BigDaddy U | SIE Module 4 Test Bank

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1. All the following statements are correct regarding U.S. Treasury bills, EXCEPT:

A. Treasury bills are not subject to state and local income taxation.

B. Treasury bills are always issued at a discount from their face value.

C. Buyers who have accepted competitive bids on a Treasury bill will pay a lower price than the price paid by non-competitive buyers.

D. Treasury bills offer investors the lowest yield of all government bond issues.

2. Which of the following investments would have the lowest yield of any money market security?

A. Bankers’ acceptances.

B. Treasury bills.

C. Eurodollars.

D. Negotiable CDs.

3. Which of the following statements is correct regarding long-term debt instruments?

A. U.S. Treasury bonds are issued with maturities from one to 10 years.

B. General obligation bonds are municipal bonds backed by revenues from a designated project.

C. Government agency issues provide slightly higher returns than Treasury securities of comparable maturity.

D. The “ask” price of a Treasury bond quotation represents the price that a dealer is willing to pay for the bond.

4. Which of the following statements is correct regarding debt issued by the federal government?

A. Treasury securities are issued in minimum denominations of $10,000.

B. Interest earned on Treasury securities is not subject to state income tax.

C. Treasury STRIPS offer a coupon rate that adjusts periodically to match the prime rate.

D. The owner of a TIPS will receive a fixed coupon payment twice per year.

5. Which of the following statements is correct regarding the characteristics of bonds?

A. Debentures are corporate bonds that are backed by specific collateral.

B. An indenture is basically a contract between the bond issuer and the bondholders.

C. Bonds that are trading “flat” include an adjustment for accrued interest.

D. With income bonds, the greater the income earned by the issuer, the more interest paid on the bond.

6. A 35-year-old single individual with income of $45,000 invested in Series EE Savings Bonds, a Tax-Exempt bond mutual fund, and Treasury Bills. All of the following statements are correct regarding the taxation of these investments, EXCEPT:

A. Interest income from the municipal bond fund is federally tax-exempt.

B. When the Series EE bond is redeemed, it will not be subject to state income tax.

C. The Treasury Bills are federally taxed only upon maturity, unless sold prior to maturity.

D. Capital appreciation from the municipal bond fund is federally tax-exempt when the fund is sold.

7. Steve purchased some 7-year, $10,000 par value Treasury Inflation-Protected Securities (TIPS), with a coupon rate of 1%. Based on the consumer price index, the inflation-adjusted principal of his bonds is now $10,200. Which of the following statements is correct regarding this security?

A. Steve will receive a fixed coupon payment of $50 every six months.

B. The $100 of additional principal will be taxed at the bond’s maturity.

C. The $100 of additional principal will be taxed at ordinary income rates this year.

D. The $100 of additional principal will decrease Steve’s tax basis in the TIPS.

8. Which one of the following statements is correct regarding Eurobonds and foreign bonds?

A. They must be denominated in the currency of their issuing country.

B. Their maturities typically exceed 20 years.

C. They pay a higher coupon rate than domestic bonds due to their additional risks.

D. The interest earned on these bonds is not subject to federal income taxation.

9. Which of the following statements is correct regarding government debt instruments?

A. Treasury bonds are issued with maturities from 1-10 years.

B. General obligation bonds are municipal bonds backed by revenues from a designated project.

C. Government agency issues provide slightly higher returns than Treasury securities of comparable maturity.

D. Treasury bills pay coupon interest twice per year.

10. Which one of the following is a characteristic of a Treasury bill?

A. Sold at a premium to face value.

B. Taxation occurs only at maturity.

C. Maturity is typically 5-10 years.

D. Coupon interest is paid semi-annually.

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11. Which one of the following statements is correct regarding long-term debt securities?

