Deck 19: Types of Fixed-Income Securities

Question 1

The type of institution which typically has home mortgage loans as its largest asset is the

A) commercial bank.
B) brokerage firm.
C) credit union.
D) savings and loan.

Answer 1

D

Question 2

At a commercial bank, a demand deposit is most like a

A) time deposit.
B) NOW account.
C) Banker's Acceptance.
D) savings account.

Answer 2

B

Question 3

Commercial paper

A) carries a high interest rate compared to other corporate debt issues.
B) has an amount outstanding larger than Treasury bills.
C) typically has a one-year maturity.
D) is mainly issued by financial companies such as GMAC.

Answer 3

D

Question 4

U. S. Treasury ______ are issued on a discount basis, with maturities of up to 52 weeks and in denominations of $10,000.

A) bonds
B) notes
C) passbooks
D) bills

Question 5

The type of institution for which all are both owned by its depositors and pays "dividends" to its depositors is the

A) credit union.
B) savings and loans.
C) life insurance companies.
D) commercial bank.

Question 6

Which of the following is NOT a relatively standard type of bond found in the financial markets?

A) collateral trust bond
B) repurchase agreement
C) equipment obligation
E) subordinated debenture

Question 7

Periodic payments made by a bond issuer to reduce, in an orderly manner, the amount of outstanding principal on bond issue over the life of the bond is known as a

A) call feature
B) private placement
C) sinking fund
D) secondary distribution

Question 8

The type of money market instrument typically used to finance foreign trade is

A) repurchase agreement.
B) banker's acceptance.
C) Eurodollar CD.
D) commercial paper.

Question 9

Securities that were issued at a discount from par because of their relatively small coupon payments are known as

A) corporate bonds
B) original issue discount securities
C) revenue bonds
D) on-the-run issues

Question 10

The principal of deposits at commercial banks is insured by

A) FDIC.
B) CUNA.
C) SEC.
D) SIPC.

Question 11

_____ bonds are issued by a state or local unit of government.

A) Corporate-entity
B) Mortgage
C) Government-agency
C) Municipal

Question 12

To qualify as a money market instrument, the obligation must have a maturity of no more than

A) 90 days.
B) 2 years.
C) 1 years.
D) 5 years.

Question 13

Which of the following is NOT a personal savings account at a financial institution?

A) a coupon bond
B) time deposit
C) certificate of deposit
D) passbook account

Question 14

_____ are a hybrid form of security that have characteristics of both common stocks and bonds.

A) Certificates of deposit
B) Discount
C) Call premiums
D) Preferred stocks

Question 15

_____ agencies are privately owned agencies that issue securities and use the proceeds to support the granting of certain types of loans to farmers, students, homeowners, and others.

A) General obligation
B) Municipal bond
C) Federally sponsored
D) Original issue discount

Question 16

Dollar-denominated time deposits in banks outside the United States are known as

A) eurodollar swaps
B) eurodollar bonds
C) eurodollar deposits
D) eurocommercial paper

Question 17

The ___ is a legal document formally describing the terms of the legal relationship between a bond issuer and bondholders.

A) indenture
B) call provision
C) trustee agreement
D) call premium

Question 18

U.S. Treasury _______have maturities greater that ten years at the time of issuance.

A) bonds
B) notes
C) passbooks
D) bills

Question 19

____ is an unsecured short-term promissory note.

A) certificate of deposit
B) commercial paper
C) bankers' acceptance
D) repurchase agreement

Question 20

If a 90-day obligation is sold on a 2.5% quarterly bank discount basis, its effective, annual return is

A) 14.2%.
B) 13.9%.
C) 10.0%.
D) 10.7%.

Question 21

A serial bond

A) needs to only pay interest if the cash is available.
B) may pay higher than stated interest if there are excess profits.
C) must be backed by specific assets.
D) has portions of the total issue maturing at differing times.

Question 22

Bonds that are general obligations of a corporation are

A) debentures.
B) equipment obligations.
C) indentures.
D) mortgage bonds.

Question 23

A pass-through GNMA certificate

A) pays semi-annual variable interest and the principal is paid at the stated maturity.
B) has a minimum denomination of $1,000.
C) does not allow a mortgage holder to prepay his interest.
D) consists of federally-insured mortgages.

Question 24

The type of municipal debt issue that is designed to help attract local businesses is

A) tax and revenue anticipation notes.
B) industrial development bonds.
C) grant anticipation notes.
D) revenue bonds.

