Kaplan series 65

Question 1

One of the ways in which U.S. government agency issues differ from those offered directly by the U.S. Treasury is that agency issues

Answer 1

C)typically carry higher returns than Treasury issues because of the lack of direct government backing. —
Agencies, with very few exceptions (GNMA being one), do not carry the direct backing of the U.S. Treasury. While they are quite safe, that lack of direct backing causes their yields to be somewhat higher. Agencies are never traded on the stock exchanges, and their float is almost always smaller than Treasuries. Both are taxable on the federal level—
GNMA: Ginnie Mae is the only home-loan agency explicitly backed by the full faith and credit of the United States government.

Question 2

All the following securities are issued at a discount except

Answer 2

CD’s ??

Question 3

The call feature available on some bonds

Answer 3

allows the issuer the option to escape high interest rates if market rates decline.—
A callable bond is a debt security that can be redeemed early by the issuer before its maturity at the issuer’s discretion. A callable bond allows companies to pay off their debt early and benefit from favorable interest rate drops.

Question 4

With respect to safety of principal, of the following investments, the least risky is:
A)exchange-listed warrants. –
B)equity options.
C)corporate AA debentures.
D)common stock.

Answer 4

Corporate AA debentures.
The least risky investment listed is the corporate debenture because, as a debt instrument, it has priority over the others.

Question 5

Which of the following rates of return is used by investment professionals as the risk-free rate?
A)Federal funds rate
B)91-day Treasury bill rate
C)Discount rate
D)Prime rate

Answer 5

The interest rate used as the basis for a risk-free rate of return is the 91-day Treasury bill rate. T-bills are U.S.-government guaranteed, the rate is short-term, and the market risk is minimal.

Question 6

A corporation issued a bond with a coupon of 6%, callable at 103. The bond matures in 2059. Current interest rates are 8%. It is most likely that

Answer 6

bond is selling at a discount —
only thing that matters here is the coupon rate of 6% and market rate of 8%, this tells us that the bond is selling at a discount because the coupon rate is lower than the market rate

Question 7

Currently, a company issues 5% Aaa/AAA debentures at par. Two years ago, the corporation issued 4% AAA rated debentures at par. Which of the following statements regarding the outstanding 4% issue are true?

1. The dollar price per bond will be higher than par.
2. The dollar price per bond will be lower than par.
3. The current yield on the issue will be higher than the coupon.
4. The current yield on the issue will be lower than the coupon.

Answer 7

answer 2&3

Answer is incomplete

Question 8

Of the following securities, which is most commonly recommended to fund a child’s college education?
A)Treasury bills
B)Municipal bonds
C)Investment-grade corporate bonds
D)Zero-coupon Treasury bonds

Answer 8

Zero-coupon Treasury bonds

Zero-coupon bonds, particularly those carrying the guarantee of the U.S. Treasury, are a favored investment vehicle for saving for a child’s higher education. They have the advantage of providing a certain, quantifiable sum at a certain date in the future.

Question 9

A client is trying to decide between a par value corporate bond carrying a coupon rate of 6.25% per year and a par value municipal bond that pays an annual coupon rate of 4.75%. Assuming all other factors are equal and your client is in a 28% marginal income tax bracket, which bond do you tell the client to purchase and why?
A) The corporate bond because the after-tax yield is 4.50%
B) The municipal bond because its equivalent taxable yield is 6.30%
C) The municipal bond because its equivalent taxable yield is 6.60%
D) The corporate bond because the after-tax yield is 6.25%

Answer 9

The municipal bond because its equivalent taxable yield is 6.6%.

If we compute the tax equivalent yield of the muni, we see that it is 6.6%, which is a higher return than the 6.25% on the corporate bond. The formula to get this starts by taking the investor’s tax bracket and subtracting that from 100%. 100% − 28% = 72%. We then divide the muni coupon of 4.75% by the 72% and the result rounds off to 6.6%.
Reference: 5.3.1.5 in the License Exam Manual

Question 10

The longest initial maturity for U.S. T-bills is?

Answer 10

A) 52 weeks

As money market instruments, the longest initial maturity of Treasury bills (T-bills) is 52 weeks. Those bills are auctioned every four weeks. T-bills of shorter maturities are auctioned weekly. The shortest initial maturity is four weeks.

Question 11

The longest initial maturity for U.S. T-bills is

Question 12

A bond, preferred stock, or debenture exchangeable at the option of the holder (for common stock of the issuing corporation) is
A)a convertible security.
B)a synthetic security.
C)a collateral-backed equity security.
D)a nondilutive stock.

Answer 12

convertible security.
(A bond, preferred stock or debenture exchangeable at the option of the holder for common stock of the issuing corporation is convertible security.)

