Exam #4 Missed Questions Flashcards
Preferred stock is issued with an “anti-dilutive” covenant. If the corporation declares a 5% stock dividend, which statements are TRUE?
I The conversion ratio is increased
II The conversion price is increased
III The conversion ratio is decreased
IV The conversion price is decreased
I and IV
During a period when the yield curve is flat:
A short term bond prices are more volatile than long term bond prices
B long term bond prices are more volatile than short term bond prices
C short term and long term bond prices are equally volatile
D no relationship exists between short term and long term bond price changes
Long term bond prices are more volatile than short term bond prices.
long term bond prices always move faster than short term bond prices
During a period when the yield curve is flat:
A short term bond prices are more volatile than long term bond prices
B long term bond prices are more volatile than short term bond prices
C short term and long term bond prices are equally volatile
D no relationship exists between short term and long term bond price changes
Long term bond prices are more volatile than short term bond prices.
long term bond prices always move faster than short term bond prices
Which bond portfolio with a 20-year life would be expected to give the highest long-term return?
A Portfolio #1 with an expected rate of return of 6% and a default risk of 5% over the portfolio life
B Portfolio #2 with an expected rate of return of 8% and a default risk of 10% over the portfolio life
C Portfolio #3 with an expected rate of return of 10% and a default risk of 20% over the portfolio life
D Portfolio #4 with an expected rate of return of 12% and a default risk of 40% over the portfolio life
The best answer is C.
The “default risk” represents the loss of return that is likely due to making higher risk investments.
If Portfolio #1 has an expected annual rate of return of 6% over 20 years; but there is the probability that 5% of those bonds will default, so the net return will be 95% of 6% = 5.7%.
If Portfolio #2 has an expected annual rate of return of 8% over 20 years; but there is the probability that 10% of those bonds will default, so the net return will be 90% of 8% = 7.2%.
If Portfolio #3 has an expected annual rate of return of 10% over 20 years; but there is the probability that 20% of those bonds will default, so the net return will be 80% of 10% = 8.0%.
If Portfolio #4 has an expected annual rate of return of 12% over 20 years; but there is the probability that 40% of those bonds will default, so the net return will be 60% of 12% = 7.2%.
Which of the following corporate obligations are NOT secured?
I Collateral trust certificate
II Subordinated debenture
III Commercial paper
IV Debenture
A I only
B II and IV only
C II, III, IV
D I, II, III, IV
The best answer is C.
A secured bondholder has a lien on a specific asset of the company - such as securities given as collateral in the form of a collateral trust certificate. A debenture and subordinated debenture (a second layer of debentures issued after the first debenture offering of a company, where the second layer of debentures will be paid after the first layer - thus, they are “subordinate” to the first layer of debentures) are promises to pay without any liens on corporate assets. Commercial paper is a short term IOU and is only backed by the issuer’s promise to pay.
Which risk is NOT applicable to Ginnie Mae Pass Through Certificates?
A Purchasing power risk
B Risk of early prepayment of mortgages if interest rates fall
C Risk of default if homeowners do not make their mortgage payments
D Risk of loss of principal if interest rates rise
The best answer is C.
Ginnie Maes are guaranteed by the U.S. Government so there is no risk of default. Ginnie Mae is authorized to raid the U.S. Treasury to make up any payment shortfalls, if required. The holder of a certificate is subject to potential loss of principal if interest rates rise, and to loss of interest income if mortgages are prepaid early (these prepayments are passed on to the certificate holders).
Which statements are TRUE when comparing traditional CDs to market index linked CDs?
I Traditional CDs have market risk if redeemed prior to maturity
II Traditional CDs do not have market risk if redeemed prior to maturity
III Market index linked CDs have market risk if redeemed prior to maturity
IV Market index linked CDs do not have market risk if redeemed prior to maturity
A I and III
B I and IV
C II and III
D II and IV
The best answer is C.
Market Index Linked CDs are a type of “structured product” that consists of a “zero-coupon” synthetic bond component that grows based on the returns of an equity index; and that has a maturity established by an embedded option, typically 3 years from issuance.
Market Index Linked Certificates of Deposit tie their investment return to an equity index, usually the Standard and Poor’s 500 Index. This can give a potentially better rate of return than that of a traditional CD. If held to maturity, there is no penalty imposed on any CD. For an early withdrawal, traditional CDs may reduce the interest earned, but there is no loss of principal. In contrast, market index linked CDs typically impose a 3-5% principal penalty for early withdrawal. This “early withdrawal” penalty is imposed because the embedded option that established the maturity of the instrument was paid for and now is not being used.
Both regular and market index linked CDs qualify for FDIC insurance. Finally, the minimum life for market index linked CDs is typically 3 years; whereas traditional bank CDs can have lives as short as 3 months.
An inverse ETF is most similar to taking what options position(s) on the reference index?
A Long Call
B Short Call
C Long Put
D Short Put
The best answer is C.
An inverse ETF is unprofitable when the market rises, and profitable when the market falls. So the answer is either a Long Put or a Short Call.
Since the maximum loss in a rising market is capped to the amount invested, and the gain keeps increasing as the market falls, the best choice is a Long Put, which has a maximum loss of the premium in a rising market and ever-increasing gain as the market falls.
In contrast, with a Short Call, in a rising market there is ever-increasing loss, and in a falling market, the gain is capped to the collected premium.
If a mutual fund distributes 99% of its Net Investment Income to its shareholders, how much of the Net Investment Income will be taxable?
A 0%
B 1%
C 99%
D 100%
The best answer is B.
A fund that distributes at least 90% of Net Investment Income to shareholders is “regulated” under Subchapter M of the Internal Revenue Code and pays no tax on the distributed amount. So, only the 1% of the income retained will be taxed.
Quotes for which of the following are shown on the Consolidated Quotations Service (CQS)?
I American Stock Exchange (NYSE American) listed issues
II New York Stock Exchange listed issues
III NASDAQ Global Market issues
IV NASDAQ Capital Market issues
A I only
B II only
C I and II only
D I, II, III, IV
The best answer is C.
The Consolidated Quotations Service (CQS) displays bid and ask quotes, with sizes for NYSE and AMEX (NYSE American) issues. These are the quotes of the Specialists (now called DMMs - Designated Market Makers) on the stock exchanges that list these issues, as well as the quotes of over-the-counter “Third Market Makers,” who compete with the Specialists/DMMs in making markets in exchange listed issues. “CQS” only displays quotes for listed securities. In addition, all trades of exchange listed securities are reported to the Consolidated Tape (Network A Tape for NYSE or the Network B Tape for AMEX (NYSE American) and regional exchanges).
The UQDF (UTP Quote Data Feed) aggregates and displays quotes for all market makers in NASDAQ issues. UTP stands for “Unlisted Trading Privileges.” Not only do NASDAQ market makers quote and trade NASDAQ stocks, but exchange Specialists are now permitted to compete and trade NASDAQ stocks under a “UTP” plan. NASDAQ is divided into NASDAQ Global Market issues, which are the most actively traded NASDAQ stocks; and NASDAQ Capital Market issues, which are the smaller NASDAQ issues. All trades of NASDAQ stocks are reported to the Network C Tape.
