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sie chapter 1-4 Flashcards

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1
Q

the last transaction in xyz 5.50s 2030 was 102. this bond is selling at

A) Par
B) A premium
C) A discount
D) asset value

A

A premium
5.50/1020= 5.39
5.50/1000= 5.55

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2
Q

The owner of which of the following products is most exposed to inflationary risk?

A) Utility stocks
B) Treasury bills
C) Treasury Bonds
D) Blue chip industrials

A

C) Treasury Bonds

Treasury Bonds have a higher inflationary risk than Blue chip industries, T-Bills, or Utility stocks.

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3
Q

A savings account at a bank is guaranteed by which of the following entities?

A) FDIC
B) SPIC
C) federal reserve
D) department of the treasury

A

A) FDIC

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4
Q

In a period of low inflation and economic recession, the Federal Reserve is expected to take which of the following actions?

A)decrease taxes
B) raise the federal funds rate
C) buy bonds in the open market
D) require banks to increase reserves

A

C) buy bonds in the open market

a central bank can expand or contract the amount of reserves in the banking system and can ultimately influence the country’s money supply.

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5
Q

A registered representative (RR) wants to participate in a private securities transaction. Which of the following actions must the RR take?

A) request a meeting with his supervisor to lay out the structure of the deal
B) call his supervisor and inform her of the deal and the RR’s potential involvement
C) send written notice to his supervisor outlining the activity and compensation structure
d) initiate the paperwork required by the policies of the firm once the activity has begun

A

C) send written notice to his supervisor outlining the activity and compensation structure

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6
Q

Call protection is most valuable to a bond owner when bond prices are generally

A) rising
B) falling
C) stable
D) fluctuating

A

A) rising

This is due to the fact that call protection prevents the issuer from buying back or ‘calling’ the bond before its maturity date.

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7
Q

Who is considered the owner of common stock?

a. Bondholder
b. Creditor
c. Preferred stockholder
d. Corporate charter

A

c. Preferred stockholder

common stock represents ownership in a corporation.

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8
Q

What is the role of authorized stock in a corporation?

a. Fixed number of shares
b. Market price determination
c. Arbitrary par value assignment
d. Quick conversion to cash

A

a. Fixed number of shares

Authorized stock is a fixed number of shares that a corporation may issue.

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9
Q

What does outstanding stock refer to?

a. Treasury stock
b. Shares traded in the market
c. IPO shares
d. Authorized but unissued stock

A

B. Shares traded in the market

Outstanding stock refers to shares that are in the public’s hands and actively traded.

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10
Q

What is the formula for Treasury Stock?

a. Outstanding shares - Issued shares
b. Issued shares + Outstanding shares
c. Issued shares - Outstanding shares
d. Outstanding shares / Issued shares

A

c. Issued shares - Outstanding shares

Treasury stock is calculated as issued shares minus outstanding shares.

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11
Q

What does the term “Regular way settlement” signify?

a. Listing on an exchange
b. Equities trading
c. Ownership transfer
d. Settlement date for buying a security

A

d. Settlement date for buying a security

Regular way settlement signifies the ownership transfer date in a securities transaction.

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12
Q

What is the purpose of a stock split?

a. Increase the total value of investment
b. Decrease the number of outstanding shares
c. Alter the market price of a stock
d. Distribute cash dividends

A

A.Increase the total value of investment

Stock splits increase the number of shares outstanding while maintaining the total value.

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13
Q

What is the main advantage of cumulative preferred stock?*

a. Priority in liquidation
b. Callable feature
c. Conversion into common shares
d. Accumulation of unpaid dividends

A

a. Priority in liquidation

Cumulative preferred stock gives priority in receiving dividends, and any missed dividends accumulate

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14
Q

In cumulative preferred stock, what must be paid before a common dividend can be distributed?

a. Fixed dividend rate
b. Unpaid dividends and current dividend
c. Callable feature
d. Convertible preferred stock

A

b. Unpaid dividends and current dividend

in cumulative preferred stock, unpaid dividends must be paid before common dividends.

