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32 Cards in this Set
- Front
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Debt instruments put up for auction by the US Treasury that offer intermediate maturities BEST describes:
A) Treasury bonds B) Anticipation notes C) Treasury bills D) Treasury notes |
Answer: D
T-notes are the intermediate maturity (1-10 yrs). T-bills are short term (less than 1 yr) T-bonds are long term (10 yrs or more) Anticipation notes are ST revenue notes
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Debt normally issued by big corporations with reliable credit ratings who seek to finance short term needs BEST describes:
A) T-bills B) Step-up CDs C) Commercial paper D) Revenue anticipation notes |
Answer: C
Also known as promissory notes, this is the definition of commercial paper. They are short term corporate issued instruments sold at a discount and maturing at par. |
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The NAV (net asset value) of an international bond fund can be expected to increase if:
1. interest rates rise abroad 2. interest rates fall abroad 3. the US dollar strengthens 4. the US dollar weakens |
Answer: 2 & 4
If interest rates fall, bond prices will rise, thus increasing the NAV of a bond portfolio. If the US dollar weakens, the value of other currencies will rise. This would also increase the NAV for a portfolio of international bonds. |
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All of the following trade flat EXCEPT:
A) T-bills B) bankers' acceptances C) commercial paper D) negotiable CDs |
Answer: D
While most money-market securities are zeroes and trade flat, negotiable CDs do trade with accrued interest. |
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Primary Dealers in US Gov't securities are selected by:
A) Financial Industry Regulatory Authority (FINRA) B) Securities & Exchange Commission (SEC) C) Federal Reserve Board (FRB) D) Securities Investors Protection Corp (SIPC) |
Answer: C
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Money market instruments guaranteed by a bank that are used to provide capital for exporters to foreign countries are called:
A) foreign bills B) banker's acceptances C) eurodollars D) ADRs |
Answer: B
BAs provide short-term financing for importers and exporters. |
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Advantages of owning a real estate DPP Program include all of the following EXCEPT:
A) depletion B) appreciation C) cash flow D) depreciation |
Answer: A
It is impossible to deplete real estate; depletion only applies to natural resources, such as oil or gas. |
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If your customer wants to set aside $40K for when his child starts college, but does NOT want to endanger the principal, you should recommend:
A) municipal bonds for their tax benefits B) corporate bonds with high rates of interest C) common stock D) Treasury STRIPS |
Answer: D
Treasury STRIPS are guaranteed by the US Gov't, so there is no chance of default. They are zero-coupon bonds and offer no current income, which is appropriate for a client who wants 100$ return paid at a future date for college expenses. |
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Ginnie Mae pass throughs will pay back both principal and interest:
A) monthly B) annually C) quarterly D) semiannually |
Answer: A
GNMA securities are called pass-through certificates because the monthly home mortgage payments, which consist of both principal and interest, pass through to the GNMA investor monthly. |
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For which of the following would the net revenue to debt service ratio be applicable?
A) Tax Anticipation Notes B) GO Bonds C) School Bonds D) Hospital Bonds |
Answer: D
This is the Coverage ratio. Because revenue bonds are only backed by funds generated by a specific source, it is important that net revenues exceed debt service requirements. Hospitals are often built withe the proceeds of revenue bond issues. |
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Your customer wishes to lock in a LT yield with minimal risk and is not interested in regular income. Which of the following securities should you recommend?
A) Treasury STRIPS B) Treasury bonds C) Corporate A-rated zero coupon bonds D) Treasury Bills |
Answer: A
The Treasury STRIPS is LT, no interim income, and has a locked-in yield since it is purchased at a discount from par. The T-bill is ST, the T-bond provides semiannual interest and the corporate zero is riskier than the STRIPS. |
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Your customer is interested in LT corporate bonds. Which of the following interest rate environments makes a call protection feature most valuable to your customer?
A) Rising interest rates B) Volatile interest rates C) Stable interest rates D) Declining interest rates |
Answer: D
A call protection feature gives the bondholder a specified length of time during which the bond cannot be called (which is more likely to happen during declining interest rates). |
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If a bond has a basis price of 7%, which of the following would MOST likely be refunded?