Question 13

What happens to outstanding fixed-income securities when interest rates decline?
A)Prices increase
B)Yields increase
C)Coupon rates increase
D)No change

Answer 13

A)Prices increase
When the Fed increases the federal funds rate, the price of existing fixed-rate bonds decreases and the yields on new fixed-rate bonds increases. The opposite happens when interest rates go down: existing fixed-rate bond prices go up and new fixed-rate bond yields decline.

Question 14

Which of the following best describes a Yankee bond?

Answer 14

D) A U.S. dollar–denominated bond issued by a non-U.S. entity inside the United States
(Yankee bonds are issued by non-U.S. entities in marketplaces inside the United States. The bonds are issued in U.S. dollars, meaning these foreign issuers will have currency risk if the dollar drops in value against their local currency.)

Question 15

Which of the following is true of GNMA securities?

1. Interest is subject to federal income tax.
2. Interest is exempt from federal income tax.
3. They are backed by farm mortgages.
4. They are backed by residential mortgages.

Answer 15

1 & 4
Income received by investors in Government National Mortgage Association (GNMA) securities is subject to both state and federal income tax, and the asset backing them is residential mortgages. —–
Government National Mortgage Association (GNMA) approves private lending institutions to issue bonds that are backed by the full faith and credit of the U.S. government

Question 16

Which of the following best describes the liquidation order when a company files for bankruptcy?
1.Common stockholders
2.Debenture holders
3.Preferred stockholders
4.Secured creditors

Answer 16

4,2,3,1
Secured creditors, including secured bondholders, have the first claim on assets. They are followed by general creditors, including debenture holders. The final claim is that of stockholders (equity) with preferred coming ahead of common.

Question 17

It is not uncommon to find a fixed-income security issued with a call feature. The feature is usually of most benefit to

Answer 17

A) The issuer.

The call feature enables the issuer to redeem (call in or buy back) the security at a specified price, usually beginning with a specified number of years after the security is issued. How does this benefit the issuer? If the cost of money (interest rates) has declined since the fixed-income security was issued, the issuer can float a new issue with interest (or dividends in the case of preferred stock) based on that lower cost of funds and use the money raised to call in the existing securities currently paying a higher return. It is the same concept as refinancing a mortgage when interest rates go down.

Question 18

A U.S. dollar–denominated bond that is sold outside the United States and the issuer’s country but for which the principal and interest are stated and paid in U.S. dollars is best described as

Answer 18

Eurodollar bond.

This is the definition of a Eurodollar bond. Yes, it is also a eurobond, but because the question specifies U.S. dollars, the more accurate choice is Eurodollar bond. A Yankee bond is U.S. dollar–denominated but is issued in the United States; Eurodollar bonds are not. Brady bonds are issued only by foreign governments, usually—but not always—are U.S. dollar–denominated, and are available for purchase in the United States.

Question 19

When referring to municipal bonds, the formula of (1 − tax bracket) is found in the computation of

Answer 19

tax-equivalent yield

(The computation for the tax-equivalent yield of a municipal bond is performed by dividing the bond’s coupon rate by (1 − the investor’s tax bracket). If the bond has a coupon of 4% and the investor is in the 20% bracket, the tax-equivalent yield is 4% divided by (1 − 0.20) or 4% divided by 0.80 = 5%)

Question 20

When a U.S. resident investor purchases foreign bonds,

Answer 20

appreciation of both the bonds and the foreign currency benefits the domestic investor.

In the same manner that purchasing foreign equities adds diversification to a portfolio, purchasing foreign bonds does as well. As with any security, if the value goes up (it appreciates), that is a benefit to the investor. When foreign securities are involved, there is another concern—currency risk. Because the foreign bond is denominated in the local currency, an increase in that currency’s value versus the U.S. dollar means the semiannual interest payments will translate into more dollars. At maturity, the return of principal will be higher as well. Of course, it can go the other way if the market value or the foreign currency depreciates against the dollar.

Question 21

An investor is trying to decide whether to purchase $10,000 face amount of a U.S. Treasury bond or a highly rated corporate bond. The price of the Treasury bond is 102.20 while the price of the corporate bond is 99 3/8. If the investor decides to purchase the Treasuries, disregarding commissions, the price difference is

Answer 21

325

The first step is remembering that Treasuries are quoted in 32nds. That means that 102.20 is 102 and 20/32 which is 102 5/8. Subtract 99 3/8 from 102 5/8 to get 3 2/8 or 3 1/4. On a $1,000 bond, that is $32.50. Then, note that this investor is purchasing 10 bonds, so the difference in price is $32.50 times 10 or $325.

Question 22

Your client in the 28% federal income tax bracket currently owns some U.S. government bonds with a coupon yield of 6%. In order to receive the same income after taxes, she would need to buy municipal bonds with a coupon of

Answer 22

4.32%.

Because the 6% on the government bond is fully taxable on a federal basis, the client receives a net of 4.32% ($60 per bond less 28% in taxes [$16.80], or $43.20 per year). Interest on municipal bonds is tax free, so a 4.32% coupon will result in the same amount of after-tax income.

