Deck 19: Government Bonds and Mortgaged-Backed Securities

Question 1

________ bonds are issued with multiple maturity dates scheduled at different intervals.

A) Put
B) Serial
C) Hybrid
D) Term
E) Callable

Answer 1

B

Question 2

________ bonds are issued by a municipality and backed by the taxing powers of the municipality.

A) Private activity
B) Hybrid
C) Revenue
D) General obligation
E) Term

Answer 2

D

Question 3

The amount that a bond pays at maturity is the ________ value.

A) bond
B) market
C) coupon
D) auction
E) face

Answer 3

E

Question 4

A STRIPS in which the holder receives only the interest payments for the bond is a ________ strip.

A) dealer
B) coupon
C) discount
D) principal
E) holder

Question 5

The risk that an issuer will not make either the interest or principal payments as agreed is called ________ risk.

A) payment
B) default
C) market
D) prepayment
E) interest rate

Question 6

________ bond only pays one payment at maturity to bondholders.

A) zero coupon
B) putable
C) premium
D) callable
E) convertible

Question 7

A ________ provision permits the issuer to retire outstanding bonds before they mature. Such a provision must specify the date bonds can be repaid early and at what price.

A) put
B) term
C) serial
D) call
E) maturity

Question 8

Treasury bills are sold on a ________ where price is set below face value.

A) bid-ask spread
B) strips
C) dealer program
D) competitive value
E) discount basis

Question 9

________ are indexed securities that guarantee a fixed rate of return in excess of realized inflation rates.

A) Real return bonds
B) Put bonds
C) Repurchases
D) Floaters
E) Callable bonds

Question 10

Municipal bonds which are putable are often referred to as:

A) Variable-rate demand obligations.
B) Pass through bonds
C) Flexible-rate notes
D) Variable-rate notes
E) Tender offer bonds

Question 11

The bonds in an issue having a single maturity date are called ________ bonds.

A) private activity
B) hybrid
C) plain vanilla
D) sinking fund
E) term

Question 12

The difference between the selling price of a Treasury bill and its face value is called the

A) coupon rate
B) imputed interest
C) current yield
D) unrealized return
E) basis risk

Question 13

The ________ is the rate of return that an investor will earn if a bond is redeemed by the issuer at the earliest permissible date.

A) yield-to-maturity
B) market rate
C) yield-to-call
D) yield-to-conversion
E) current yield

Question 14

The difference between a bond's face value and its call price is the

A) basis
B) put premium
C) discount
D) call premium
E) conversion value

Question 15

The lowest accepted competitive bid in a Canadian Treasury auction determines the ________. Such a resulting price is also known as stop-out bid.

A) yield curve
B) yield-to-maturity
C) non-competitive bid
D) recent yield
E) cut-off yield

Question 16

________ are securities that pay an interest rate which changes according to market conditions.

A) Floaters
B) Tender offer bonds
C) Flexible-rate notes
D) Variable rate bonds
E) Pass through bonds

Question 17

________ bonds grants the bondholder the right to resell the bonds back to the issuer prior to maturity at specified times.

A) Put
B) Serial
C) Hybrid
D) Term
E) Callable

Question 18

Securities that are collateralized by a pool of mortgage loans are called ________.

A) marketable mortgages
B) mortgage bonding
C) mortgage-backed securities
D) mortgage certificates
E) mortgage securitization

Question 19

A medium-term bond with a coupon rate that changes with market conditions is a(n) ________ note.

A) variable rate
B) strips
C) flexible coupon
D) interest only
E) market rate

Question 20

The Treasury program with coupon and principal bond payments sold separately is known as

A) VRDO
B) VAR
C) STRIPS
D) LIBOR
E) CDIC

Question 21

A coupon bond with 20 years to maturity can be separated into a maximum of ________ strips.

A) 2
B) 21
C) 40
D) 41
E) 42

Question 22

A pool of mortgages containing default-free mortgages is called a ________ mortgage pool.

A) securitization
B) fully modified
C) secured
D) fully funded
E) prepaid

Question 23

A ________ mortgage pool is a mortgage pool that guarantees the timely payment of interest and principal.

A) CDIC insured
B) preauthorized
C) seasoned
D) fully modified
E) collateralized

Question 24

Paying off a mortgage principal ahead of the amortization schedule is mortgage ________.

A) Securitization
B) Amortization
C) pass-throughs
D) value reduction
E) Prepayment

Question 25

Bonds representing a claim on the cash flows of a pool of mortgages are ________. Their investment returns are based on the pool.

