The following bond offerings have identical maturity dates. Which results in the higher dollar purchase cost to the investor?
[A] 4 7/8% coupon offered on a 5.20 basis
[B] 5 1/4% coupon offered on a 5.00 basis
[C] 5 1/2% coupon offered on a 5.50 basis
[D]
B
Higher dollar purchase cost means less yield, therefore the answer would be the choice which has a basis (YTM) which is less than the coupon.
An investor living on a fixed income has $10,000 to invest. His investment objectives are safety of principal and capital appreciation. Which of the following would be the most suitable investment?
[A] Common stock in a growth company
[B] A convertible co
B
A convertible corporate bond graded A or better would most likely achieve the results that the investor desires. The fact that the bond is rated A or better means that it is a high quality bond with little chance of defaulting on debt service payments.
An investor buys two bonds, a 7.5% bond and a 8.5% bond maturing in 2020 at a 6.00 basis. The price of both of the bonds moves to 90.5. Which bond will appreciate most in the price?
[A] The 7.5% bond
[B] The 8.5% bond
[C] Both will appreciate by the same
D
If an investor buys bonds with a basis lower than the coupon, as in this case, that means he paid a premium for the bonds, or more than $1,000. If the price of the bonds moves to 90.5, or less than $1,000, then the market price of the bonds has decrease
Chris has a portfolio of corporate bonds. The portfolio currently yields 7.5%, but then Chris has tax consequences related to the bonds. Chris is currently in the 25% tax bracket. Chris is considering switching over to a portfolio of municipal bonds, wher
C
Chris is looking for a municipal bond that has a tax-free yield that is equivalent to his corporate taxable yield of 7.5%. So the yield that we are seeking is going to be less than 7.5%. To find the figure, we use the formula for taxable equivalent yiel
Which bond would be most suitable for an investor who invests for maximum liquidity?
[A] A bond selling at a premium
[B] A bond selling at a discount
[C] A bond with a high call premium
[D] A bond with a one-year maturity
D
Short term investments are considered the most liquid, therefore, D would be the correct answer.
The effect of steadily declining interest rates on the secondary bond market is:
I.Yields decrease
II.Prices decrease
III.Yields increase
IV.Prices increase
[A] I, II
[B] I, IV
[C] II, III
[D] III, IV
B
Three AA corporate bonds having a 6% coupon rate are selling at par. Bond A has a one year maturity. Bond B has a 20 year maturity and Bond C has a 40 year maturity. If there is a rise in the general level of interest rates, which of the following will oc
D
An XYZ Corporation Debenture pays annual interest to its bondholders. The interest is taxable to the bondholders as
[A] ordinary income subject to federal and state taxes.
[B] a long-term capital gain.
[C] ordinary income subject to federal tax only.
[D]
A
When analyzing the investment quality of a mortgage bond, which of the following would be least useful to the analyst?
[A] The rating assigned the mortgage bond from a nationally recognized ratings service.
[B] Information pertaining to the collateral tha
C
Investors will decide to purchase a mortgage bond based on several factors, including the rating, how the bonds are secured, and by general trends in the business cycle. The name of the trustee has little or no bearing on this decision.
Zero coupon bonds are frequently used to:
[A] amortize the cost of the bond
[B] provide a steady stream of dividend income
[C] provide a steady stream of interest income
[D] accumulate capital to fund a particular investment goal
D
Place the following investments in order of least risk to greatest risk:
I.Municipal Bonds.
II.U.S. Government Securities
III.Corporate Bonds
[A] III, II, I
[B] II, I, III
[C] I, II, III
[D] II, III, I
B
All of the following are TRUE of commercial paper EXCEPT:
[A] Commercial paper is considered a short-term instrument.
[B] Commercial paper is generally issued by corporations.
[C] Commercial paper is used by corporations in the financing of international
C
Which of the following are characteristics of corporate "Junk Bonds." They are:
I.Issued by corporations with questionable credit strength.
II.Also called "high-yield" bonds.
III.Sometimes used to finance the takeover of one corporation by another.
IV.Bon
D
When part of a Term Bond issue is called based on a Sinking Fund provision, how is the selection normally made?
[A] Lowest coupon.
[B] Randomly.
[C] In order of descending serial numbers.
[D] In order of ascending serial numbers.
B
Of the following forms of bringing securities to market, which is most commonly used by the US Government for Treasury Securities?
[A] Initial Public Offering (IPO)
[B] Registered Secondary Distribution
[C] Competitive Bid Auction
[D] Negotiated Market
C
During a discussion with a client, the client indicates that he feels that interest rates are going to be going down soon. If the client wishes to invest according to this assumption, which of the following recommendations should the registered representa
C
If the client feels that interest rates are going to go down, the client should attempt to lock in the longest maturities possible in their portfolio. This calls for extending the overall maturity of the bond portfolio. The client should also attempt to
The Alternative Minimum Tax (AMT) may be applied to shareholders of a mutual fund that has which of the following securities contained within?