Question 25

Eurodollar CD's

A) are issued by banks within the U.S.
B) are denominated in dollars.
C) do not have a secondary market.
D) pay rates much higher than domestic alternatives.

Question 26

The document that names the trustee to act on behalf of the corporate bond holders is the

A) indenture.
B) debenture.
C) general obligation.
D) participation certificate.

Question 27

Corporate bond trading

A) uses specialists.
B) is in round lots of 100 bonds per trade.
C) is only in domestic bonds at the NYSE.
D) is mostly in the OTC market.

Question 28

By 1992, the total amount of Federal Government debt, as measured by outstanding fixed income securities, was approximately

A) $ 4 trillion.
B) $10 trillion.
C) $ 2 trillion.
D) $800 billion.

Question 29

A $10,000 Treasury bill maturing in 30 days has a listed ask discount of 6.2%. Its annualized equivalent yield is

A) 6.62%.
B) 6.32%.
C) 6.02%.
D) 6.23%.

Question 30

By the end of 1991, the percentage of marketable interest-bearing public debt that will mature within five years is approximately

A) 20%.
B) 95%.
C) 70%.
D) 85%.

Question 31

Treasury motes

A) have maturities of one to ten years.
B) are sold at discount with a zero-coupon.
C) are not marketable.
D) are presently sold as bearer instruments.

Question 32

A $10,000 Treasury bill maturing in 60 days has a listed ask discount of 9%. Its annualized equivalent yield is

A) 9.26%.
B) 8.74%.
C) 9.42%.
D) 9.74%.

Question 33

A 180-day Treasury bill lists 7.1%; 7.3% ask. An investor, paying the dealer's price for a $10,000 Treasury bill, would pay

A) $10,000.
B) $ 9,635.
C) $ 9,270.
D) $ 9,290.

Question 34

Treasury bonds

A) may be callable at par value
B) have a minimum denomination of $10,000.
C) can have maturities of one to 20 years at issuance.
D) are sold at discount with no interest paid until maturity.

Question 35

Treasury bills

A) are sold at a discount from the maturity value.
B) pay interest each month.
C) do not have a secondary market.
D) ownership is indicated by the certificate received by the purchaser.

Question 36

Historically, the lowest pre-tax yields have been on

A) Aa corporate bonds.
B) BBB corporate bonds.
C) Aa municipal bonds.
D) BBB municipal bonds.

Question 37

A 90-day Treasury bill lists 6% bid; 6.2% ask. The dealer's spread on a $10,000 Treasury bill is

A) $20.
B) $15.
C) $10.
D) $ 5.

Question 38

A call provision attached to a corporate bond issue

A) will require that the bond be recalled for its par value.
B) typically raises the price of the bond.
C) provides the corporation with refunding flexibility.
D) also requires the bond to be convertible.

Question 39

Series EE bonds

A) pay the same rate of interest every year.
B) may be held for up to 30 years.
C) require the owner to pay federal income taxes each year on the appreciation.
D) are sold in bearer form.

Question 40

All of the following are zero-coupon federal government obligations except

A) DOGS.
B) TIGRS.
C) LIONS.
D) CATS.

Question 41

The last tranche of a CHO

A) has the principal decrease each year.
B) has small interest-rate risk.
C) receives no interest or principal until the other tranches have been retired.
D) typically has a lower rate of return than the earlier tranches.

Question 42

Which one of the following statements is true about most corporations that default on their debts?

A) The corporation is not liquidated to pay the debts.
B) They enter bankruptcy and later liquidation of the firm.
C) They do not enter bankruptcy but enter into reorganization.
D) The corporation is seldom forced into bankruptcy.

Question 43

Most preferred stock

A) has cumulative dividends.
B) has variable dividends.
C) allows voting.
D) is purchased by individual investors.

Question 44

An investor purchases a $1,000, 8% coupon rate Treasury note 100 days after the last interest payment and 82 days before the next interest payment. She

A) will receive $21.98 of accrued interest.
B) must pay $43.96 in accrued interest.
C) will have no liability for accrued interest as the market price adjusts.
D) must also pay $21.98 of accrued interest.

Question 45

The security that is referred to as a perpetual bond is

A) convertible bond.
B) GNMA.
C) preferred stock.
D) jumbo CD.

Question 46

Municipal bonds

A) must be backed by a specific asset.
B) must be registered with the SEC.
C) if sold at a discount, the holder must pay federal income tax on the economic accrual.
D) allow holders to sue a state that defaults.

