Unit 2: Debt Securities
- Unit 2: Debt Securities
Last Modified: 2012-07-11
All of the following statements regarding government and agency securities are true EXCEPT:A) interest paid is always subject to federal income tax. B) they are considered safer than corporate debt securities. C) they are always directly backed by the federal government. D) they are authorized by Congress.
Reggie owns a convertible bond that converts into 20 shares of common stock. The current market value of the bond was 118-½ at the close on Friday, April 1. A 30-day call is announced prior to the opening on Monday, April 4, at a price of $102. The stock is trading at $57.75. What should Reggie do?A) Sell the bond. B) Redeem the bond at the call price. C) Convert the bond into the stock. D) Hold the bond to maturity.
A characteristic not associated with a Series EE bond is:A) a fixed maturity date. B) marketability. C) a fixed rate of return. D) security of principal.
Money market instruments guaranteed by a bank that are used to provide capital for exporters to foreign countries are called:A) ADRs. B) eurodollars. C) banker's acceptances. D) foreign bills.
Your answer, banker's acceptances., was correct!.
A quote of 6.20 bid 6.18 offered would most likely be a quote on a:A) Ginnie Mae bond. B) T-bill. C) GO bond. D) T-bond.
The accreted interest income from Treasury STRIPS is:A) taxed at the state and local levels. B) taxed at all levels. C) tax free. D) taxed at the federal level.
All of the following are true of negotiable commercial paper EXCEPT:A) it trades with accrued interest. B) it has a maximum 270-day maturity. C) it is considered a money market instrument. D) it is discounted on a 360-day year.
Your answer, it trades with accrued interest., was correct!.
An investor purchases a corporate bond at par to yield 5.5% to maturity. If he sells the bond at a price equivalent to a 5% yield to maturity two years later, the investor incurs:A) no taxable result at this time. B) a capital loss. C) tax-free income. D) a capital gain.
Which of the following money rates are set by banks in competition with one another?
- Federal Funds Rate.
- Discount Rate.
- Broker Call Loan Rate.
- Prime Rate.
Market interest rates have been rising, which means that the price of bonds traded in the secondary market has:A) stayed the same. B) increased. C) decreased. D) not changed because bond prices are not affected by interest rates.
Your answer, decreased., was correct!.
All of the following statements regarding bonds with both a convertible and callable feature are correct EXCEPT:A) the coupon rate on a convertible bond would be less than the rate for comparable nonconvertible debt. B) if called, the owners have the option of retaining the bonds and will continue to receive interest. C) after the call redemption date, interest payments will cease. D) dilution of company stock will occur on conversion of the bonds.
Which of the following are characteristics of negotiable (sometimes referred to as jumbo) CDs?
- Issued in amounts of $100,000 to $1 million.
- Always FDIC insured to face value.
- Always mature in 1 to 2 years.
- Trade in the secondary market.
Your answer, I and IV., was correct!.
Which of the following statements regarding Treasury receipts are TRUE?
- Interest is paid annually.
- Interest is paid at maturity.
- Interest is taxed annually.
- Interest is taxed at maturity.
Which of the following bonds trade flat?A) GO bonds. B) Revenue bonds. C) Income bonds. D) Mortgage bonds.
Your answer, Income bonds., was correct!.
Which of the following is a money market instrument?A) Common stock. B) Short-term debt. C) Long-term debt. D) Preferred stock.
A corporate or municipal issuer might include a put option on a newly issued bond to:A) allow the issuer to redeem the bond before maturity. B) raise additional capital by issuing more bonds in the future. C) increase the yield on the bond. D) make the offering more attractive to investors.
Your answer, make the offering more attractive to investors., was correct!.
The term "trading flat" means:A) there is no accrued interest. B) the price of the bond has remained level. C) the bond is sold without markup or commission. D) the bond is in default.
Your answer, there is no accrued interest., was correct!.
Which of the following risk factors would be least important to disclose in recommending CMO securities to public customers?A) Credit risk. B) Prepayment risk. C) Extended payment risk. D) Interest rate risk.
Which of the following statements are TRUE of CMO investors?
- They have interest rate risk.
- They do not have interest rate risk.
- They have little or no risk exposure.
- They can be exposed to extension and prepayment risk.
A) II and IV. B) I and III. C) I and IV. D) II and III.
All of the following securities are exempt from the Trust Indenture Act of 1939 EXCEPT:A) Treasury bonds. B) debentures. C) preferred stock. D) municipal bonds.
Your answer, debentures., was correct!.
U.S. government securities that are deposited with a trustee against which certificates are sold representing principal payments only on the securities are:
- clipped bonds.
- stripped bonds.
- subject to annual taxation on the per year accreted amount.
