Chapter 5 Flashcards
Interest on U.S. Treasury securities is:
Subject to federal and state income tax
Subject to federal income tax, but exempt from state income tax
Exempt from federal and state income tax
Subject to state income tax, but exempt from federal income tax
Subject to federal income tax, but exempt from state income tax
The main difference between a Treasury note and Treasury bond is:
Treasury bonds are issued at a discount
Treasury bonds have maturities exceeding 10 years
Treasury notes have longer maturities
The minimum denomination of a Treasury note is $5,000
Treasury bonds have maturities exceeding 10 years
What’s the primary difference between STRIPS and Treasury receipts?
Treasury receipts are backed by the full faith and credit of the U.S. government, but STRIPS are not
STRIPS are backed by the full faith and credit of the U.S. government, but Treasury receipts are not.
Treasury receipts pay interest and STRIPS do not
STRIPS pay interest and Treasury receipts do not.
STRIPS are backed by the full faith and credit of the U.S. government, but Treasury receipts are not.
Which of the following securities is subject to prepayment risk?
Asset-backed securities
Bond mutual funds
Corporate bonds
Government bonds
Asset-backed securities
A quote of 5.90 - 5.75 is a quote for which of the following securities?
Treasury bills
Treasury notes
A mortgage-backed security
Treasury bonds
Treasury bills
Bonds that are backed by the taxing authority of state or municipal governments are referred to as:
Moral obligation bonds
Private activity bonds
Special assessment bonds
General obligation bonds
General obligation bonds
A municipality has issued a long-term municipal bond which indicates that the state legislature will provide support if the bond goes into default. What type of municipal bond offers this protection?
Special assessment bond
Double barreled bond
Moral obligation bond
Revenue bond
Moral obligation bond
Each of the following are considered types of secured debt, EXCEPT:
Mortgage Bonds
Collateral Trust Bonds
Equipment Trust Certificates
Debentures
Debentures
A corporation that has filed for bankruptcy is to be liquidated. Which of the following securities issued by that corporation has seniority in the liquidation process?
Participating preferred stock
Debenture bonds
Mortgage bonds
Common stock
Mortgage bonds
A type of security that is issued in the U.S. by foreign governments and corporations, trades in U.S. markets, and is denominated in U.S. dollars is called a:
Global mutual fund
Eurodollar bond
Repurchase agreement
Yankee bond
Yankee bond
An investment that provides investors with a floating rate of interest, a stated maturity, and the ability to put the security back to an intermediary on a pre-determined basis is referred to as:
A stock put option
A variable rate demand obligation (VRDO)
A perpetual puttable preferred stock
A tax-deferred non-qualified, variable annuity
A variable rate demand obligation (VRDO)
Variable rate demand obligations (VRDOs) provide a floating rate, a fixed maturity, and the ability to sell (i.e., put) the security back to a financial intermediary. VRDOs can be put back at any time that the interest rate is reset, which may be daily, weekly, or monthly.
(17621)
Which of the following securities is NOT backed by the credit of the U.S. government?
Treasury bills
Treasury STRIPS
Government National Mortgage Association (GNMA) bonds
Federal National Mortgage Association (FNMA) bonds
Federal National Mortgage Association (FNMA) bonds
Federal National Mortgage Association (FNMA) bonds are issued by a privately owned organization and are not backed by the U.S. government. All of the other choices are directly backed by the U.S. government.
(60711)
All of the following statements are TRUE concerning both auction rate securities (ARSs) and variable-rate demand obligations (VRDOs), EXCEPT:
Interest rates are set at specified intervals
They are often issued by municipalities
They are long-term securities with short-term trading features
They have a put feature allowing the holder to redeem the security at par
They have a put feature allowing the holder to redeem the security at par
Although they are both long-term securities with short-term trading features, only VRDOs have a put feature that permits the holder to sell the securities back to the issuer or third party. Auction rate securities (ARSs) do not have this feature and, if the auction fails, the investor may not have immediate access to her funds. In addition, ARSs use an auction process to reset the interest rate on the securities, whereas the interest rate on a VRDO is reset by the dealer at a rate that allows the securities to be sold at par value.
(72977)
Which of the following approvals is required before a municipality can begin making payments on a moral obligation bond?
Approval by a majority of legal age voters
Approval by the state legislature
Approval by the bond trustee
Approval by the appropriate state agency
Approval by the state legislature
State legislative approval is required before a municipality can begin making payments on a moral obligation bond.
(72959)
A town has started the construction of public sewers. This project is likely paid by a(n):
Special assessment bond
Industrial development bond
Moral obligation bond
Equipment trust certificate
Special assessment bond
Public sewers are often built with the proceeds of a special assessment bond. A special assessment is a charge against property that receives a benefit from the improvement.
The ongoing cost of operating and maintaining the sewer system plus the payment of debt service on sewer bonds issued for this purpose, may be paid from property taxes or fees. (17247)
A corporation that has filed for bankruptcy is to be liquidated. Which of the following securities issued by that corporation has seniority in the liquidation process?
