Premium, Discount, YTM, YTC, etc..
A corporate bond has a 5% coupon (paid annually), a $1,000 par value, and is currently trading at a market price of $900. What is the bond’s current yield?
A. 5.0%
B. 5.6%
C. 6.0%
D. 11.1%
Correct Answer: B. The current yield is calculated as annual interest divided by market price. The bond pays $50 annually (5% of $1,000). At a $900 price, $50/$900 = 5.6% (approximately)
Which statement best describes a puttable bond?
A. It gives the issuer the right to redeem the bond early.
B. It gives the bondholder the right to sell the bond back to the issuer at a specified price.
C. It can be converted into a fixed number of shares of the issuer’s stock.
D. It has no fixed maturity date.
Correct Answer B. It gives the bondholder the right to sell the bond back to the issuer at a specified price.
All of the following are characteristics of U.S. Treasury bills EXCEPT:
A) They mature in one year or less.
B) They pay interest semiannually.
C) They are sold at a discount to face value.
D) Their interest income is exempt from state and local taxes.
D. Municipal bonds are issued by local governments, not by the U.S. Treasury, making option D the only one that is not a Treasury security.
All of the following are classifications of investment companies under the 1940 Act EXCEPT:
I. Face-amount certificate company;
II. Unit Investment Trust;
III. Management company (open- or closed-end);
IV. Real Estate Investment Trust.
A. I only
B. II only
C. III only
D. IV only
Answer: D. The Investment Company Act recognizes only three types of investment companies: face-amount certificate companies, UITs, and management companies. A REIT is not one of these categories under the Act.
A client purchases $10,000 of Class A shares in a mutual fund with a NAV of $25.50 and a 5% front-end sales load. Which of the following statements about this transaction are true?
I. The POP of the shares is approximately $26.84.
II. The sales load charged on the $10,000 purchase is $500.
III. The investor receives about 372.6 shares.
A) I and II only
B) I and III only
C) II and III only
D) I, II, and III
Correct Answer: D – All three statements are true. With a 5% front load, POP = $25.50 ÷ (1–0.05) ≈ $26.84 (statement I). The sales load on $10,000 is 5% of $10,000 = $500 (statement II). The net amount invested is $9,500, so shares = 9,500 ÷ 25.50 ≈ 372.6 (statement III).
A bond’s coupon rate is 6%, and prevailing market interest rates for similar bonds are also 6%. If this bond is trading at par value, which of the following is true?
A. The bond’s nominal yield, current yield, and YTM are all 6%
B. The bond’s current yield is higher than its nominal yield
C. The bond’s yield to maturity is lower than its current yield
D. The bond’s yield to call is higher than its yield to maturity
Correct Answer: A. When a bond sells at par, its coupon rate equals the market yield. Thus, nominal yield = current yield = YTM (and YTC as well). The investor’s only return is the coupon interest since there’s no discount or premium
A callable bond is a bond that:
A. allows bondholders to extend its maturity at their option.
B. can be redeemed ("called") by the issuer before it matures.
C. can be converted into equity at the issuer’s discretion.
D. pays no interest until maturity.
B. can be redeemed ("called") by the issuer before it matures.
Which of the following is a key difference between Treasury bills and Treasury notes?
A) Treasury bills have maturities of one year or less, whereas notes have maturities ranging from 2 to 10 years.
B) Treasury bills pay regular coupon interest, whereas notes pay all interest at maturity.
C) Treasury bills are issued by the Federal Reserve, whereas notes are issued by the U.S. Treasury.
D) Treasury bills are sold at par value, whereas notes are sold at a discount only.
A. Treasury bills pay no periodic interest (coupon); they are sold at a discount and return face value at maturity, so A is correct. The other choices (notes, bonds, etc.) pay regular semiannual interest, which is why they are not correct for this question.
All of the following statements about open-end (mutual) funds are true EXCEPT:
I. They continuously issue and redeem shares in response to demand;
II. Their shares trade on the secondary market like common stock;
III. Investors can redeem shares directly with the fund at NAV;
IV. The number of shares outstanding can increase or decrease daily.
A. I only
B. II only
C. III only
D. IV only
B. Open-end funds (mutual funds) do not trade on exchanges. They continuously create or redeem shares at NAV (not on a secondary market), and the share count fluctuates daily. Statement II is false (mutual funds cannot trade like stock).
