Question 1

A bond has a conversion ratio of 24 and a market price of $1,080. If the par value is $1,000, what is the conversion price?

Accepted Answer

A) $40.00 
B) $41.67 
C) $42.60 
D) $43.20 
E) $43.80 
A) $40.00 
B) $41.67 
C) $42.60 
D) $43.20 
E) $43.80

Question 2

Which one of the following is the difference between the price a bond dealer is willing to pay to buy and the price at which he or she is willing to sell?

Accepted Answer

A) commission 
B) imputed cost 
C) imputed interest 
D) bid-ask spread 
E) ask price 
A) commission 
B) imputed cost 
C) imputed interest 
D) bid-ask spread 
E) ask price

Question 3

Which one of the following defines an in-the-money bond?

Accepted Answer

A) secured bond with collateral value that exceeds the bond's price 
B) callable bond with a call price that exceeds the current market price 
C) put bond with a put price that exceeds the current market price 
D) convertible bond with a call price that exceeds its conversion value 
E) convertible bond with a conversion value that exceeds its call price 
A) secured bond with collateral value that exceeds the bond's price 
B) callable bond with a call price that exceeds the current market price 
C) put bond with a put price that exceeds the current market price 
D) convertible bond with a call price that exceeds its conversion value 
E) convertible bond with a conversion value that exceeds its call price

Question 4

A municipal bond is yielding 3.2%. Jeremy has a marginal tax rate of 15%. What is his equivalent taxable yield?

Accepted Answer

A) 2.18% 
B) 2.72% 
C) 2.89% 
D) 3.01% 
E) 3.76% 
A) 2.18% 
B) 2.72% 
C) 2.89% 
D) 3.01% 
E) 3.76%

Question 5

You have a marginal tax rate of 24% and an average tax rate of 19%. Municipal bonds in your area are yielding 3.90%. What is your equivalent taxable yield?

Accepted Answer

A) 5.13% 
B) 5.23% 
C) 5.34% 
D) 5.48% 
E) 5.89% 
A) 5.13% 
B) 5.23% 
C) 5.34% 
D) 5.48% 
E) 5.89%

Question 6

Lester is considering a municipal bond yielding 5.5% and a corporate bond yielding 8.2%. His marginal tax rate is 28%. He should invest in the ________ bond because the critical marginal tax rate is ________ %.

Accepted Answer

A) corporate; 26 
B) corporate; 29 
C) corporate; 33 
D) municipal; 35 
E) municipal; 37 
A) corporate; 26 
B) corporate; 29 
C) corporate; 33 
D) municipal; 35 
E) municipal; 37

Question 7

A municipal bond is yielding 4.8%. Jeremy has a marginal tax rate of 24%. What is his equivalent taxable yield?

Accepted Answer

A) 2.18% 
B) 4.58% 
C) 6.15% 
D) 6.32% 
E) 7.18% 
A) 2.18% 
B) 4.58% 
C) 6.15% 
D) 6.32% 
E) 7.18%

Question 8

Which one of the following is a municipal bond that is secured by the income collected from a specific project?

Accepted Answer

A) agency bond 
B) general obligation bond 
C) development bond 
D) contingency bond 
E) revenue bond 
A) agency bond 
B) general obligation bond 
C) development bond 
D) contingency bond 
E) revenue bond

Question 9

What is the interest on a Treasury bill called when it is determined by the size of the bill's discount from face value?

Accepted Answer

A) assumed interest 
B) imputed interest 
C) imaginary interest 
D) convergent interest 
E) original-issue interest 
A) assumed interest 
B) imputed interest 
C) imaginary interest 
D) convergent interest 
E) original-issue interest

Question 10

What is the method of selling Treasury bills at less than face value called?

Accepted Answer

A) imputed basis 
B) par value method 
C) discount basis 
D) STRIP basis 
E) face value method 
A) imputed basis 
B) par value method 
C) discount basis 
D) STRIP basis 
E) face value method

Question 11

A Treasury bond matures in 7 years, has a 3.50% coupon, and has a quoted price of 98.055. What is the yield to maturity?

Accepted Answer

A) 3.50% 
B) 3.82% 
C) 4.06% 
D) 4.19% 
E) 4.38% 
A) 3.50% 
B) 3.82% 
C) 4.06% 
D) 4.19% 
E) 4.38%

Question 12

A STRIPS that matures in 6 years is selling for $10,950. The par value is $15,000. What is the yield to maturity?

Accepted Answer

A) 3.36% 
B) 4.67% 
C) 5.31% 
D) 6.54% 
E) 6.75% 
A) 3.36% 
B) 4.67% 
C) 5.31% 
D) 6.54% 
E) 6.75%

Question 13

What are the restrictions on investment portfolios that require that all securities held within the portfolio meet a specified level of safety called?

Accepted Answer

A) protective covenants 
B) negative restrictions 
C) prudent investment guidelines 
D) safety monitors 
E) risk ranges 
A) protective covenants 
B) negative restrictions 
C) prudent investment guidelines 
D) safety monitors 
E) risk ranges

Question 14

You just purchased a 5-year STRIPS security that was created from a 30-year T-bond. How many payments will you receive?

