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;
39 Cards in this Set
- Front
- Back
|
Which CMO tranche will be offered at the highest yield?
A) Plain vanilla B) Targeted amortization class C) Planned amortization class D) Companion |
D) Companion -"Shock absorber" -absorbs prepayment risk and extension risk |
|
|
A "call premium" on a bond is the:
A) amount by which the purchase price of the bond exceeds par B) amount by which the redemption price prior to maturity exceeds par C) amount which the redemption price at maturity exceeds par D) maximum premium at which the bond can trade over its life |
B) amount by which the redemption price prior to maturity exceeds par |
|
|
Which statements are TRUE regarding the legal opinion of a new municipal bond issue?
I All new municipal bonds have a legal opinion II Only new issue municipal revenue bonds have a legal opinion III Municipal issuers desire a qualified opinion IV Municipal issuers desire an unqualified opinion |
I and IV |
|
|
A municipality issues a 30-year zero-coupon bond at deep discount. The bond is callable at 103. The bond is called in Year 10 when its current accreted value is $500. The bondholder will receive: A) $500 B) 103% of $500 C) $1,000 D) 103% of $1,000 |
B) 103% of $500 -If a zero-coupon bond is called prior to maturity, it is called at the current accreted value plus any call premium specified in the bond contract |
|
|
The most commonly used measure to evaluate the ability of a revenue bond issuer to pay interest and repay principal is the ratio of:
A) Gross Revenues / Debt Service B) Net Revenues / Debt Service C) Overall Net Debt / Population D) Overall Net Debt / Assessed Value |
B) Net Revenues / Debt Service
-The ratio used to analyze revenue bonds is the Debt Service Coverage Ratio. It is the ratio of Pledged Revenues to Debt Service cost. Almost all revenue bonds have a net revenue pledge, where "net revenues" are pledged to the bondholders (net revenues are gross revenues minus operation and maintenance costs). |
|
|
Yield curve analysis is useful for an investor in debt securities for all of the following reasons EXCEPT:
A) the yield curve is used to compare the marketability risk of one issue to that of another B) investors can compare rates of return relative to changing maturities C) the yield of a specific security can be compared to the market expectation for similar securities D) the curve shows market expectations for interest rates |
A) the yield curve is used to compare the marketability risk of one issue to that of another |
|
|
Short sale transactions are typical for all of the following EXCEPT:
A) Treasury bonds B) Municipal bonds C) Common stock D) Listed options |
B) Municipal bonds
- Municipal bonds are generally not sold short because the trading market in each maturity is very thin, making short covering difficult, if not impossible. |
|
|
A municipality would defease its debt with which of the following?
I U.S. Government securities II U.S. Government agency securities III AAA Municipal securities IV Bank certificates of deposit |
I, II, and IV - AAA Municipal Securites expect from Federal income tax, all others are subject, this one would make no sense to defease |
|
|
Which of the following statements are TRUE for both government and agency securities?
I They are exempt from registration under the Securities Act of 1933 II They are interest bearing obligations quoted in 32nds III Trades settle in Federal Funds IV They are eligible for trading in Federal Reserve open market operations |
ALL OF THEM! |
|
|
Issuers of Federal tax exempt commercial paper include:
I Corporations II Federal Government III Municipal Governments |
III Municipal Governments
|
|
|
Generally, which statement is FALSE about market index linked CDs?
A) There can be a penalty applied to the principal amount of early withdrawals of funds B) The annual rate of return may be capped to an amount that is lower than the actual index return C) A market index linked CD can be redeemed at any time D) A market index linked CD is FDIC insured |
C) A market index linked CD can be redeemed at any time
- has a maturity established by an embedded option, typically 3 years from issuance |
|
|
Dealer offerings of corporate bonds found in Bloomberg are:
I retail quotes II wholesale quotes III new issue offerings sold under a prospectus IV secondary market offerings |
II and IV |
|
|
CMOs are often quoted on a yield spread basis to similar maturity:
A) U.S. Government bonds B) U.S. Government Agency bonds C) Municipal bonds D) Any of the above |
B) U.S. Government Agency bonds
|
|
|
Which statements are TRUE regarding structured products?
I A “structured product” is a derivative security that is “structured” to have the characteristics of a debt, but give the higher returns typically associated with “equity” securities II Structured products give a rate of return linked to an equity index such as the Standard and Poor’s 500 index III Structured products have a fixed maturity at par in around 7 years based on an embedded option in the security IV Structured products are standardized and liquid instruments |
I, II, and III |
|
|
A municipal dealer who solicits a "Bid Wanted":
I must accept the first bid received II need not accept the first bid received III must have purchased the bonds prior to soliciting the bids IV need not have purchased the bonds prior to soliciting the bids |
II and IV |
|
|
Which statement is TRUE about IO tranches?
