UNIT 01.01-002 Flashcards
The best time to PURCHASE SHARES in a LONG-TERM BOND FUND is when LONG-TERM INTEREST RATES are _______ after a period of ________
when long-term interest rates are FALLING after a period of HIGH-INTEREST RATES.
The best time to purchase shares in a long-term bond fund is when interest rates are falling after a period of high rates.
The bonds already in the fund will continue to pay a high rate of return, and if rates CONTINUE TO FALL, the market value of the fund’s portfolio will RISE.
A popular asset found in the portfolio of money market mutual funds is commercial paper.
The most common issuer of commercial paper is
corporations
Commercial paper, a money market instrument, is issued by corporations.
A MONEY MARKET fund portfolio might contain
negotiable, unsecured bank _________.
T-____.
negotiable, unsecured bank certificates of deposit.
T-bills.
The portfolio of a money market mutual fund would contain money market securities.
Those are defined as high-quality debt issues with ONE YEAR OR LESS to maturity.
T-bills and negotiable bank CDs (jumbo CDs) meet that definition.
Common stock, regardless of when issued, is equity, not debt. T-bonds would be included only if they were due to mature in one year or less.
An investor purchasing a CONVERTIBLE DEBENTURE would most likely not be seeking to maximize _________
current income.
Convertible bonds are more marketable to the public, and as such, the issuer is able to offer a LOWER coupon.
Therefore, if looking to maximize income, investors should purchase a nonconvertible bond (with a HIGHER coupon).
TRUE
take advantage of a possible increase in stock prices.
have the safety of a debt security.
diversify an equity portfolio.
If INTEREST RATES increase, the INTEREST PAYABLE on outstanding corporate bonds will
remain unchanged.
The INTEREST PAYABLE is the NOMINAL YIELD, which is stated on the face of the bond. It is the percentage of face value the bond will pay each year, regardless of the prevailing interest rates in the market.
It is the MARKET PRICE of bonds, NOT the INTEREST PAYABLE, that responds inversely to changes in interest rates.
Which of the following are characteristics of NEGOTIABLE JUMBO CDs?
Issued in amounts of $_____ to $_____ or more
Trade in the _____ market
Issued in amounts of $100,000 to $1 million or more
Trade in the secondary market
Negotiable jumbo CDs are issued for $100,000 to $1 million or more and trade in the secondary market. Most jumbo CDs are issued with maturities of less than a year. The FDIC insures only up to $250,000.
In describing GNMAs to a potential investor, you could correctly tell him that
the certificates are backed by ________
the certificates are backed by the full faith and credit of the U.S. government.
The certificates issued by the GNMA represent interests in government-insured mortgages pooled by mortgage brokers who guarantee the monthly cash flow, but it is the U.S. government that actually backs GNMA pass-through certificates. GNMA pass-through securities are issued in minimum denominations of $25,000, and all interest earned is subject to federal income tax, as well as state and local taxes.
A corporation has a 9% bond issue outstanding. The bondholder may exchange the bond for 50 shares of the corporation’s stock. Which of the following types of bonds is this?
Convertible
A bond is convertible if the holder has the right to convert the bond into shares of common stock of the corporation.
A bond is convertible if the holder has the right to convert the bond into shares of common stock of the corporation.
All of the following are money market instruments except
A) Treasury bills.
B) commercial paper.
C) municipal notes.
D) newly issued Treasury bonds.
newly issued Treasury bonds.
Money market securities are high-quality debt instruments with a maximum maturity of 1 year. Treasury bonds are high quality but issued with maturities of more than 10 years. All the other securities listed are both high quality and issued with maturities of 1 year or less.
Which of the following does not issue commercial paper?
A) Broker-dealer
B) Finance company
C) Service company
D) Sole proprietorship
Sole proprietorship
Sole proprietorships do not issue commercial paper. The commercial paper market was developed so that CORPORATIONS could lend to, and borrow from, each other more economically.