A) Coupon 7 1/2%, maturing in 2033, callable in 2013 at 103 B) Coupon 7 1/2%, maturing in 2033, callable in 2013 at 100 C) Coupon 6 1/2%, maturing in 2033, callable in 2013 at 100 D) Coupon 6 1/2%, maturing in 2033, callable in 2013 at 103 |
Answer: B
An issuer is most likely to refund the issue that will cost it the most money over the life of the issue. Always use the following order in making this choice:
1) Highest coupon 2) Lowest call premium 3) Earliest call date 4) Longest maturity |
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MNO is planning to raise capital through an offering of 30 year bonds. Which call price would be MOST beneficial to MNO?
A) 102 B) 104 C) 106 D) 110 |
Answer: A
MNO would benefit most from the ability to call bonds at the lowest possible price. The call feature enables MNO to buy the bonds before maturity to reduce their fixed interest costs. |
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Moody's bond ratings are based primarily on an issuer's:
A) financial strength B) expected marketability of a bond issue C) capitalization D) expected trading volume of a bond issue |
Answer: A
Bond ratings are credit ratings for an issuer and measure the issuer's ability to repay principal and interest, and thus, its financial strength. |
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A bond would be considered speculative below which of the following S&P's ratings?
A) BBB C) B D) BB |
Answer: A
BBB is the lowest investment-grade rating assigned by S&P. |
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An investor anticipating a fall in interest rates would likely purchase:
A) noncallable bonds B) callable bonds C) noncallable & callable bonds D) none of these |
Answer: A
If rates fall, bonds are likely to be called. |
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A 7% bond is selling to yield 4 1/2%. The next time interest is paid, an investor who owns $10K face amount of the bonds will receive:
A) 700 B) 350 C) 225 D) 450 |
Answer: B
The bond is a 7% bonds. The total amount paid each year on 10 bonds = $700. 6 months interest = $350. |
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A Notice of Defeasance informs bondholders that:
A) the purpose of the issue has been defeated and the bonds are called. B) the facility has been condemned and the bonds have been called. C) the interest and principal will not be paid. D) the funds for the principal and the interest are in escrow. |
Answer: D
A defeased issue is one in which the issuer placed US government securities in the bank as collateral for the old issue. |
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If interest rates are falling, issuers will likely call which of the following bonds?
1. Bonds with low coupons 2. Bonds with high coupons 3. Bonds trading at a discount 4. Bonds trading at a premium |
Answer: 2 & 4
An issuer will call higher coupon bonds first because the interest payments on them are more costly. Bonds with higher coupons are the ones trading at a premium (above par), as they are more desirable to investors and demand for them pushes their prices up. |
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A customer has 10 municipal bonds which each increased in yield by 1 BASIS point. For the 10 bond positions, this increase is equal to:
A) $0.50 B) $5.00 C) $10.00 D) $1.00 |
Answer: D
1 basis point = 1/100 of a point 1 point = $10, so 1 basis point = $0.10 .10 x 10 = $1.00 |
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A debenture maturing in 2012 is bid at 77 7/8 and asked at 78 3/4. Which of the following are TRUE of the spread?
1. 7/8 per bond 2. %0.875 per bond 3. $8.75 per bond 4. $87.50 per bond |
Answer: 1 & 3
7/8 = .875 - Per bond, this is $8.75 7/8 x 1% of $1000 = .875 x $10 = $8.75 |
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A customer bought a bond that yields 6 1/2% with a 5% coupon. If the bond matures at this point, the customer will receive:
A) $1025 B) $1000 + a call premium C) $1065 D) $1050 |
Answer: A
Upon redemption of a bond, whatever current interest rates may be, the investor receives par ($1000) + the final SEMIANNUAL interest payment ($25 in this case), for a total of $1025. |
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Which of the following would be considered funded debt?
