Practice Questions Flashcards
Holders of each of the following are creditors EXCEPT investors owning
a. preferred stock
b. corporate bonds
c. municipal bonds
d. government bonds
A.Preferred Stock- Remember, all stockholders (even preferred stockholders) are owners of a corporation, not creditors
Among the advantages of including preferred stock in an investor’s portfolio are:
- dividends must be paid before any distribution to common stockholders
- a fixed rate of return that is likely higher than that for a debt security offered by the same issuer
In general, the type of security offering the greatest degree of safety to an investor is:
a. common stock
b. debentures
c. mortgage bonds
d. preferred stock
C. Mortgage Bonds-
A debenture is issued based on:
a: the general credit of the corporation
b. a pledge of real estate
c. a pledge of equipment
d. the ability to levy taxes
A. the general credit of the corporation- there are no assets behind a debenture, merely the credit standing of he corporation. it is a corporate IOU.
When Treasury bills are issued, they are quoted at:
a. a premium over par
b. 100% of the par value
c. par value with interest coupons attached
d. a discount from principal with no coupons attached
D. A discount from principal with no coupons attached- these are always issued at a discount, they pay no interest. The investor profits by receiving back par value and makes the difference between the discounted purchase price and the par received at maturity. All government bonds are now book entry; there has not been a Treasury note or bond issued since July 1986 with interest coupons attached.
According to Standard and Poor’s rating system, the 4 highest grades of bonds ( from best to lowest grade) are:
D. AAA; AA; A; BBB
Municipal bonds are often called tax exempts. This refers to the exemption of their income from:
a. state, federal and inheritance taxes
b. state income taxes
c. federal income taxes
d. inheritance taxes
C. Federal income taxes- Although municipal bonds are sometimes exempt from state income tax (if issued in the state of residence of the taxpayer), all references to tax exemption refer to their exemption from federal income taxes.
The current yield on a bond with a coupon rate of 5.5% selling at 110 is:
a. 2%
b. 5%
c. 5.5%
d. 6%
B. 5%- the current yield of any security, equity, or debt is always the income return (dividend or interest) divided by the current market price. In this case, it is 5.5 divided by 110=5%
A bond is selling at a premium over par value. Therefore, its:
Current yield is less than its nominal yield.
-Any bond selling at a premium will yield less than the coupon rate (nominal yield). Conversely, of course, a bond trading at a discount will certainly yield more. Remember, there is an inverse relationship between bond prices and bond yields.
A bond issue that may be retired in advance of maturity at the option of the issuer is said to have
a. a callable feature
b. an optional reserve
c. a conversion feature
d. a put option feature
A. a callable feature- the issuer at its option may redeem that bond at a specified price known as the call or redemption price
BFJ Corp’s 5% convertible bond is trading at 120. The bond is convertible at $50. If one bought the bond now and immediately converted into common stock, he would receive: (how many shares?)
20 shares- Par divided by the conversion price=number of shares
All of the following are true of government agency bonds except:
a. they are considered relatively safe investments
b. They are direct obligations of the US government
c. they trade openly
d. older ones have coupons attached, new ones are book entry
B. They are direct obligations of the US government- The only government agency that is a direct obligation of the US government is the Ginnie Mae security. All of the others are moral obligations.
All of the following are true about GNMAs except:
a. they are backed by the US government
b. they provide funds for residential mortgages
c. interest on GNMAs is not exempt from state and local taxes
d. interest is paid semiannually
D. interest is paid semiannually- GMNAs make payment monthly, unlike virtually all other debt securities, which make payments semianually
One of the more popular money market instruments is the negotiable CD. These normally are found in minimum denominations of: ( number)
$100k- THey are unsecured, interest-bearing obligations of banks
Historically, all of the following are risks generally associated with CMOs except:
a. credit
b. liquidity
c. prepayment
d. reinvestment
A. credit