A) capitalized mortgages
B) mortgage pass-throughs
C) mortgage capitalization bonds
D) mortgage trusts
E) marketable mortgage certificates

Question 26

Canadian Treasury notes:

A) Are zero-coupon securities
B) Are sold in $1,000 increments with the smallest face amount being $10,000
C) Generally have original maturities of 2, 5 or 10 years
D) Are inflation-indexed securities
E) Are sold on a non-marketable basis only

Question 27

The yield-to-maturity of a Treasury security is calculated using the bid price or the ask price. The yield-to-maturity using the bid price will be ________ than the yield-to-maturity using the ask price.

A) Higher
B) Lower
C) The same
D) Lower only if the bond is selling at a premium
E) Higher only if the bond is selling at a premium

Question 28

If you purchase a principal STRIPS, you are buying

A) The right to receive repayment out of a bond's next coupon payment
B) A security that will pay semi-annual interest along with a repayment of the face amount
C) A one-time payment that will be paid from the repayment of a bond's face value
D) A security backed by the interest payment on a Treasury notes
E) A security backed by the face value of a corporate bond

Question 29

When a borrower pays a fixed monthly amount on their home mortgage based on a fixed rate of interest, this individual has a ________ mortgage.

A) repayment-based
B) open-end
C) fixed-rate
D) variable-rate
E) prime-rate

Question 30

The process of paying down the mortgage principal with a monthly mortgage payment is called mortgage ________.

A) securitization
B) amortization
C) pass-throughs
D) value reduction
E) prepayment

Question 31

Canadian Treasury bills:

A) Are zero-coupon securities
B) Generally mature in 4, 13, 26 or 52 weeks
C) Have a minimum denomination of $1,000
D) All of the above
E) None of the above

Question 32

The ________ rate is the probability a mortgage will be prepaid during the year.

A) seasoning
B) retirement
C) prepayment
D) terminal
E) amortization

Question 33

Canadian Treasury notes:

A) Have a fixed coupon that is set approximately equal to the market rate when issued
B) Are sold on a discount basis
C) Are generally issued for 15, 20, 25 or 30 years
D) Are adjustable semiannually for inflation
E) Are sold at a minimum face value of $100,000

Question 34

Which of the following Canadian government securities is nonmarketable?

A) Treasury bills.
B) Treasury notes.
C) Treasury bonds.
D) Canada Savings bonds.
E) All of the above are marketable.

Question 35

_________ are always sold on a discount basis.

A) Treasury bills
B) Mortgaged-back securities
C) Municipal bonds
D) Callable bonds
E) None of the above

Question 36

The outstanding amount of a mortgage is called the mortgage ________.

A) principal
B) interest
C) constant
D) ceiling
E) floor

Question 37

________ is the government agency responsible for creating and maintaining liquidity in the Canadian home mortgage market.

A) CDIC
B) IDA
C) CRA
D) IMF
E) CMHC

Question 38

The creation of mortgage-backed securities from a pool of mortgages is known as mortgage ________.

A) securitzation
B) marketing
C) bundling
D) amortization
E) aggregation

Question 39

The CMHC offers all of the following types of mortgage backed securities pools except:

A) Commercial.
B) exclusive homeowners.
C) multi-family.
D) social housing.
E) Mixed.

Question 40

CMHC

A) helps first-time home buyers
B) is a government-owned finance company
C) backs mortgage pools
D) is established in 1946
E) all of the above

Question 41

The inflation-protected real return Canadian bonds are indexed for inflation by adjusting the

A) Coupon rate
B) Current yield
C) Face value
D) Call price
E) Interest payment dates

Question 42

Canada savings bonds are exempt from ________ taxes.

A) Federal
B) Non-resident withholding
C) Provincial and federal
D) Provincial
E) None of the above

Question 43

Any time a callable Treasury bond has a price greater than its par, the reported yield is

A) The current yield
B) The yield-to-call
C) The coupon rate
D) The discount rate
E) The yield-to-maturity

Question 44

Treasury callable bonds usually carry a schedule of call premium reductions, until about ________ to ________ years before maturity, when the call premium is eliminated entirely.

A) 2; 5
B) 2; 10
C) 1; 5
D) 5; 10
E) 1; 10

Question 45

What is the maximum amount Canadian residents are allowed to own?