- subject to taxation at maturity.
Each of the following securities are issued with a fixed rate of return EXCEPT:A) bonds. B) convertible preferred stock. C) preferred stock. D) common stock.
Your answer, common stock., was correct!.
The effective Fed funds rate is:A) the daily average rate charged by banks. B) the rate charged by the largest bank. C) the highest rate charged by any bank. D) the lowest rate charged by any bank.
Your answer, the daily average rate charged by banks., was correct!.
Debt normally issued by big corporations with reliable credit ratings who seek to finance short-term needs best describes:A) step-up CDs. B) revenue anticipation notes. C) T-bills. D) commercial paper.
A customer purchases a 4% corporate bond yielding 5%. A year before the bond matures, new corporate bonds are issued at 3%, and the customer sells the 4% bond. Which of the following statements regarding the bond are TRUE?
- The customer bought it at a discount.
- The customer bought it at a premium.
- The customer sold it at a premium.
- The customer sold it at a discount.
Your answer, I and III., was correct!.
On Friday, August 18, a customer purchased an 8% AB Health Care bond at 98-3/4 with interest payable May and November 15 in a cash settled transaction. If the bond is due to mature in 10 years, how many days of accrued interest will the customer pay the seller?A) 100. B) 94. C) 101. D) 93.
Your answer, 93., was correct!.
Which of the following statements regarding GNMA securities are TRUE?
- Interest is subject to federal income tax.
- Interest is exempt from federal income tax.
- They are backed by farm mortgages.
- They are backed by residential mortgages.
Your answer, I and IV., was correct!.
If interest rates are falling, issuers will likely call which of the following bonds?
- Bonds with low coupons.
- Bonds with high coupons.
- Bonds trading at a discount.
- Bonds trading at a premium.
The prime rate is the:A) charge on loans to brokers for margin investors. B) charge on loans to depositary institutions by the Federal Reserve Bank of New York. C) rate on loans offered by large U.S. money center commercial banks to their most creditworthy corporate customers. D) rate on reserves traded among commercial banks for overnight use in amounts of $1 million or more.
All of the following trade with accrued interest EXCEPT:A) jumbo certificates of deposit. B) zero-coupon bonds. C) convertible bonds. D) Treasury bonds.
Your answer, zero-coupon bonds., was correct!.
A debenture maturing in 2012 is bid at 77-7/8 and asked at 78-3/4;. Which of the following are TRUE of the spread?
- 7/8 per bond
- $.875 per bond.
- $8.75 per bond.
- $87.50 per bond.
Securities issued by private lending institutions approved by which of the following are directly backed by the federal government?A) Federal Intermediate Credit Bank (FICB). B) Government National Mortgage Association (GNMA). C) Federal National Mortgage Association (FNMA). D) Federal Home Loan Mortgage Corporation (FHLMC).
Your answer, Government National Mortgage Association (GNMA)., was correct!.
Ginnie Mae pass-throughs will pay back both principal and interest:A) annually. B) monthly. C) quarterly. D) semiannually
The minimum face amount of a negotiable CD is:A) $100,000. B) $25,000. C) $50,000. D) $10,000.
Your answer, $100,000., was correct!.
DMF Company has $50 million of convertible bonds (convertible at $50) outstanding. The current market value of DMF's stock is $42. The bond indenture contains a nondilution feature. If DMF declares a 10% stock dividend, the new conversion price will be:A) lower than $50. B) higher than $50. C) the stock's current market price. D) $50.
Corporate bonds are considered safer than common stock issued by the same company because:A) bonds place the issuer under an obligation but stock does not. B) if there is a shortage of cash, dividends are paid before interest. C) bonds and similar fixed-rate securities are guaranteed by SIPC. D) the par value of bonds is generally higher than that of stock.
You have a client who is about to retire and wants to rearrange his portfolio in order to have predictable income. Which of the following would NOT be a good investment vehicle?A) Income bonds. B) U.S. Treasury note. C) AA rated IDB. D) AA rated debenture.
Your answer, Income bonds., was correct!.
All of the following have been recognized by the SEC under the Credit Rating Agency Reform Act as being registered with the commission to rate debt instruments. Which of the following historically has specialized in ratings for the insurance sector?A) A.M. Best. B) Fitch Ratings. C) Standard & Poor's. D) Moody's.
Your answer, A.M. Best., was correct!.
One of your customers buys a new issue municipal revenue bond on March 19. The trade settles on March 24, and the bond pays interest on February 1 and August 1. If the dated date of the bond is March 1, how many days of accrued interest are due?A) 55. B) 19. C) 23. D) 24.
Your answer, 23., was correct!.
