Chapter 2 True or False Flashcards
An ADR’s value is always equal to the value of the foreign security that it represents
F. an ADR certificate may represent more or less than a single share of the stock on which it is based
Are zero coupon bonds subject to reinvestment risk
no
T-bills are quoted at the annualized ratio of the bill’s discount to its face value
true. they’re quoted as a bank discount yield which is the annualized ratio of the bill’s discount to its face value
What are the characteristics of Eurodollar bonds
they’re eurobonds denom’d in US dollars. this means the interest and principal on the bonds is paid in US dollars, while the bonds are sold outside the US
Where is callable preferred stock usualyy redeemed?
at a price that’s higher than its par value
When exercised, what is a warrants effect on the investments of existing shareholders
the effect is to dilute the investment of existing shareholders
What is duration
duration is a measure of a bond’s sensitivy to changes in interest rates and it roughly expresses the % change in the price of a bond that would result from a 1% change in interest rate yields
When do subscription rights typically expire
within 2-4 weeks of issuance
Bond anticipation notes (BANs) are notes that are retired by the proceeds from a previously issued bond.
BANs enable work to start on a capital project before the municipality completes its issuance of long-term bonds associated with the project
A corporate bond has a bid-ask spread of 98 3/8 – 99 5/8. The dollar value of the spread is $12.
False. The difference between 98 3/8 and 99 5/8 is 1 2/8 . This is equal to .0125% or $12.50.
What are the taxes on US savings bonds
not subject to state and local; however, federal taxes must be paid when bonds are redeemed
The holder of a zero coupon bond must pay taxes each year on a portion of the discount that the issuer sold it at.
True. zeros are bonds that are sold at a deep discount to par value. Instead of interest payments the bondholder is paid the par value upon maturity. Bondholder must pay taxes each year on a portion of the issuer’s discount to the par value, even though the bondholder hasn’t been paid the amount yet. this is sometimes called phantom interest
The holder of a zero coupon bond must pay taxes each year on a portion of the discount that the issuer sold it at.
True. zeros are bonds that are sold at a deep discount to par value. Instead of interest payments the bondholder is paid the par value upon maturity. Bondholder must pay taxes each year on a portion of the issuer’s discount to the par value, even though the bondholder hasn’t been paid the amount yet. this is sometimes called phantom interest
Serial bonds
issued such that groups of bonds mature at different installment periods over a set length of time. thus all bonds don’t mature on same date
what does current yield measure?
the approximate return an investor can expect to receive on a bond over the next year
Revenue Anticipation Notes
issued to finance the current operations of a project backed by a rev bond in anticipation of fees from the completed project that will help to repay the notes
Characteristics of Yankee bonds
US dollar denom’d bonds issued in the US by foreign issuer. May be issued by foreign governments but more often issued by private entities
Who sets the ex-date for a dividend
the ex-date is set by the exchange on which the security trades or FINRA if traded OTC
bond point vs basis point
a bond point represents 1% of a bond’s par value while a basis point represents one hundredth of 1% of a bond’s par value
What is registration of a security ‘in street name’
this means that it is registered in the name of the broker-dealer instead of the purchasing customer. in this case, the customer is the beneficial owner of the sct and enjoys the benefits of owning the sct
Defeasance occurs when assets sufficient to pay off refunded bonds are kept in escrow, with the assets cancelling out the refunded bonds for legal and accounting purposes.
T. As long as assets sufficient to pay off the old debt from refunded bonds are kept in escrow, the escrow account and the refunded bonds cancel each other out for legal and accounting purposes.
The refunded bonds are then said to be defeased
How are state GO bonds usually paid?
income, sales and excise taxes collected @ the state level and paid for by residents of the state no matter their specific locality
How do the spreads of thinly traded securities compare to the spreads of securities that are actively traded?
thinly traded securities have greater spreads than more actively traded securities
ask price is the price at which a dealer
is willing to sell a security
bid price is the price at which a dealer
is willing to buy a security
How do you convert the value of a convertible bond?
multiply the conversion ratio by the current market price of the stock to which the bond will convert
what is typically the purpose of a derivative suit
to protect shareholder’s long-term interests by imposing corrective changes rather than by obtaining monetary damages
Define ex-dividend date
date before which an investor must buy a sct in order to receive a dividend payment associated with it. it’s one day before the record date
When a registered bond is transferred to another investor, the bond certificate is turned over from the original owner to that investor.
F. registered bonds can be transferred or sold to another only after owner signs off and presents endorsed certificate to the transfer agent who then cancels the certificate and issues a new one to new owner
The dividend payment for a floating-rate preferred stock is based on a formula tied to a benchmark not directly related to the issuing company.
