Question #1 of 106Question ID: 1268830
When an issuer schedules portions of a bond issue's principal to mature at predetermined intervals over a period of years until the entire balance has been repaid, the issuer has issued what type of bond?
D)
Explanation
A serial bond issue schedules portions of the principal to mature at intervals over a period of years until the entire principal balance has been repaid.
Question #2 of 106Question ID: 1289011
When purchasing a bond, the investor is taking on
D)
Explanation
When an investor is purchasing a bond, he is lending money to the issuer and becomes a creditor of the issuer.
Question #3 of 106Question ID: 1268940
Municipal revenue bonds
do not require voter approval.
generally have a higher rating than general obligation (GO) bonds from the same issuer.
are not subject to statutory debt limits.
are backed and supported by ad valorem (property) taxes.
A)
Explanation
Revenue bonds are designed to be self-supporting. They are backed by the revenue derived from the project funded by the bonds. Because they are not backed by property taxes, voter approval is not required. GO bonds however are backed by taxes, such as ad valorem (property) taxes, and therefore voter approval is generally required. With GO bonds, there is a debt ceiling or limit imposed on the issuer as well. Because they are backed by taxes, the issuer is limited as to how much can be issued. They generally have a higher rating than the same issuer's revenue bonds.
Question #4 of 106Question ID: 1268939
An investor holds a debt security backed by ad valorem taxes. This security is issued by
C)
Explanation
Ad valorem taxes are real estate taxes. Real estate taxes can only back debt securities issued by towns, cities, or counties (never states). These are collectively known as local municipalities.
Question #5 of 106Question ID: 1268828
Regarding different types of debt security maturities available to issuers, which of the following is accurate?
C)
Explanation
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.
Question #6 of 106Question ID: 1268871
An investor holds a 6% callable bond purchased at 105. If the issuer calls the bond before maturity, the yield to call (YTC) realized by the investor would be
B)
Explanation
When a bond purchased at a premium (105) is called before it matures, the accelerated premium loss is reflected in the calculated yield to call (YTC). In this light, remember that the YTC is always the lowest of all possible yields for premium bonds, less than the coupon, CY, and YTM.
Question #7 of 106Question ID: 1268879
To the benefit of the bondholder, a puttable bond is likely to be put back to the issuer when interest rates
D)
Explanation
Bonds with put features are most likely to be put back to the issuer when interest rates rise. For example, if a bondholder has a bond paying 4% and interest rates have risen to 6%, why settle for a 4% return when prevailing market rates are now up to 6%? Better to put the 4% bond back to the issuer for redemption and then purchase a new bond paying the prevailing higher rate. In this way, put features benefit the bondholder.
Question #8 of 106Question ID: 1268837
Par value for a bond is also known as
B)
Explanation
Par value (usually $1,000) is the face value of a bond or the amount a bond will be redeemed for by the investor at maturity.
Question #9 of 106Question ID: 1279883
A bond that is structured so that the issuer pays off a portion of the principal before the final maturity but pays off a major portion of the bond at the final maturity date is
A)a balloon bond.
B)a serial bond.
C)a term bond.
D)a series bond.
A)
Explanation
A balloon maturity is a series of partial payments over a few years with the bulk of the offer maturing in the final year.
Question #10 of 106Question ID: 1268868
Yield to call (YTC) calculations reflect the early redemption date and
acceleration of the discount gain if the bond was originally purchased at a premium.
acceleration of the discount gain if the bond was originally purchased at a discount.
accelerated premium loss if the bond was originally purchased at a premium.
accelerated premium loss if the bond was originally purchased at a discount.
B)
Explanation
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).
Question #11 of 106Question ID: 1268942
For municipal debt issues, which of the following is true?
A)
Explanation
Revenue bonds are self-supporting. The project or facilities revenue supports the debt service of the bond. GO bonds are backed by the municipality's good faith and credit, namely the municipality's authority to tax.
Question #12 of 106Question ID: 1268863
A registered representative speaks to a customer about a particular 6% municipal bond quoted on a 6.5% basis. Which of the following is correct?
6% is the bond's coupon.
6% is the bond's current yield.
6.5% is the bond's yield to maturity.
6.5% is the bond's current yield.
A)I and III
B)I and IV
C)II and IV
D)II and III
A)
Explanation
When a bond is referred to by a yield percentage (6%), it is the coupon (nominal or stated) yield being referenced. Basis yield refers to yield to maturity (YTM). Hence, a 6% coupon bond currently trading with a 6.5% YTM.
Question #13 of 106Question ID: 1279879
Which of the following statements is most accurate about feature benefits?
