshire Index, better known as the Wilshire 5,000, is the largest index with over 6,000 stocks. The S&P has two indices -- the 100 (stocks) and 500 (stocks). The Nasdaq varies according to the number of stocks it has at any given time. The Dow Jones is the smallest with only 30 industrial stocks in the DJIA (Dow Jones Industrial Average Index), but a total of 65 stocks in the total Dow Jones Index. The other 35 are rails and transportation. [Module 4, Economics & the Markets, Sections 5.6 - 5.10]

115

The Fed is changing the reserve requirement. What effect does it have on bank deposits?

A. Regressive B. Multiplier C. Neutral D. Negative

Incorrect! The correct answer is: B. Multiplier

The multiplier effect is what happens when the Fed changes the reserve requirement. This is because the higher the requirement, the less that can be lent out, and this is multiplied each time the money is used. The opposite is also true -- cut the requirement, and the multiplier effect increases the use of the money. [Module 4, Economics & the Markets, Section 1.4]

116

The Federal government guarantees prompt payment of principal and interest on which of the following issues?

A. FNMA common stock B. FNMA pass-throughs C. GNMA pass-throughs D. Freddie Mac pass-throughs

Correct Answer: C. GNMA pass-throughs

GNMA pass-throughs. These are the only mortgage securities that are guaranteed by the U.S. government. Remember -- the government covers the Ginnie but not the Fannie. [Module 3, Government Securities, Section 2.1]

117

A new municipal bond is being offered as a 20-year serial bond callable in 10 years. The bond has a higher than normal interest rate and is selling at a premium. What can be said of the scale for the offering?

A. The scale shows the yield to maturity for all the bonds. B. The scale shows the yield to call for all the bonds. C. The scale shows the current yields of the bonds. D. The scale shows the lower of the yield to maturity or yield to call of the bonds.

Incorrect! The correct answer is: D. The scale shows the lower of the yield to maturity or yield to call of the bonds.

The scale shows the lower of the yield to maturity or yield to call of the bonds. Since the first 10 years are not callable, all of those will be yields to maturity. In the last 10 years, the scale could be the yield to maturity or the yield to call, depending on the price of the bond, and the price at which the bond could be called. You do not have enough information to determine more than the yield is the lower of the YTM or YTC. [Module 5, Municipal Securities, Sections 7.2 & 11.1; Module 6, Underwriting, Section 5.5]

118

RPL, Inc. has a 12% $50 million convertible bond outstanding. The bond is convertible at $48 and has an anti-dilution feature. If RPL's board of directors declares a 20% stock dividend payable November 1, what will the conversion price be after the dividend date?

A. $38.40 B. $40 C. $48 D. $57.60

Incorrect! The correct answer is: B. $40

$40. The first step is to find the conversion ratio before the dividend:


NUMBER OF SHARES x SHARE PRICE = BOND PRICE
?? x $48 = 1,000 = 20.83 shares, the conversion ratio at 48

Before the dividend, the bond would be converted into 20.83 shares. Now there is a 20% increase in shares, or 4.17 more shares (20.83 x .20 = 4.1666); therefore, there are now 25 shares per bond. Now find the parity price with the new shares:


25 x ?? = 1,000
1,000 / 25 = 40, the new conversion price

Or, you can do it the easy way: $48 x .20 = $9.60, then $48 - $9.60 = $38.40 and then take the next higher number, which is $40. This will always work when given answers on a test.
[Module 2, Corporate Debt Securities, Sections 6.3 & 10.3]

119

An investor purchases a $50M 7% U.S. government bond that matures in 10 years in the secondary market at 95. Seven years later, the investor sells the bond at 97. What is the current accreted value on the date of sale?

A. $935 B. $50 C. $970 D. $985

Correct Answer: D. $985

$985. The compounded accreted value is the basis of the bond at the time the bond is sold. Since the bond is purchased at 95, or 950 per bond, the investor will accrete the $50 discount (1,000 - 950) over the 10 years to maturity, or $5 per year. The bond is sold after seven years. To find the current accreted value, multiply the yearly accretion times the number of years held ($5 x 7 years = $35) and then add that amount to the original cost of the bond ($950) to get the accreted value of $985. [Module 3, Corporate Debt Securities, Sections 16.2 & 16.3]

120

Which two of the following trades are cleared through the use of federal funds?

I. U.S. Treasury bonds
II. Municipal bonds
III. Project notes
IV. U.S. Treasury notes

A. I and IV B. II and III C. II and IV D. I and III

Correct Answer: A. I and IV

I and IV. U.S. Treasury bonds and notes. Only Treasury securities (U.S. government bonds, notes, and bills) are cleared through federal funds. Remember that federal funds are the monies kept at the Federal Reserve Bank, and these monies are used to buy and sell Treasury securities. Municipal and corporate securities are cleared through clearing house funds. Project notes are a municipal note. [Module 4, Economics & the Markets, Section 1.2]

121

All the following are types of corporate underwriting commitments, except:

A. Stand-by B. AON C. Firm D. FOK

Correct Answer: D. FOK

FOK. An FOK, meaning fill or kill, is an order, not an underwriting commitment. An AON, all or none, can also be an order, but it is also a type of underwriting commitment. [Module 6, Underwriting, Sections 1.2 & 1.3]

122

Revenue bond rate covenants require user fees to be high enough to cover all of the following obligations of the issuing authority, except:

A. Renewal and replacement B. Operating and maintenance C. Debt service reserve fund D. Optional call provisions

Incorrect! The correct answer is: D. Optional call provisions

Optional call provisions. Since these are "optional" calls, the issuer does not need to have money to satisfy them. The issuer must charge user fees to cover debt service and pay for operating and maintenance, as well as renewal and replacement of parts of the facility. [Module 5, Municipal Securities, Sections 9.1 & 9.2]

123

Which of the following is true about a TAC CMO?

A. A TAC is a type of PAC that has a higher degree of extension risk. B. A TAC is a type of PAC that has a higher degree of prepayment risk. C. A TAC is a type of PAC that has a lower degree of extension risk. D. A TAC is a type of PAC that has a lower degree of prepayment risk.

Incorrect! The correct answer is: A. A TAC is a type of PAC that has a higher degree of extension risk.

A TAC is a type of PAC that has a higher degree of extension risk for the main tranche. A TAC has no companion securities for extension risk protection -- it only has prepayment risk companion securities for protection against early payoff. That is why the prepayment risk on a TAC is the same as the prepayment risk on a PAC. [Module 3, Government Securities, Section 9.2]

124

A city is issuing $2 million of new bonds with $4 million bonds outstanding. The county has a $3 million debt and the municipality is liable for 70% of the county debt through property taxes. The population of the city is 20,000. The per capita net direct debt including the new bond issue is:

A. $300 B. $405 C. $3,000 D. $4,050

Incorrect! The correct answer is: A. $300

$300. To find this, do not include the overlapping debt, because this is "net DIRECT debt." Therefore, the old debt of $4 million + the new debt of $2 million = $6 million ? 20,000 people is $300 per person. [Module 5, Municipal Securities, Section 9.1]

125

Which of the following is the order when the economy changes?

I. Trough
II. Peak
III. Expansion
IV. Recession

A. I, IV, II, III B. III, I, IV, II C. III, II, IV, I D. I, IV, III, II

Correct Answer: C. III, II, IV, I

III, II, IV, I. The order can start anywhere, so you must draw yourself the cycle -- going up, high point, going down, low point, going up, high point, etc. Then label each and go from there. The exam can start this anywhere, so be ready for it. [Module 4, Economics & the Markets, Section 5.5]