Unit 1

Front 1

An investor has purchased convertible bonds issued by ABC. The common stock of ABC has risen dramatically in recent months. The price of the bonds will most likely reflect the current market value of the company's:
 A) pre-emptive rights.
 B) common stock.
 C) preferred stock.
 D) warrants.

Back 1

A convertible bond is converted into common stock issued by the company. If the stock's current price is above parity, it will tend to have an upward effect on the price of the bond.

Front 2

A debt security issued by the City of Chicago that is backed by the rents received from a corporation leasing industrial park facilities is likely to be what kind of bond?
 A) General obligation.
 B) Convertible.
 C) Industrial development revenue.
 D) Collateral trust.

Back 2

Industrial Development Revenue bonds (IDRs) are used to finance municipal projects, such as industrial parks, that are in turn leased to private corporations. The lease payments serve as security for the bond.

Front 3

Which of the following statements regarding significant interest rates in the U.S. economy is NOT true?
 A) The discount rate is the rate the New York Federal Reserve Bank charges for short-term loans to member banks.
 B) The prime rate is the interest rate that large U.S. money center commercial banks charge their most creditworthy corporate borrowers.
 C) The federal funds rate is the rate the Federal Reserve charges for overnight loans to member commercial banks.
 D) The broker call loan rate is the interest rate banks charge broker/dealers on money they borrow to lend to margin account customers.

Back 3

The federal funds rate is the rate the Federal Reserve charges for overnight loans to member commercial banks.
The federal funds rate is the rate that member banks charge each other for overnight loans of $1 million or more.

Front 4

What happens to outstanding fixed-income securities when market interest rates drop?
 A) Yields increase.
 B) Coupon rates increase.
 C) Prices increase.
 D) Short-term fixed-income securities are affected most.

Back 4

When interest rates drop, the price of outstanding bonds rises to adjust to the lower yields on bonds of comparable quality.

Front 5

Jack Smith, in the 35% tax bracket, has an opportunity to buy a 5.3% municipal bond. What corporate yield would provide an equivalent return?
 A) 5.3%.
 B) 8.15%.
 C) 3.5%.
 D) 15.2%.

Back 5

To determine the taxable equivalent yield, divide the tax-free yield by the complement of the individual's tax bracket (1 − the tax bracket %). 5.3% / 65% = 8.153. Note: the corporate bond would have to yield more than the municipal bond to provide the same after-tax return, but not almost triple the return, as called for with the 15.2% corporate yield.