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Question 1 of 10
1. Question
Which of the following statement(s) is (are) true about option?
I. An option is a security that gives the holder the ability to purchase a given number of shares at a predetermined price.
II. An option is similar to a right in that it is offered and guaranteed directly by the issuing company and allows for the purchase of a specified number of shares at a given price.
III. The time period within which an option is valid is typically much longer than that of a right or option.
IV. An option is a contract between two parties (not the issuing company) that gives the holder of the option the right, but not the obligation, to purchase a given number of securities from the other party at a specified date at an agreed upon price.Correct
An option is a contract between two parties (not the issuing company) that gives the holder of the option the right, but not the obligation, to purchase a given number of securities from the other party at a specified date at an agreed upon price.
Incorrect
An option is a contract between two parties (not the issuing company) that gives the holder of the option the right, but not the obligation, to purchase a given number of securities from the other party at a specified date at an agreed upon price.
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Question 2 of 10
2. Question
Which of the following statement(s) is (are) true about a secured bond?
I. A secured bond is typically issued by a company that uses a particular asset or revenue stream as collateral for the bond as a means to lowering its interest payments.
II. These bonds are less risky to investors than unsecured bonds so investors do not demand as high of an interest rate.
III. A secured bond does not have any specific assets or revenues backing it and the only security an investor has is that in the event of a bankruptcy or liquidation he will be in line ahead of equity security holders as a creditor of the company.
IV. All of the company’s assets and revenue streams back all of its secured bonds.Correct
A secured bond is typically issued by a company that uses a particular asset or revenue stream as collateral for the bond as a means to lowering its interest payments. Because the principal value of the bond is “secured” by a specifically identified asset or the revenue stream, these bonds are less risky to investors than unsecured bonds so investors do not demand as high of an interest rate.
Incorrect
A secured bond is typically issued by a company that uses a particular asset or revenue stream as collateral for the bond as a means to lowering its interest payments. Because the principal value of the bond is “secured” by a specifically identified asset or the revenue stream, these bonds are less risky to investors than unsecured bonds so investors do not demand as high of an interest rate.
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Question 3 of 10
3. Question
Which of the following statement(s) is (are) not true about a zero coupon bond?
I. A zero coupon bond is a bond in which the investor pays a price that is discounted from the face amount of the bond and only receives repayment of the principal at the bond’s maturity;
II. A zero coupon bond does not make any coupon payments.
III. the duration of a zero coupon bond is the remaining maturity since all payments occur at that time.
IV. A zero coupon bond would be attractive to an investor who fears an upcoming fall in interest rates as it minimizes reinvestment risk.Correct
A zero coupon bond is a bond in which the investor pays a price that is discounted from the face amount of the bond and only receives repayment of the principal at the bond’s maturity; this bond does not make any coupon payments. Thus, the duration of the bond is the remaining maturity since all payments occur at that time. This type of bond would be attractive to an investor who fears an upcoming fall in interest rates as it minimizes reinvestment risk.
Incorrect
A zero coupon bond is a bond in which the investor pays a price that is discounted from the face amount of the bond and only receives repayment of the principal at the bond’s maturity; this bond does not make any coupon payments. Thus, the duration of the bond is the remaining maturity since all payments occur at that time. This type of bond would be attractive to an investor who fears an upcoming fall in interest rates as it minimizes reinvestment risk.
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Question 4 of 10
4. Question
Which of the following statement(s) is (are) true about convertible bond?
I. A convertible bond is a type of bond that the investor can choose to convert into a given number of common or preferred shares of the company’s stock.
II. A convertible bond may be an attractive option for an investor who does not wish to take on the full risk of investing in the company’s equity securities but wishes to retain the upside potential of the equity securities.
III. The duration of the convertible bond is the remaining maturity since all payments occur at that time.
IV. A convertible bond would be attractive to an investor who fears an upcoming fall in interest rates as it minimizes reinvestment risk.Correct
A convertible bond is a type of bond that the investor can choose to convert into a given number of common or preferred shares of the company’s stock. This may be an attractive option for an investor who does not wish to take on the full risk of investing in the company’s equity securities but wishes to retain the upside potential of the equity securities.
Incorrect
A convertible bond is a type of bond that the investor can choose to convert into a given number of common or preferred shares of the company’s stock. This may be an attractive option for an investor who does not wish to take on the full risk of investing in the company’s equity securities but wishes to retain the upside potential of the equity securities.
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Question 5 of 10
5. Question
Which of the following statement(s) is (are) true about mortgage-backed security (MBS)?
I. A mortgage-backed security (MBS) is a security with cash flows backed by a pool of mortgages with a given credit rating and expected prepayment rate.