A. Revenue bonds typically offer higher yields than general obligation bonds.

B. Industrial bonds are bonds issued by railroads and public utility companies.

C. Federal National Mortgage Association bonds are backed by the full faith and credit of the U.S. government.

D. Municipal bonds typically offer higher interest rates than comparable corporate bonds.

12. A company is considering issuing a bond. Assuming they would like the right to pay off the bond before its maturity, the most appropriate bond to issue would be a:

A. Callable bond.

B. Convertible bond.

C. Adjustable rate bond.

D. Serial bond.

13. Which of the following bonds has the highest credit risk to the bondholder?

A. Mortgage-backed security.

B. Asset-backed security.

C. Secured bond.

D. Debenture bond.

14. All of the following statements are correct regarding bond ratings EXCEPT:

A. Bond ratings are changed frequently, most often occurring immediately after a change in fundamentals.

B. Default risk can be minimized by purchasing investment-grade bonds.

C. Bonds rated less than Baa (Moody’s) or BBB (Standard and Poor’s) are known as junk bonds.

D. Bond ratings tend to decrease with corporate earnings volatility, debt, and increased defined benefit plan obligations.

15. Which one of the following statements is correct regarding various types of investments?

A. Demand deposit accounts are freely traded in the secondary market.

B. Treasury bills pay a fixed rate of interest every six months until maturity.

C. Money market funds are unsecured promissory notes issued by corporations with a maturity of up to 270 days.

D. American Depositary Receipts pay dividends in U.S. dollars.

16. Assume each of the following bonds will mature in 10 years:
• Bond A – U.S. Treasury bond with a 5% coupon, currently selling for $112.50.
• Bond B – U.S. Treasury strip bond (zero coupon), currently selling for $90.25.
• Bond C – A corporate B-rated bond with a coupon of 4%, currently selling for $105.50.
Which one of the following statements is correct regarding these bonds?

A. Bond C has the highest interest rate risk.

B. Bond A has the highest default risk.

C. Bond B has the longest duration.

D. Bond C has the highest reinvestment rate risk.

17. John, a resident of Louisiana, purchased a state of New York municipal bond. Which of the following represents the taxation of the interest?

A. Federal - Taxable; Lousiana - Tax-free

B. Federal - Taxable; Lousiana - Taxable

C. Federal - Tax-free; Lousiana - Taxable

D. Federal - Tax-free; Lousiana - Tax-free

18. Johnny, age 31, has $60,000 he wants to invest in tax-advantaged securities that emphasize income over capital appreciation. He currently makes the maximum allowable contribution to his 401(k) plan sponsored by his employer. Which one of the following securities would allow him to receive a relatively stable level of income while at the same time minimizing his current year tax liability?

A. High-yield bond mutual fund.

B. Series EE savings bonds.

C. Municipal bonds.

D. U.S. Treasury bills.

19. Which one of the following represents a short-term interest-bearing security issued by a local municipality for temporary financing needs?

A. Unit Investment Trust.

B. Bond Anticipation Note.

C. Private Placement.

D. Private Activity Bond.

20. Which one of the following statements is correct regarding commercial paper?

A. It is free of default risk.

B. It has a maturity of two years or less.

C. It is an unsecured debt instrument issued by a corporation.

D. It is issued in denominations of $5,000 or greater.

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21. The safest rated bonds are referred to as:

A. Zero-coupon bonds.

B. Junk bonds.

C. Investment grade bonds.

D. Revenue bonds.

22. A callable bond typically:

A. Is not subject to interest rate risk.

B. Offers a lower interest rate than on otherwise similar non-callable bonds.

C. Is called at a value that is slightly above the par value of the bond.

D. Is called if market interest rates move higher.

23. Which one of the following statements is correct regarding convertible bonds?

A. The bond exhibits characteristics of a put option on the stock of the issuer.

B. The holder can convert the bond into shares of common stock of the issuer.

C. The bond price is influenced by the number of outstanding shares of the issuer.

D. The convertible feature permits the issuer to retire the bonds early if interest rates rise.

24. A city in Ohio is issuing tax-exempt bonds to build a highway. Interest payments made by the city on the bonds will be payable from the taxes collected from residents living in the city. Which one of the following types of bonds were issued by the city?

A. General obligation bonds.

B. Eurobonds.

C. Revenue bonds.

D. Debentures.

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