• Shuffle
    Toggle On
    Toggle Off
  • Alphabetize
    Toggle On
    Toggle Off
  • Front First
    Toggle On
    Toggle Off
  • Both Sides
    Toggle On
    Toggle Off
  • Read
    Toggle On
    Toggle Off
Reading...
Front

Card Range To Study

through

image

Play button

image

Play button

image

Progress

1/13

Click to flip

Use LEFT and RIGHT arrow keys to navigate between flashcards;

Use UP and DOWN arrow keys to flip the card;

H to show hint;

A reads text to speech;

13 Cards in this Set

  • Front
  • Back

The following is taken from the S&P Bond Guide:



FLB Zr 12 87 87-1/2



What is the coupon rate on this bond?



A) 0.12
B) 87
C) 87.5
D) No coupon

Answer: D



FLB = ISSUER


ZR = ZERO COUPON


12 = YEAR OF MATURITY (2012)


87 = BID PRICE ($870)


87-1/2 = ASK PRICE ($875)

Which of the following statements regarding a bond quoted as QRS Zr 12 is TRUE?



A) The bond pays $120 interest annually.
B) The interest payable is tax free.
C) The bond pays no interest until maturity.
D) The bond pays $12 interest annually.

Answer: C



Zr = Zero coupon bond. Zero coupon bonds are bought at a discount and mature at face value. If held until maturity, the difference between the purchase price and the maturity price is considered interest, though it is taxed on a yearly basis.

Which of the following regarding corporate debentures are TRUE?



1. They are certificates of indebtedness.


2. They give the bondholder ownership in the corporation.


3. They are unsecured bonds issued to finance capital expenditures or to raise working capital.


4. They are the most senior security a corporation can use.

Answer: 1 & 3



Debentures are debt securities that represent unsecured loans of the issuer. They are senior to common and preferred stock in claims against an issuer. They are issued to finance capital expenditures or raise working capital.

Of the following bonds, which has the greatest price volatility?



A) Zero coupon bond with 5 years to maturity


B) Corporate bond fund
C) AA Corporate bond with 7 yrs to maturity
D) Zero coupon bond with 15 years to maturity


Answer: D



The longer the duration of a bond, the greater the volatility will be of its market price when interest rates change. Because zero coupon bonds do not make interest payments but are priced at a deep discount to par, they are more volatile than coupon bearing bonds.

If LMN, Inc. has filed for bankruptcy, in what order would interested parties be paid?



1. Holders of secured debt
2. Holders of subordinated debentures
3. General creditors
4. Preferred stockholders


Answer: 1, 3, 2, 4



The liquidation order is as follows:


-IRS (and other government agencies)


-Secured debt holders


-Unsecured debt holders & general creditors


-Holders of subordinated debt


-Preferred stockholders


-Common stockholders

You have a client who is about to retire and wants to rearrange his portfolio in order to have predictable income. Which of the following would NOT be a good investment vehicle?



A) Income bonds


B) US Treasury note


C) AA rated IDB


D) AA rated debenture

Answer: A



Income bonds, aka adjustment bonds, are issued when a co. is reorganizing and coming out of bankruptcy. Income bonds pay interest only if the co. has enough income to meet the interest payment. As a result, these bonds normally trade flat, without accrued interest. Therefore, they are not suitable for customers seeking income.

Corporate bonds that are guaranteed are:



A) guaranteed as to payment of principal and interest by the US government.
B) guaranteed as to payment of principal and interest by another corporation.
C) insured by Assured Guaranty Corp. (AGC)
D) required to maintain a self-liquidating sinking fund.

Answer: B



A guaranteed corporate bond is one guaranteed by another corporation that typically has a higher credit rating than the issuing corporation and is in a control relationship with it.

Which of the following callable debentures is LEAST likely to be called?



A) 6% maturing in 2017, callable at 102
B) 6% maturing in 2018, callable at 100
C) 8% maturing in 2018, callable at 102
D) 8% maturing in 2024, callable at 100

Answer: A



The bond with the shortest maturity is the least likely to be called, because it will cost the issuer the least in net interest over the life of the bond. When determining which bonds to call, the comparison in order of priority is:


1 - Years to maturity


2 - Coupon rate


3 - Call premiums

Which of the following corporate bonds is backed by other securities?



A) Mortgage bond
B) Equipment trust certificate
C) Debenture
D) Collateral trust bond

Answer: D



Collateral trust bonds are backed by a portfolio of other securities; mortgage bonds are backed by real estate. Equipment trust certificates are backed by equipment. Debentures are backed only by the company's promise to pay.

If ABC Corporation reports a loss for the year, it is obligated to pay interest on all of the following EXCEPT:



A) variable rate bonds
B) nonconvertible bonds
C) convertible bonds
D) adjustment bonds

Answer: D



Even if a corporation reports a loss, the corporation is obligated to pay interest on all of its outstanding debt except for income (adjustment) bonds. Income, or adjustment bonds, require interest to be paid only if declared by the BOD.

Equipment trust certificates are commonly issued by:



A) political subdivisions
B) the US government
C) transportation companies
D) utilities

Answer: C



Equipment trust certificates are corporate bonds commonly issued by transportation companies, such as railroads & airlines. These bonds are backed by equipment (e.g. aircraft) the issuer uses in their business.

An investor seeking a high level of income combined with a moderate level of risk would purchase:



A) mortgage bonds
B) convertible bonds
C) income bonds
D) junk bonds

Answer: A



Bonds provide a semiannual stream of fixed income. Because convertible bonds normally have a lower coupon rate than nonconvertible bonds, and income bonds only pay interest if the co. declares a payment, the best choice is the mortgage bond, which is secured by real estate.

If a customer sells a zero coupon bond before maturity, gain or loss will be the difference between sales proceeds and:



A) par value


B) discounted value
C) accreted value
D) original cost

Answer: C



Zero coupon bonds must be accreted for tax purposes. Each year, the annual accretion is taxable to the holder. In addition, the customer may adjust the cost basis of the zero upward by the amount of the annual accretion.