II. Payments of principal and interest on the mortgages are essentially passed through to the security holders.
III. Mortgage-backed security (MBS) is attractive because it is often seen as a higher yielding instrument with relatively low principal risk because it is a secured obligation.
IV. Mortgage-backed security (MBS) is a type of bond that the investor can choose to convert into a given number of common or preferred shares of the company’s stock.Correct
A mortgage-backed security (MBS) is a security with cash flows backed by a pool of mortgages with a given credit rating and expected prepayment rate. Payments of principal and interest on the mortgages are essentially passed through to the security holders. This type of security is attractive because it is often seen as a higher yielding instrument with relatively low principal risk because it is a secured obligation.
Incorrect
A mortgage-backed security (MBS) is a security with cash flows backed by a pool of mortgages with a given credit rating and expected prepayment rate. Payments of principal and interest on the mortgages are essentially passed through to the security holders. This type of security is attractive because it is often seen as a higher yielding instrument with relatively low principal risk because it is a secured obligation.
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Question 6 of 10
6. Question
A collateralized mortgage obligation (CMO) is –
Correct
A collateralized mortgage obligation (CMO) is a specific type of mortgage-backed security in which the bondholders are divided into tranches that determine the order in which they receive principal and interest payments.
Incorrect
A collateralized mortgage obligation (CMO) is a specific type of mortgage-backed security in which the bondholders are divided into tranches that determine the order in which they receive principal and interest payments.
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Question 7 of 10
7. Question
Which of the following statement(s) is (are) true about Treasury bills?
Correct
Treasury bills are fixed income securities issued by the US government with durations of one year or less.
Incorrect
Treasury bills are fixed income securities issued by the US government with durations of one year or less.
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Question 8 of 10
8. Question
Which of the following statement(s) is (are) true about Treasury Inflation Protection Securities (TIPS)?
I. Treasury Inflation Protection Securities (TIPS) were created to attract investors by offering protection against rising inflation, which erodes the value of fixed-income securities.
II. Every six months, the interest rate paid on TIPS is adjusted to reflect changes in the Consumer Price Index (CPI).
III. When inflation is rising, the interest payment paid on TIPS rises; if the CPI were to drop, interest payments would be lowered.
IV. TIPS are sold at lower interest rates than other government securities.Correct
Treasury Inflation Protection Securities (TIPS) were created to attract investors by offering protection against rising inflation, which erodes the value of fixed-income securities. Every six months, the interest rate paid on TIPS is adjusted to reflect changes in the Consumer Price Index (CPI). When inflation is rising, the interest payment paid on TIPS rises; if the CPI were to drop, interest payments would be lowered. Because of this built-in protection, TIPS are sold at lower interest rates than other government securities.
Incorrect
Treasury Inflation Protection Securities (TIPS) were created to attract investors by offering protection against rising inflation, which erodes the value of fixed-income securities. Every six months, the interest rate paid on TIPS is adjusted to reflect changes in the Consumer Price Index (CPI). When inflation is rising, the interest payment paid on TIPS rises; if the CPI were to drop, interest payments would be lowered. Because of this built-in protection, TIPS are sold at lower interest rates than other government securities.
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Question 9 of 10
9. Question
Which of the following statement(s) is (are) true about Municipal bonds?
I. Municipal bonds are exempt from federal taxes.
II. Municipal bonds are exempt from state and local taxes.
III. Municipal bonds are issued without being associated with a specific project or revenue stream of the municipality.
IV. Municipal bonds are issued to finance a particular revenue-generating project and the revenues from that project are specifically earmarked to repay the bondholders.Correct
One of the most attractive features of municipal bonds is that they are exempt from federal taxes and often also from state and local taxes.
Incorrect
One of the most attractive features of municipal bonds is that they are exempt from federal taxes and often also from state and local taxes.
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Question 10 of 10
10. Question
Which of the following statement(s) is (are) true about Treasury receipts?
I. Treasury receipts are fixed income securities issued by the US government with durations of one year or less.
II. Due to Treasury receipt’s short duration, these do not make coupon payment.
III. Treasury receipts are issued at a discount from par so that the return occurs through the increase from the purchase price to par over the duration of the security.
IV. Treasury receipts are guaranteed by the FDIC in the same way that banks accounts are protected.Correct
Treasury bills: fixed income securities issued by the US government with durations of one year or less. Due to their short duration, these securities do not make coupon payments but are issued at a discount from par so that the return occurs through the increase from the purchase price to par over the duration of the security.
Incorrect
Treasury bills: fixed income securities issued by the US government with durations of one year or less. Due to their short duration, these securities do not make coupon payments but are issued at a discount from par so that the return occurs through the increase from the purchase price to par over the duration of the security.