Mortgage bonds
Debenture bonds
Common stock
Participating preferred stock
Mortgage bonds
When a corporation is liquidated, its assets are sold and the proceeds are distributed. Secured creditors are paid first (i.e., mortgage bondholders), then unsecured creditors (debenture holders), then preferred stockholders, and last the common stockholders. This would make mortgage bonds the senior security of those listed.
(84279)
The credit rating of a municipality will likely improve with a(n):
Increase in tolls
Increase in property taxes
Decrease in residents
Decrease in fees being charged for licenses
Increase in property taxes
An increase in property taxes results in more funds becoming available to the municipality. As a result, the credit rating of the municipality will likely improve. Decreases in residents and fees being charged for licenses will generally result in a decline in the credit rating. An increase in tolls will provide a benefit to the facility, not the municipality. (17520)
Which of the following statements about municipal revenue bonds is NOT TRUE?
They are not subject to the debt limitations that apply to general obligation bonds
The maturity of the bonds will equal the useful life of the facility being built
They can be issued by states, political subdivisions, interstate authorities, and intrastate authorities
The interest and principal payments are derived from the funds being generated by the facility
The maturity of the bonds will equal the useful life of the facility being built
Municipal revenue bonds do not always have maturity schedules that equal the useful life of the facility being built. Instead, the facility’s useful life should significantly exceed the maturity of the bonds. Municipal revenue bonds do not have the debt limitations that apply to general obligation bonds. A debt limitation is considered the statutory or constitutional maximum debt that an issuer may legally incur. Revenue bonds can be issued by states, political subdivisions (e.g., counties and townships), interstate authorities, and intrastate authorities. Municipal revenue bond interest and principal payments are derived from the funds being generated by the facility.
(88250)
For corporate bonds, accrued interest is calculated based on:
Actual calendar days in every month and 365 days in the year
30 days in every month and 360 days in the year
Actual calendar days in every month and 360 days in the year
30 days in every month and 365 days in the year
30 days in every month and 360 days in the year
For corporate and municipal bonds, accrued interest is calculated based on 30 days in every month and 360 days in the year. On the other hand, Treasury notes and bonds use the actual calendar days in every month and a 365 days in the year. (17524)
The main difference between a Treasury note and Treasury bond is:
Treasury notes have longer maturities
The minimum denomination of a Treasury note is $5,000
Treasury bonds are issued at a discount
Treasury bonds have maturities exceeding 10 years
Treasury bonds have maturities exceeding 10 years
Treasury bonds have maturities exceeding 10 years. In fact, currently the maturities are 20 and 30 years. The minimum denomination for both securities is $100, and neither security is issued at a discount. Treasury bills are issued at a discount. (13477)
When first issued, which of the following securities is considered a money market instrument?
Treasury receipt
Treasury note
Treasury bond
Treasury bill
Treasury bill
Money market instruments are defined as debt securities that have a maturity of one year or less. Treasury bills are typically issued with maturities of three months, six months, and one year. Treasury notes are issued with maturities of up to 10 years, while Treasury bonds have maturities that exceed 10 years. Treasury receipts are essentially Treasury notes and Treasury bonds without interest payments included; therefore, they trade as zero coupon securities. (13486)
An investor has purchased a Bristol County Public Power System revenue bond. Which of the following statements is TRUE concerning this investment?
Earnings from the bond are exempt from federal, state, and local taxes
Payment of principal and interest is ultimately the responsibility of Bristol County
If the power system declares bankruptcy, the bonds will go into default
The assets of the power system secure the bond
If the power system declares bankruptcy, the bonds will go into default
Interest from a revenue bond (a type of municipal bond) is exempt from federal income tax. However, it is generally exempt from state and local taxes only if purchased by a resident of the state of issuance. In addition, a revenue bond is backed by a stream of income from a specific project or facility. Unlike a general obligation bond, it is not backed by a general promise by the issuer to repay the debt.
In this example, only the revenue (not the assets) of the power system back the bonds. If the power system cannot produce enough revenue to pay the bond’s interest and/or principal, there will be a default. Bristol County is not obligated to use any other funds to make payments on the bonds.
(84257)
Interest on U.S. Treasury securities is:
Subject to federal and state income tax
Exempt from federal and state income tax
Subject to federal income tax, but exempt from state income tax
Subject to state income tax, but exempt from federal income tax
Subject to federal income tax, but exempt from state income tax
Interest on U.S. Treasury securities is subject to federal income tax, but exempt from state income tax. This is the opposite of the tax treatment on municipal (state) bond interest, which may be subject to state tax, but is exempt from federal tax.
(37028)
Which of the following choices represents the greatest concern for an investor who purchased a Treasury bond?
Interest-rate risk
Liquidity risk
Prepayment risk
Default risk
Interest-rate risk
As with all bonds, the prices of U.S. Treasury securities move inversely with interest rates (i.e., they have interest-rate risk). However, Treasuries have no default risk and are some of the most liquid securities. Prepayment risk is only associated with agency securities and collateralized mortgage obligations (CMOs).
(10736)