A) $500,000
B) $250,000
C) $100,000
D) $60,000
E) An amount determined by the Minister of Finance

Question 46

Real return Canadian bonds can provide

A) Inflation insurance
B) Safe temporary parking place
C) Rising income
D) Portfolio protection
E) All of the above

Question 47

Rank the following Treasury securities in order of maturity from shortest to longest.

A) Treasury bonds, Treasury bills, Treasury notes
B) Treasury bonds, Treasury notes, Treasury bills
C) Treasury bills, Treasury notes, Treasury bonds
D) Treasury bills, Treasury bonds, Treasury notes
E) Treasury notes, Treasury bills, Treasury bonds

Question 48

Canada Savings Bonds are offered on sale for six months beginning in ________ of each year.

A) October
B) December
C) July
D) April
E) January

Question 49

A sinking fund is managed by:

A) bondholders.
B) the Bank of Canada.
C) the issuer.
D) a trustee.
E) the Canadian Securities Commission.

Question 50

Canada savings bonds

A) Are transferable
B) Have the largest face value denomination of $100,000
C) Can only be sold by the banks
D) Are RRSP eligible
E) All of the above

Question 51

Which of the following is likely to have the highest level of default risk?

A) Canada Treasury notes.
B) Municipal securities.
C) Canada premium bonds.
D) Savings bonds.
E) Canada Treasury bonds.

Question 52

Using Standard & Poor's credit ratings, the lowest credit rating for an investment grade municipal bond is ________.

A) AA
B) A
C) BBB
D) BB
E) B

Question 53

Which of the following is exempt from non-resident withholding tax?

A) Canadian real return bond
B) Canada premium bond
C) CMHC bond
D) Canada savings bond
E) Nova Scotia municipal bond

Question 54

Canadian Treasury bonds are quoted

A) On a discount basis
B) On a percentage of par in 32^nds of one percent
C) On a percentage of face value in decimals
D) On a percentage of the initial cost in decimals
E) None of the above

Question 55

If the yield-to-maturity on a Canadian government bond is equal to its coupon rate, the bond will

A) Most likely be called
B) Sell at par
C) Have a bid-ask spread of zero
D) Sell at a discount
E) Decrease in price due its overvaluation

Question 56

Canada Savings Bonds can be purchased

A) online or by phone
B) at banks and credit unions
C) through the payroll savings program
D) from discount brokerage companies
E) all of the above

Question 57

Which of the following bond credit ratings applies to default-free federal government securities?

A) AAA with S&P and DBRS
B) Aaa with Moody
C) 1 with D&P
D) All of the above
E) None of the above

Question 58

Which of the following bonds would be considered 'Investment-Grade' bonds?
I) A Government of British Columbia bond rated 'AA'
II) A Government of Canada bond rated 'BBB'
III) A Municipality of Red Deer bond rated 'Baa'
IV) A Regional Municipality of Niagara bond rated 'AA'

A) I) only.
B) I) and IV) only.
C) I), II), and IV) only.
D) II) and III) only.
E) All are 'Investment-Grade'.

Question 59

Ownership of Canada Savings Bonds is registered with the:

A) Pension Plans Commission.
B) Bank of Canada.
C) Central Payor and Transfer Agent.
D) Canada Revenue Agency.
E) Broker.

Question 60

Which of the following would be most appropriate for an investor who is worried about the affect of inflation on their future purchasing power.

A) Treasury Notes
B) Real Return Bonds
C) Treasury Bonds
D) Canada Savings Bonds
E) Canada Premium Bonds

Question 61

The gross profit generated for the dealer in a Treasury security transaction is measured by the:

A) ask YTM.
B) commission.
C) bid YTM.
D) bid-ask spread.
E) Coupon rate.

Question 62

A municipal bond is currently priced at $5,105 and is callable in 4 years. If the bond has a coupon rate of 4 percent and is callable at 103 percent of par, what is the yield-to-call?

A) 4.12%
B) 3.86%
C) 4.38%
D) 3.43%
E) 4.24%

Question 63

The majority of the municipal securities are ________ bonds.

A) Revenue
B) Industrial development
C) General obligation
D) Serial
E) Hybrid

Question 64

Which of the following mortgages will have the greatest total interest payments over the life of the mortgage?

A) 20-year, 7 percent
B) 20-year, 9 percent
C) 30-year, 7 percent
D) 30-year, 9 percent
E) All will be the same.

Question 65

Which of the following is not potentially part of monthly mortgage payments?