Which of the following is NOT true regarding Treasury Receipts?A) Interest income is taxed at maturity. B) They pay interest at maturity. C) They are not backed by the faith and credit of the U.S. government. D) Treasury securities held in trust collateralize the Receipts.
Which of the following statements regarding put and call features of bonds are TRUE?
- The put feature would likely be exercised if interest rates fall.
- The put feature would likely be exercised if interest rates rise.
- The issuer will likely call bonds if interest rates fall.
- The issuer will likely call bonds if interest rates rise.
XYZ Corporation has outstanding a 7% convertible bond currently trading at 102. The bond, which has a conversion price of $50, was issued with an antidilution covenant. If XYZ declares a 10% stock dividend, the new conversion price, as of the ex-date, will be:A) $55.55. B) $45.00. C) $45.45. D) $55.00.
Moody's bond ratings are based primarily on an issuer's:A) expected trading volume of a bond issue. B) financial strength. C) expected marketability of a bond issue. D) capitalization.
Your answer, financial strength., was correct!.
An investor purchases a PQR convertible bond at 98 on June 18, 1994. The bond is convertible at $25, and on June 19, 1995, when the common stock is trading at $26 per share, the investor converts his bond into the stock. For tax purposes, these transactions will result in:A) neither gain nor loss. B) a $40 capital loss. C) a $40 capital gain. D) a $60 capital gain.
On February 13, your customer buys an 8% Treasury bond maturing in 2009 for settlement on February 14. If the bonds pay interest on January 1 and July 1, how many days of accrued interest are added to the buyer's price?A) 44. B) 43. C) 45. D) 14.
Your answer, 44., was correct!.
The date on which interest will begin accruing on a new municipal issue is the:A) filing date. B) closing date. C) delivery date. D) dated date.
Your answer, dated date., was correct!.
A newly-issued municipal bond pays interest on March 1 and September 1. If the bond has a dated date of August 1, 2011, the bondholder's first interest payment (payable on March 1, 2012) would include interest for a period of:A) 6 months. B) 1 month. C) 4 months. D) 7 months.
Your answer, 7 months., was correct!.
Freddie Mac does which of the following?
- Issues pass-through securities.
- Purchases student loans.
- Purchases conventional residential mortgages from financial institutions.
- Issues securities backed directly by the full faith and credit of the U.S. government.
Crossover refunding, a type of advance refunding, is best described by which of the following statements? A) The revenue stream originally pledged to secure the refunded issue continues to pay debt service on those bonds until they mature or are called. B) The new issue will not be funded by the revenue stream from the project that funded the initial bond offering. C) The revenue steam is halted completely from the project until the new bonds are issued. D. Revenues can never cross over to fund a new issue.
Your answer, The revenue stream originally pledged to secure the refunded issue continues to pay debt service on those bonds until they mature or are called., was correct!.
Prices quoted for immediate payment and delivery of currencies are know asA) last sales B) spot prices C) forward prices D) future prices
Your answer, spot prices, was correct!.
All of the following are characteristics of certificates of deposit EXCEPT:A) A CD may be payable to the bearer or registered in the name of the investor. B) The Federal Deposit Insurance Corporation (FDIC) provides insurance for CDs to $500,000. C) A CD is often issued by a bank. D) A CD can be negotiable or nonnegotiable.
Your answer, The Federal Deposit Insurance Corporation (FDIC) provides insurance for CDs to $500,000., was correct!.
An investor interested in monthly interest income should invest in:A) Treasury bonds. B) GNMAs. C) utility company stock . D) corporate bonds.
Your answer, GNMAs., was correct!.
Which of the following is TRUE of principal protected notes?A) They are unsecured debt obligations backed by the full faith and credit of their issuer. B) They are comprised of 2 bonds linked together and sold as one. C) They are considered to be equity securities. D) The investor is always guaranteed that the note is 100% principal protected and, therefore, they cannot, in any circumstance, lose their initial investment.
If a bond has a basis price of 7%, which of the following would most likely be refunded?A) Coupon 6-½%, maturing in 2033, callable in 2013 at 103. B) Coupon 6-½%, maturing in 2033, callable in 2013 at 100. C) Coupon 7-½%, maturing in 2033, callable in 2013 at 100. D) Coupon 7-½%, maturing in 2033, callable in 2013 at 103.
A 10-year bond, callable in 5 years at par, is sold at a discount. Rank the following yields from lowest to highest.
- Nominal yield.
- Current yield.
- Yield to call.
- Yield to maturity.
Your answer, I, II, IV, III., was correct!.
Which of the following is NOT a risk to a U.S. resident owning a eurodollar bond?A) Currency risk. B) Default risk. C) Inflation risk. D) Interest rate risk.
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