Question 47

The primary purpose of dividing a mortgage-pass through pool's principal and income flow into various tranches is to

A) allow for wider ownership of the obligations.
B) permit tax shelter from double taxation .
C) allow investors to match their risk preferences the appropriate tranch.
D) to open up greater tax benefits for faster-pay tranches.

Question 48

The majority of commercial paper is issued by

A) public utilities.
B) non-financial firms.
C) the U.S. Treasury.
D) financial companies.

Question 49

The security that is referred to as a perpetual bond is

A) convertible bond.
B) GNMA.
C) preferred stock.
D) jumbo CD.

Question 50

A STRIP is purchased for $800 to mature at $1,000 in four years. For the first year, the investor must pay taxes on the economic accrual of

A) $48.63.
B) $54.12.
C) $45.92.
D) $36.15.

Question 51

From the viewpoint of the issuing corporation, debt represents crucial differences from equity in all of the following ways but NOT that debt

A) principal and interest are obligatory.
B) Payment default may expose the firm to expensive legal actions.
C) Interest payments are expenses and reduce taxable income.
D) dilutes the ownership of current stockholders.

Question 52

Most preferred stock

A) is participating.
B) has variable dividends.
C) allows voting.
D) has cumulative dividends.

Question 53

Which of the following money market instruments represents the least risk to the investor?

A) repurchase agreements
B) mortgage bonds
C) treasury bonds
D) preferred stocks

Question 54

In case a company cannot pay its debt obligations, bankruptcy laws

A) require that the firm be liquidated and all creditors paid from the proceeds.
B) require that the present management team resign.
C) may allow shareholders to be paid before bondholders.
D) may allow the maturities of present debt to be extended

Question 55

One advantage to the investor of a preferred to a common stock is

A) the preferred stock has twice as many voting rights
B) the preferred stock may issue its dividends in stock as well as cash
C) preferred stockholders receive dividends before common stockholders
D) preferred dividends are indexed to the expected rate of inflation.

Question 56

A major reason a U.S. investor would purchase a Yankee bond is

A) diversification of the bond portfolio.
B) wishes to take advantage of foreign exchange fluctuations.
C) they have a larger trading volume than domestic bonds.
D) less regulations than a U.S. bond.

Question 57

What is the primary risk facing the holder of a mortgage participation certificate?

A) The pool of mortgages is disbanded.
B) The homeowners may pay off their mortgages early.
C) The government will withdraw its guarantee of payment to the holder.
D) The rate of inflation will decrease substantially.

Question 58

A municipal bond carries a 6.5% and is trading at par. To an investor in the 33% tax bracket, the bond would provide a taxable equivalent yield of

A) 9.70%
B) 10.58%
C) 8.92%
D) 6.50%

Question 59

What is the difference between a general obligation municipal bond and a revenue municipal bond?

A) Revenue bonds are backed by the full faith and credit of the issuing agency.
B) Revenue bonds have no call on other revenue sources to ensure payment.
C) General obligation bonds may face an inadequate source of revenue more often that the revenue bond.
D) General obligation bonds are backed by a specific project or authority.

Question 60

A U.S. firm issues Eurobonds in France. The Eurobonds

A) will be denominated in francs.
B) will have a lower coupon rate than comparable bonds issued by a French firm in France.
C) must be in registered form.
D) will have a higher tax rate on the proceeds than a domestic issue.

Question 61

Why are preferred stocks often referred to as "hybrid" securities?

A) They are similar to money market as well as capital market securities.
B) Owners have the same voting rights as bondholders in the annual stockholders meeting.
C) They make fixed payments such as bonds but are not legal obligations of the issuer.
D) Like fixed income securities, they have a maturity date.

Question 62

What is the most important feature of the eurobond market from the perspective of the foreign investor?

A) the market is heavily regulated by both the investor's country and the local government.
B) The market is unregulated and untaxed.
C) Interest rates on eurobonds tend to be higher than equivalent bonds issued domestically.
D) Holders of eurobonds are not required to pay taxes.

Question 63

Why are government backed securities NOT risk free?

A) As inflation fluctuates in time, the value of the principal amount will fluctuate.
B) The amount of the interest payment may vary over time
C) The government is free to ignore its guarantee of principal payments.
D) As market interest rates fluctuate, the value of the security will move in an inverse direction regardless of the government's guarantees.

Question 64

When might a mortgage bond be less secure that a debenture?

A) The mortgage bond is issued by a highly leverage, unprofitable company.
B) The debenture is issued by a start-up company.
C) The mortgage bond is backed by a specific asset such as a certain piece of machinery.
D) The debenture is callable and the mortgage bond is not.