UNIT 2 QBANK Flashcards
An investor holds a 4% bond, callable in 8 years, and maturing in 12 years. The bond’s current yield (CY) measures its annual coupon payment relative to
A) par value.
B) its value at maturity.
C) its value when callable.
D) its market price.
D) its market price.
The CY measures a bond’s annual coupon payment (interest) relative to its market price, as shown in the following equation: annual coupon payment ÷ market price = current yield.
A bond with a 4.5% stated yield might make
I. annual interest payments of $45.
II. annual interest payments of $450.
III. semiannual interest payments of $2.50.
IV. semiannual interest payments of $22.50.
A) I and IV
B) I and III
C) II and IV
D) II and III
A) I and IV
A bond with a 4.5% stated, nominal, or coupon yield pays $45 annual interest (4.5% × $1,000 par value). If the $45 annual interest is paid in semiannual payments, each would be $22.50.
Regarding different types of debt security maturities available to issuers, which of the following is accurate?
A) A term maturity uses elements of both serial and balloon maturities.
B) A serial maturity uses elements of both term and balloon maturities.
C) A balloon maturity uses elements of both serial and term maturities.
D) No maturity types incorporate the elements of any other.
C) A balloon maturity uses elements of both serial and term maturities.
An issuer can schedule its bond’s maturity using elements of both serial and term maturities. This is known as a balloon maturity. The issuer repays part of the bond’s principal before the final maturity date, as with a serial maturity, but pays off the major portion of the bond at maturity.
A corporation has issued debt securities backed by the shares of another corporation that it owns. These debt securities are known as
A) debentures.
B) collateral trust bonds.
C) equipment trust certificates.
D) mortgage bonds.
B) collateral trust bonds.
A corporation can deposit securities it owns into a trust to be used as collateral to back its debt issues. When this is done, the securities issued are known as collateral trust bonds.
Each year a bond pays semiannual interest payments of $20. This bond has a nominal yield of
A) 4%.
B) 20%.
C) 1%.
D) 2%.
A) 4%.
If a bond pays two interest payments of $20 each annually, this means that the total annual interest is $40. Annual interest ($40) divided by par ($1,000) equals the nominal, stated, or coupon yield (0.04 or 4%).
Which of the following is a characteristic shared by both corporate debentures and income bonds?
A) Both are secured by assets of the corporation.
B) Neither pay interest.
C) Both are a type of mortgage bond.
D) Both must pay principal as it comes due.
D) Both must pay principal as it comes due.
All bonds must pay principal when due. Income bonds, however, are not required to pay interest when due unless the earnings of the issuer are deemed to be sufficient and the board of directors (BOD) declares that interest payments be made.
Money market instruments are typically
A) fixed-income (debt) securities with short- to intermediate-term maturities.
B) equity securities with short- to intermediate-term maturities.
C) fixed-income (debt) securities with short-term maturities.
D) equity securities with short-term maturities.
C) fixed-income (debt) securities with short-term maturities.
Money market instruments are fixed-income (debt) securities with short-term maturities, typically one year or less.
Money market debt instruments typically have maturities of
A) 1 year or less.
B) 10–30 years.
C) 1–2 years.
D) longer than 2 years.
A) 1 year or less.
Money market debt instruments typically have maturities of one year or less. Generally, securities with maturities of 1–10 years are considered intermediate term and those with 10 years or more to maturity are long term.
To the benefit of the issuer, a callable bond is likely to be called when interest rates
A) rise.
B) remain stable for long periods of time.
C) are volatile moving both up and down over short periods of time.
D) fall.
D) fall.
Bonds with call features are most likely to be called by an issuer when interest rates fall. For example, if an issuer has an outstanding bond paying 6% and interest rates have fallen to 4%, why pay out 6% when prevailing market rates are only 4%? Better to call in the 6% bond and reissue a new bond at the current rate of 4%. In this way, call features benefit the issuer.
An investor holds a Treasury note with a stated interest of 6%. The investor will receive
A) two $30 interest payments per year.
B) one $6 interest payment per year.
C) one $60 interest payment per year.
D) two $60 interest payments per year.
A) two $30 interest payments per year.
Treasury note (T-note) annual interest is stated as a percentage of par value ($1,000) and is paid in semiannual payments. Therefore, a 6% T-note pays $60 per year in two payments of $30 each.
Yield to call (YTC) calculations reflect the early redemption date and
I. acceleration of the discount gain if the bond was originally purchased at a premium.
II. acceleration of the discount gain if the bond was originally purchased at a discount.
III. accelerated premium loss if the bond was originally purchased at a premium.
IV. accelerated premium loss if the bond was originally purchased at a discount.
A) I and III
B) I and IV
C) II and IV
D) II and III
D) II and III
YTC calculations reflect the early redemption date and consequent acceleration of the discount gain if the bond was originally purchased at a discount (less than what will be received at maturity), or the accelerated premium loss if the bond was originally purchased at a premium discount (more than what will be received at maturity).
Bondholders should expect that interest payments would always be forthcoming for all of the following except
A) convertible bonds.
B) income bonds.
C) debentures.
D) subordinated debentures.
B) income bonds.
Income bonds pay interest only if earnings are sufficient and the payments to be made are declared by the board of directors (BOD). This is not true of any of the other fixed-income securities listed (debentures, subordinated debentures, or convertible bonds).
Which of the following regarding federal funds is true?
A) These funds can provide long-term loans for Federal Reserve Board (FRB) members.
B) These funds are the amount required to be held on reserve at the Federal Reserve Board (FRB).
C) These funds can provide intermediate-term loans for Federal Reserve Board (FRB) members.
D) These funds may be loaned from one Federal Reserve Board (FRB) member bank to another.
D) These funds may be loaned from one Federal Reserve Board (FRB) member bank to another.
Federal funds are the excess amounts above the amount of a bank’s deposits required to be held on reserve at the Federal Reserve member banks can lend these funds to one another to meet the FRB reserve requirements. These loans are very short term and, in most cases, are utilized overnight.
Which of the following obligations is backed by the full faith and credit of the United States Government?
A) Federal Home Loan Mortgage Corporation (FHLMC)
B) Government National Mortgage Association (GNMA)
C) Federal National Mortgage Association (FNMA)
D) Treasury receipts
B) Government National Mortgage Association (GNMA)
GNMA is a government-owned corporation that supports the Department of Housing and Urban Development. Ginnie Maes are the only agency securities backed by the full faith and credit of the federal government.
Regular way settlement for Treasury bills is
A) same day.
B) T+2.
C) T+1.
D) T+3.
C) T+1.
All U.S. government issues settle next business day (T+1).