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15
Q

What is the primary function of a balance sheet?

a. Capture profitability over time
b. Snapshot of assets and liabilities
c. Determine P/E ratio
d. Calculate earnings per share

A

b. Snapshot of assets and liabilities

A balance sheet provides a snapshot of a company’s financial position at a specific point in time.

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16
Q

What does the P/E ratio represent?

a. Market price of security / Earnings per share
b. Net worth / Liabilities
c. Annual income / Market price
d. Gross income - Expenses

A

a. Market price of security / Earnings per share

The P/E ratio is calculated as the market price of a security divided by its earnings per share.

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17
Q

Which right allows shareholders to buy new shares at a price below the current market price?

a. Preemptive rights
b. Proxy voting
c. Residual assets right
d. Cumulative voting

A

a. Preemptive rights

Preemptive rights allow shareholders to maintain their proportionate ownership by buying new shares below market price.

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18
Q

What type of preferred stock allows shareholders to convert into common shares?

a. Cumulative preferred
b. Callable preferred
c. Convertible preferred
d. Participating preferred

A

c. Convertible preferred

Convertible preferred stock allows shareholders to convert their shares into common stock.

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19
Q

When are cash dividends usually paid?

a. Irregularly
b. Quarterly
c. Annually
d. Monthly

A

b. Quarterly

Cash dividends are typically paid quarterly.

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20
Q

What is the primary purpose of American Depository Receipts (ADRs)?

a. Convertible into common shares
b. Trading foreign securities in the US
c. Priority in liquidation
d. Accumulation of unpaid dividends

A

b. Trading foreign securities in the US

ADRs are a vehicle for trading foreign securities in the US.

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21
Q

What is the primary risk associated with ADRs?*

a. Exchange rate risk
b. Interest rate risk
c. Market price risk
d. Credit risk

A

a. Exchange rate risk

ADR owners have foreign currency risk due to fluctuations in exchange rates.

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22
Q

What is the primary function of a proxy in shareholder voting?

a. Receive dividends
b. Inspect books and records
c. Vote on behalf of absent shareholders
d. Transfer ownership

A

c. Vote on behalf of absent shareholders

Proxies allow shareholders who cannot attend meetings to vote on corporate decisions.

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23
Q

What does the term “current yield” measure?

a. Annual income / Market price
b. Earnings per share
c. P/E ratio
d. Net income

A

a. Annual income / Market price

Current yield measures the annual income generated by an investment relative to its market price.

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24
Q

What is the primary difference between rights and warrants?

a. Time value
b. Market placement
c. Intrinsic value
d. Long-term vs. short-term

A

b. Market placement

Rights are short-term options issued below market price, while warrants are long-term options issued above market price

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25
Q

What is the purpose of preemptive rights?

a. Maintain proportionate ownership
b. Declare dividends
c. Trade in secondary markets
d. Inspect books and records

A

a. Maintain proportionate ownership

Preemptive rights give shareholders the option to maintain their proportionate ownership in the company.

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26
Q

What financial statement captures a company’s profitability over a period of time?

a. Balance sheet
b. Income statement
c. Statement of cash flows
d. Statement of retained earnings

A

b. Income statement

The income statement captures a company’s profitability over a specific period.

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27
Q

What does a bond represent?

a. Ownership in a corporation
b. Fixed income security representing a loan
c. Voting rights in a company
d. Preferred stock ownership

A

b. Fixed income security representing a loan

A bond is a fixed income security that represents a loan made by an investor to a bond issuer.

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28
Q

What is the primary role of the bond issuer?

a. Borrower
b. Debtor
c. Lender
d. Creditor

A

a. Borrower

The bond issuer is considered the borrower, as they promise to pay interest and repay the principal to the bondholders.

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29
Q

What is the annualized rate of interest paid on the face value of a bond called?

a. Coupon rate
b. Yield to maturity
c. Current yield
d. Nominal yield

A

a. Coupon rate

The annualized rate of interest paid on the face value of a bond is known as the coupon rate.

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30
Q

How are term bonds structured?

a. Quoted at a premium
b. Quoted in 1/8ths
c. Maturity on different days
d. All mature on the same day

A

c. Maturity on different days

Term bonds mature on the same day, while series bonds mature on different days with different coupon rates.