D)
Explanation
The call feature allows the issuer to call in old bonds at a high rate of interest and then issue new bonds at a lower rate, similar to refinancing a high interest rate loan. The put feature allows the investor to sell the bond back to the issuer at par when the bond market value has declined, thus avoiding a loss.
Question #14 of 106Question ID: 1268847
When interest rates in the open market move up or down, a bond's coupon rate will
D)
Explanation
Though the price of a bond will react to market forces, such as supply and demand, and be interest-rate sensitive (inverse), the coupon is always the same: A fixed percentage of par value established by the issuer when the bond was first issued.
Question #15 of 106Question ID: 1268835
The coupon for a bond is calculated as a percentage of
B)
Explanation
The coupon rate on a bond is calculated as a percentage of par value. While par value can be any amount the issuer determines it to be, it is usually $1,000 for bonds and should be assumed to be so, unless it is indicated otherwise.
Question #16 of 106Question ID: 1279876
Which of the following statements is true of income bonds?
D)
Explanation
An income bond is normally issued by a corporation emerging from bankruptcy. In order to allow the company to regain a firmer footing, these bonds only pay interest when the board of directors declares that a payment will be made.
Question #17 of 106Question ID: 1268826
A bond has been structured so that the principal of the entire issue matures on a single date. This is what type of bond?
A)Term
B)Balloon
C)Serial
D)Single maturity
A)
Explanation
Term bonds are structured so that the principal of the entire issue is all payable on the same datejQuery112406797823890318897_1614393719881the maturity date.
Question #18 of 106Question ID: 1268862
A customer buys a 4% Treasury bond, maturing in 10 years, at a price of $96.08. The yield to maturity (YTM) is
A)greater than nominal yield.
B)less than current yield.
C)same as current yield.
D)less than nominal yield.
A)
Explanation
A bond whose price is below par (priced at a discount) has a higher YTM than current yield, which in turn is higher than the nominal yield.
Question #19 of 106Question ID: 1268936
Which of the following require voter approval?
B)
Explanation
Municipal general obligation (GO) bonds require voter approval because the debt service for these bonds (principal and interest payments) is funded by the taxes collected by the municipal issuer. Voters pay these taxes.
Question #20 of 106Question ID: 1268946
Water and sewer facilities are most likely to use what kind of debt financing to fund expansion plans?
B)
Explanation
Municipal revenue bonds are issued to finance any municipal facility that charges user fees. These municipal bonds are self-supporting because principal and interest payments are made exclusively from revenues generated by the project for which the debt was issued, such as a water and sewer facility billing the municipalities' customers for usage each month.
Question #21 of 106Question ID: 1345705
When selling a bond, the issuer is taking
A)
Explanation
Issuers of bonds are borrowing money from the purchaser of the bond.
Question #22 of 106Question ID: 1268932
Municipal securities can be issued by
C)
Explanation
Municipal securities can be issued by state or local governments or by U.S. territories, authorities, and special districts.
Question #23 of 106Question ID: 1268848
The market forces that typically drive the price of a bond trading in the secondary market would include all of the following except
C)
Explanation
Bond prices can be impacted by the usual market forces that impact securities in general, such as supply and demand. Additionally bond prices, they have an inverse relationship to interest rates.
Question #24 of 106Question ID: 1268859
The stated coupon on a bond is its
D)
Explanation
The coupon on a bond, also known as the stated or nominal yield indicates the annual interest paid. For example, a 4% bond pays $40 of interest per year (0.04 ?? $1,000 par).
Question #25 of 106Question ID: 1268882
An investor has purchased bonds having a put feature attached. With this put feature, it is likely that these bonds were issued with
A)
Explanation
When bonds are issued with features that benefit the bondholder, such as a put feature, the issuer can generally pay a slightly lower coupon rate of interest. This is because the put feature compensates the holder in another way, aside from the coupon rate.
Question #26 of 106Question ID: 1268881
An issuer has issued bonds with a call feature. It is likely that these bonds have
D)
Explanation
When bonds are issued with features that benefit the issuer, such as a call feature, the issuer generally will need to pay a slightly higher coupon rate of interest to make the bond attractive to new investors.
Question #27 of 106Question ID: 1268938
A municipality wants to issue general obligation (GO) bonds that will put it over its statutory debt limit. Which of the following is true?
A)This is prohibited by the federal government.
B)They may do so with the approval of their state senators.
C)This is statutorily forbidden.
D)They may do so with voter approval.
D)
Explanation
The amount of GO debt that a municipal government may incur can be limited by state or local statutes to protect taxpayers from excessive taxes. In order to issue bonds that would exceed this borrowing limit voter approval would be needed??that is, the approval of those who would be paying the taxes.