Question 23

In general, from the choices given, the type of security offering the greatest degree of safety to an investor is

Answer 23

C) a mortgage bond

Debt securities, because they are an obligation of the issuer, are generally considered safer than equity securities. Secured debt is safer than unsecured debt. The only one of these debt obligations with pledged assets as security for the loan is the mortgage bond. Debentures are unsecured corporate debt obligations.

Question 24

ABC’s stock has paid a regular dividend every quarter for the past several years. If the price of the stock has remained the same over the past year but the dividend amount per share has increased, it may be concluded that ABC’s

Answer 24

current yield per share has increased

The current yield would have increased because current yield is the income (dividend) divided by price. A higher dividend divided by the same price results in a higher yield. Stocks do not have a yield to maturity.

Question 25

Which of the following U.S. government securities do not bear a stated interest rate but are sold at a discount through weekly auctions?

Answer 25

Treasury bills Treasury bills bear no stated interest rate. They are sold at a discount through weekly auctions and are actively traded in the money market. Treasury notes and Treasury bonds both carry stated interest rates.

Question 26

Bond prices are quoted as a percentage of

Answer 26

face Value / Par Value Bond prices are quoted as a percentage of par value. On the exam, the par value of bonds is always $1,000.

Question 27

Which two of the following investments would offer your clients the best chance of minimizing inflation risk? 1. Common stock 2. Callable preferred stock 3. Money market mutual funds 4. TIPS

Answer 27

1&4 Historically, common stock has been the best hedge against inflation. TIPS (Treasury Inflation Protection Securities) are Government guaranteed debt issues that automatically adjust the principal based upon the inflation rate.

Question 28

Which of the following statements regarding a zero-coupon corporate bond is true? A)The investor reports the difference between the purchase price and maturity value as ordinary income at maturity. B)These bonds have higher reinvestment risk as to interest than bonds paying semiannual interest. C)Bonds selling at a premium have a yield lower than the coupon rate. D)The investor has phantom income, which must be reported on an annual basis.

Answer 28

The investor has phantom income, which must be reported on an annual basis. Explanation: On a taxable zero-coupon bond, the annual imputed interest is reported for tax purposes. Because this income is not actually received annually, it is referred to as phantom income. Zero-coupon bonds always sell at a discount from their maturity value—never at a premium—and one risk that zero-coupon bonds avoid is reinvestment risk because there are no interest payments to reinvest

Question 29

A customer asks if there are any debt instruments providing income that might at least keep pace with inflation and offer some tax advantages. What suitable recommendation could be made that would meet the customer's criteria?

Answer 29

Indexed bonds, such as Treasury Inflation-Protected Securities (TIPS) Treasury Inflation-Protected Securities (TIPS) are debt instruments specifically designed to provide income that keeps pace with inflation. Issued by the U.S. Treasury, the interest is tax exempt at the state and local levels. Neither GNMAs nor Treasury bills (T-bills) meet all of these criteria, and American depositary receipts (ADRs) are not debt instruments.

Question 30

The interest from which of the following bonds is exempt from federal income tax? 1.State of California bonds 2.City of Anchorage bonds 3.Treasury bonds 4.GNMA bonds

Answer 30

1&2 Municipal bonds are exempt from federal income tax. Treasury bonds are exempt from state tax but not federal tax. GNMAs are subject to federal, state, and local income tax.

Question 31

The yield to maturity is

Answer 31

A)the annualized return of a bond if it is held to maturity. The yield to maturity reflects the annualized return of a bond if it is held to its maturity. The computation reflects the internal rate of return and is frequently referred to as the market required rate of return for a debt security. The rate set at issuance and printed on the face of the bond is the nominal or coupon rate. Dividing the coupon rate by the current market price of the bond provides the current yield. The return of a bond if it is held to the call date is the yield to call.

Question 32

GNMA mortgage-backed securities are A)a direct obligation of the U.S. government. B)exempt from federal income tax for the interest payments received by the bondholders. C)available to investors through a minimum purchase of $5,000. D)backed exclusively by a pool of mortgages.

Answer 32

A direct obligation of the U.S. government GNMA securities are a direct obligation of the U.S. government and are backed by a pool of mortgages (which is why the choice "backed exclusively by a pool of mortgages" is not the best choice). The monthly payments are partially a return of principal and partially taxable interest, which is subject to state and federal income tax. GNMA pass-through securities are available to investors with a minimum issue price of $1,000.

Question 33

Richard purchased a 30-year bond for 103½ with a stated coupon rate of 8.5%. What is the approximate yield to maturity for this investment if Richard receives semiannual coupon payments and expects to hold the bond to maturity?

Answer 33

8.50% No calculation is necessary here. Why not? Because anytime a bond is purchased at a premium over par (103½ % is a premium), the YTM must be less than the nominal (coupon) rate. There is only one choice lower than 8.5%. It isn't about your computational skills; it is about your understanding the relationship between prices and yields.

