UNIT 01.01-001 Flashcards
A customer purchases a 4% corporate bond yielding 5%. A year before the bond matures, new corporate bonds are issued at 3%, and the customer sells the 4% bond. Which of the following statements regarding the bond are true?
The customer bought it at a ________.
The customer sold it at a ________.
The customer BOUGHT it at a DISCOUNT.
The customer SOLD it at a PREMIUM.
When the customer bought the bond, it was at a discount, because the YTM (5%) was higher than the nominal yield (4%). When they sold the bond, interest rates had declined to 3%, which was below his nominal yield. Therefore, because the bond has a higher coupon than current market rates, it would be sold at a premium.
Which of the following statements regarding TREASURE BILLS are true?
They are sold at ______.
They mature at ______.
They are sold at auction.
They mature at par.
T-bills are sold at a discount by auction and mature at par in less than one year.
Transactions in all of the following are effected in the money market, as opposed to the capital market, except
A) U.S. Treasury bills.
B) commercial paper.
C) bankers acceptances.
D) municipal revenue bonds.
municipal revenue bonds.
The money market is the marketplace for SHORT-term (one year or less) debt obligations.
The capital market is where LONG-term capital is raised.
Municipal bonds, being LONG- term, are a part of the CAPITAL MARKET.
Which of the following statements regarding a corporate bond quoted as QRS Zr 20 is true?
The bond pays NO INTEREST UNTIL _______.
BOUGHT AT A ________ and
MATURE AT _________.
The bond pays NO INTEREST UNTIL MATURITY.
BOUGHT at a DISCOUNT and
MATURE at PAR.
QRS Zr 20 represents a zero-coupon bond issued by the QRS Company maturing in 2020.
Zero-coupon bonds are BOUGHT AT A DISCOUNT and MATURE AT FACE VALUE.
If a bond is held to maturity, the difference between the purchase price and the maturity price is considered interest, though it is taxed on a yearly basis.
To calculate current yield divide the X by the Y
To calculate current yield divide the [annual dividend] by the [current market value]
ABC Corporation $6 preferred stock trades at $110 a share. What is the current yield?
5.45%
A $6 preferred stock would pay $6 annually. To calculate current yield divide the annual dividend by the current market value. 6 / 110 = 5.45%
Which of the following would be characteristic of money market mutual funds?
____ volatility
A portfolio consisting of ____-term securities
Low volatility
A portfolio consisting of short-term securities
A money market mutual fund portfolio consists of high-quality, short-term debt securities.
The volatility of money market shares is managed to be very low and is reflected in the fund’s very low beta coefficient.
A customer buys a long-term, 10% Treasury bond with a current yield of 12% and holds the bond until one year before maturity. She sells the bond when the short-term T-bill rate is 8%. Which of the following statements are correct?
The bond was purchased at a discount.
The bond was sold at a premium.
When the yield is higher than the coupon, it means that the bond was purchased at a discount. Because the question tells us the T-bills are now yielding 8% and she has a bond maturing within a year with a 10% coupon, she would be able to sell that bond at a premium.
A railroad company pledges its railroad cars as collateral for a bond offering. This bond would be issued as
an equipment trust certificate.
As the name implies, equipment trust certificates are collateralized by the issuer’s equipment. In most cases, this is rolling stock or some other transportation item.
An investor’s portfolio includes 10 bonds and 200 shares of common stock. If both positions increase by one point, what is the appreciation?
$300
The gain would be $100 for the bonds (one point for one bond is $10 × 10 bonds) and $200 for the common stock (one point is $1 × 200 shares). The total portfolio gain is $300.
BuyStuff, Inc., common stock currently trades at $37.00 a share. The board of directors has declared a $0.37 a share dividend to be paid to shareholders on the payable date. This dividend was expected as it is the same amount the company has paid the past two years. What is BuyStuff’s dividend yield?
4%
The formula for dividend yield (also called current yield) is annual dividend divided by the current market value. Remember to multiply the quarterly dividend by four to get the annual dividend. In this example (0.37 × 4) / 37 = 0.04 (or 4%).