Which of the following statements about mutual fund share pricing are correct?
I. The public offering price (POP) of a front-end load fund is equal to the NAV plus the sales charge per share.
II. The POP can be calculated by dividing the NAV by (1 minus the front-end sales load percentage).
III. The sales charge percentage per share can be calculated as (POP – NAV) / NAV.
A) I and II only
B) I and III only
C) II and III only
D) I, II, and III
Correct Answer: A – Statements I and II are correct. By definition, POP = NAV + sales charge (so I is true), and POP can be calculated as NAV ÷ (1 – load%) (so II is true). Statement III is false because the sales charge percentage is (POP – NAV)/POP, not divided by NAV. (In practice, if NAV = $X and load = L%, then POP = $X/(1–L%)
A bond is trading at a premium. Which of the following accurately depicts the relationship among its yields?
I. Nominal yield (coupon) > Current yield
II. Current yield > Yield to Maturity (YTM)
III. Yield to Maturity > Yield to Call (YTC)
IV. Current yield > Nominal yield
A. I, II, and III
B. I and IV only
C. II, III, and IV only
D. I, II, III, and IV
Correct Answer: A. For a premium bond, the ranking from highest to lowest yield is: Nominal (coupon) > Current > YTM > YTC
Which of the following is true of a convertible bond?
A. The issuer has the option to convert the bond into its own stock.
B. The bondholder can convert the bond into a specified number of the issuer’s shares.
C. It can be sold back to the issuer at par before maturity.
D. It pays dividends instead of interest.
B. The bondholder can convert the bond into a specified number of the issuer’s shares.
An investor needs a guaranteed lump sum payment in 10 years and does not want to worry about reinvestment of interest along the way. Which of the following would best meet that objective?
A) Buy a 10-year Treasury STRIP that matures when the funds are needed.
B) Buy a new 10-year Treasury note and reinvest the semiannual coupons at market rates.
C) Buy a 10-year TIPS, ignoring the interim inflation adjustments.
D) Continuously roll over 3-month Treasury bills for 10 years.
B. When market interest rates rise, existing fixed-rate Treasury bond prices fall, so option B is correct (reflecting the inverse price-yield relationship). Any choice suggesting that prices would rise with interest rates or remain unchanged is incorrect.
All of the following describe face-amount certificate (FAC) companies EXCEPT: I. Investors fund the contract by periodic payments or a lump sum; II. They offer fixed payouts at maturity; III. Certificates are redeemable for a cash value before maturity; IV. They actively trade a portfolio of securities on behalf of investors.
A. I only
B. II only
C. III only
D. IV only
D. FACs issue certificates with fixed payouts at maturity and are funded by periodic or lump-sum paymentsapp.achievable.me. They allow redemption before maturity (at a surrender value). They are not actively traded portfolios – statement IV is false.
Given:
NAV = $22.50
POP = $24.00
All of the following statements are correct EXCEPT:
A) The sales-charge percentage is 6.25%.
B) The dollar amount of the sales charge is $1.50 per share.
C) The formula used is (POP – NAV)/POP.
D) The investor pays $24.00 to purchase each share.
Answer A – because precise sales-charge = 6.33%, not 6.25%.
An investor buys a 6% coupon bond for $900. Which of the following statements about this bond is true?
A. The bond is trading at a discount to its $1,000 par value
B. The bond’s current yield is approximately 6.67%
C. The bond’s yield to maturity is higher than its current yield
D. All of the above are true
Correct Answer: D. All of the above are true.
Which of the following bonds has the highest degree of interest rate risk (price sensitivity)?
A. 5-year bond with a 5% coupon
B. 5-year zero-coupon bond
C. 20-year bond with a 5% coupon
D. 20-year zero-coupon bond
D. 20-year zero-coupon bond
Which of the following statements about the taxation of Treasury securities is/are correct?