Question 34

Kate, age 59, has an investment portfolio exceeding $250,000. She considers herself a moderate to conservative investor. To generate additional income, she is anticipating adding bonds to her portfolio. She lives in a state that does not have an income tax and she is in the 28% federal income tax bracket. Which of the following bonds would be the best recommendation for her portfolio?

Answer 34

C) Bond A, A-rated corporate debenture with a 6.50% coupon rate Even though Bond C has the highest after-tax rate of return, this bond would not be appropriate for Kate based on her risk tolerance. Therefore, Bond A would be the best choice. Calculations: Bond A: 6.5 × (1 - 0.28) = 4.68% Bond B: 3.75% Bond C: 8% × (1 - 0.28) = 5.76% Bond D: 2.55% × (1 - 0.28) = 1.84%

Question 35

A bond offered at par has a coupon rate

Answer 35

B)equal to its current yield. When a bond is selling at par, its coupon or nominal rate, current yield, and yield to maturity are all the same.

Question 36

If a customer buys a 6% bond maturing in eight years on a 7.33 basis, the price of the bond is

Answer 36

below par (A bond with a basis, or yield to maturity, greater than its coupon is trading at a discount, or below par)

Question 37

An investor interested in monthly interest income should invest in

Answer 37

GNMAs pay monthly interest and principal, treasury bonds pay semiannual interest, utility stocks pay quarterly dividends, and corporate bonds pay semiannual interest.

Question 38

Securities issued by which of the following agencies offer direct government backing? A)Federal Intermediate Credit Bank B)Federal National Mortgage Association C)Government National Mortgage Association D)Federal Home Loan Mortgage Corporation (Freddie Mac)

Answer 38

Government National Mortgage Association FNMA, FHLMC, and FICB are considered GSEs (government-sponsored enterprises), and although their securities are quite safe, they do not have the direct backing of the Treasury. It is important to remember for the exam that the only security without the word Treasury in its name that is backed by the U.S. government is a GNMA.

Question 39

A corporation has issued a 4% $60 par convertible stock with a conversion price of $20. With the preferred stock selling at $66 per share, an investor holding 100 shares of this stock will benefit by converting if the price of the common stock is

Answer 39

above $22 per share (With a conversion price of $20 and a par value of $60, this preferred stock is convertible into 3 shares of the company's common stock. We divide the current price of the preferred ($66) by the 3 shares to arrive at the parity price of $22. If the common stock is selling for more than the parity price, the investor can benefit by converting and selling the stock in the marketplace.)

Question 40

DERP Corporation has issued 5% convertible debentures maturing in 2040. The conversion price is $40 and the common is currently trading at $48 per share. One would expect the DERP debentures to be selling somewhat

Answer 40

above $1,200 The first step here is to compute the parity price. A conversion price of $40 means the debenture is convertible into 25 shares of the common stock (par of $1,000 divided by $40 = 25 shares). With a current market price of $48 per share, the parity price of the convertible would be $1,200 (25 × $48). Because convertible securities generally sell at a slight premium over their parity price, the debentures should have a current market value a bit higher than $1,200.

Question 41

The annual interest payment divided by the current dollar price of a bond is

Answer 41

Current yield Coupon yield, also known as the coupon rate, is the annual interest rate established when the bond is issued that does not change during the lifespan of the bond. Current yield is the bond's coupon yield divided by its current market price.

Question 41

What rate of interest would a bank in England charge another British bank for a short-term loan?

Answer 41

D) SOFR For more than 40 years, the London Interbank Offered Rate—commonly known as LIBOR—was a key benchmark for setting the interest rates charged on adjustable-rate loans, mortgages, and corporate debt. Over the last decade, LIBOR has been burdened by scandals and crises. Effective January 2022, LIBOR is no longer being used to issue new short-term loans in the U.S. It was replaced by the Secured Overnight Financing Rate (SOFR) which many experts consider a more accurate and more secure pricing benchmark. As is always the case with NASAA, we do not know when the exam questions will be updated. One thing we can promise you is that any question relating to this topic will not have both LIBOR and SOFR as choices, so you should choose whichever one appears.

Question 42

A bond with a par value of $1,000 and a nominal yield of 6% paid semiannually is currently selling for $1,300. The bond matures in 25 years and is callable in 15 years at $1,080. In the computation of the bond's yield to call, which of these would be a factor?

Answer 42

Interest payments of $30 *The YTC computation involves knowing the amount of interest payments to be received, the length of time to the call, the current price, and the call price. With a 15-year call, there are only 30 semiannual interest payment periods, not 50. The present value is $1,300 and the future value is $1,080; the reverse of the numbers indicated in the answer choices.

Question 43

An investor buys 10M RAN 6.6s of 32 at 67. What is the total purchase price?

