UNIT 01.01 003 Flashcards
If your customer holds 10 KLP 6% bonds, how much money will he receive in total at the debenture’s maturity?
$10,300
The holder of 10 bonds will receive $10,000 in principal at maturity. Each bond pays 6% annual interest, or $60. Thus, 10 bonds pay a total of $600 per year in two semiannual payments of $300. At maturity, the bondholder will receive the $10,000 face amount plus the final semiannual payment ($10,000 + $300 = $10,300).
Which of the following is not a money market instrument?
A) Municipal construction loan note (CLN)
B) Commercial paper issued by a finance corporation of a major automobile manufacturer
C) Federal Farm Credit Bank note maturing in one year
D) Newly issued Treasury notes issued to meet a specific government-funding requirement
Newly issued Treasury notes issued to meet a specific government-funding requirement
A newly issued Treasury note would have a maturity of at least two years and would not be considered a money market instrument.
Your customer buys a 5% bond at a price of 105. What is the bond’s current yield?
4.75%
The formula for current yield is annual interest divided by current market value. A 5% bond would pay $50 a year. The bond is trading at $1,050 (105). 50 / 1050 = 0.0476 (4.75% is the best answer.)
Your customer feels overburdened with taxes and would like relief. After you discuss the ABC Municipal Bond Fund with her and advise her of the tax treatment of the distributions, which of the following statements would be the correct advice?
Dividends are federally tax exempt, but capital gains are subject to taxation.
Dividends from municipal bond funds are tax exempt because they represent tax-exempt interest paid to the portfolio; capital gains distributions are taxable.
All of the following statements about a bond’s nominal yield are true except
A) it identifies the amount of interest that the bondholder will receive.
B) it increases when interest rates increase.
C) it is stated on the bond certificate.
D) it is also known as the bond’s coupon.
it increases when interest rates increase.
A bond’s nominal yield is fixed as of the date of issue. It identifies the amount of interest an investor receives and, once the bond is issued, is not affected by changes in market interest rates. It is also known as the coupon rate of the bond and is stated on the bond certificate.
TRUE
A) it identifies the amount of interest that the bondholder will receive.
C) it is stated on the bond certificate.
D) it is also known as the bond’s coupon.
How often do Treasury notes pay interest?
Every six months
Unlike Treasury bills, T-notes pay interest every six months.
If interest rates are increasing and the market prices of bonds are decreasing, what happens to the value of straight preferred stock during this period?
Its value decreases.
Preferred stocks are interest rate sensitive, as are other fixed-income investment securities, such as bonds. Thus, if interest rates increase, the fixed return may be surpassed by the return provided by other investments. The value of preferred stock will thus decrease when interest rates rise.
Seabird Airlines pays a $1.20 quarterly dividend. If the current yield is 4% the stock must be trading at which of these prices?
$120.00
A dividend yield is an annual figure. $1.20 × 4 = $4.80 (the annual dividend). Divide this figure by the yield (0.04) to find the market price of $120.00.
If a customer’s chief concern is to shelter as much of his portfolio earnings from tax as possible, which of the following securities would be most suitable?
A) High-yield bonds
B) Treasury STRIPS
C) Municipal GOs
D) Money market instruments
Municipal GOs
The interest on municipal GOs is exempt from federal income tax and perhaps state income tax, depending on the investor’s residency.
An income-seeking investor is concerned with the possibility of rising interest rates over the next few years. Of the choices listed, his best investment selection would be
Treasury bills.
Long-term maturities have a high degree of interest rate risk. An investor who is looking for income but is concerned with rising rates should invest in short-term instruments such as Treasury bills.
