Question 1

The investment banker bears the risk if the securities do not sell in a(n):

Accepted Answer

The investment banker bears the risk if the securities do not sell in a firm commitment underwriting agreement. In this type of agreement, the investment banker purchases the security from the issuing firm and is fully exposed to any risk associated with the issue.

Question 2

Which of the following steps in the underwriting process will occur last?

Accepted Answer

The public offering price is set at the latest possible minute. The underwriters want to have the most current information available when setting the price, especially since they will experience the loss if the securities fail to sell for at least that price.

Question 3

Which of the following is not a feature associated with an investment in preferred stock?

Accepted Answer

Choice C describes a feature that is not associated with an investment in preferred stock. Preferred shareholders usually have no voting rights whatsoever. Preferred stock usually pays a fixed dividend and is usually cumulative, which means that missed dividends must be made up before common shareholders can receive any dividends. Preferred stock sometimes has a convertible feature, which allows the preferred stockholders to convert their shares to common stock.

Question 4

Nat Informed places a market order to buy 200 shares of Abercrombie & Fitch (ANF) on Thursday, September 16^th.When will Nat be required to pay for this Transaction?

Accepted Answer

If Nat places an order to purchase 200 shares of Abercrombie & Fitch on Thursday, September 16^th, payment will be due on Tuesday, September 21^st. The settlement date for stock transactions is T + 3, which means the third business day after the trade. Saturday is not a business day.

Question 5

Connie Serve placed an order to purchase five, $1,000 Treasury bonds in the secondary market on Tuesday, October 12^th.Connie will be required to pay for this purchase on which day?

Accepted Answer

Connie will be required to pay for this purchase on Wednesday, October 13^th. The settlement date for Treasury securities and exchange-listed options is one business day after the trade date, or T + 1.

Question 6

On Monday, August 2^nd, the Board of Directors of Baldor Electric (BEZ) announced that the firm would pay a dividend of $0.17 a share. Payment will be made on Friday, October 8^th to shareholders of record as of Friday, September 17^th.In order to receive this dividend check, an investor would have to purchase shares of Baldor Electric before which day?

Accepted Answer

In order to receive the dividend check, an investor would have to purchase shares of Baldor Electric before Wednesday, September 15^th, the ex-dividend date. The ex-dividend date of a stock is two business days prior to the date of record.

Question 7

On Friday, August 6^th, the Board of Directors of Ecolab (ECI) announced that it would pay a dividend of $0.155 a share to shareholders of record as of Tuesday, September 21^st.The dividend checks were scheduled to be mailed on Friday, October 15^th.In this scenario, the ex-dividend date is:

Accepted Answer

The ex-dividend date is Friday, September 17^th in this scenario. It is two business days prior to the date of record, which is Tuesday, September 21^st in this example. Saturday is not considered a business day, so the ex-dividend date is the preceding Friday.

Question 8

On Friday, August 6^th, the Board of Directors of Ecolab (ECI) announced that it would pay a dividend of $0.155 a share to shareholders of record as of Tuesday, September 21^st.The dividend checks were scheduled to be mailed on Friday, October 15^th. In this scenario, the payment date is:

Accepted Answer

The payment date is none of the choices listed. The payment date is the day the checks are scheduled to be mailed-Friday, October 15^th.

Question 9

Given the same maturity, which of the following debt instruments would you expect to offer the highest yield-to-maturity?

Accepted Answer

Given the same maturity, the debenture issued by Abbott Laboratories would be expected to offer the highest yield-to-maturity. It is unsecured debt offered by a corporation and is the riskiest of the four choices. Bonds issued by the U.S. government and by U.S. government agencies are considered to be free of default-risk and would have lower yields to reflect this. The general obligation bond offered by the state of Massachusetts pays interest that is free from federal taxation and will have a lower yield because of this feature.

Question 10

Jack purchased a new bond of the Candlestick Corporation for its face value of $1,000.The bond has a coupon rate of 3.5%, makes semiannual interest payments, and matures in fifteen years. A year after purchasing the bond, Jack needs to sell the bond to offset some major expenses he incurred when his home caught on fire. Interest rates in the economy at this time have fallen to 3.0%.Given this scenario, when Jack sells the bond, he can expect to receive which of the following?

Accepted Answer

Since interest rates in the economy have decreased, Jack can expect to receive more than what he originally paid for the bond. Bond prices move inversely with interest rate changes, all else equal.

Question 11

MBIA, Inc., a municipal bond insuring company, has a bond issue that is selling for $80.05 per $100 of par. The bond has a coupon rate of 7%, with semiannual payments, and matures in 2025. The current yield on this bond is:

Accepted Answer

The current yield on this MBIA bond is 8.745%. The current yield is the annual interest payment of $7 per $100 of par divided by the bond price of $80.05: $7/$80.05 = 8.745%.