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31
Q

What is the difference between serial and series bonds?

a. Serial bonds mature on the same day
b. Series bonds have different coupon rates
c. Serial bonds mature on different days
d. Series bonds have balloon maturities

A

c. Serial bonds mature on different days

Serial bonds have different maturities, with each maturity having a different coupon rate.

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32
Q

How are corporate bonds typically quoted?

a. In 1/32nds
b. In dollars
c. In basis points
d. In 1/8ths

A

b. In dollars

Corporate bonds are typically quoted in dollars, representing a percentage of the bond’s face value.

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33
Q

How is the dollar price of a bond calculated when quoted at 98 1/8?

a. $981.25
b. $982.50
c. $980.31
d. $979.88

A

a. $981.25

1/8=.125= 981.25

34
Q

What is the bid-ask spread in bond trading?

a. Difference between serial and series bonds
b. Spread between coupon and yield
c. Difference between bid and ask prices
d. Difference between term bonds and dollar bonds

A

c. Difference between bid and ask prices

The bid-ask spread is the difference between the price at which a dealer buys and sells bonds.

35
Q

How is bond yield expressed?

a. In dollars
b. In basis points
c. In 1/8ths
d. In percentage terms

A

d. In percentage terms

Bond yield is expressed as a percentage, representing the return an investor is expected to receive.

36
Q

What is the primary relationship between bond prices and yields?

a. Direct
b. Inverse
c. Unrelated
d. Constant

A

b. Inverse

There is an inverse relationship between bond prices and yields; as yields go up, bond prices go down.

37
Q

What is the role of current yield (CY) in bond evaluation?

a. Fixed interest rate
b. Total return if held to maturity
c. Stated rate of interest
d. Annual interest divided by current market price

A

d. Annual interest divided by current market price

Current yield (CY) is calculated as annual interest divided by the current market price, providing a percentage return.

38
Q

What does Yield to Maturity (YTM) represent?

a. Total return if held to maturity
b. Stated rate of interest
c. Fixed interest rate
d. Annual interest divided by current market price

A

a. Total return if held to maturity

Yield to Maturity (YTM) represents the total return an investor would receive if the bond is held until maturity.

39
Q

How does the total return for a discount bond compare to its current yield (CY)?

a. YTM is less than CY
b. YTM is greater than CY
c. YTM is equal to CY
d. YTM and CY are unrelated

A

B. YTM is greater than CY

For a discount bond, YTM is greater than CY because it takes into account the difference between the discount and par value.

40
Q

For a premium bond, how does Yield to Maturity (YTM) relate to Current Yield (CY)?

a. YTM is less than CY
b. YTM is greater than CY
c. YTM is equal to CY
d. YTM and CY are unrelated

A

a. YTM is less than CY

For a premium bond, YTM is less than CY as YTM considers the difference between the premium paid and par value.

41
Q

In which order are the yields for a discount bond listed from least to greatest?

a. NY < CY < YTM
b. CY < YTM < NY
c. YTM < NY < CY
d. CY < NY < YTM

A

a. NY < CY < YTM

The correct order for yields on a discount bond is Nominal Yield (NY) less than Current Yield (CY) less than Yield to Maturity (YTM).

42
Q

What is a callable bond feature?

a. The investor’s right to sell the bond
b. The issuer’s right to call the bond before maturity
c. The bond’s ability to pay interest semi-annually
d. The bond’s fixed coupon rate

A

b. The issuer’s right to call the bond before maturity

Callable bonds grant the issuer the right to call the bond at a predetermined price before the bond reaches its maturity date

43
Q

When are callable bonds typically called by the issuer?

a. Immediately after issuance
b. After a stated call date
c. Only when interest rates rise
d. When the bond reaches maturity

A

b. After a stated call date

Callable bonds usually cannot be called until after a specified call date, giving the bondholder protection for a certain period

44
Q

What is the purpose of a call premium in callable bonds?

a. It compensates the issuer for the bond being called
b. It rewards the bondholder for holding the bond until maturity
c. It is an additional interest payment
d. It reduces the coupon rate of the bond

A

a. It compensates the issuer for the bond being called.

The call premium is paid by the issuer to compensate bondholders if the bond is called soon after the first call date.

45
Q

How does the yield to call (YTC) for a discount bond compare to Yield to Maturity (YTM)?

a. YTC is always equal to YTM
b. YTC is greater than YTM
c. YTC is less than YTM
d. YTC and YTM are unrelated

A

b. YTC is greater than YTM

YTC takes into account the bond being called before maturity, resulting in a higher yield than YTM for a discount bond.

46
Q

In a premium bond, what does Yield to Call (YTC) take into account?*

a. Coupon plus gain from the difference between purchase and call price
b. Coupon minus loss from the difference between purchase and call price
c. Only the coupon rate
d. The bond’s marketability

A

b. Coupon minus loss from the difference between purchase and call price

In a premium bond, YTC considers the coupon minus the potential loss from the difference between the purchase and call price.

47
Q

What is a put provision in a bond contract?

a. The issuer’s right to sell the bond
b. The bondholder’s right to sell the bond back to the issuer
c. The bond’s right to increase its coupon rate
d. The bondholder’s right to buy additional bonds at a discount

A

b. The bondholder’s right to sell the bond back to the issuer

A put provision allows the bondholder to sell the bond back to the issuer, typically at par, after a specified date.

48
Q

Why might a bondholder exercise a put option?

a. To sell the bond at a premium
b. To reinvest in higher-yielding bonds
c. To increase the bond’s coupon rate
d. To avoid the issuer’s call option

A

b. To reinvest in higher-yielding bonds

Bondholders might exercise a put option to sell the bond and reinvest the proceeds in bonds with higher yields if interest rates rise.

49
Q

What is the primary risk associated with bond ratings?

a. Marketability risk
b. Interest rate risk
c. Default risk
d. Business risk

A

c. Default risk

Bond ratings primarily measure default risk, indicating the risk that an issuer may not make interest and principal payments.

50
Q

Which rating signifies an investment-grade bond according to Moody’s?

a. B
b. Aa
c. Ba
d. CCC

A

b. Aa

According to Moody’s, an investment-grade bond is rated Aa, signifying a high level of creditworthiness.

51
Q

What does purchasing power risk relate to in bonds?

a. Default risk
b. Marketability risk
c. Inflation risk
d. Call risk

A

c. Inflation risk

Purchasing power risk relates to the risk that inflation will reduce the value of future interest payments received at maturity.

52
Q

What is the risk associated with rising interest rates and bond prices?

a. Business risk
b. Marketability risk
c. Interest rate risk
d. Inflation risk

A

c. Interest rate risk

Rising interest rates pose interest rate risk, causing existing bond prices to fall.

53
Q

What is the measurement of a bond’s volatility?

a. Yield to Maturity (YTM)
b. Duration
c. Current yield
d. Nominal yield

A

b. Duration

Duration is a measure of a bond’s volatility, with higher durations indicating higher volatility.

54
Q

Which bonds are generally less volatile?*

a. Bonds with higher coupons
b. Bonds with lower coupons
c. Zero-coupon bonds
d. Variable rate bonds

A

a. Bonds with higher coupons

Bonds with higher coupons are generally less volatile than those with lower coupons.

55
Q

What is the primary risk associated with prepayment in bonds?

a. Marketability risk
b. Call risk
c. Reinvestment risk
d. Currency exchange risk

A

c. Reinvestment risk

Prepayment risk is associated with reinvestment risk, as investors might face challenges reinvesting their principal at a similar rate.

56
Q

Which risk is related to investing in foreign countries with weak political/legal systems?

a. Purchasing power risk
b. Political risk
c. Legislative risk
d. Business risk

A

b. Political risk

Political risk is the concern related to investing in foreign countries with weak political or legal systems, impacting the bond’s value.

57
Q

What is the primary characteristic of bearer bonds?

a. Registered ownership
b. Fully secured
c. Physical coupons
d. Issued in book entry form

A

c. Physical coupons

Bearer bonds have physical certificates with removable coupons, and interest or principal is payable to the holder.