Answer 43

C)$6,700. For those of you not familiar with bond listings, this means that the investor bought $10,000 (10M) of the RAN Corporation bonds with a 6.6% coupon (interest rate stated on the face of the bond) that mature in 2032 (32). The price is 67, which represents 67% of $10,000, or $6,700.

Question 44

The net asset value of an international bond fund can be expected to increase if which of these occur? 1.Interest rates rise abroad. 2.Interest rates fall abroad. 3.The U.S. dollar strengthens. 4.The U.S. dollar weakens.

Answer 44

2 & 4

Question 45

A risk-averse investor, who had only invested funds in bank certificates of deposits, was informed by his investment adviser representative that higher returns with safety could be achieved by investing in U.S. Treasury notes with a 10-year maturity. The adviser representative assured the client that investment in federal government-backed securities is riskless. In this situation, the representative acted

Answer 45

unethically because the agent failed to disclose that the customer retains interest rate risk. Although Treasury securities do not carry default risk (principal and interest are guaranteed by the federal government), they are subject to interest rate risk. The prices of Treasury securities will decline if interest rates rise, subjecting the client to loss of principal if he sells them prior to maturity.

Question 46

A respected analyst reports that last week's T-bill rate at 6% is lower than the rate for the preceding week and lower than the average for the past month. Which of the following is true?

Answer 46

Investors are paying more for T-bills.

Question 47

If a corporate bond is convertible, this means that

Answer 47

?? What Is a Convertible Bond? A convertible bond is a fixed-income corporate debt security that yields interest payments, but can be converted into a predetermined number of common stock or equity shares

Question 48

Which of the following statements regarding callable bonds is correct?

Answer 48

C) They usually provide a call risk premium.

Question 49

Which of the following statements best describes the risk-free rate of interest?

Answer 49

A) The rate of interest earned on the 91-day U.S. Treasury bill

Question 50

A company currently has earnings of $4.00 and pays a $0.50 quarterly dividend. If the market price is $40, what is the current yield?

Answer 50

5%

Question 51

An investor buys 10M RAN 6.6s of 32 at 67. What is the total purchase price?

Answer 51

6700 For those of you not familiar with bond listings, this means that the investor bought $10,000 (10M) of the RAN Corporation bonds with a 6.6% coupon (interest rate stated on the face of the bond) that mature in 2032 (32). The price is 67, which represents 67% of $10,000, or $6,700.

Question 52

Many fixed-income investors are looking to avoid loss of principal. Which of the following would likely have the lowest degree of exposure to credit risk?

Answer 52

D)Aa-rated corporate debenture A bond's rating takes into consideration all factors, including collateral and tax base. The higher the rating, the lower the credit risk.

Question 53

When a corporation domiciled in the United Kingdom issues U.S. dollar–denominated bonds in the United States, it is issuing

Answer 53

B)Yankee bonds. Yankee bonds are foreign bonds, denominated in U.S. dollars and issued in the United States by foreign banks and corporations. ADRs are issued in the United States by domestic banks and represent receipts for securities traded on foreign exchanges. Eurobonds are issued by a borrower in a foreign country, denominated in a currency other than one native to the issuer's country. Yankee bonds are a form of eurobond, but that is not the best answer to this specific question.

Question 54

What rate of interest would a bank in England charge another British bank for a short-term loan?

Answer 54

A) SOFR For more than 40 years, the London Interbank Offered Rate—commonly known as LIBOR—was a key benchmark for setting the interest rates charged on adjustable-rate loans, mortgages, and corporate debt. Over the last decade, LIBOR has been burdened by scandals and crises. Effective January 2022, LIBOR is no longer being used to issue new short-term loans in the U.S. It was replaced by the Secured Overnight Financing Rate (SOFR) which many experts consider a more accurate and more secure pricing benchmark. As is always the case with NASAA, we do not know when the exam questions will be updated. One thing we can promise you is that any question relating to this topic will not have both LIBOR and SOFR as choices, so you should choose whichever one appears

Question 55

Which of the following agency securities is guaranteed by the U.S. government?

Answer 55

Ginnie Mae? Only Ginnie Mae securities are backed by the full faith and credit of the U.S. government. Other agency securities have lines of credit at the Treasury, but this credit does not constitute a full guarantee.

Question 56

When comparing a time deposit account and a demand deposit account, you would expect

Answer 56

D) a higher rate of interest paid on the time deposit account. The best example of a time deposit account is a CD. Money is deposited for a fixed length of time, generally at a fixed interest rate. Demand deposit accounts are checking accounts. Because the bank expects to have longer use of time deposit funds, interest rates are generally higher. DDAs offer the instant access of check-writing (or online payments). Typically CDs, have penalties for early withdrawal; there is no such charge on a checking account. Both are covered by FDIC up to the applicable limit.

Question 57

Which of the following is correct regarding zero-coupon bonds?

