FINRA Series 6 Exam Practice Questions (P. 4)
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Question #31
MBIA, Inc., a municipal bond insuring company, has a bond issue that is selling for $80.05 per $100 of par. The bond has a coupon rate of 7%, with semiannual payments, and matures in 2025. The current yield on this bond is:
- A8.745%.
- B7.000%.
- C9.550%.
- Dnone of the above
Correct Answer:
A
The current yield on this MBIA bond is 8.745%. The current yield is the annual interest payment of $7 per $100 of par divided by the bond price of
$80.05: $7/$80.05 = 8.745%.
A
The current yield on this MBIA bond is 8.745%. The current yield is the annual interest payment of $7 per $100 of par divided by the bond price of
$80.05: $7/$80.05 = 8.745%.
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Question #32
MBIA, Inc., a municipal bond insuring company, has a bond issue that is selling for $80.05 to yield 9.5%. The bond has a coupon rate of 7%, with semiannual payments, and matures in 2025.If interest rates in the economy increase, which of the following statements will be true, all else equal?
I. the nominal yield of the bond will increase.
II. the yield-to-maturity of the bond will increase.
III. the current yield of the bond will increase.
I. the nominal yield of the bond will increase.
II. the yield-to-maturity of the bond will increase.
III. the current yield of the bond will increase.
- AI only
- BI and II only
- CII and III only
- DI, II, and III
Correct Answer:
C
Only statements II and III are true. If interest rates in the economy increase, both the bonds yield-to-maturity and its current yield will increase. The bonds yield-to-maturity will increase to reflect current market rates on similar risk investments, and this, in turn, causes the price of the bond to fall. The current yield of the bond is the interest payment divided by the bond price. Since the interest payment does not change with interest, the current yield will increase with the decrease in the bond price. The nominal yield of the bond is the same as its coupon rate, or what it yields when it sells at its par value, and does not change with changes in interest rates in the economy.
C
Only statements II and III are true. If interest rates in the economy increase, both the bonds yield-to-maturity and its current yield will increase. The bonds yield-to-maturity will increase to reflect current market rates on similar risk investments, and this, in turn, causes the price of the bond to fall. The current yield of the bond is the interest payment divided by the bond price. Since the interest payment does not change with interest, the current yield will increase with the decrease in the bond price. The nominal yield of the bond is the same as its coupon rate, or what it yields when it sells at its par value, and does not change with changes in interest rates in the economy.
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Question #33
A bond has a face value of $1,000, matures in 10 years, and pays an 8% coupon, with interest paid semiannually. If the bond is priced to yield 8.8%, it is selling:
- Aat par.
- Bat a discount.
- Cat a premium.
- Dat its maturity value.
Correct Answer:
B
If the bond is priced to yield 8.8%, it is selling at a discount. Its nominal yield is the same as its coupon rate, 8%, which is what it would yield if it were selling at its par value, which is the same as its maturity value and its face value--$1,000. In order to be yielding more than this, the bond has to be selling for less than its face value, such that investors are also getting a return from capital gains. A bond that is selling below its face value is said to be selling at a discount.
B
If the bond is priced to yield 8.8%, it is selling at a discount. Its nominal yield is the same as its coupon rate, 8%, which is what it would yield if it were selling at its par value, which is the same as its maturity value and its face value--$1,000. In order to be yielding more than this, the bond has to be selling for less than its face value, such that investors are also getting a return from capital gains. A bond that is selling below its face value is said to be selling at a discount.
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Question #34
A bond has a face value of $1,000, matures in 12 years, and pays an 4% coupon, with interest paid semiannually. If the bond is priced to yield 3.5%, it is selling:
- Aat par.
- Bat a discount.
- Cat a premium.
- Dat its maturity value.
Correct Answer:
C
If the bond is priced to yield 3.5%, it will be selling at a premium. The coupon rate of 4% is also the bonds nominal rate, which is what the bond would be yielding if it were selling at its par value. If it is yielding less than this, it means that the bond is selling for more than its par value, which is the same as its maturity value. A bond that sells for more than its par value is said to be selling at a premium.