Question 12

MBIA, Inc., a municipal bond insuring company, has a bond issue that is selling for $80.05 to yield 9.5%. The bond has a coupon rate of 7%, with semiannual payments, and matures in 2025.If interest rates in the economy increase, which of the following statements will be true, all else equal?
I. the nominal yield of the bond will increase.
II. the yield-to-maturity of the bond will increase.
III. the current yield of the bond will increase.

Accepted Answer

Only statements II and III are true. If interest rates in the economy increase, both the bond's yield-to-maturity and its current yield will increase. The bond's yield-to-maturity will increase to reflect current market rates on similar risk investments, and this, in turn, causes the price of the bond to fall. The current yield of the bond is the interest payment divided by the bond price. Since the interest payment does not change with interest, the current yield will increase with the decrease in the bond price. The nominal yield of the bond is the same as its coupon rate, or what it yields when it sells at its par value, and does not change with changes in interest rates in the economy.

Question 13

A bond has a face value of $1,000, matures in 10 years, and pays an 8% coupon, with interest paid semiannually. If the bond is priced to yield 8.8%, it is selling:

Accepted Answer

If the bond is priced to yield 8.8%, it is selling at a discount. Its nominal yield is the same as its coupon rate, 8%, which is what it would yield if it were selling at its par value, which is the same as its maturity value and its face value--$1,000. In order to be yielding more than this, the bond has to be selling for less than its face value, such that investors are also getting a return from capital gains. A bond that is selling below its face value is said to be selling at a discount.

Question 14

A bond has a face value of $1,000, matures in 12 years, and pays an 4% coupon, with interest paid semiannually. If the bond is priced to yield 3.5%, it is selling:

Accepted Answer

If the bond is priced to yield 3.5%, it will be selling at a premium. The coupon rate of 4% is also the bond's nominal rate, which is what the bond would be yielding if it were selling at its par value. If it is yielding less than this, it means that the bond is selling for more than its par value, which is the same as its maturity value. A bond that sells for more than its par value is said to be selling at a premium.

Question 15

Which of the following is not a function performed by an investment banker as part of a full commitment underwriting?

Accepted Answer

The investment banker does not advice the issuing firm on the projects in which it should invest the money raised in a full commitment underwriting. It does advise the issuing firm on what type of security it should issue in order to raise the money; it purchases the securities from the issuing firm for immediate resale to the public; and it provides price support for the security for a short time after it begins trading in the secondary market.

Question 16

A bond issued by the Needy Corporation pays an 8% coupon, matures in ten years, and is selling for its face value of $1,000.The yield-to-maturity on this bond is:

Accepted Answer

Since the bond is selling for its face value, its yield-to-maturity is equal to its coupon rate.

Question 17

Which of the following bonds will experience the greatest percentage change in price for a given change in interest rates?

Accepted Answer

The bond that will experience the greatest percentage change in price for a given change in interest rates is the bond with 10 years to maturity that pays a 5% coupon. Bonds with longer durations experience greater changes in price, and the long maturity, low coupon bonds have longer durations.

Question 18

Pete Prophet, the manager of a bond mutual fund, is expecting interest rates to increase. All else equal, which of the following bonds would be the best investment under this assumption?

Accepted Answer

If Pete is expecting interest rates to increase, the bond with a 10% coupon and 5 years to maturity is the best investment. If interest rates increase, bond prices fall, so he will want to invest in the bond that will have the lowest percentage decrease in price. This will be the bond with the shortest duration, which is the bond described in Choice B. It has the highest coupon and the fewest years to maturity.

Question 19

Common stock and preferred stock differ in that:

Accepted Answer

Common stock and preferred stock differ in that preferred stockholders will receive their part of the proceeds if the firm is liquidated before the common shareholders receive anything. Neither preferred stock nor common stock dividends are legal obligations of the firm. Preferred stock typically pays a fixed dividend that does not vary with the firm's earnings, while the common stock dividend may. Except in special circumstances specified in the preferred stock agreement, preferred shareholders have no voting rights.

Question 20

An ADR is:

Accepted Answer

An ADR is a receipt designating ownership of shares of a foreign stock that are held in a trust. The acronym stands for American Depository Receipt.

Quiz 1: Investment and Bond Market

The investment banker bears the risk if the securities do not sell in a(n) :

Which of the following steps in the underwriting process will occur last?

Which of the following is not a feature associated with an investment in preferred stock?

Nat Informed places a market order to buy 200 shares of Abercrombie & Fitch (ANF) on Thursday, September 16^th.When will Nat be required to pay for this Transaction?

Connie Serve placed an order to purchase five, $1,000 Treasury bonds in the secondary market on Tuesday, October 12^th.Connie will be required to pay for this purchase on which day?