I. Interest earned on Treasury bills, notes, and bonds is subject to federal income tax.
II. Interest on U.S. Treasuries is exempt from state and local income taxes.
III. The inflation adjustment to the principal of a TIPS is taxable in the year it occurs.
IV. Interest income from Treasury STRIPS is not taxed until maturity (when the payment is received).
A) I, II, and III only
B) I and II only
C) III and IV only
D) I, II, III, and IV
C. An inverted yield curve (option C) is when short-term Treasury yields are higher than long-term Treasury yields. The other choices describe different yield curve shapes (normal or flat) or are unrelated terms, so they don’t match the inverted scenario.
All of the following statements about Real Estate Investment Trusts (REITs) are correct EXCEPT:
I. They must distribute at least 90% of taxable income to shareholders;
II. At least 75% of assets (and of income) must be invested in real estate or mortgages;
III. They allow investors to pass through investment losses to offset other income;
IV. They may be either publicly traded or non-traded entities.
A. I only
B. II only
C. III only
D. IV only
C. REITs must distribute ≥90% of taxable income and have ≥75% of assets/income in real estate, and they cannot pass investment losses through to share. Statement III is false (REITs pass through income, but not losses).
Which of the following statements about sales-charge calculation methods are FALSE?
I. When the NAV and POP are known, the percentage sales charge equals (POP – NAV)/NAV.
II. When the NAV and POP are known, the correct formula is (POP – NAV)/POP.
III. The sales-charge percentage can never exceed 8.5% under FINRA rules.
A) I only
B) II only
C) I and II only
D) I and III only
A) – I is false because the denominator must be POP, not NAV. II and III are correct.
A 5% annual-coupon corporate bond is priced at $900. Which statement is most accurate regarding its yields?
A. The bond’s yield to maturity is higher than its current yield
B. The bond’s yield to maturity is equal to 5%
C. The bond’s current yield and yield to maturity are equal
D. The bond’s current yield is higher than its yield to maturity
Correct Answer: A. For a bond priced at $900 with a 5% coupon, the current yield = $50/$900 ≈ 5.56%. The bond is at a discount, so the YTM must be higher than 5.56% to account for the $100 gain at maturity. It’s certainly above the coupon 5% as well.
Which of these bonds will be least sensitive to interest rate changes?
A. A 1-year Treasury bill
B. A 30-year Treasury bond paying an 8% coupon
C. A 30-year floating-rate bond with coupons resetting quarterly
D. A 10-year zero-coupon bond
C. A 30-year floating-rate bond with coupons resetting quarterly
Which of the following statements about Treasury bills (T-bills), notes, and bonds is/are correct?
I. Treasury bills do not pay coupon interest, while Treasury notes and bonds do pay semiannual coupons.
II. Treasury bonds have longer original maturities than Treasury notes.
III. Treasury bills are typically issued at a discount and redeemed at face value at maturity.
IV. Treasury notes carry higher default risk than Treasury bills or bonds.
A) I and II only
B) II, III, and IV only
C) I, II, and III only
D) I, III, and IV only
C. Treasury bills are used to meet the government’s short-term financing needs (they mature in a year or less and are issued frequently), so option C is correct. Treasury notes and bonds (options A and B) are for longer-term funding and wouldn’t be used for very short-term cash requirements, and any non-Treasury instrument mentioned would be irrelevant here.
Which of the following are managed investment companies?
I. Open-end (mutual) fund;
II. Closed-end fund;
III. Unit Investment Trust;
IV. Face-amount certificate company.
A. I and II only
B. I and III only
C. II and IV only
D. III and IV only
Answer: A. A “management company” (open-end or closed-end fund) is any investment company other than a UIT or FAC. Thus open-end and closed-end funds are managed companies. UITs and FACs are not managed companies. Options I and II are correct.
An investor buys shares at POP = $30.00 when NAV = $28.20.
I. The sales-charge percentage ≈ 6%.
II. If NAV rises to $29.50 and POP remains constant, the effective sales-charge percentage declines.
III. If the fund eliminated its load, the investor would pay $28.20 per share.
A) I only
B) I and III only
C) II and III only
D) I, II, and III
D) – All are correct: (30 – 28.2)/30 ≈ 6%; higher NAV reduces effective load ratio; no-load fund → POP = NAV.