58
Q

Which type of bonds is backed by tangible assets and may involve liquidation of underlying assets in case of default?

a. Convertible bonds
b. Mortgage bonds
c. Income/adjustment bonds
d. Unsecured debentures

A

b. Mortgage bonds

Mortgage bonds are secured by real estate or property, making them backed by tangible assets.

59
Q

What does the term “book entry form” refer to in bond issuance?

a. Physical certificate with coupons
b. Indenture contract
c. Fully registered bonds
d. Electronic record-keeping with no physical certificate

A

d. Electronic record-keeping with no physical certificate

Book entry form refers to fully registered bonds without physical certificates, where ownership is electronically recorded.

60
Q

Under the Trust Indenture Act of 1939, when is a trust indenture required for corporate bond issues?

a. $1 million or more
b. $10 million or more
c. $50 million or more
d. $100 million or more

A

c. $50 million or more

The Trust Indenture Act of 1939 requires a trust indenture for corporate issues of $50 million or more.

61
Q

Which bonds are commonly issued by transportation companies and require annual repayment until retired?

a. Collateral trust certificates
b. Equipment trust certificates
c. Debentures
d. Subordinated debentures

A

b. Equipment trust certificates

Equipment trust certificates are backed by equipment or machinery and involve serial bond issues with annual repayments

62
Q

What is the main characteristic of commercial paper?
a. Long maturities
b. SEC registration required
c. Sold in units of $1,000
d. Maturities not exceeding 270 days

A

d. Maturities not exceeding 270 days

Commercial paper has very short maturities, typically 14 to 90 days, and may not exceed 270 days.

63
Q

Which bond is issued when a corporation is in bankruptcy and pays interest only if the corporation returns to profitability?

a. Convertible bonds
b. Guaranteed bonds
c. Income/adjustment bonds
d. Subordinated debentures

A

c. Income/adjustment bonds

Income/adjustment bonds are issued in bankruptcy, retire existing bonds, and obligate payment only if the corporation returns to profitability.

64
Q

What is the primary advantage to the issuer of convertible bonds?

a. Higher interest rates
b. Tax-deductible dividend payments
c. No obligation to pay interest
d. Potential price appreciation based on stock conversion

A

d. Potential price appreciation based on stock conversion

Convertible bonds offer the issuer lower interest rates, and the potential for the bondholder is price appreciation if converted into stock.

65
Q

What does the term “forced conversion” refer to in the context of convertible bonds?

a. Mandatory bond redemption
b. Bondholder’s right to convert
c. Call option exercised by the issuer
d. Conversion at the bondholder’s discretion

A

c. Call option exercised by the issuer

Forced conversion refers to the issuer’s right to replace bonds with equity securities if the bonds are called.

66
Q

Which U.S. government debt type is not traded and is non-negotiable?

a. Treasury bills
b. Savings bonds
c. Treasury bonds
d. Treasury notes

A

b. Savings bonds

Savings bonds are non-negotiable, non-tradable, and have specific terms for redemption.

67
Q

What characteristic distinguishes STRIPS (Separate Trading of Registered Interest and Principal Securities)?

a. Interest and principal separation
b. High interest rates
c. Short-term maturities
d. Low discount rates

A

a. Interest and principal separation

STRIPS involve the separation of interest and principal payments, offering zero coupon bonds with different maturities.

68
Q

Which agency issues mortgage-backed pass-through certificates subject to prepayment risk?

a. Federal Farm Credit System
b. Fannie Mae (FNMA)
c. Ginnie Mae (GNMA)
d. Federal Home Loan Mortgage Corporation (Freddie Ma

A

c. Ginnie Mae (GNMA)

Ginnie Mae issues mortgage-backed pass-through certificates, and the prepayment risk is associated with changes in interest rates.

69
Q

What tax status applies to interest received from U.S. government bonds?

a. Fully taxable at all levels
b. Exempt from federal income tax
c. Exempt from state and local taxes
d. Taxed at the state level only

A

c. Exempt from state and local taxes

Interest received from U.S. government bonds is subject to federal income tax but exempt from state and local taxes.