True. The dividends for floating-rate preferred stock are adjustable and are based on a formula that is tied to a benchmark separate from the issuing company. That benchmark is generally some type of interest rate benchmark (e.g., 1% above the 90-day T-bill rate).
While they offer higher returns than other types of CDs, brokered long-term CDs come with significant liquidity risk.
Brokered long-term CDs offer higher returns than shorter term CDs, but they carry significant liquidity risk. This is largely because if a holder of one of these CDs wishes to sell it before maturity, he will usually have to pay a penalty that will reduce his overall return.
Issuers of municipal bonds must file an official statement with the SEC.
False. Municipal bonds are exempt from federal oversight. While municipal dealers must offer an official statement when they sell municipal bonds, that document does not need to be filed with the SEC by the issuer.
bank CDs are FDIC protected instruments that are not considered scts
T. bank cds are issued by a bank and offer up to 250k in FDIC protection to investor. they’re not considered scts
when are Tax anticipation notes typically issued?
to finance a project’s current operations in anticipation of future tax receipts
current yield for a premium bond is always lower than bond’s nominal yield
true. cy and ytm are alwasy lower than nominal yieldl for a premium bond
An ADR’s depository bank is usually a branch of the custodian bank
False. A bank in the U.S. purchases the issuing company’s shares in the issuer’s home country. This U.S. bank is called the depository bank. The depository bank deposits the purchased shares in a bank located in the issuer’s country, called the custodian bank. The custodian bank is usually a branch of the U.S. depository bank. The depository bank then issues ADRs, which represent the shares held in the custodian bank, and sells them in U.S. markets.
Who holds most of preferred stock?
Corporations. This is because on their taxes, corporations get to deduct up to 50 percent of the dividends received when they invest in other corporations
When is a convertible bond at parity?
When a convertible bond’s current market price is equal to its value upon conversion (conversion ratio x market price of company stock), it is said to be at parity.
Do strips have reinvesstment risk?
no. because investors don’t receive regular payments as a result of holding them
what type of corporation typically issues collateral trust bonds
corporations that have few hard assets but have significant amounts of scts such as financial firms
how long are warrants usually kept for
2 to 10 years
An investor who purchases a premium bond will receive less in principal when the bond matures than he paid to purchase the bond at its market price
T. a premium b’s marketprice is higher than its par value. thus an investor who purchases the bond in the marketwill pay more for it than he will receive in principal at maturity
Tax and revenue anticipation notes TRANS are only used to pay expenses funded by revenue bonds
F. TRANS are used to pay expenses for various projects funded by both GO and rev bonds. they’re backed by future tax and rev receipts
What is used as the discount rate in a DCF analysis?
the WACC
The funds used to pay of rev bond investors is generated by general taxation
F. P&I payments for rev bonds are paid specifically from the rev generated by those projects that the bonds are used to fund
How is a bonds YTM measured? It’s market value?
YTM is measured in basis points,market value is measured in bond points
An investor must be the owner of record no later than the record date, which is one business day after the ex-dividend date, to receive a dividend payment.
T. investors must be owners of record no later than the record date, which is one business day after ex-div date to receive a dividend payment
Can treasury notes or t bonds be callable?
t notes are always non-callable, t - bonds may have a call feature
what does a TIPS investor receive at maturity?
the higher of the inflation-adjusted principal and the original principal
Municipal notes are issued in advance of an expected source of revenue that has not yet been received.
True. Municipal notes, also known as anticipation notes, are issued in anticipation of some expected source of revenue. These notes allow a project to begin before funding has been received.
When the price of the U.S. dollar drops, an investor in foreign securities faces a higher level of currency risk.
False. A rising U.S. dollar exposes an investor in foreign securities to a higher level of currency risk. This is because an investor in foreign securities receives payments in the issuing company’s currency; when that currency drops in value compared to the dollar, he will be able to convert his payment into fewer dollars.
A bond indenture gives an independent trustee the right to seize the issuer’s assets if the issuer becomes insolvent.
True. A bond indenture must appoint an independent trustee to protect the bondholders’ rights. The trustee has the right to seize the bond issuer’s assets if the issuer becomes insolvent in order to protect the bondholders’ rights to their investment.
An issue of term bonds is one where all of the bonds in the issue mature on the same date and offer a single interest rate.
True. A term bond issue is made up of bonds that all mature on the same date and carry the same interest rate.
how do you calculate the present value of a perpetuity
divide the rate of return an investor can expect to earn for one of these payments into the payment amount for the period