Question #28 of 106Question ID: 1268843
Assuming $1,000 par value, a bond priced at $1,200 is trading at
C)
Explanation
When a bond is priced above par value, it is trading at a premium (premium to par).
Question #29 of 106Question ID: 1268864
If the dollar price of a municipal bond is 101 and the basis is 6.10, the nominal yield is
A)
Explanation
For bonds trading at a premium (101), the nominal yield (or coupon) is higher than the basis (YTM). For bonds at a premium, yields from lowest to highest are yield to call (YTC), YTM, current yield, and nominal yield.
Question #30 of 106Question ID: 1268943
Municipal revenue bonds are
B)
Explanation
Municipal revenue bond issues are self-supporting. Given that they do not rely on taxes to support the debt service, they do not require voter approval. Nor are they subject to statutory debt limits as general obligation (GO) bonds are.
Question #31 of 106Question ID: 1268947
Short-term securities that generate funds for a municipality that expects alternate longer-term financing include all of the following except
B)
Explanation
TANs, for example, are used to finance current operations in anticipation of future tax receipts. This helps municipalities to even out cash flow between tax collection periods. Similarly, BANs will be converted to long-term financing through the sale of bonds, and so on. REITs are not a municipal security. They issue shares of beneficial interest in a trust set up for real estate investment.
Question #32 of 106Question ID: 1279910
Which of the following projects would be funded by general obligation (GO) bonds?
B)
Explanation
Schools are funded by state and local taxes which is what backs GO bonds.
Question #33 of 106Question ID: 1268844
An investor purchases a bond in the secondary market at $950. Assuming $1,000 par value, this bond is trading at
B)
Explanation
When a bond is priced below par value, it is trading at a discount (discount to par).
Question #34 of 106Question ID: 1268876
A call feature attached to a bond allows
A)a bondholder to call the issuer for a redemption before the maturity date.
B)an issuer to call in a bond before maturity at times that will benefit the bondholder.
C)a bondholder to hold a bond beyond the maturity date benefitting the bondholder.
D)an issuer to call in a bond before maturity at times that will benefit the issuer.
D)
Explanation
A call feature attached to a bond allows an issuer to call in a bond before maturity. Issuers will do this when interest rates have fallen. 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%. Obviously, the ability to call in the bond benefits the issuer.
Question #35 of 106Question ID: 1268831
Bonds can typically be issued with
C)
Explanation
The three types of maturities that bonds can typically be issued with are term, serial, or balloon maturities. Note that there is no series maturity type.
Question #36 of 106Question ID: 1268845
With interest rates in the marketplace at 7%, it could be expected that in the secondary market, a bond carrying a 5% coupon would trade
A)
Explanation
While bond prices like those of other securities are impacted by supply and demand, they also have a unique inverse relationship to interest rates. As interest rates rise in the marketplace, the prices of bonds trading in the secondary market will fall, and as interest rates fall in the marketplace, the prices of bonds trading in the secondary market will rise.
Question #37 of 106Question ID: 1268834
Which of the following would all be considered the same regarding yields on debt instruments?
A)
Explanation
The interest rate the issuer has agreed to pay the investor is the coupon yield. The coupon yield is also called the stated or nominal yield.
Question #38 of 106Question ID: 1268846
An investor owns a bond carrying a 4% coupon. Interest rates in the marketplace have been moving downward and are currently at 2.5%. Given the current interest rates in the marketplace, this investor should see
B)
Explanation
Prices of bonds trading in the secondary market have an inverse relationship to interest rates. As interest rates rise in the marketplace, the prices of bonds trading in the secondary market will fall, and as interest rates fall in the marketplace, the prices of bonds trading in the secondary market will rise. Once the coupon rate is established by the issuer, it remains unchanged throughout the life of the bond.
Question #39 of 106Question ID: 1268941
Which of the following are true of municipal revenue bonds?
They are secured by a specific pledge of property.
They are a type of general obligation bond.
They are not subject to statutory debt limits.
They are backed by a facilities ability to generate revenue.
C)
Explanation
The two types of municipal bonds are general obligation (GO) and revenue bonds. Revenue bonds are not secured by a specific pledge of property; instead they are backed by project revenue. Unlike GO bonds, they are not subject to any statutory debt limits.
Question #40 of 106Question ID: 1326371
When a bond is purchased at a premium the current yield will be
B)
Explanation
The coupon rate, the stated rate, the fixed rate and the nominal rate all mean the same. It is the amount the bond will pay each year. On a premium bond the coupon rate is always higher than the current yield.
