Securities 2

Question 1

Liquidation priority

Answer 1

Wages
Taxes
Secured bonds
Debentures and general creditors
Subordinated debentures
Preferred stock
Common stock

Question 2

Treasury receipts

Answer 2

Issued and backed by broker dealers
Mature at par
Discounts: Accrete (add, adjust cost basis up)
Premiums: Amortize (subtract, adjust cost basis)

Question 3

Treasury STRIPS

Answer 3

Issued by US Treasury
Mature at par
Discounts: Accrete (add, adjust cost basis up)
Premiums: Amortize (subtract, adjust cost basis down)

Question 4

Collateralized Mortgage Obligations (CMOs)

Answer 4

Sold by financial institution
Backed by pool of mortgage securities
Associated with refinancing risk
Securities separated into Tranches
Each tranche has different risk characteristics
Investor chooses tranch and signs suitability statement

Question 5

Unsecured debenture

Answer 5

Backed by issuers full faith and credit

Question 6

Unsecured subordinated debenture

Answer 6

Paid last of all debt if issuer is in default

Question 7

Unsecured guaranteed bond

Answer 7

guaranteed by a third party (parent company guarantees subsidiary’s debt)

Question 8

Unsecured income (adjustment bond)

Answer 8

Interest payable only if earned (risky; not suitable for investors seeking income)

Question 9

Secured mortgage bond

Answer 9

Backed by real estate

Question 10

Secured collateral trust bond

Answer 10

Backed by other securities the issuer owns (ex. gov’t debt)

Question 11

Secured equipment trust certificate

Answer 11

Backed by equipment used in the issuers business

Question 12

Bearer

Answer 12

Possession proves ownership, no owner name on certificate, interest coupons attached

Question 13

Registered as to principal only

Answer 13

Registered owner on certificate, interest coupons attached

Question 14

Fully registered

Answer 14

Owner registered with transfer agent, interest paid directly to owner

Question 15

Book or journal entry

Answer 15

No certificate, confirmation proves ownership, interest paid directly to owner

Question 16

Balloon

Answer 16

A repayment schedule over a period of years having the largest number of bonds maturing at the final maturity date

Question 17

T-bill

Answer 17

1 year or less
annualized % discount from par
Not callable

Question 18

T-note

Answer 18

2-10 years
% of par in 32nds
Not callable

Question 19

T-bond

Answer 19

10 years and over
% of par in 32nds
Callable

Question 20

Government National Mortgage Association (GNMA)

Answer 20

Backed by the full faith and credit of the US government
Approves lenders who issue pass-through certificates created from a pool of FHA and VA insured mortgages
Monthly check to investor includes both principal and interest

Question 21

Federal farm credit system

Answer 21

Backed by the issuing agency
Loans to farmers
Finance land purchases
Finance farm equipment purchases
Establishes buying co-ops to achieve economies of scale when purchasing agricultural goods

Question 22

Federal national mortgage association (FNMA) and federal home loan mortgage corporation

Answer 22

Backed by the issuing agencies
Lines of credit with the US Treasury
Mortgage-backed paper associated with prepayment risk

Question 23

Normal yield curve

Answer 23

Yields increase farther out in time

Question 24

Inverted yield curve

Answer 24

Yields decrease farther out in time

Question 25

Prime rate

Answer 25

The rate large US money center banks charge their best corporate customers

Question 26

Discount rate

Answer 26

The rate charged by the FRB for loans to depository institutions

Question 27

Broker call loan

Answer 27

The rate banks charge broker/dealers for funds borrowed to lend to margin account customers