UNIT 01.01 007 Flashcards
Under which of the following circumstances is an investor in a position to acquire stock?
Buy a call
Sell a put
The holder of a call has the right to buy stock at the strike price if exercised. The seller of a put is obligated to buy stock at the strike price if exercised.
Which of the following, though issued by a municipality, is not backed by its taxing authority?
A) School bond
B) General obligation bond
C) Courthouse bond
D) Industrial development bond
Industrial development bond
An industrial development bond is issued by a municipality to provide funding for a business or a commercial facility, which is then leased to a business enterprise. The interest and principal of the bond are then paid off by the business enterprise, not the municipality.
All of the following statements regarding government and agency securities are true except
A) the interest paid is always subject to federal income tax.
B) they are always directly backed by the federal government.
C) they are authorized by Congress.
D) they are considered safer than corporate debt securities.
they are always directly backed by the federal government.
Only GNMAs are directly backed by the federal government. FNMAs and FHLMCs are only indirectly backed but are still considered less risky than corporate debt. Income from all three are taxable at federal, state, and local levels, and all were authorized by Congress.
A bond is convertible at $25. The market value of the stock is $30. What is the parity price of the bond?
$1,200
If a bond is convertible at $25, each $1,000 bond will convert to 40 shares.
40 shares × $30 = $1,200 parity of the bond
Which of the following would not trade in the money market?
Newly issued debentures rated Aaa
Treasury notes
Commercial paper
Treasury bonds maturing in six months
Newly issued debentures rated Aaa
Treasury notes
The money market is made up of short-term, high-quality debt issues. Because the Treasury bond is maturing in less than a year, it is considered a money market instrument. The debenture and Treasury note must be considered intermediate or long-term instruments because their maturity is not stated.
Corporate bonds are considered safer than common stock issued by the same company because
bonds place the issuer under an obligation but stock does not.
A bond represents a legal obligation to repay principal and interest by the company. Common stock carries no such obligation and is therefore considered riskier.
Your customer purchases a 6% corporate bond at 101. After one year the bond matures. What is the total return on this position?
5.0%
The formula for calculating capital gains is income received plus gains (or minus losses) divided by cost basis equals total return. In this example the bond paid $60 in interest. The bond cost $1,010 and matures at par ($1,000). (60 – 10) / 1010.
M-N-O Corporation’s 6% mortgage bond is trading at 120 and pays $30 in interest every six months. What is the current yield?
5.0%
A nominal yield of 6% will pay $60 of interest annually. To get the current yield divide $60 by the current price of $1,200. 60 / 1200 = 0.05 (5%)
Securities issued by which of the following agencies offers direct government backing?
A) Government National Mortgage Association
B) Student Loan Marketing Association (Sallie Mae)
C) Federal Intermediate Credit Bank
D) Federal National Mortgage Association
Government National Mortgage Association
FNMA and FICB are considered GSEs (government-sponsored enterprises), and although their securities are quite safe, they do not have the direct backing of the Treasury.
Which of the following bond prices would fluctuate the most if the interest rates fell?
A) 15-year unsecured bond with duration of 12
B) 10-year zero coupon with duration of 10
C) 20-year mortgage bond with duration of 16
D) 30-year corporate bond with duration of 14
20-year mortgage bond with duration of 16
Generally speaking, the rule of thumb is that bonds with long-term maturities will have greater fluctuations in price than will short-term maturities, given the same move in interest rates. What we need to pay attention to here is not the original maturity of the bond but how much time is left. The truest measure of sensitivity (volatility) is the bonds’ duration and the greater the duration, the greater the fluctuation in price when interest rates move.
A bond trades at 98 and has a nominal yield of 8%. What is the bonds current yield?
8.16%
The formula for current yield is annual interest divided by current market value. An 8% bond would pay $80 a year. The bond is trading at $980 (98). 80 / 980 = 0.0816 (8.16% is the best answer.)
Which of the following would be considered money market instruments?
A Treasury bond with 11 months to maturity
Ten shares of preferred stock sold within 270 days
An American depositary receipt (ADR) held for less than 1 year
A $200,000 negotiable certificate of deposit
A Treasury bond with 11 months to maturity
A $200,000 negotiable certificate of deposit
Money market securities are high-grade debt securities with 1 year or less to maturity. Preferred stock and ADRs are equity securities.
Which of the following is not a characteristic of GNMA securities?
A) The usual minimum purchase amount is $25,000.
B) These securities are directly backed by the U.S. Treasury.
C) Distributions are made annually.
D) Interest income received on GNMAs is fully taxable at both the state and the federal level.
Distributions are made annually.
GNMA securities (Ginnie Maes) make interest-plus-principal payments monthly.
Harris sells 200 shares of BigCo stock short at $52 a share. Three months later he purchases 200 shares of BigCo at $45 to cover the short. What is the result of the trade?
$1,400 gain
Harris sold the shares for $52 and bought them for $45, gaining $7 a share on the 200 shares for a total gain of $1,400.
All of the following are characteristics of an investment in Treasury notes except
A) interest is paid semiannually.
B) they are issued in various denominations.
C) they are issued with a variety of maturities.
D) they are short-term issues.
they are short-term issues.
Treasury notes sell at par and pay semiannual interest. Their maturities vary from 2 to 10 years and are, therefore, intermediate term, not short term.