Answer 57

B) They eliminate reinvestment rate risk. Zero-coupon bonds are sold at a deep discount from par value and have no coupon payments. Because there is nothing to reinvest, there is no reinvestment risk. That is why many investors prefer zero-coupon for specific goals, such as college education for children. The tradeoff is that no coupon also means higher interest rate risk. These bonds have maximum price volatility and respond sharply to interest rate changes.

Question 58

Which of the following investments would provide the highest after-tax income to your client in the 35% federal income tax bracket?

Answer 58

D)8% debenture issued by the LMN Corporation Only the State H bond is exempt from federal income tax. Using the tax-equivalent yield formula of the muni coupon divided by (100% minus the investor's tax bracket %), we get 5% divided by 65%, or 7.7%. That's a better deal than receiving 6% on the Treasury and paying taxes as well as 7% on the Canadian bond (although you learned that securities issued by Canadian provinces were exempt from registration under the Uniform Securities Act, that has nothing to do with U.S. income taxes). However, with a TEY of 7.7%, your client would take home more with the 8% taxable corporate security. You can also work backward to get the correct answer. Simply subtract 35% tax from each of the choices (other than the muni) and see which is the highest. In this case, 8% minus a 35% tax equals 5.2%—just a bit higher than the 5% coupon on the municipal bond.

Question 59

DERP Corporation's 5% convertible debentures maturing in 2030 are currently selling for 120. The conversion price is $40. One would expect the DERP common stock to be selling

Answer 59

C)somewhat below $48 per share. The first step here is to compute the parity price. A conversion price of $40 means the debenture is convertible into 25 shares of the common stock (par of $1,000 divided by $40 = 25 shares). With a current market price of $1,200, the parity price of the stock would be $48. Because convertible securities generally sell at a slight premium over their parity price, the stock should have a current market value a bit less than $48 per share.

Question 60

A corporation is capitalized with common stock, senior preferred stock, mortgage bonds, and subordinated debentures. Your client, who holds $10,000 of the debentures, is concerned about the future viability of the enterprise. You can inform the client that the debentures have a claim

Answer 60

C) ahead of the common stock and the preferred stock but after the bonds. Any debt security, even a subordinated debenture, has a claim ahead of all equity. However, it is subordinated to all other debt.

Question 61

An investor interested in investing in sovereign debt would most likely purchase

Answer 61

C) Sweden 2.5s of 2032.

Question 62

A bond purchased at $900 with a 5% coupon and a five-year maturity has a current yield of

Answer 62

D) 5.56%

Question 63

A bank is advertising a no-cost DDA. Your client asks you to describe what that is. You would respond that DDA stands for

Answer 63

A) demand deposit account.

Question 64

Bond prices are quoted as a percentage of

Answer 64

D) Par value.

Question 65

Ginnie Mae pass-throughs will pay back both principal and interest

Answer 65

D) monthly.

Question 66

A municipal bond has a coupon of 6.25%, and at the present time, its yield to maturity is 6.75%. From this information, it can be determined that the municipal bond is trading

Answer 66

C) at a discount.

Question 67

Which of the following would make a corporate bond more subject to liquidity risk? 1.Short-term maturity 2.Long-term maturity 3.High credit rating 4.Low credit rating

Answer 67

Your answer, II and IV. The most marketable bonds have shorter maturities and higher credit ratings.

Question 68

Which of the following statements regarding a zero-coupon corporate bond is true?

Question 69

All of the following are true of negotiable, jumbo certificates of deposit except

Answer 69

D) they are secured obligations of the issuing bank.

Question 70

A bond offered at par has a coupon rate

Question 71

In general, from the choices given, the type of security offering the greatest degree of safety to an investor is

Answer 71

B) a mortgage bond.

Question 72

A customer asks if there are any debt instruments providing income that might at least keep pace with inflation and offer some tax advantages. What suitable recommendation could be made that would meet the customer's criteria?

Answer 72

D) TIPS

Question 73

Which of the following are characteristics of commercial paper? 1.It represents a loan by the holder to the issuer. 2.It is a certificate of ownership in the corporation. 3.It is commonly issued to raise working capital for a corporation. 4.It is junior in preference to convertible preferred stock.

Answer 73

D) I and III Commercial paper instruments are debt securities; they represent loans to the issuing corporation by the holder. They are commonly issued to raise working capital and, as debt obligation, are senior in preference to preferred stock in claims against an issuer.

Question 74

The current yield on a bond with a coupon rate of 5.5% selling at 110 is

Answer 74

B) 5% The current yield of any security, equity, or debt is always the income return (dividend or interest) divided by the current market price. In this case, it is the annual interest of $55 ($1,000 x 5.5%) divided by $1,100 and that equals 5%.

Question 75

A U.S. dollar–denominated bond that is sold outside the United States and the issuer's country but for which the principal and interest are stated and paid in U.S. dollars is best described as

Question 76

When an investor notices that a bond's coupon yield is lower than its current yield, this is an indication that the bond

Answer 76

A) is selling at a premium.

