CPCU 540 Ch. 8

Question 1

A municipal debt instrument secured by the full faith, credit, and taxing authority of the issuing state or municipality

Answer 1

General obligation bond

Question 2

A municipal debt instrument that is payable entirely from revenue received from the users or beneficiaries of the projects financed

Answer 2

Revenue bond

Question 3

A long-term debt instrument that is denominated to US dollars or another currency and that is offered and issued outside the issuer’s country of origin

Answer 3

Eurobond

Question 4

A long-term debt instrument requires the issuer to pay a set annual rate of interest and to repay the borrowed sum on a specified date

Answer 4

Bond

Question 5

A legal document that details the terms of a bond

Answer 5

Indenture agreement

Question 6

The date on which a bond’s principal or par value becomes payable to the bondholder

Answer 6

Maturity date

Question 7

In finance, the amount borrowed under a loan

Answer 7

Principal

Question 8

A bond’s original value and the amount that will be paid at the bond’s maturity date

Answer 8

Face value

Question 9

A bond’s annual interest rate stated as a percentage of its par value

Answer 9

Coupon rate

Question 10

The amount of interest to be paid on the dates specified in indenture agreement

Answer 10

Coupon

Question 11

A debt instrument that gives the holder the option to convert the bond into another security (generally common stock) of the issuing company at a specified price, within a given time, and under stated terms

Answer 11

Convertible bond

Question 12

A debt instrument guaranteed by an entity other than the issuer

Answer 12

Guaranteed bond

Question 13

A debt instrument that pays interest at a rate that is indexed to the rates on the US treasury securities or other money market instruments

Answer 13

Floating bond rate

Question 14

A provision that requires a bond issuer to set aside money at periodic intervals for the specific purpose of repaying of its existing bonds each year

Answer 14

Sinking fund provision

Question 15

A debt instrument that is secured by specific assets and has priority over the funds received in the liquidation of those assets

Answer 15

Secured bond

Question 16

A debt instrument that is an unsecured general obligation of the issuing corporation

Answer 16

Debenture bond

Question 17

A financial instrument collateralized by a pool of loans, leases, or other receivables

Answer 17

Asset-backed securities

Question 18

A financial instrument collateralize by a pool of mortgages

Answer 18

Mortgage-backed security

Question 19

A measure of the total rate of return a bondholder will earn over the life of the bond if it is held to maturity

Answer 19

Yield to maturity (YTM)

Question 20

A bond issued that receives one of the top four investment quality ratings from one or both of the two main bond rating agencies, Moody’s and Standard & Poor’s or Moody’s

Answer 20

Investment grade bond

Question 21

A bond that receives a BB/Ba rating or lower from on or both of the two main bond rating agencies, Standard & Poor’s or Moody’s

Answer 21

Junk bond

Question 22

An additional return to compensate investors for the relatives illiquidity of an investment. The more illiquid an investment, the higher the return demanded by the investors

Answer 22

Liquidity premium

Question 23

The effect on a bond’s price of the length of time to maturity

Answer 23

Term structure

Question 24

For a given security, the difference in yield between one term of maturity and another

Answer 24

Maturity premium

Question 25

The rate of return adjusted for the effects of inflation

Answer 25

Real rate of return

Question 26

An increase in return on a security to account for an expected decrease in purchasing power associated with price inflation

Answer 26

Inflation premium

Question 27

Stock that is generally nonvoting but that has a priority over a common stock, usually regarding dividends and capital distribution if the corporation ends its existence

Answer 27

Preferred stock

Question 28

A security that gives the holder the right to receive accrued unpaid dividends before any dividends can be paid to the common stockholders

Answer 28

Cumulative preferred stock

Question 29

A security that does not give the holder the right to receive accrued unpaid dividends

Answer 29

Noncumulative preferred stock

Question 30

A type of preferred stock that allows the holder to convert it into a stated number of common shares of the issuing company

Answer 30

Convertible preferred stock

Question 31

An ownership interest in a corporation that gives stock owners certain rights and privileges, such as the right to vote on important corporate matters and receive dividends

Answer 31

Fundamental analysis

Question 32

Dividends paid divided by earning

Answer 32

Dividend payout ratio

Question 33

A contract that obligates one party to buy another party to sell a specific financial instrument or physical commodity at a specified future date and price

Answer 33

Forward contract

Question 34

An option to buy a set amount of the underlying security at any time within a specified period

Answer 34

Call option

Question 35

An option giving the holder the right to sell a set amount of the underlying security at any time within a specified period

Answer 35

Put option

Question 36

An accounting recognition of the difference between a bond’s purchase price and face value from purchase date to maturity

Answer 36

Amortized cost

Question 37

An adjustment in an asset’s valuation to reflect changes in its actual or estimated market price

Answer 37

Mark-to-market

Question 38

The profit earned by an insurer when an asset, such as a bond or stock, is sold for more than its cost

Answer 38

Realized capital gain

Question 39

The profit not yet earned on a held asset when it exceeds its original purchase price but has not been sold

Answer 39

Unrealized capital gain

Question 40

In accounting, the reduction in the cost basis of a financial asset by an amount that is deemed to be unrecoverable

Answer 40

Impairment