On Friday, August 6^th, the Board of Directors of Ecolab (ECI) announced that it would pay a dividend of $0.155 a share to shareholders of record as of Tuesday, September 21^st.The dividend checks were scheduled to be mailed on Friday, October 15^th.In this scenario, the ex-dividend date is:

On Friday, August 6^th, the Board of Directors of Ecolab (ECI) announced that it would pay a dividend of $0.155 a share to shareholders of record as of Tuesday, September 21^st.The dividend checks were scheduled to be mailed on Friday, October 15^th. In this scenario, the payment date is:

Given the same maturity, which of the following debt instruments would you expect to offer the highest yield-to-maturity?

MBIA, Inc., a municipal bond insuring company, has a bond issue that is selling for $80.05 per $100 of par. The bond has a coupon rate of 7%, with semiannual payments, and matures in 2025. The current yield on this bond is:

A bond has a face value of $1,000, matures in 10 years, and pays an 8% coupon, with interest paid semiannually. If the bond is priced to yield 8.8%, it is selling:

A bond has a face value of $1,000, matures in 12 years, and pays an 4% coupon, with interest paid semiannually. If the bond is priced to yield 3.5%, it is selling:

Which of the following is not a function performed by an investment banker as part of a full commitment underwriting?

A bond issued by the Needy Corporation pays an 8% coupon, matures in ten years, and is selling for its face value of $1,000.The yield-to-maturity on this bond is:

Which of the following bonds will experience the greatest percentage change in price for a given change in interest rates?

Pete Prophet, the manager of a bond mutual fund, is expecting interest rates to increase. All else equal, which of the following bonds would be the best investment under this assumption?

Common stock and preferred stock differ in that:

An ADR is:

Quiz 1: Investment and Bond Market

The investment banker bears the risk if the securities do not sell in a(n) :

Which of the following steps in the underwriting process will occur last?

Which of the following is not a feature associated with an investment in preferred stock?

Nat Informed places a market order to buy 200 shares of Abercrombie & Fitch (ANF) on Thursday, September 16th.When will Nat be required to pay for this Transaction?

Connie Serve placed an order to purchase five, $1,000 Treasury bonds in the secondary market on Tuesday, October 12th.Connie will be required to pay for this purchase on which day?

On Friday, August 6th, the Board of Directors of Ecolab (ECI) announced that it would pay a dividend of $0.155 a share to shareholders of record as of Tuesday, September 21st.The dividend checks were scheduled to be mailed on Friday, October 15th.In this scenario, the ex-dividend date is:

On Friday, August 6th, the Board of Directors of Ecolab (ECI) announced that it would pay a dividend of $0.155 a share to shareholders of record as of Tuesday, September 21st.The dividend checks were scheduled to be mailed on Friday, October 15th. In this scenario, the payment date is:

Given the same maturity, which of the following debt instruments would you expect to offer the highest yield-to-maturity?

MBIA, Inc., a municipal bond insuring company, has a bond issue that is selling for $80.05 per $100 of par. The bond has a coupon rate of 7%, with semiannual payments, and matures in 2025. The current yield on this bond is:

A bond has a face value of $1,000, matures in 10 years, and pays an 8% coupon, with interest paid semiannually. If the bond is priced to yield 8.8%, it is selling:

A bond has a face value of $1,000, matures in 12 years, and pays an 4% coupon, with interest paid semiannually. If the bond is priced to yield 3.5%, it is selling:

Which of the following is not a function performed by an investment banker as part of a full commitment underwriting?

A bond issued by the Needy Corporation pays an 8% coupon, matures in ten years, and is selling for its face value of $1,000.The yield-to-maturity on this bond is:

Which of the following bonds will experience the greatest percentage change in price for a given change in interest rates?

Pete Prophet, the manager of a bond mutual fund, is expecting interest rates to increase. All else equal, which of the following bonds would be the best investment under this assumption?

Common stock and preferred stock differ in that:

An ADR is:

Nat Informed places a market order to buy 200 shares of Abercrombie & Fitch (ANF) on Thursday, September 16^th.When will Nat be required to pay for this Transaction?

Connie Serve placed an order to purchase five, $1,000 Treasury bonds in the secondary market on Tuesday, October 12^th.Connie will be required to pay for this purchase on which day?

On Friday, August 6^th, the Board of Directors of Ecolab (ECI) announced that it would pay a dividend of $0.155 a share to shareholders of record as of Tuesday, September 21^st.The dividend checks were scheduled to be mailed on Friday, October 15^th.In this scenario, the ex-dividend date is:

On Friday, August 6^th, the Board of Directors of Ecolab (ECI) announced that it would pay a dividend of $0.155 a share to shareholders of record as of Tuesday, September 21^st.The dividend checks were scheduled to be mailed on Friday, October 15^th. In this scenario, the payment date is: