Questions Flashcards
Which of the following is contained in an official notice of sale? A. Reoffering yields on the bond B. Delivery date C. Amount of good faith deposit D. Agreement among underwriters
C. Amount of good faith deposit
The official notice of sale contains the information a syndicate needs to prepare a bid, including the amount of the good faith deposit the syndicate must submit with the bid. The delivery date has not been determined. The syndicate develops the yield for each maturity and the agreement among underwriters.
Your customer, a small business owner likes investments that are short term, relatively safe from credit risk and liquid. He’s heard that higher rates of return can be realized from auction rate securities than the rates he is currently getting on the Treasury bills in his portfolio. He asks you to explain them to him. Which of the following would you note as being reasons why they are not suitable for your customer?
I. Auction rate securities are intended as long-term investments.
II. Interest or dividend rates are reset at established intervals based on a Dutch auction.
III. If the auction fails, holders of ARSs may not have immediate access to his funds.
IV. The interest or dividend rate is set as the lowest rate to match supply and demand at the time of the auction.
A. I and IV
B. II and IV
C. I and III
D. II and III
C. I and III
Auction rate securities (ARSs) are long-term variable rate bonds with maturities of 20 to 30 years tied to short-term interest rates. As long-term instruments they are not suitable for an investor favoring short-term investments. Additionally, interest rates are reset using a Dutch auction method at predetermined intervals, typically 7, 28, or 35 days. A failed auction can occur due to lack of demand and hence no bids are received to reset the rate. This risk would not align with investment objectives such as safety and liquidity.
A legal opinion issued for a municipal bond covers which of the following?
I. Feasibility of public works projects
II. Creditworthiness of the issuing municipality
III. Tax status of the municipal debt
IV. The constitutionality and legality of the municipal debt
A. II and III
B. I and II
C. III and IV
D. I and IV
C. III and IV
Municipal securities are reviewed by specialized lawyers who render a legal opinion. The opinion covers two main issues: constitutionality (i.e., it ensures that the bonds are legal, valid, and binding obligations of the issuer) and verification of the tax status of the debt (i.e., interest on the bonds is exempt from federal income taxes as well as state and local taxes in some cases).
Your firm is bidding on a new general obligation bond issue. As the issuer weighs and evaluates the competitive bids, what factor will be most important in deciding who will be awarded the winning bid?
A. Net Interest Cost
B. Concession
C. Scale
D. Takedown
A. Net Interest Cost
Net interest cost measures an issuer’s overall cost of borrowing for a particular bond issue. It is, therefore, the most important item an issuer considers when evaluating competing bids.
All of the following terms are associated with general obligation (GO) bonds EXCEPT:
A. protective covenants
B. voter referendum
C. coterminous debt
D. limited tax bond
A. protective covenants
The protective covenants are found in the trust indenture of a revenue bond. Coterminous debt, or overlapping debt, exists when a single property is taxed by more than one taxing authority (i.e., property is taxed by both a school district and a county). Certain GOs may have limitations imposed on increasing any of the taxes that back them and are called limited tax bonds. GO bonds require voter approval.
A stockholder owns 200 shares of common stock in a corporation that features statutory voting. If an election is being held in which 6 candidates are running for 3 seats on the board, the stockholder could cast the votes in which of the following ways?
A. 600 votes for any 1 director.
B. 200 votes for each of 3 directors.
C. 100 votes for each of 6 directors.
D. 300 votes for each of 2 directors.
B. 200 votes for each of 3 directors
A stockholder has 1 vote per seat for each share of stock he owns. Thus, in this case, the stockholder has a total of 600 votes. Under the statutory voting method, he must allocate an equal number to each seat, or 200 for each of 3 seats.
Gargantuan Computers, Inc. (GCI) conducts a rights offering to its current shareholders at $50 per share, plus 1 right. If the current market price of GCI is $70, what is the value of one right before the stock trades ex-rights?
A. 5
B. 3
C. 15
D. 10
A. 5
The stock is trading cum rights (before the ex-date). The formula to calculate the value of one right before the ex-date is follows: CMV − subscription price / Number of rights to purchase 1 share + 1. Therefore one right is valued at $10, computed as ($70 − $50) / 2 = $10.