A) Principal payments.
B) Payments of interest on outstanding principal.
C) Interest prepayments.
D) Principal prepayments.
E) All of the above are potential monthly payments.

Question 66

Which of the following mortgages has the highest monthly payment?

A) 15-year, 6 percent
B) 15-year, 8 percent
C) 25-year, 6 percent
D) 25-year, 8 percent
E) Insufficient information.

Question 67

A Treasury bond has a dollar price of $1,011.55. What would you expect the bond quote to be?

A) 101.031
B) 101.155
C) 101.162
D) 101.050
E) Undetermined

Question 68

VRDOs frequently carry a provision allowing the issuer to

A) Convert the issue into a fixed-rate issue
B) Delay payments under certain circumstances
C) Convert the issue from GO bonds to revenue bonds
D) Repay the entire issue at any time with 30-day notice
E) Eliminate the call premium if the entire issue is called

Question 69

Which of the following bid types are permitted at auction for Canada Treasury securities?
I) Competitive.
II) Noncompetitive.
III) Stop-out.

A) I only
B) III only
C) I and III only
D) I, II, and III
E) I and II only

Question 70

When interest rates fall, mortgage prepayments ________, and when interest rates rise, mortgage prepayments ________.

A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
E) Insufficient information.

Question 71

For a given loan amount, which of the following mortgages will have the greatest total principal payments over the life of the mortgage?

A) 20-year, 7 percent
B) 20-year, 9 percent
C) 30-year, 7 percent
D) 30-year, 9 percent
E) All will be the same.

Question 72

A Treasury bond with face value of $1,000 matures in 6.5 years has a 5.5% coupon rate and a quoted price of 99.09375. What is the yield-to-maturity?

A) 5.67%
B) 5.56%
C) 5.71%
D) 5.50%
E) 5.75%

Question 73

A municipal bond with a yield-to-maturity of 4.08 percent has a coupon rate of 4.6 percent. If the bond has 9 years to maturity, what is the price of the bond? The face value is assumed to be $5,000.

A) $5,294.12
B) $5,194.21
C) $5,246.87
D) $5,219.23
E) $4,810.15

Question 74

Mortgage securitization is advantageous to mortgage originators such banks because it:

A) eliminates the need for the bank to service the mortgage.
B) increases the bank's return.
C) results in lower mortgage rates.
D) allows the bank to participate in the bond market.
E) transfers the risk of holding the mortgage.

Question 75

Suppose you take out a fixed rate mortgage and make an extra payment of $50 per month in addition to the scheduled monthly payments. Which of the following mortgages will have the greatest difference in the number of actual payments and the number of scheduled payments?

A) 15-year, 7 percent
B) 15-year, 9 percent
C) 30-year; 7 percent
D) 30-year, 9 percent
E) All will be reduced by the same number of payments.

Question 76

A Treasury bond with a face value of $1,000 has yield-to-maturity of 6.8%, a time to maturity of 12 years and a coupon rate of 6.5%. What is the bond price?

A) $975.66
B) $975.92
C) $976.13
D) $976.28
E) $1,003.30

Question 77

A municipal bond with a coupon rate of 4.2 percent is currently selling at a yield-to-maturity of 4.96 percent. What is the price of the bond if it has 14 years to maturity? Assume that the bond has a face value of $5,000.

A) $5,329.15
B) $4,723.64
C) $4,619.71
D) $4,686.04
E) $4,571.91

Question 78

A Treasury bond has a face value of $5,000 with a quoted bid price of 101.84 and a quoted ask price of 101.88. What is the dollar amount you receive if you sell your bond?

A) $3,208.50
B) $1,917.00
C) $5,094.00
D) $5,750.50
E) $5,092.00

Question 79

Which of the following mortgages will have the greatest principal amount outstanding after the 120^th payment?

A) 15-year, 8 percent
B) 15-year, 10 percent
C) 25-year, 8 percent
D) 25-year, 10 percent
E) C and D would be the same.

Question 80

Why are CMHC mortgages said to be "fully modified mortgage" pools?

A) CMHC backing insures bondholders against prepayment risk.
B) The CMHC modifies to mortgage pool to prevent it against interest rate risk.
C) CMHC backing allows for mortgages to be modified so they have longer terms and less chance of default.
D) The CMHC guarantees the payments of interest and principal even if the mortgages default.
E) The CMHC insures the higher risk mortgages in the pool against default.