A 7% general obligation bond is issued with 20 years to maturity. A customer buys the bond on a 7.50%
basis. The bond contract allows the issuer to call the bonds in 5 years at 102 1/2, with the call premium
declining by 1/2 point a year thereafter. The bond is puttable in 5 years at par. The price of the bond to a
customer would be calculated based on the: - #36
20 year maturity
The best answer is D.
This is a very difficult question. Since the bond has a stated rate of interest of 7%, but is priced to yield
7.50%, the bond is being sold at a discount. The amount of the discount to which this equates is about
$140 (you do not need to know how to do this, but you do need to understand the concept that
follows). The dollar price of the bond would be $860 to yield 7.50% to maturity. Under MSRB rules,
bonds are priced on a worst case basis, meaning in this case where the discount ($140 in this case) is
earned over the longest period of time. This occurs if the bonds are held to maturity. If the bonds are
called earlier, the yield actually improves on the bonds, since the customer earns the discount faster.
Ford Motor Company has issued 8% convertible debentures, convertible at a 10:1 ratio. Currently the
debenture is trading at 94. The stock is trading at $80. What is the conversion price of the stock? - 40
Ford Motor Company has issued 8% convertible debentures, convertible at a 10:1 ratio. Currently the
debenture is trading at 94. The stock is trading at $80. What is the conversion price of the stock?
A. $10
B. $80
C. $94
D. $100
The best answer is D.
The bond is convertible into common at a 10:1 ratio, based on the par value of the bond. The
conversion price formula is: 1000/10
, All of the following securities are quoted on a yield basis EXCEPT: - 46
All of the following securities are quoted on a yield basis EXCEPT:
American Depositary Receipts
The best answer is C.
Money market instruments are original issue discount obligations quoted on a yield basis that are
priced at a discount to par (with the exception of negotiable certificate of deposit that are priced at par
plus accrued interest). The discount from par is the interest earned. American Depositary Receipts are
not a money market instrument. They are essentially shares of a foreign company, traded domestically
similar to equity securities. They are dollar price quoted in 1/8ths.
Which of the following statements are TRUE regarding warrants? - The exercise price of a warrant is set
at a premium to the stock's current market price
Warrants are exercised when the exercise price is below the market price
Which of the following statements are TRUE regarding warrants? - Warrants are considered to be an
equity-related security
Warrants allow the holder to buy the stock of that issuer at a fixed price
Warrants are attractive to speculators because of the leverage that they offer
The payment of interest and principal on these bonds is secured by the: - full faith and credit of Toga
County Corporation
The best answer is A.
Since these bonds are debentures, they are backed solely by the full faith and credit of the issuer. There
is no property backing these bonds.
The nominal interest rate on a TIPS is: - less than the rate on an equivalent maturity Treasury Bond
Which statements are TRUE regarding ETFs (Exchange Traded Funds)? - I ETFs are available on broad-
based stock indexes
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