Question #41 of 106Question ID: 1268944
A state government has outstanding debt that it issued to finance toll roads, sports facilities, and public housing projects. All of these issues are examples of
These are all examples of municipal revenue bonds, which are bonds issued to finance a project or facility with the bonds' debt service backed by the facility's revenue stream. The revenue might come from rents, tolls, or admission fees, among other sources.
Question #42 of 106Question ID: 1268839
Each year a bond pays semiannual interest payments of $20. This bond has a nominal yield of
D)
Explanation
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%).
Question #43 of 106Question ID: 1279908
Municipal bonds are issued by all of the following government entities except
D)
Explanation
Municipal bonds can be issued by any government entity except the federal government.
Question #44 of 106Question ID: 1268945
For revenue bonds issued by a state or municipality, which of the following is true?
D)
Explanation
Revenue bonds are not backed by the full faith and credit of the municipality that issues them. Instead, they are backed by the revenue produced by the project or facility that they support. In that light, the revenue must be large enough to cover the interest and principal payments if those obligations are to be met.
Question #45 of 106Question ID: 1268840
The coupon on a bond can be described as its
B)
Explanation
The coupon on a bond is also known as the nominal or stated yield and indicates the annual interest paid. For example, a 4% bond pays $40 of interest per year (4% ?? $1,000 par value).
Question #46 of 106Question ID: 1279877
Two benefits of owning preferred stock over common stock are
C)
Explanation
Liquidation and payment of dividends are two areas in which preferred stock has a benefit over common stock. Dividends are not guaranteed and rising interest rates are a negative. Preferred gets paid after debt, wages, and taxes.
Question #47 of 106Question ID: 1268875
Given bonds are interest-rate sensitive, which of the following statements regarding put and call features for bonds are true?
The put feature would likely be exercised if interest rates fall.
The put feature would likely be exercised if interest rates rise.
The issuer will likely call bonds if interest rates fall.
The issuer will likely call bonds if interest rates rise.
B)
Explanation
A put feature on a bond benefits the bondholder. Once the bond becomes puttable, its holder has the right to put it back to the issuer at par. At this point, the bondholder is insulated from rate risk (the risk that rates will rise, putting downward pressure on bond prices). Once puttable, the bond will not trade below par. Issuers will likely call bonds if rates fall. The issuer can issue new bonds at a lower rate and use the proceeds to call in the original bond.
Question #48 of 106Question ID: 1289015
T-notes are delivered in
A)
Explanation
All U.S. government issues are delivered in book entry.
Question #49 of 106Question ID: 1268867
A bond having a call feature
A)can be redeemed before maturity at the bond holder's option.
B)must be redeemed before the bond matures.
C)is guaranteed not to be redeemed before maturity.
D)can be redeemed before maturity at the issuer's option.
D)
Explanation
A bond with a call feature may be redeemed before maturity at the issuer's option. There is no guarantee that it will or will not be called, nor is there a requirement that it must be called.
Question #50 of 106Question ID: 1268880
A convertible feature for a corporate bond allows
A)an issuer the ability to convert its debt obligations over to voting stockholders who would then hold the debt paper.
B)an issuer to convert its debt securities to those offered by another issuer.
C)a bondholder to convert a debt instrument into securities that give the investor ownership rights.
D)a bondholder the opportunity to exchange a debt instrument for another debt instrument with shorter maturity.
C)
Explanation
Corporate bonds with convertible features allow the bondholders to convert the debt obligation they hold into shares of stock. Stock gives the holders an equity position in the company with ownership rights.
Question #51 of 106Question ID: 1279881
When interest rates in the marketplace move up, what happens to the coupon rate on existing bond?
B)
Explanation
The coupon rate (the fixed rate, the nominal rate, the stated rate) is fixed when the bond is issued and does not change.
Question #52 of 106Question ID: 1289016
STRIPS are delivered in
A)
Explanation
All U.S. government issues are delivered in book entry.
Question #53 of 106Question ID: 1268829
With a balloon maturity,
D)
Explanation
With a balloon maturity, the issuer repays part of the bond's principal before the final maturity date over scheduled serial maturity dates, but pays off the major portion of the bond principal on the final maturity date.
Question #54 of 106Question ID: 1268937
Regarding municipal general obligation (GO) bonds, which of the following is true?
C)
Explanation
Municipal debt limits, known as statutory debt limits, can make a bond safer for investors. These limit the amounts of debt that the municipality can incur. The lower the debt limit, the less risk of excessive borrowing and default by the municipality, and thus the issuer's securities are safer for investors.