Accepted Answer

A) 1 
B) 10 
C) 11 
D) 60 
E) 61 
A) 1 
B) 10 
C) 11 
D) 60 
E) 61

Question 15

What are the various provisions within a bond indenture that are designed to protect bondholders by restricting the actions of the issuer called?

Accepted Answer

A) restrictive actions 
B) prohibitions 
C) negative conditions 
D) protective covenants 
E) restrictive amendments 
A) restrictive actions 
B) prohibitions 
C) negative conditions 
D) protective covenants 
E) restrictive amendments

Question 16

A $5,000 face value municipal bond matures in 12 years and is priced at $4,850. The coupon rate is 5.5% with interest paid semiannually. What is the yield to maturity on the bond?

Accepted Answer

A) 4.77% 
B) 5.14% 
C) 5.40% 
D) 5.61% 
E) 5.85% 
A) 4.77% 
B) 5.14% 
C) 5.40% 
D) 5.61% 
E) 5.85%

Question 17

Bonds issued with a regular sequence of maturity dates are called which one of the following?

Accepted Answer

A) callable bonds 
B) sequential bonds 
C) serial bonds 
D) sinking bonds 
E) put bonds 
A) callable bonds 
B) sequential bonds 
C) serial bonds 
D) sinking bonds 
E) put bonds

Question 18

You own a principal STRIPS that is based on a 4.5% coupon Treasury bond that matures in 20 years. The STRIPS is priced at $22,868 and has a par value of $50,000. What is the yield to maturity on the STRIPS?

Accepted Answer

A) 3.79% 
B) 3.90% 
C) 3.93% 
D) 3.95% 
E) 3.99% 
A) 3.79% 
B) 3.90% 
C) 3.93% 
D) 3.95% 
E) 3.99%

Question 19

A convertible bond has a par value of $1,000 and a market price of $1,116.76. If the conversion ratio is 19, what is the conversion price?

Accepted Answer

A) $43.48 
B) $45.45 
C) $47.62 
D) $52.63 
E) $55.56 
A) $43.48 
B) $45.45 
C) $47.62 
D) $52.63 
E) $55.56

Question 20

Which one of the following is the clause that prevents a bond issuer from issuing new debt that has seniority over current debt?

Accepted Answer

A) first in line 
B) sinking fund 
C) call provision 
D) affirmation 
E) negative pledge 
A) first in line 
B) sinking fund 
C) call provision 
D) affirmation 
E) negative pledge

Exam 18: Corporate and Government Bonds

A bond has a conversion ratio of 24 and a market price of $1,080. If the par value is $1,000, what is the conversion price?

Which one of the following is the difference between the price a bond dealer is willing to pay to buy and the price at which he or she is willing to sell?

Which one of the following defines an in-the-money bond?

A municipal bond is yielding 3.2%. Jeremy has a marginal tax rate of 15%. What is his equivalent taxable yield?

You have a marginal tax rate of 24% and an average tax rate of 19%. Municipal bonds in your area are yielding 3.90%. What is your equivalent taxable yield?

Lester is considering a municipal bond yielding 5.5% and a corporate bond yielding 8.2%. His marginal tax rate is 28%. He should invest in the ________ bond because the critical marginal tax rate is ________ %.

A municipal bond is yielding 4.8%. Jeremy has a marginal tax rate of 24%. What is his equivalent taxable yield?

Which one of the following is a municipal bond that is secured by the income collected from a specific project?

What is the interest on a Treasury bill called when it is determined by the size of the bill's discount from face value?

What is the method of selling Treasury bills at less than face value called?

A Treasury bond matures in 7 years, has a 3.50% coupon, and has a quoted price of 98.055. What is the yield to maturity?

A STRIPS that matures in 6 years is selling for $10,950. The par value is $15,000. What is the yield to maturity?

What are the restrictions on investment portfolios that require that all securities held within the portfolio meet a specified level of safety called?

You just purchased a 5-year STRIPS security that was created from a 30-year T-bond. How many payments will you receive?

What are the various provisions within a bond indenture that are designed to protect bondholders by restricting the actions of the issuer called?

A $5,000 face value municipal bond matures in 12 years and is priced at $4,850. The coupon rate is 5.5% with interest paid semiannually. What is the yield to maturity on the bond?

Bonds issued with a regular sequence of maturity dates are called which one of the following?

You own a principal STRIPS that is based on a 4.5% coupon Treasury bond that matures in 20 years. The STRIPS is priced at $22,868 and has a par value of $50,000. What is the yield to maturity on the STRIPS?

A convertible bond has a par value of $1,000 and a market price of $1,116.76. If the conversion ratio is 19, what is the conversion price?

Which one of the following is the clause that prevents a bond issuer from issuing new debt that has seniority over current debt?

A Brief History of Risk and Return

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Overview of Security Tips

Mutual Funds and Other Investment Companies

The Stock Market

Common Stock Valuation

Stock Price Behavior and Market Efficiency

Behavioral Finance and the Psychology of Investing

Interest Rates

Bond Prices and Yields

Diversification and Risky Asset Allocation

Return, Risk, and the Security Market Line

Performance Evaluation and Risk Management

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Stock Options

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Projecting Cash Flow and Earnings

Global Economic Activity and Industry Analysis

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Lester is considering a municipal bond yielding 5.5% and a corporate bond yielding 8.2%. His marginal tax rate is 28%. He should invest in the bond because the critical marginal tax rate is %.