ABC Corporation, whose common stock is trading at $32, has issued $40 million of 8-1/8% debentures due 10-1-14. Each bond issued with a $1,000 PAR value has a warrant attached enabling the holder to buy 4 shares of ABC common at $40 per share. If all of the warrants are exercised, ABC Corporation will receive:
A. $20 million.
B. $12.8 million
C. $10 million
D. $6.4 million
D. $6.4 million
There are a total of 40,000 warrants outstanding ($40 million of debentures / $1,000 par value per bond). Each warrant entitles the holder to buy 4 shares of common stock. Therefore, if all warrants are exercised, holders will be purchasing 160,000 shares (4 × 40,000) at $40 per share. 160,000 × $40 = $6.4 million.
Dividends may be paid to holders of:
A. rights
B. American depositary receipts.
C. warrants
D. treasury stock
B. American depositary receipts.
American depositary receipt (ADR) owners have most of the rights common stockholders normally hold. One of these includes the right to receive dividends when declared. Rights and warrants allow holders to purchase stock from a corporation and treasury stock is stock that has been issued by the corporation and then bought back. Neither rights, warrants or treasury stock holders have the right to receive dividends.
The ex-date for NYSE-listed issues is set by:
A. the NYSE
B. the SEC
C. FINRA
D. the issuer
A. the NYSE
The ex-date is set by the market where the security principally trades.
Stockholders’ preemptive rights include the right to:
A. sell stock back to the issuing corporation.
B. maintain proportionate ownership interest in the corporation.
C. serve as an officer on the board of directors.
D. purchase treasury stock.
B. maintain proportionate ownership interest in the corporation
Preemptive rights allow stockholders to maintain their proportionate ownership when the corporation wants to issue more stock. For example, if a stockholder owns 5% of the outstanding stock and the corporation wants to issue more stock, the stockholder has the right to purchase 5% of the new shares.
The ex-dividend date is the
I. date on and after which the buyer is entitled to the dividend
II. date on and after which the seller is entitled to the dividend
III.one business day before the record date
IV.one business day after the record date
A. II and III
B. I and II
C. II and IV
D. I and IV
A. II and III
Stock sold on the ex-dividend date entitles the seller to the dividend; ex-date is one business day before the record date.
The last day that stocks can be bought for cash and still receive the dividend is
A. on the ex-date
B. the day after the record date
C. the record date
D. the business day prior to the regular way ex-date
A. on the ex-date
A cash trade settles the same day. Stocks bought for cash on the record date will be entitled to the dividend.
Which of the following statements regarding ADRs are TRUE?
I. Dividends are payable in the underlying foreign currency.
II. Dividends are payable in U.S. dollars.
III. Holders have voting rights.
IV. Holders do not have voting rights.
A. I and IV.
B. I and III.
C. II and IV.
D. II and III.
D. II and III
The holder of an ADR does not hold the shares of the underlying security but instead holds a receipt for those shares and therefore does not have voting rights. ADRs are U.S. securities traded in U.S. markets in U.S. dollars, with dividends payable in U.S. dollars as well.
Holders of common shares may generally vote on:
A. which member of the board of directors should be chairman.
B. whether the company should issue additional preferred stock
C. whether an administrative assistant should be promoted to management.
D. whether a cash dividend is to be declared.
A. which member of the board of directors should be chairman.
Common shareholders must vote to approve the issuance of additional preferred stock because additional preferred shares dilute the common shares’ residual assets under a liquidation. Common shareholders do not vote to declare dividends. Board members select the chairman of the board. Shareholders do not get involved in the daily operational activity of the corporation.
Which of the following must be paid before a corporation may pay its cumulative preferred stock arrearages? I. This year's preferred dividends. II. Bond interest. III. Corporate taxes. IV. Common stock dividends.
A. I and IV
B. II and IV
C. I and III
D. II and III
D. II and III
Before paying any dividends, the corporation must pay wages, taxes, and both interest and principal on debts that are due. Once the debt obligations have been satisfied, it may pay arrearages on cumulative preferred stock, then current fixed dividends on preferred stock, and finally common dividends.
If a customer holds certificates of beneficial interest in a REIT, each of the following statements regarding this investment is true EXCEPT:
A. investors receive dividends periodically
B.a mortgage REIT represents pooled capital for real estate financing
C. the certificates are publicly traded.
D. the issuer must redeem certificates on shareholder request.
C. the certificates are publicly traded.
REITs are not redeemed by the issuer. REITS are publicly traded units that represent either an interest in pooled capital for real estate financing or an interest in real property and that pass through income and capital gains distributions to investors. Investors who wish to liquidate their interests must sell them in the secondary market.
If an investor is anticipating that the yield spread between U.S. government and BBB-rated corporate bonds will widen, the investor is expecting the U.S. economy to:
A. remain flat over the coming months.
B. experience volatility over the coming months.
C. enter a recession over the coming months.
D. expand over the coming months.
C. enter a recession over the coming months.
If investors anticipate a recession, they tend to flee to quality. In this case, they would likely sell lower quality corporate bonds (forcing prices down and yields up) and use the proceeds to buy higher quality U.S. government bonds (forcing prices up and yields down). Thus, the yield spread would widen between corporate and government bonds. Yields on corporate bonds are higher than yields on U.S. government bonds to begin with. If yields on corporate bonds go up and yields on government bonds decline, the spread will widen.
Long term securities issued by municipalities that use a Dutch auction method to reset short term interest rates known as “clearing rates” are:
A. American Depositary Receipts (ADRs).
B. Real Estate Investment Trusts (REITs).
C. Auction Rate Securities (ARSs).
D. Collateralized Mortgage Obligations (CMOs).
C. Auction Rate Securities (ARSs).
Auction Rate Securities (ARSs) are long term securities issued by municipalities that use a Dutch auction to reset interest rates at short term intervals. The reset rate is known as the “clearing rate” and establishes the rate paid during the period following the auction.
In a municipal underwriting, the interest cost calculation discounts future interest payments to arrive at present value. This interest cost calculation method is the:
A. net interest cost.
B. simple interest cost.
C. relative interest cost.
D. true interest cost.
D. true interest cost.
When an issuer discounts future interest payments to arrive at present value, the interest cost method being used is the true interest cost (TIC). This method takes into consideration the time value of money.
A quote of 6.20 bid 6.18 offered would most likely be a quote on a:
A. T-bill.
B. T-bond.
C. GO bond.
D. Ginnie Mae bond.
A. T-bill.
Discounted instruments (such as T-bills) are quoted on a discount yield basis. Even though the number representing the bid is higher than the ask, it would be lower when converted into dollars. The greater the yield, the lower the price.
All of the following statements describe stock rights EXCEPT:
A. they are short-term instruments that become worthless after the expiration date.
B. they are traded in the secondary market.
C. they are issued by a corporation.
D. they are most commonly offered with debentures to make the offering more attractive.
D. they are most commonly offered with debentures to make the offering more attractive.
A corporation issues rights to existing shareholders to allow them to purchase enough stock, within a short period and at less than current market price, to maintain their proportionate interest in the company. Rights need not be exercised but may be traded in the secondary market. Warrants, not rights, are often issued with debentures to sweeten the offering.
Which of the following does NOT issue commercial paper?
A. Commercial bank
B. Broker/dealer.
C. Corporation.
D. Finance company.
A. Commercial bank
Commercial banks do not issue commercial paper. The commercial paper market was developed to circumvent banks so that corporations could lend to, and borrow from, each other more economically. Commercial paper is unsecured, short-term corporate debt.
All of the following are true of stripped Treasury bonds EXCEPT
A. interest is received at maturity
B. interest is not taxed
C. they are backed by the U.S. government
D. they are a form of zero-coupon bond
B. interest is not taxed
Stripped U.S. Treasury bonds sell at a deep discount and mature at par like zero-coupon bonds. The gain the investor receives is treated as interest, which is taxed as ordinary income. They are fully backed by the U.S. government.