Question #55 of 106Question ID: 1268934
Your customer has a portfolio consisting entirely of municipal-issued securities. Therefore, the entire portfolio would have to consist of
B)
Explanation
Two categories of municipal securities are general obligation (GO) bonds and revenue bonds.
Question #56 of 106Question ID: 1268861
A customer buys a 10% bond with a current yield of 12% and holds the bond until one year before maturity. The bond is sold when current interest rates are 8%. Which of the following statements are correct?
The bond was purchased at a premium.
The bond was purchased at a discount.
The bond was sold at a premium.
The bond was sold at a discount.
A)II and IV
B)II and III
C)I and III
D)I and IV
B)
Explanation
When the current yield (12%) is higher than the coupon (10%), it means the bond was purchased at a discount. Because the question tells us that current interest rates are now 8%, the bond maturing within a year with a 10% coupon would now be able to be sold at a premium.
Question #57 of 106Question ID: 1268818
A bond certificate represents
A)the borrower's right to receive interest on the amount it received.
B)the lender's obligation to repay the amount it borrowed plus interest.
C)the lender's right to receive an ownership share in the entity it leant the funds to.
D)the borrower's obligation to repay the amount it borrowed plus interest.
D)
Explanation
When an investor lends money to an entity, the certificate evidencing the loan is known as a bond. This certificate represents the borrower's obligation to pay the investor back the amount it borrowed plus interest.
Question #58 of 106Question ID: 1268935
A statutory debt limitation imposed on a municipality restricts its authority regarding
A)insuring municipal bond issues.
B)issuing general obligation (GO) bonds.
C)raising tax rates.
D)selling municipal revenue bonds.
B)
Explanation
A municipality may be limited by statute regarding the amount of GO debt it may incur, thus limiting the GO bonds it can issue.
Question #59 of 106Question ID: 1268822
The time to maturity for debt instruments
B)
Explanation
While 5- to 30-year maturities are common, the length of time to maturity can be shorter or longer.
Question #60 of 106Question ID: 1279880
Accrued interest on corporate bonds is calculated using
B)
Explanation
Corporate and municipal bonds use the artificial 30-day, 360-day calendar, but government bonds use actual days.
Question #61 of 106Question ID: 1289017
Most municipals pay interest that is tax free at the federal level. Which one of the following is a taxable municipal bond?
B)
Explanation
BABs are Build America Bonds that were issued without the tax free status. The others are tax-free municipal notes. Though BABs are not covered in the SIE material, the other three items are, and are all tax free. Note that industrial development revenue bonds (IDRs or IDBs) are also taxable for investors subject to the alternative minimum tax (AMT).
Question #62 of 106Question ID: 1268933
In safety of principal, municipal bonds are considered second only to
C)
Explanation
Municipal securities are considered second in safety of principal only to U.S. government and agency issues.
Question #63 of 106Question ID: 1279911
Which of the following would be funded by general obligation (GO) bonds?
C)
Explanation
City halls are funded by local taxes which is what backs GO bonds.
Question #64 of 106Question ID: 1268852
An investor purchases a bond at $900 with a 5% coupon and a 5-year maturity. The bond has a current yield of
D)
Explanation
Current yield is determined by dividing annual interest (coupon) payment by the current market price of the bond ($50 ?? $900 = 5.6%). Years to maturity is not a factor in calculating current yield.
Question #65 of 106Question ID: 1268823
A serial bond is best described as
A)the issuer repaying part of the bond's principal before the final maturity date, but paying off the largest portion of the bond at maturity.
B)debt structured so that the principal of the whole issue matures at one time.
C)portions of bond principal scheduled to mature at intervals over a period of years until the entire balance has been repaid.
D)bonds in which the principal is secured by food-quality grains.
C)
Explanation
A serial bond issue schedules portions of the principal to mature at intervals over a period of years until the entire balance has been repaid.
Question #66 of 106Question ID: 1268866
An investor is able to purchase a bond at $725, well below par value. Buying the bond so cheaply tells us that the investors return at maturity
D)
Explanation
A $1,000 par value bond purchased at $725 is bought at a discount to par. Whenever a bond is purchased for an amount less than will be received at maturity ($1,000 par), the discount initially paid increases the return. In other words, in addition to receiving the coupon interest payments, the investor will also receive at maturity an additional $275 more than the $725 paid when the bond matures.
Question #67 of 106Question ID: 1268858
6% XYZ debentures are trading for $1,200 while similarly rated bonds are being offered at 4.5%. What is the current yield on the 6% XYZ debentures?
D)
Explanation
Current yield is defined as the annual income (or coupon rate) from a bond divided by the bond's current market price ($60 ?? $1,200 = 0.05 or 5%). Accordingly, the current yield (5%) is lower than the coupon rate (6%) because the bond is trading at a premium.
Question #68 of 106Question ID: 1268865
An investor pays 102 ($1,020) for a $1,000 par value bond. At maturity,
A)
Explanation
A $1,000 par value bond purchased at 102 ($1,020) is bought at a premium to par. Whenever a bond is purchased for an amount greater than will be received at maturity, the premium paid decreases the return. In this case, the additional $20 paid when the bond was initially purchased reduces the overall return from the interest payments received.
Question #69 of 106Question ID: 1268883
An investor anticipates that a fall in interest rates is imminent. This investor, now wanting to purchase bonds in order to lock in interest income, would likely buy
D)
Explanation
If rates fall, bonds are likely to be called. Therefore, an investor who anticipates that rights might fall soon would look to purchase bonds that are not callable (noncallable). In this way, the investor is assured of receiving the coupon interest payments until maturity.
Question #70 of 106Question ID: 1268849
Which of the following would be least likely to directly impact a bonds yield?
C)
Explanation
A bond's yield expresses the cash interest payments in relation to the bond's value. Yield is determined by the issuer's credit quality, prevailing interest rates, time to maturity, and any features the bond may have. The number of bonds in a single issue is generally determined by how much capital the issuer needs to borrow at the time of issue, while its yield is something that will fluctuate as the bond trades in the secondary market and gets closer to maturity.
Question #71 of 106Question ID: 1268827
A balloon maturity for an issuer's debt securities is most accurately described as
A)a later final maturity within a serial issue of bonds that contains a disproportionately large percentage of the principal amount of the original issue.
B)a serial issue of bonds on which the interest rate periodically changes over the life of the issue for all bonds remaining outstanding.
C)an obligation granting the bondholder the right to require the issuer to purchase the bonds at par at a certain time before maturity.
D)bonds comprising all of a particular issue that come due in a single maturity.
A)
Explanation
A balloon maturity is generally distinguished from term bonds by the presence of serial maturities in the years immediately preceding the final maturity date. While some of the principal is paid back on the serial dates, the major portion of the principal is paid back on the final maturity date.
Question #72 of 106Question ID: 1268854
A bond having an 8% coupon is selling with an 8.25% yield to maturity. Which of the following statements are true?
Nominal yield is higher than yield to maturity (YTM).
Current yield is higher than nominal yield.
Nominal yield is lower than yield to maturity (YTM).
Current yield is lower than nominal yield.
A)I and IV
B)II and III
C)I and III
D)II and IV
B)
Explanation
The bond is offered with a YTM of 8.25%. Because the YTM is higher than the 8% coupon, the bond is trading at discount to par. For discount bonds, the nominal yield is lower than both the current yield and the YTM.
Question #73 of 106Question ID: 1268833
The coupon payable on a bond may also be referred to
C)
Explanation
The coupon rate is also called the stated or nominal yield. It is the rate of interest the issuer has agreed to pay the investor for use of the funds loaned to the issuer.
Question #74 of 106Question ID: 1268841
A bond with a 4.5% stated yield might make
annual interest payments of $45.
annual interest payments of $450.
semiannual interest payments of $2.50.
semiannual interest payments of $22.50.
A)I and III
B)I and IV
C)II and IV
D)II and III
B)
Explanation
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.
Question #75 of 106Question ID: 1279912
One of the major benefits of municipal bonds is
D)
Explanation
Municipal bonds are federal-tax free and may be state- and local-tax free if the investor lives in that state. They pay a lower interest rate because of the tax-free status and are considered second in safety to U.S. government bonds.
Question #76 of 106Question ID: 1312235
A customer buys a callable 5% coupon bond at par that will mature in 10 years. Which of the following statements is true?
A)Yield to call (YTC) is lower than yield to maturity (YTM).
B)Yield to call (YTC) is higher than yield to maturity (YTM).
C)Yield to call (YTC) is the same as yield to maturity (YTM).
D)Nominal yield is higher than either yield to maturity (YTM) or yield to call (YTC).
D)
Explanation
This bond was purchased at par. If a bond is trading at par, the nominal yield (coupon rate) = current yield (CY) = YTM = YTM. YTC is higher than YTM if the bond is trading at a discount to par. YTC is lower than YTM if the bond is trading at a premium over par. Nominal yield is higher than either YTM or YTC if the bond is trading at a premium over par.
Question #77 of 106Question ID: 1268860
A bond has a 7% coupon and is currently offered at a price of 102. Which of the following yields could be the yield to maturity (YTM) for this bond?