A) US Treasury bonds maturing in 20 years B) Commercial paper maturing in 270 days C) Municipal revenue bonds maturing in 10 years D) Corporate debt maturing in 10 years |
Answer: D
Funded debt is simply another name for medium-to-long term corporate debt. If a corporate bond has 5 or more years to maturity, it is said to be funded debt of the issuer. |
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When a corporation issues a LT bond, one of the factors influencing the bond's interest rate is the credit rating of the issuer. Another factor is the:
A) par value of the bond B) tax status of the bond C) cost of money in the marketplace D) call loan rate |
Answer: C
Money is a commodity, and its cost is determined by supply and demand. When the cost of money is higher, borrowers incur a higher interest rate. The call loan rate impacts broker/dealers, not issuers of bonds. |
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A corporation with a single outstanding bond issue chooses to refund this debt. This means that the corp:
A) replaces one debt with another B) issues stock to replace the bonds C) buys back the bonds, at par, from the bondholders, using corp profits D) established a sinking fund for use in making regular open market purchases of the bonds |
Answer: A
Refunding is synonymous with refinancing. When we refinance, we take out a new debt and use the proceeds of that debt to pay off the old one. |
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Defeasement can be BEST described as a:
A) Refundment B) matched sale C) prerefunding D) refinancing |
Answer: C
Pre-refunding involves issuing one bond to call an outstanding bond at a future date. When this is done, the money raised is held in escrow to redeem the outstanding bonds at a future call date. What was originally pledged to back the bonds is now replaced by escrowed funds. The issuer no longer has to show these bonds as an obligation on its debt statement. This is known as defeasement. The escrowed funds are invested in US government securities. |
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A city waterworks publishes a tombstone offering a $20M new issue of bonds priced at 100.65%. The bonds are priced above par because the:
A) price reflects the fact that the coupon rate for the bonds at issuance is more than the rates of similar newly issued bonds available on the market. B) amount exceeding par includes accrued interest C) amount exceeding par represents the underwriter's spread D) municipality has applied the standard municipal bond servicing charge to the issue price. |
Answer: A
If a bond issue is priced above par, it is usually because the coupon rate at which the bonds were issued is more than the prevailing rate for other newly issued bonds. |
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All of the following statements regarding municipal bond put options are true EXCEPT that the put option:
A) is generally exercisable immediately after the bond has been issued. B) protects the holder from depreciation because of rising interest rates. C) protects the holder from a loss of principal when bond prices fall. D) ensures that the holder will never receive less than par for the bond. |
Answer: A
Put options are exercisable only after the put protection period has passed; this protects the issuer. |
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Two conservative customers in their 50s are interested in preserving principal and high-current income from their investments. In which order, from first to last, are the following bonds ranked in meeting your customer's needs?
1. A1 Fort Worth Gas 9 1/4s of '25 2. AA+ San Antonio Transit 9 1/4s of '25 3. Aaa Texas Telecom 9 1/4s of '25 4. AA- Dallas Electric 9 1/4 of '25 |
Answer: 3, 2, 4, 1
Because the maturity and coupon rates are all the same, we can rank the bonds by rating. Based on the ratings given, the highest quality bond is Aaa, followed by AA+, AA- and A1. |
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All of the following have been recognized by the SEC under the Credit Rating Agency Reform Act as being registered with the commission to rate debt instruments. Which of the following historically has specialized in ratings for the insurance sector?
A) S&P B) AM Best C) Moody's D) Fitch Ratings |
Answer: B
AM Best issues financial strength ratings measuring insurance companies' ability to pay claims and rate financial instruments issued by insurance companies, such as bonds and notes. They can issue debt and financial strength ratings for other sectors as well, under the Credit Rating Agency Reform Act. |
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Crossover refunding, which is a type of advance refunding, is best described by which of the following statements?
A) The new issue will not be funded by the revenue stream from the project that funded the initial bond offering B) Revenues can never cross over to fund a new issue C) The revenue stream originally pledged to secure the refunded issue continues to pay debt service on those bonds until they mature or are called D) The revenue stream is halted completely from the project until the new bonds are issued. |
Answer: C
Crossover refunding is a method of advance refunding in which the revenue stream originally pledged to secure the refunded bonds continues to be used to pay debt service on those bonds until they mature or are called in by the issuer.
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