A) When interest rates rise, the price of the tranche falls B) When interest rates rise, the price of the tranche rises C) When interest rates rise, the interest rate on the tranche falls D) When interest rates rise, the interest rate on the tranche rises |
B) When interest rates rise, the price of the tranche rises
-Interest only tranche, interest directly affects the price of the tranche |
|
|
A municipality is at its debt limit and wishes to sell additional bonds. Voter approval is required for the municipality to sell:
I Limited tax general obligation bonds II Unlimited tax general obligation bonds III Self-supporting revenue bonds IV Self-supporting industrial revenue bonds |
I and II only |
|
|
A customer buys a 2 1/2% Treasury Note, maturing July 1, 2017, at 104.16 on Monday, February 3rd in a regular way trade. The bond pays interest on January 1st and July 1st. How many days of accrued interest are due?
A) 33 B) 34 C) 39 D) 40 |
B) 34
January: 31 days February:3 days (settlement takes place on the 4th of February) 34 days |
|
|
A customer buys 5M of 3 1/2% Treasury Bonds at 101-16 The customer will pay how much for the bonds?
A) $1,011.60 B) $1,015.00 C) $5,058.00 D) $5,075.00 |
D) $5,075.00
- The purchase price is 101-16 = 101 16/32nds = 101.5% of $5,000 = $5,075. |
|
|
At which Standard and Poor's rating is a bond considered to be speculative ("junk bond")?
A) AA B) BBB C) BB D) C |
C) BB
|
|
|
Which bond will exhibit the greatest price volatility?
A) 2% coupon bond with a 2 year maturity B) 0% coupon bond with a 1 year maturity C) 6% coupon bond with a 10 year maturity D) 0% coupon bond with a 9 year maturity |
D) 0% coupon bond with a 9 year maturity
- Lower coupon and longer maturity |
|
|
Variable rate municipal notes avoid which of the following risks?
A) market risk B) default risk C) marketability risk D) credit risk |
A) market risk
- Variable rate municipal notes avoid "interest rate risk," also known as market risk, since a rise in interest rates will not devalue these securities. |
|
|
Payments to holders of Ginnie Mae pass-through certificates:
I are made monthly II are made semi-annually III represent a payment of both interest and principal IV represent a payment of only interest |
I and III - All pass through certificates pass on the monthly mortgage payments received from the pooled mortgages to the certificate holders. |
|
|
All of the following debt securities may be issued by corporations EXCEPT:
A) Equipment trust certificates B) Mortgage bonds C) Adjustment bonds D) Moral obligation bonds |
D) Moral obligation bonds
- Corporations do not issue moral obligation bonds |
|
|
If a bond is trading at a discount, price volatility is greatest for a bond having: I low interest rates II high interest rates III short term maturities IV long term maturities |
I and IV - The lower the coupon rate (the same as saying the lower the price of the bond), the greater the bond price volatility;The longer the maturity, the greater the bond price volatility.Thus, the most volatile bonds are deep discount, long maturity bonds. |
|
|
All of the following are true statements regarding revenue bonds EXCEPT: A) issuance of the bonds is dependent on earnings requirements B) the bonds may be double barreled with backing by ad valorem taxes C) revenue bonds are only suitable for investors willing to assume a high level of risk D) yields for revenue bond issues are generally higher than yields for comparable G.O. issues |
C - In order to issue revenue bonds, a feasibility study must be prepared and it must show adequate net revenues ("earnings") to service the debt before the bonds can be floated. A revenue bond can be double barreled to improve its safety by additionally backing the issue with the ad valorem taxing power of the issuer. Yields on revenue bonds are higher than that of comparable G.O. bonds because of generally higher risk. Revenue bonds are suitable for investors willing to take on low, medium or high risk. To evaluate credit risk on these issues, look at Moody's or Standard and Poor's ratings. |
|
|
MBIA insures municipal bonds for the:
|
Loss of both interest and principal from the time of default |
|
|
An analysis of general obligation bonds would include:
I examination of collection ratios II evaluation of engineer's reports III analysis of debt to value ratios IV analysis of debt service coverage ratios |
I and III |
|
|
Which of the following are considered to be creditors of a corporation?