Question 77

Which of the following would be least likely for an investment adviser representative to consider before recommending a municipal security to a customer?

Question 78

Which of the following indicates a bond selling at a discount?

Question 79

Which of the following is true of a zero-coupon bond? 1.The rate of return is locked in. 2.There is no reinvestment risk. 3.The imputed interest is taxed as ordinary income on an annual basis. 4.A check for the interest is paid at maturity.

Answer 79

D) I, II, and III

Question 80

An 8% corporate bond is offered on an 8.25 basis. Which of the following statements are true? 1.Nominal yield is higher than YTM. 2.Current yield is higher than nominal yield. 3.Nominal yield is lower than YTM. 4.Current yield is lower than nominal yield.

Answer 80

C) II and III

Question 81

As defined in the Securities Exchange Act of 1934, the term municipal security would include

Question 82

A bond with a par value of $1,000 and a nominal yield of 6% paid semiannually is currently selling for $1,300. The bond matures in 25 years and is callable in 15 years at $1,080. In the computation of the bond's yield to call, which of these would be a factor?

Answer 82

D) Interest payments of $30

Question 83

Which of the following statements regarding U.S. government agency securities is true? A)Interest received on agency securities is exempt from federal income tax. B)They generally offer higher yields than direct U.S. obligations. C)They are direct obligations of the U.S. government. D)They generally trade on the major stock exchanges.

Answer 83

They generally offer higher yields than direct U.S. obligations.

Question 84

Although there are a number of risks to owning a debt security that are common to all investors, which specific risk is avoided when a U.S. resident purchases a Eurodollar bond? A)Currency risk B)Interest rate risk C)Inflation risk D)Default risk

Answer 84

A) Currency risk

Question 85

The owner of a convertible debt issue A) is generally in a senior position to other bondholders. B) generally expects a higher current return than with a nonconvertible bond of the same quality and maturity. C) has the choice of receiving the bond's interest or dividends on the underlying stock, whichever is higher. D) is a creditor of the issuer.

Answer 85

D) is a creditor of the issuer.

Question 86

The DERP Corporation has an outstanding convertible bond issue with a conversion price of $125 per share. If the current market price of the bond is 80, the parity price of the stock is A) $156.25 per share. B) $125.00 per share. C) $64.00 per share. D) $100.00 per share.

Answer 86

156.25 ??

Question 87

MNO is planning to raise capital through an offering of 30-year bonds. Which call price would be most beneficial to MNO? A)102 B)106 C)110 D)104

Answer 87

B) 102. MNO would benefit most from the ability to call bonds at the lowest possible price. The call feature enables MNO to buy the bonds before maturity to reduce their fixed interest costs. A call price of 102 requires the lowest call premium of the options shown.

Question 88

Your client is interested in investing in preferred stocks in an effort to receive dividend income. The client's target goal is a 6% current return on investment (ROI). If the RIF Series B preferred stock is paying a quarterly dividend of $0.53, your client's goal will be achieved if the RIF can be purchased at A)$22.55. B)$8.83. C)$50.00. D)$35.33.

Answer 88

First, take the quarterly dividend and annualize it (4 × $.53 = $2.12). Then, divide that number by 6% and you get $35.33

Question 89

Which of the following projects is most likely to be financed by a general obligation rather than a revenue bond? A)Expansion of an airport B)Public golf course C)Municipal hospital D)Public library

Answer 89

Public Library (also new high school)

Question 90

A bond with a par value of $1,000 and a coupon rate of 6% paid semiannually is currently selling for $1,200. The bond is callable in 15 years at 105. In the computation of the bond's yield to call, which of these would be a factor? A)Present value of $1,050 B)15 payment periods C)Interest payments of $30 D)Future value of $1,200

Answer 90

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Question 91

You are meeting with a relatively unsophisticated investor who doesn't understand very much about stocks and bonds. The investor asks, "Can you list the advantages of owning common stock as compared to bonds?" Among other reasons, you could reply that A)bonds have priority over any equity security in the event of liquidation. B)bonds must be surrendered at maturity or at a call while the owner of common stock can hold the investment as long as desired. C)there is limited liability. D)income payments are more reliable.

Answer 91

B)bonds must be surrendered at maturity or at a call while the owner of common stock can hold the investment as long as desired.

Question 92

Which of the following would you not expect to see issued at a discount? A)Bank jumbo CD B)Treasury bill C)Commercial paper D)Zero-coupon bond

Answer 92

A)Bank jumbo CD

Question 93

If an investor pays 95.28 for a Treasury bond, how much did the bond cost? A)$95.28 B)$950.28 C)$958.75 D)$9,528.00

Answer 93

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Question 94

In general, among the advantages to investing in Brady bonds over those issued by countries classified as emerging economies is A)increased liquidity. B)greater risk. C)higher yields. D)shorter maturities.