A)6.55%
B)7.09%
C)7.07%
D)7.02%
A)
Explanation
For a bond trading at a premium (102), the ranking of yields from lowest to highest is yield to call (YTC), YTM, current yield, and nominal yield. Therefore, the YTM for this bond must be less than the nominal yield of 7%.
Question #78 of 106Question ID: 1268855
The current yield on a bond with a coupon (nominal) rate of 7.5% currently selling at 105? is approximately
A)
Explanation
A bond with a coupon rate of 7.5% pays $75 of interest annually. Current yield equals annual interest amount divided by bond market price, or $75 ?? $1,055 = 7.109%, or approximately 7.1%.
Question #79 of 106Question ID: 1279885
All of the following may be callable except
D)
Explanation
Fixed income and debt securities may have a call feature. Common stock does not.
Question #80 of 106Question ID: 1268838
A bond with a 3% stated yield and a $1,000 par value would pay how much in annual interest?
A)$3
B)$30
C)Not determinable
D)$300
B)
Explanation
The amount of interest payable annually as the stated, nominal, or coupon yield is calculated as follows: rate 3% ?? par value ($1,000) = $30.
Question #81 of 106Question ID: 1345706
If a callable bond is priced at par, which of the following is true?
C)
Explanation
For any bond priced at par, all of the yields are equal; nominal = CY = YTM = YTC if callable.
Question #82 of 106Question ID: 1268853
An investor purchases a bond offered at par. The bond has a coupon rate
C)
Explanation
When a bond is selling at par, its coupon or nominal rate, current yield, and yield to maturity are all the same.
Question #83 of 106Question ID: 1268820
An issuer of bonds can be
A)
Explanation
Debt instruments (bonds) can be issued by corporations, and both federal and municipal government entities.
Question #84 of 106Question ID: 1268824
All of the following are types of maturities for debt instruments except
C)
Explanation
The three types of maturities for debt instruments are term, serial, and balloon.
Question #85 of 106Question ID: 1268819
Interest is best described as
A)
Explanation
Interest is the rate of return above the principal sum received by a lender (investor) from a borrower. Interest is rate of return the investor receives for use of the funds over the life of the loan.
Question #86 of 106Question ID: 1268856
Which of the following statements regarding $1,000 par value 6.5% bond trading offered at 110 is true?
C)
Explanation
This bond is trading at a premium (110 or $1,100). Given the bond is trading at a premium, the current (stated) yield will be higher than its YTM. A bond's current yield is calculated by dividing its annual interest ($65) by its current (market) price ($1,100), which in this case equals 5.9%
Question #87 of 106Question ID: 1268832
The coupon rate on a debt security represents
A)
Explanation
The coupon rate on a debt security represents the interest rate the issuer has agreed to pay the investor for use of the funds loaned to the issuer.
Question #88 of 106Question ID: 1268878
To the benefit of the issuer, a callable bond is likely to be called when interest rates
D)
Explanation
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.
Question #89 of 106Question ID: 1268874
Bonds can be issued with additional features attached, making them more attractive to investors. All of the following can be considered such features except
D)
Explanation
The features most commonly attached to a bond issue would be having the bond be callable, puttable, or convertible. Each of these features in its own way might make the issue more attractive to an investor. All bonds have a stated maturity, and as such, this would not be considered an additional feature.
Question #90 of 106Question ID: 1268842
An investor owns a bond with a 3.5% nominal yield making semiannual interest payments. On each interest payable date, the investor can expect to receive how much?
D)
Explanation
A bond with a nominal yield of 3.5% pays $35 in interest annually (3.5% ?? $1,000 par value). Given the bond makes semiannual interest payments, each of those payments would be in the amount of $17.50.
Question #91 of 106Question ID: 1268816
Which of the following statements regarding bond interest is true?
C)
Explanation
Bond prices have an inverse relationship to interest rates. If interest rates go up, bond prices for those bonds trading in the secondary markets will go down. Conversely, if interest rates decline, bond prices rise. Par value is a fixed number for the life of the bond.
Question #92 of 106Question ID: 1268836
An investor has purchased a bond with a 5% coupon. This investor will receive
A)
Explanation
The coupon represents the annual rate of interest payable. A bond with a 5% coupon will pay $50 interest annually (5% ?? $1,000 par value = $50).
Question #93 of 106Question ID: 1268817
A certificate stating a borrower's obligation to pay back a specific amount of money on a specific date to an investor is
A)a stock certificate.
B)a bond or stock power.
C)an ownership certification.
D)a bond.
D)
Explanation
A bond is best described as a certificate stating a borrower's obligation to pay back a specific amount of money on a specific date to an investor. A bond certificate also states the borrower's obligation to pay the investor a specific rate of interest for the use of the funds.