70
Q

Which bond type involves adjusting principal based on changes in the Consumer Price Index (CPI)?

a. Municipal bonds
b. Convertible bonds
c. Income/adjustment bonds
d. Treasury Inflation-Protected Securities (TIPS

A

d. Treasury Inflation-Protected Securities (TIPS)

TIPS involve adjusting principal based on the Consumer Price Index (CPI), protecting against purchasing power risk.

71
Q

In which scenario would an investor face purchasing power risk?

a. Holding Treasury Inflation-Protected Securities (TIPS)
b. Investing in mortgage-backed securities
c. Owning savings bonds
d. Holding corporate debentures

A

b. Investing in mortgage-backed securities

Purchasing power risk is faced when holding mortgage-backed securities, as changes in interest rates impact the likelihood of homeowners refinancing.

72
Q

What is the primary difference between secured and unsecured debt instruments?

a. Secured bonds pay higher coupons
b. Unsecured bonds involve lien on real estate
c. Secured bonds are backed by the issuer’s promise
d. Unsecured bonds have physical certificates

A

c. Secured bonds are backed by the issuer’s promise

The primary difference is that secured bonds are backed by tangible assets, while unsecured bonds rely on the issuer’s promise.

73
Q

Which bond type is commonly issued by the Federal Home Loan Banks?

a. Equipment trust certificates
b. Income/adjustment bonds
c. Mortgage-backed securities
d. Federal Farm Credit System bonds

A

a. Equipment trust certificates

Equipment trust certificates are commonly issued by the Federal Home Loan Banks.

74
Q

When are Treasury bills issued at a discount and mature at par?

a. Always
b. Never
c. Only in times of economic recession
d. Only during periods of high inflation

A

a. Always

Treasury bills are issued at a discount and mature at par, regardless of economic conditions.

75
Q

What does the term “forced conversion” refer to in the context of convertible bonds?

a. Mandatory bond redemption
b. Bondholder’s right to convert
c. Call option exercised by the issuer
d. Conversion at the bondholder’s discretion

A

c. Call option exercised by the issuer

Forced conversion refers to the issuer’s right to replace bonds with equity securities if the bonds are called.

76
Q

What is the primary characteristic of collateral trust certificates?

a. Backed by a portfolio of marketable securities
b. Backed by equipment or machinery
c. Backed by tangible assets
d. Backed by the general credit of the issuing company

A

a. Backed by a portfolio of marketable securities

Collateral trust certificates are backed by a portfolio of marketable securities, providing security for bondholders.

77
Q

Which government agency explicitly backs Ginnie Mae (GNMA) bonds?
a. Federal Home Loan Banks
b. Federal National Mortgage Association (Fannie Mae)
c. Government National Mortgage Association (Ginnie Mae)
d. Federal Home Loan Mortgage Corporation (Freddie Mac)

A

c. Government National Mortgage Association (Ginnie Mae)

Ginnie Mae explicitly backs GNMA bonds, providing government support.

78
Q

What tax status applies to interest received from investments in mortgage-backed pass-through certificates?

a. Fully taxable at all levels
b. Exempt from federal income tax
c. Exempt from state and local taxes
d. Taxed at the state level only

A

a. Fully taxable at all levels

Interest received from investments in mortgage-backed pass-through certificates is fully taxable at all levels.

79
Q

Which bond type involves adjusting principal based on changes in the Consumer Price Index (CPI)?

a. Municipal bonds
b. Convertible bonds
c. Income/adjustment bonds
d. Treasury Inflation-Protected Securities (TIPS)

A

d. Treasury Inflation-Protected Securities (TIPS)

TIPS involve adjusting principal based on the Consumer Price Index (CPI), protecting against purchasing power risk.

80
Q

What is the primary purpose of Repos in open market operations?

a. To tighten credit by selling treasuries
b. To loosen credit by buying treasuries
c. To increase federal income tax
d. To decrease state and local taxes

A

b. To loosen credit by buying treasuries

Repos in open market operations are used to inject cash into the economy, lowering interest rates and loosening credit.

SIE chapters 1-4 (1 decks)

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