[A] U.S. Treasury Bills
[B] Convertible bonds
[C] Municipal bonds issued for private industry purposes
[D] Inves
C
Bobby is currently in the 25% tax bracket. He owns a municipal bond yielding 4%. He has also been looking for a few corporate bonds to add to his portfolio, but he wants to make sure that the yield after taxes is at least equal to what he is receiving on
B
List the yields from lowest to highest, if a corporate bond is trading at a premium.
I.Nominal Yield
II.Current Yield
III.Basis
[A] I, II, III
[B] II, III, I
[C] III, II, I
[D] III, I, II
C
Mr. Smith, your client, has maintained about 80% of his portfolio in fixed income securities. Interest rates are expected to decline over the next 12 month period. Mr. Smith calls you because he is concerned about this prediction and his portfolio. Which
B
Of the choices offered the best choice would be to leave his portfolio in fixed income securities. If interest rates decline the value of his bonds will go up and his overall portfolio value will increase. He also would be able to continue to receive th
Which of the following is NOT a characteristic of Notes issued by the U.S. Treasury?
[A] All U.S. Treasury Notes have call features.
[B] Maturities on these securities are typically intermediate.
[C] Quotes on these securities are listed as a percentage o
A
Corporate bonds normally pay a higher rate of interest (coupon rate) than other issuers of debt because:
[A] The IRS requires corporations to pass on a certain percentage of their profits to their bondholders.
[B] Other issuers of debt are limited by law
C
The Trust Indenture Act of 1939 regulates corporate debt issues and requires the designation of a trustee. What duty does this trustee have?
[A] The trustee is charged with ensuring that the proper filing procedures take place with relation to the issue a
C
General Motors Corporation 6 1/2's of '19 describe a bond with
[A] $65 annual interest with a quote of 190
[B] $65 annual interest maturing in 2019
[C] $650 annual interest maturing in 2019
[D] $6.50 annual interest with a quote of 190
B
The "Call Protection" period on an outstanding callable bond would be most advantageous to which of the following?
[A] Common stock holder
[B] Issuer of the bonds
[C] Bondholder
[D] Preferred stockholders
C
Which of the following represents funded debt?
[A] U.S. Treasury note
[B] municipal bond
[C] corporate mortgage bond
[D] flower bond
C
Funded Debt is a corporate term used to describe debt that has one year or more to maturity, therefore the corporate mortgage bond would represent funded debt.
An investor buys a bond issue that has an option to convert to common stock. How is the conversion value determined on this type of bond?
[A] It is based on the market value of the bond.
[B] It is based on the par value or face value of the bond.
[C] It i
B
The formula is: Par or face value of the bond / Conversion price Therefore, the answer is B
Which of the following bonds would pay interest that is exempt from federal income tax?
I.Treasury bonds
II.City of Boston bonds
III.State of Maine bonds
IV.California Power Company bonds
[A] II and III only
[B] II, III and IV only
[C] all of the above
[D
A
Municipal bonds pay an investor interest that is exempt from federal income tax. Of the choices given, City of Boston bonds and State of Maine bonds are examples of municipal bonds. Treasury bonds are U.S. government securities that pay interest which i
When a bond is trading at a discount, the current yield on the bond is:
[A] unrelated to its yield to maturity
[B] less than its yield to maturity
[C] equal to its yield to maturity
[D] more than its yield to maturity
B
Which of the following would represent a quote for a railroad bond?
[A] 106 1/2
[B] 106 16/32
[C] 106.50
[D] 106.16
A
A railroad bond quote would be a corporate bond. Corporate bonds are quoted in eighths only. Government securities are the only securities quoted using decimals and 32nds. Last, 16th's are not normally used in quoting corporate or government securities.
If a bond has a Coupon Rate of 8% and a Basis of 7%, the bond is trading at a?
[A] Premium
[B] Discount
[C] Parity
[D] Premium above parity price
A
An investor who wishes to minimize market risk should buy
[A] short-term bonds.
[B] high-yield bonds.
[C] high-grade bonds.
[D] discount bonds.
A
Market risk is the risk that the market price of the security will decline. Short term bonds are the most marketable of the bonds listed, and would be least susceptible to market risk.
Zero coupon bonds would be most suitable for an investor seeking which one of the following?
[A] Tax free interest.
[B] Dividend income.
[C] Accumulation of capital.
[D] Semi-annual interest income.
C
Conversion" is best described by:
[A] New bonds are exchanged for old bonds.
[B] Bonds are tendered for equity securities.
