Chapter 2 True or False

Question 1

An ADR’s value is always equal to the value of the foreign security that it represents

Answer 1

F. an ADR certificate may represent more or less than a single share of the stock on which it is based

Question 2

Are zero coupon bonds subject to reinvestment risk

Answer 2

no

Question 3

T-bills are quoted at the annualized ratio of the bill’s discount to its face value

Answer 3

true. they’re quoted as a bank discount yield which is the annualized ratio of the bill’s discount to its face value

Question 4

What are the characteristics of Eurodollar bonds

Answer 4

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

Question 5

Where is callable preferred stock usualyy redeemed?

Answer 5

at a price that’s higher than its par value

Question 6

When exercised, what is a warrants effect on the investments of existing shareholders

Answer 6

the effect is to dilute the investment of existing shareholders

Question 7

What is duration

Answer 7

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

Question 8

When do subscription rights typically expire

Answer 8

within 2-4 weeks of issuance

Question 9

Bond anticipation notes (BANs) are notes that are retired by the proceeds from a previously issued bond.

Answer 9

BANs enable work to start on a capital project before the municipality completes its issuance of long-term bonds associated with the project

Question 10

A corporate bond has a bid-ask spread of 98 3/8 – 99 5/8. The dollar value of the spread is $12.

Answer 10

False. The difference between 98 3/8 and 99 5/8 is 1 2/8 . This is equal to .0125% or $12.50.

Question 11

What are the taxes on US savings bonds

Answer 11

not subject to state and local; however, federal taxes must be paid when bonds are redeemed

Question 12

The holder of a zero coupon bond must pay taxes each year on a portion of the discount that the issuer sold it at.

Answer 12

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

Question 13

The holder of a zero coupon bond must pay taxes each year on a portion of the discount that the issuer sold it at.

Answer 13

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

Question 14

Serial bonds

Answer 14

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

Question 15

what does current yield measure?

Answer 15

the approximate return an investor can expect to receive on a bond over the next year

Question 16

Revenue Anticipation Notes

Answer 16

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

Question 17

Characteristics of Yankee bonds

Answer 17

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

Question 18

Who sets the ex-date for a dividend

Answer 18

the ex-date is set by the exchange on which the security trades or FINRA if traded OTC

Question 19

bond point vs basis point

Answer 19

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

Question 20

What is registration of a security ‘in street name’

Answer 20

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

Question 21

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.

Answer 21

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

Question 22

How are state GO bonds usually paid?

Answer 22

income, sales and excise taxes collected @ the state level and paid for by residents of the state no matter their specific locality

Question 23

How do the spreads of thinly traded securities compare to the spreads of securities that are actively traded?

Answer 23

thinly traded securities have greater spreads than more actively traded securities

Question 24

ask price is the price at which a dealer

Answer 24

is willing to sell a security

Question 25

bid price is the price at which a dealer

Answer 25

is willing to buy a security

Question 26

How do you convert the value of a convertible bond?

Answer 26

multiply the conversion ratio by the current market price of the stock to which the bond will convert

Question 27

what is typically the purpose of a derivative suit

Answer 27

to protect shareholder’s long-term interests by imposing corrective changes rather than by obtaining monetary damages

Question 28

Define ex-dividend date

Answer 28

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

Question 29

When a registered bond is transferred to another investor, the bond certificate is turned over from the original owner to that investor.

Answer 29

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

Question 30

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.

Answer 30

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).

Question 31

While they offer higher returns than other types of CDs, brokered long-term CDs come with significant liquidity risk.

Answer 31

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.

Question 32

Issuers of municipal bonds must file an official statement with the SEC.

Answer 32

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.

Question 33

bank CDs are FDIC protected instruments that are not considered scts

Answer 33

T. bank cds are issued by a bank and offer up to 250k in FDIC protection to investor. they’re not considered scts

Question 34

when are Tax anticipation notes typically issued?

Answer 34

to finance a project’s current operations in anticipation of future tax receipts

Question 35

current yield for a premium bond is always lower than bond’s nominal yield

Answer 35

true. cy and ytm are alwasy lower than nominal yieldl for a premium bond

Question 36

An ADR’s depository bank is usually a branch of the custodian bank

Answer 36

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.

Question 37

Who holds most of preferred stock?

Answer 37

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

Question 38

When is a convertible bond at parity?

Answer 38

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.

Question 39

Do strips have reinvesstment risk?

Answer 39

no. because investors don’t receive regular payments as a result of holding them

Question 40

what type of corporation typically issues collateral trust bonds

Answer 40

corporations that have few hard assets but have significant amounts of scts such as financial firms

Question 41

how long are warrants usually kept for

Answer 41

2 to 10 years

Question 42

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

Answer 42

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

Question 43

Tax and revenue anticipation notes TRANS are only used to pay expenses funded by revenue bonds

Answer 43

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

Question 44

What is used as the discount rate in a DCF analysis?

Answer 44

the WACC

Question 45

The funds used to pay of rev bond investors is generated by general taxation

Answer 45

F. P&I payments for rev bonds are paid specifically from the rev generated by those projects that the bonds are used to fund

Question 46

How is a bonds YTM measured? It’s market value?

Answer 46

YTM is measured in basis points,market value is measured in bond points

Question 47

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.

Answer 47

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

Question 48

Can treasury notes or t bonds be callable?

Answer 48

t notes are always non-callable, t - bonds may have a call feature

Question 49

what does a TIPS investor receive at maturity?

Answer 49

the higher of the inflation-adjusted principal and the original principal

Question 50

Municipal notes are issued in advance of an expected source of revenue that has not yet been received.

Answer 50

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.

Question 51

When the price of the U.S. dollar drops, an investor in foreign securities faces a higher level of currency risk.

Answer 51

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.

Question 52

A bond indenture gives an independent trustee the right to seize the issuer’s assets if the issuer becomes insolvent.

Answer 52

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.

Question 53

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.

Answer 53

True. A term bond issue is made up of bonds that all mature on the same date and carry the same interest rate.

Question 54

how do you calculate the present value of a perpetuity

Answer 54

divide the rate of return an investor can expect to earn for one of these payments into the payment amount for the period