Question #94 of 106Question ID: 1268877
A put feature attached to a bond allows
A)an issuer to put additional bonds to existing bondholders before the maturity date of bonds they hold.
B)a bondholder to put a bond back to the issuer for redemption at times that will benefit the bondholder.
C)a bondholder to hold a bond beyond the maturity date benefitting the bondholder.
D)a bondholder to put a bond back to the issuer for redemption at times that will benefit the issuer.
B)
Explanation
A put feature attached to a bond allows a bondholder to put a bond back to the issuer for redemption before maturity. Bondholders will do this when interest rates have risen. For example, if a bondholder has a bond paying 4% and interest rates have risen to 6%, why settle for a 4% return when prevailing market rates are now up to 4%? Better to put the 4% bond back to the issuer for redemption and then purchase a new bond paying the prevailing higher rate. Obviously, the ability to put the bond back to the issuer benefits the bondholder.
Question #95 of 106Question ID: 1268873
At the time of maturity, an investor realizes that the overall return on the investment was actually greater than the coupon rate stated on the bond when purchased. This most likely would have occurred because the bond had initially been purchased
B)
Explanation
Bonds are redeemed at par. When a bond is purchased at a discount (less than will be received at the time the bond matures), that discounted amount will increase the overall return of the bond, making it greater than the coupon rate. If the discount bond is called before it matures, the increased return due to the discount purchase would still occur but would now be accelerated.
Question #96 of 106Question ID: 1268857
A bond with 10 years to maturity and callable in five years at par is sold at a discount. Rank the following yields from lowest to highest.
Nominal yield
Current yield
Yield to call (YTC)
Yield to maturity (YTM)
A)I, II, IV, III
B)II, I, IV, III
C)IV, II, III, I
D)I, II, III, IV
A)
Explanation
The bond is trading at a discount. The lowest of all yields for a discount bond is the nominal or stated yield (coupon rate), which is a fixed percentage of par. Next would be the current yield and then YTM. The highest possible return to the owner of a bond purchased at a discount would occur if the bond were called before maturity, because less time must elapse for the investor to receive the discount.
Question #97 of 106Question ID: 1279875
A bond that is structured so that the principal of the whole issue matures at once is
A)a serial bond.
B)a balloon bond.
C)a term bond.
D)a series bond.
C)
Explanation
With a term bond, the entire offer matures at the same time. A serial bond has portions maturing over a period of years. A balloon is a hybrid of a term and a serial maturity. Series is not a type of bond maturity.
Question #98 of 106Question ID: 1268851
Which of the following expressions describes the current yield of a bond?
A)
Explanation
The current yield on a bond is calculated by dividing the annual interest (coupon) payment by the current market price of the bond: Annual coupon payment ?? market price = current yield.
Question #99 of 106Question ID: 1268821
An investor lending money to an entity receives back the principal amount of the loan on
C)
Explanation
The date that the principal amount of a loan is due to be paid back to an investor is known as the maturity date.
Question #100 of 106Question ID: 1268870
For a callable bond priced at a discount,
A)
Explanation
For callable bonds trading at a discount, YTC will be the highest possible yield, higher than YTM, CY, and the coupon (stated or nominal) yield.
Question #101 of 106Question ID: 1279882
All of the following are corporate secured bonds except
A)
Explanation
Debentures are unsecured. Mortgage bonds are backed by property. Equipment trust certificates are backed by equipment. Collateral trust certificates are backed by securities.
Question #102 of 106Question ID: 1268825
A corporation has issued a single bond having successive maturity dates set from 2020 through 2030. This is known as what type of bond?
A)Term
B)Serial
C)Balloon
D)Series
B)
Explanation
Serial maturity bonds are all issued at one time and mature in successive years. Note that there is no series maturity type.
Question #103 of 106Question ID: 1279878
If a bond is trading at a premium, rank the following rates from low to high.
A)
Explanation
The order from low to high is yield to call, yield to maturity, current yield, nominal yield.
Question #104 of 106Question ID: 1268850
Which of the following are fixed at the time a bond is issued?
A)
Explanation
Coupon, nominal, or stated yield is set at the time of issue and is a fixed percentage of the bond's par value.
Question #105 of 106Question ID: 1279884
All of the following are names for the rate stated on the face of the bond except
D)
Explanation
The current yield is calculated by dividing the annual interest payment amount by the current price of the bond. The others are all the same as the stated rate and are calculated by dividing the annual interest payment amount by $1,000.
Question #106 of 106Question ID: 1279913
Regular way settlement for Treasury bills is
D)
Explanation
All U.S. government issues settle next business day (T+1).