[C] Bonds are paid off by a corporation prior to maturity.
[D] New bonds are sold and the proceeds used to redeem old bonds.
B
Which of the following bonds pay all of their interest at maturity?
[A] Defaulted Bonds
[B] Zero-Coupon Bonds
[C] Corporate Bonds
[D] Government Bonds
B
Which of the following amounts is typically paid to the holder of a normal corporate bond at maturity?
[A] The market price of the bond at the time of purchase
[B] All interest payments
[C] The par or face value that is printed on the bond
[D] No amount i
C
Which of the following are CORRECT statements in relation to sinking fund provisions included in corporate bond indentures?
I.Such provisions require mandatory retirement of debt by the issuer.
II.Such provisions allow the voluntary retirement of debt by
B
Which of the following is true regarding "bearer bonds"?
[A] A check will be sent in payment of interest.
[B] The security of the bond is greatly affected by a "bear" market.
[C] Demonstration of ownership is required for redemption.
[D] Coupons will be a
D
A bond's par value represents the bond's
[A] market price and guaranteed payout on the bond.
[B] face value and the amount of principal that the issuer is expected to repay at maturity of the bond.
[C] value as a sum of all interest payments that will be
B
Which of the following is an example of funded corporate debt?
[A] Long-term bonds
[B] Commercial paper
[C] Banker's Acceptance
[D] Preferred stock
A
A conservative investor with a need for income tells his registered representative that he understands that both bonds and preferred stock are considered to be fixed income securities, but he doesn't understand the difference between the two investments.
D
In what order do the following receive payments in the event of a corporate liquidation?
I.Debenture holders
II.Preferred stockholders
III.Senior lien bondholders
IV.Taxes
[A] IV, III, II, I
[B] III, IV, II, I
[C] IV, III, I, II
[D] IV, II, III, I
C
The proper sequence is:
1 - Taxes
2 - Senior Lien bond holders
3 - Debenture holders
4 - Preferred stockholders
An issuer of bonds sees that interest rates have gone down. The issuer wishes to redeem an existing bond issue and refund it with new bonds that have a lower coupon rate. What bond feature is necessary in order for the issuer to effectively complete their
C
If a bond has a Coupon Rate of 7% and a Basis of 6%, the bond is trading at a:
[A] Premium
[B] Discount
[C] Parity
[D] Disparity
A
What is the amount of interest payable per year on a $1,000 par value 5% bond selling at 80 and redeemable at par in 10 years?
[A] $10
[B] $40
[C] $45
[D] $50
D
Which of the following statements are true regarding registered bonds?
I.Coupons are permanently attached to the bonds.
II.Ownership of the bond is transferable only upon proper endorsement.
III.Principal payments are sent directly to the registered owner
C
Junk Bonds" can also be called a corporate bond which:
I.is a non-rated bond.
II.Has lower yields than Investment Grade bonds.
III.Has a rating of BB or lower.
IV.Are also referred to as "high yield" bonds.
[A] I and II only
[B] II and III only
[C] I, II
C
What would be the effects of a general decline in interest rates?
I.An increase in the yield on bonds
II.An increase in the price of bonds
III.Decrease in the yield on bonds
IV.Decrease in the price of bonds
[A] I and III
[B] I and IV
[C] II and III
[D] I
C
A decrease of 10 basis points for a $1,000 bond would represent which of the following decreases in the price of the bond?
[A] $100.00
[B] $10.00
[C] $1.00
[D] $.10
C
A basis point is equal to $.10 in dollar value of a bond: therefore, a change of 10 basis points would equal a $1.00 in value.
Which of the following statements are generally accurate regarding securities issued by agencies of the U.S. Government?
I.Though these securities pay interest, only the principal is considered to be a safe and liquid.
II.The U.S. Government does not full
C
The two issuance formats used when Corporate Bonds are issued, are Serial Form and Series Form. In describing Series Form, the issue would have
I.Different issuance dates
II.The same issuance date
III.Different maturity dates
IV.The same maturity date
[A]
B
A change of 10 basis points would produce the greatest change in the dollar price on which of the following bonds:
[A] Coupon Rate: 5% Maturity: 2008 YTM: 5%
[B] Coupon Rate: 5% Maturity: 2011 YTM: 6%
[C] Coupon Rate: 5% Maturity: 2015 YTM: 6.75%
[D] Coup
D
Mr. Jones purchased $10,000 par value of 8% bonds to yield 5%. On the normal interest payment date, he will receive:
[A] $250
[B] $400
[C] $500
[D] $800
B
Which of the following bond offerings would be required to have a trust indenture under the Trust Indenture Act of 1939?
[A] U.S. Treasury Bond
[B] airport authority revenue bond
[C] general obligation bond
[D] mortgage bond
D