I Common Shareholders II Preferred Shareholders III Convertible Bondholders IV Warrant Holders |
B) Bondholders are creditors of a company. Convertible bondholders are creditors of a company as long as they keep their bonds and do not convert to common shares. Common and preferred shareholders have an equity position. Warrant holders have a long term option to buy the stock. Warrants are considered equity-related securities, but they have neither an equity nor creditor stake in the corporation.
|
|
|
The term "Funded Debt" applies to:
I Commercial Paper II Corporate Bonds III Municipal Notes IV Treasury Bills |
B) "Funded debt" is a term that applies to long term corporate obligations. This debt is "funded," indicating that the monies are long term and do not have to be repaid shortly. Short term debt is termed "unfunded" debt - these are not a long term funding. All of the other choices - commercial paper, municipal notes, and Treasury bills are short term obligations.
|
|
|
A customer buys 5M of 3 1/2% Treasury Bonds at 101-16. How much will the customer receive at each interest payment?
|
"5M" means that 5-$1,000 bonds are being purchased (M is Latin for $1,000). Annual interest on the bonds is 3.5% of $5,000 face amount equals $175.00. Since interest is paid semi-annually, each payment will be for $87.50.Notice that the fact that the bond is trading at a premium is irrelevant - the interest payment is based on the stated interest rate times par value.
|
|
|
Yield curve analysis is useful for an investor in debt securities because:
I the curve shows market expectations for interest rates II investors can compare rates of return relative to changing maturities III the yield of a specific security can be compared to the market expectation for similar securities IV the curve can show relative demand for differing maturities by comparing the change in yield to the change in maturity |
All of the above |
|
|
The listing of current municipal bond offerings shows the following:
Cook County School District Bond 3.20coupon M'16 3.50 The bonds are currently priced at: A) par B) premium C) discount D) parity |
C) Discount, the market price is higher than the coupon value |
|
|
A 5 year 3 1/2% Treasury Note is quoted at 101-4 - 101-8. The note pays interest on Jan 1st and Jul 1st. All of the following statements are true regarding this trade of T-Notes EXCEPT:
A) interest accrues on an actual day month; actual day year basis B) the yield to maturity will be higher than the current yield C) the trade will settle in Fed Funds D) the trade will settle next business day if performed "regular way" |
B) Because these T-Notes are trading at a premium, the yield to maturity will be lower than the current yield. The current yield does not factor in the loss of the premium over the life of the bond, whereas yield to maturity does. Government bond trades settle next business day; accrued interest is computed on an actual month/actual year basis; and trades settle through the Federal Reserve system in "Fed Funds."
|
|
|
A 10 year 7% municipal bond, quoted on a 5.00 basis, is priced at 104. A 10 year 6% municipal bond, quoted on a 5.00 basis, is priced at 101. What is the price of a 10 year, 6.30% municipal bond, quoted on a 5.00 basis?
|
7%Coupon5.00 Basis1046.3%Coupon5.00 Basis?6%Coupon5.00 Basis101The difference in price between the 6% and 7% bonds is 3 points. The 6.30% bond is 30% of the way from 6% to 7%. 30% x 3 points = .90 point price increment from the 6% price. 101 + .90 = 101.90 price for the 6.30% bond.
|
|
|
The purchaser of a CMO tranche experiences extension risk during periods when interest rates:
A) rise B) fall C) are stable D) are volatile |
A) If interest rates rise, then homeowners will defer moving at the anticipated rate, since they have a "good" deal with their existing mortgage. Thus, the expected mortgage repayment flows from the underlying pass-through certificates slow down, and the expected maturity of the CMO tranches will lengthen. This is extension risk - the risk that the CMO tranche will have a longer than expected life, during which a lower than market rate of return is earned.
|
|
|
Interest earned on corporate bonds is:
A) 100% taxable at the Federal level B) 80% taxable at the Federal level C) 70% taxable at the Federal level D) 0% taxable at the Federal level |
A) The interest earned from corporate bonds is 100% subject to Federal, State and Local tax for all investors except for tax qualified retirement plans (where the plan itself is tax deferred).
|
|
|
Which of the following does not trade "flat"?
A) Treasury Bills B) Treasury STRIPS C) Treasury Bonds D) Treasury Receipts |
C) Treasury Bills are short term original issue discount obligations, with the discount earned being the "interest". Treasury Receipts and Treasury STRIPS are essentially zero-coupon obligations. Because all of these obligations do not make periodic interest payments, they trade "flat" - that is, without accrued interest. Treasury Bonds pay interest semi-annually, so they trade with accrued interest.
|
|
|
Which of the following trades settle in "Fed" funds?
I General Obligation Bonds II U.S. Government Bonds III Agency Bonds |
II and III |