Answer 94

A) increased liquidity.

Question 95

One of the advantages of owning a corporation's debentures is that you have prior claim over A)employees. B)secured creditors. C)preferred stockholders. D)general creditors.

Answer 95

C) preferred stockholders.

Question 96

A bond issued by the GEMCO Corporation has been rated BBB by a major bond-rating organization. This bond would be considered A)secured. B)a high-yield corporate bond. C)callable. D)an investment-grade corporate bond.

Answer 96

D)an investment-grade corporate bond.

Question 97

One of the benefits of adding foreign debt securities to an investor's portfolio is A)receiving income in foreign currency. B)potentially higher risk. C)reduced taxation. D)potentially higher yields.

Answer 97

D)potentially higher yields.

Question 98

An investor purchasing 10 corporate bonds at a price of 102¼ each will pay A)$1,022.50. B)$10,225.00. C)$1,020.25. D)$10,202.50.

Answer 98

At 102¼, each bond cost $1,022.50 (102 = 1,020 and ¼ of $10 = $2.50). There are 10 bonds so the total is $1,022.50 × 10 = $10,225

Question 99

Probably the most significant characteristic of municipal bonds for investors is A)their exemption from registration on the state and federal level. B)their safety. C)that their coupon yields are higher than comparably rated corporate issues. D)their exemption from federal income tax.

Answer 99

D)their exemption from federal income tax.

Question 100

Which of the following debt instruments generally presents the least amount of default risk? A)High-yield corporate bonds B)Municipal revenue bonds C)Convertible senior debentures D)Municipal general obligation bonds

Answer 100

D)Municipal general obligation bonds

Question 101

Which of the following would be most likely to increase a bond's liquidity? A)A higher rating B)A longer maturity C)No call protection D) A lower rating

Answer 101

A)A higher rating

Question 102

Securities issued by which of the following issuers have the direct backing of the U.S Treasury? A)Federal Agricultural Mortgage Corporation (Farmer Mac) B)Federal National Mortgage Association (Fannie Mae) C)Government National Mortgage Association (Ginnie Mae) D)Federal Home Loan Mortgage Corporation (Freddie Mac)

Answer 102

A)Federal Agricultural Mortgage Corporation (Farmer Mac)

Question 103

Which of the following are general characteristics of negotiable jumbo CDs? A)Always mature in one to two years with a prepayment penalty for early withdrawal B)Issued in amounts of $100,000 to $1 million C)Typically pay interest on a monthly basis D)Trade only in the primary market

Answer 103

B)Issued in amounts of $100,000 to $1 million

Question 104

Which of the following statements regarding convertible bonds is not true? A)The conversion rate is set at issuance and does not change. B)Convertible bondholders are creditors of the corporation. C)Coupon rates are usually higher than nonconvertible bond rates of the same issuer. D)If there is no advantage to converting the bonds into common stock, they would sell at a price based on their market value without the convertible feature.

Answer 104

C)Coupon rates are usually higher than nonconvertible bond rates of the same issuer.

Question 105

The GHIJ Corporation has a 3% convertible debenture outstanding with a conversion price of $40. The bond's current market price is 126. The most probable reason for this is A)the current market price of the GHIJ common stock is approximately $50 per share. B)interest rates have risen since the debenture was issued. C)the current market price of the GHIJ common stock is approximately $35 per share. D)GHIJ’s earnings have risen since the debenture was issued.

Answer 105

A)the current market price of the GHIJ common stock is approximately $50 per share.

Question 106

Which of the following is not a money market instrument? A)Commercial paper B) Banker's acceptances C)Newly issued Treasury notes D)Treasury bills

Answer 106

C) Newly issued Treasury notes

Question 107

A TIPS bond is issued in the principal amount of $1,000, paying 3.5%. Over the security's 5-year term, the annual inflation rate is 6%. What is the principal value of the bond at the end of 4 years? A) $1,267 B) $1,344 C) $1,240 D) $1,300

Answer 107

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Question 108

The current yield on a bond with a coupon rate of 7.5% currently selling at 105½ is approximately A) 7.50%. B) 6.50%. C) 8.00%. D) 7.11%.

Question 109

A client has indicated that his primary objective is maximizing current income regardless of the risk. Which of the following mutual funds would probably be most suitable for achieving that goal? A)JKL Municipal Bond Fund B)DEF High-Yield Bond Fund C)ABC Growth and Income Fund D)GHI Index Fund

Answer 109

B) DEF High-Yield Bond Fund

Question 110

To secure the debt that a subsidiary is offering, a railroad holding company transfers to a trustee the common stock of another subsidiary. The offering is one of A) secured income notes. B) collateral trust certificates. C) equipment trust certificates. D) guarantee trust bonds.

Answer 110

B) collateral trust certificates.