Midterm Quiz 2 Flashcards
Money market instruments are typically
A) equity securities with short-term maturities.
B) equity securities with short- to intermediate-term maturities.
C) fixed-income (debt) securities with short- to intermediate-term maturities.
D) fixed-income (debt) securities with short-term maturities
D) fixed-income (debt) securities with short-term maturities.
Money market instruments are fixed-income (debt) securities with short-term maturities, typically one year or less.
A broker-dealer has engaged in a reverse repurchase (repo) agreement. How was this done?
A) An initial sale is followed by a purchase later, at a lower price.
B) An initial purchase is followed by a sale later, at a lower price.
C) An initial purchase is followed by a sale later, at a higher price.
D) An initial sale is followed by a purchase later, at a higher price.
C) An initial purchase is followed by a sale later, at a higher price.
In a reverse repurchase (repo) agreement a dealer agrees to buy securities from an investor and sell them back later at a higher price. In other words, the reverse of a repo agreement.
Which of the following statements is true of income bonds?
A) Unlike other bonds, they pay income quarterly.
B) Unlike other bonds, they pay income monthly.
C) Unlike other bonds, they don’t pay income unless declared by the board of directors.
D) Unlike other bonds, they pay income annually.
C) Unlike other bonds, they don’t pay income unless declared by the board of directors.
An income bond is normally issued by a corporation emerging from bankruptcy. In order to allow the company to regain a firmer footing, these bonds only pay interest when the board of directors declares that a payment will be made.
Each of the following makes regular interest payments except
A) Treasury bonds.
B) Treasury notes.
C) corporate bonds.
D) Treasury STRIPS.
D) Treasury STRIPS.
Treasury STRIPS have the coupons removed and therefore do not make regular interest payments. Each of the remaining answer choices pays interest on a semiannual basis.
The Federal Reserve Bank is raising interest rates, this will
A) push bond prices lower in the open market.
B) have no impact on bond prices in the open market.
C) make bonds trading in the open market more desirable.
D) push bond prices higher in the open market.
A) push bond prices lower in the open market.
This is interest-rate risk. When interest rates are rising, bond prices in the open market are pushed down. Rate movements and prices have an inverse relationship. Those already holding the bonds in their portfolios see their investments decrease in value. This also makes bonds trading in the open market less desirable because new issue bonds will be yielding the now higher rates and comparably be more desirable.
A bond backed by a corporation’s full faith and credit is
I. secured.
II. unsecured.
III. backed by a specific asset.
IV. not backed by any assets.
A) II and III
B) I and III
C) I and IV
D) II and IV
D) II and IV
When a bond is backed by a corporation’s full faith and credit, it is backed only by the reputation, credit record, and financial stability of the corporation. Not being backed by any of the corporation’s assets, this bond is unsecured.
Which of the following are securities representing other securities held on deposit with a trustee where the principal and interest payments have been separated?
A) Treasury bills and notes
B) Treasury receipts and STRIPS
C) Treasury receipts, bills, and notes
D) Treasury notes and bonds
B) Treasury receipts and STRIPS
Treasury receipts or STRIPS can represent U.S. T-bonds and notes held on deposit at a bank where essentially the coupon interest payments have been separated from the principal. When the Treasury Department does this, the resulting new issues are known as Treasury STRIPS, and when broker-dealers do this, the resulting new issues are known as Treasury receipts.
ABC and MNO both have the same market price and shares outstanding for their common stock. If ABC’s price-to-earnings ratio is higher, that would indicate
A) ABC sales are lower than MNO’s.
B) ABC’s net income is less than MNO’s.
C) ABC’s net income is higher than MNO’s.
D) ABC’s sales are higher than MNO’s.
B) ABC’s net income is less than MNO’s.
If ABC’s price-to-earnings ratio is higher than MNO’s, then its earnings (defined as net income ÷ shares outstanding) is lower than MNO’s. The information provided does not provide enough detail to know whether ABC or MNO had higher sales.
Options contracts
A) give both parties the right to buy or sell the underlying security.
B) obligate both parties to purchase the underlying security.
C) obligate both parties to sell the underlying security.
D) give one party the right to buy or sell the underlying security.
D) give one party the right to buy or sell the underlying security.
Options contracts involve two parties: buyer and seller. One party (buyer) has the right to either buy or sell the underlying security, while the other party (seller) would have the obligation to fulfill the contra side of the buy or sell transaction.
An investor holds a 5% bond callable in six years and maturing in eight years. The bond’s current yield (CY) measures its annual coupon payment relative to
A) its value when callable.
B) par value.
C) its value at maturity.
D) its market price.
D) its market price.
The CY measures a bond’s annual coupon payment (interest) relative to its market price, as shown in the following equation: annual coupon payment ÷ market price = current yield.
An investor looking to speculate in penny stocks would be exempt from the suitability statement requirement under which of the following circumstances?
A) The investor has already received the risk disclosure statement.
B) The investor’s account is approved for margin purchases.
C) The investor is an established customer.
D) The investor is already exempt from the risk disclosure requirements.
C) The investor is an established customer.
Established customers are exempt from the penny stock suitability statement requirement. An established customer is someone who has held an account with the broker-dealer for at least one year (and has made a deposit of funds or securities); or has made three purchases of qualifying penny stocks that occurred on separate days and involved different issuers. No one is exempt from the risk disclosure requirements
An investor interested in quarterly income should invest in
A) Treasury bonds.
B) STRIPS.
C) utility company stock.
D) corporate bonds.
C) utility company stock.
Utility stocks generally pay quarterly dividends, whereas corporate and Treasury bonds pay interest semiannually. STRIPS pay at maturity.
All of the following is true about local government investment pools (LGIPs) except
A) pools are not required to register with the Securities and Exchange Commission (SEC).
B) investors must be provided a prospectus at or before they purchase shares in the investment portfolio.
C) LGIPs operate similarly to a money market instrument.
D) the pool maintains a fixed $1 net asset value.
B) investors must be provided a prospectus at or before they purchase shares in the investment portfolio.
The operating characteristics of LGIPs are similar to those of money market funds, and they keep a $1 net asset value (NAV). They are not required to register with the SEC and therefore there is no prospectus but do provide information statements, which include details of the management fees.
When an investor purchases a corporate bond, the investor is
A) lending money to and becoming an owner of the corporation.
B) borrowing money from and becoming a creditor of the corporation.
C) lending money to and becoming a creditor of the corporation.
D) borrowing money from and becoming an owner of the corporation.
C) lending money to and becoming a creditor of the corporation.
While stock represents ownership, a bond represents a loan. When investors purchase bonds, they are lending money to the borrowing entity and thus become creditors of the entity.
Regarding CDs and negotiable CDs issued by banks,
A) both CDs and negotiable CDs are considered money market instruments.
B) only CDs are considered money market instruments.
C) neither CDs nor negotiable CDs are considered money market instruments.
D) only negotiable CDs are considered money market instruments.
D) only negotiable CDs are considered money market instruments.
Banks issue and guarantee CDs with fixed interest rates. Some that can be traded in the secondary market are known as negotiable CDs. Only these negotiable CDs are considered money market instruments.