C
If the bond is priced to yield 3.5%, it will be selling at a premium. The coupon rate of 4% is also the bonds nominal rate, which is what the bond would be yielding if it were selling at its par value. If it is yielding less than this, it means that the bond is selling for more than its par value, which is the same as its maturity value. A bond that sells for more than its par value is said to be selling at a premium.
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Question #35
Which of the following is not a function performed by an investment banker as part of a full commitment underwriting?
- Aprovides advice to the issuing firm on the projects in which it should invest the money raised
- Bprovides advice to the issuing firm on what type of security should be issued in order to raise the funds
- Cpurchases the securities from the issuing firm
- Dprovides short-term price support for the security after it begins trading in the secondary market
Correct Answer:
A
The investment banker does not advice the issuing firm on the projects in which it should invest the money raised in a full commitment underwriting. It does advise the issuing firm on what type of security it should issue in order to raise the money; it purchases the securities from the issuing firm for immediate resale to the public; and it provides price support for the security for a short time after it begins trading in the secondary market.
A
The investment banker does not advice the issuing firm on the projects in which it should invest the money raised in a full commitment underwriting. It does advise the issuing firm on what type of security it should issue in order to raise the money; it purchases the securities from the issuing firm for immediate resale to the public; and it provides price support for the security for a short time after it begins trading in the secondary market.
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Question #36
A bond issued by the Needy Corporation pays an 8% coupon, matures in ten years, and is selling for its face value of $1,000. The yield-to-maturity on this bond is:
- Aless than its coupon rate of 8%
- Bgreater than its coupon rate of 8%.
- Cequal to its coupon rate of 8%.
- Dindeterminable with the information provided.
Correct Answer:
C
Since the bond is selling for its face value, its yield-to-maturity is equal to its coupon rate.
C
Since the bond is selling for its face value, its yield-to-maturity is equal to its coupon rate.
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Question #37
Which of the following bonds will experience the greatest percentage change in price for a given change in interest rates?
- Aa bond with 5 years to maturity that pays a 5% coupon
- Ba bond with 10 years to maturity that pays a 5% coupon
- Ca bond with 5 years to maturity that pays a 7% coupon
- Da bond with 10 years to maturity that pays a 7% coupon
Correct Answer:
B
The bond that will experience the greatest percentage change in price for a given change in interest rates is the bond with 10 years to maturity that pays a 5% coupon. Bonds with longer durations experience greater changes in price, and the long maturity, low coupon bonds have longer durations.
B
The bond that will experience the greatest percentage change in price for a given change in interest rates is the bond with 10 years to maturity that pays a 5% coupon. Bonds with longer durations experience greater changes in price, and the long maturity, low coupon bonds have longer durations.
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Question #38
Pete Prophet, the manager of a bond mutual fund, is expecting interest rates to increase. All else equal, which of the following bonds would be the best investment under this assumption?
- Aa Treasury strip with 15 years to maturity
- Ba bond with a 10% coupon and 5 years to maturity
- Ca bond with a 5% coupon and 10 years to maturity
- Da zero-coupon corporate bond with 12 years to maturity
Correct Answer:
B
If Pete is expecting interest rates to increase, the bond with a 10% coupon and 5 years to maturity is the best investment. If interest rates increase, bond prices fall, so he will want to invest in the bond that will have the lowest percentage decrease in price. This will be the bond with the shortest duration, which is the bond described in Choice B. It has the highest coupon and the fewest years to maturity.
B
If Pete is expecting interest rates to increase, the bond with a 10% coupon and 5 years to maturity is the best investment. If interest rates increase, bond prices fall, so he will want to invest in the bond that will have the lowest percentage decrease in price. This will be the bond with the shortest duration, which is the bond described in Choice B. It has the highest coupon and the fewest years to maturity.
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Question #39
Common stock and preferred stock differ in that:
- Athe firm is legally mandated to make the dividend payments on its preferred stock; there is no legal obligation to make dividend payments on its common stock.
- Bcommon stock pays a fixed dividend while the dividend associated with preferred stock will typically increase as the earnings of the firm increases.
- Cpreferred stockholders have more voting rights than the common stockholders of the firm.
- Dpreferred stockholders will receive their part of the proceeds if the firm is liquidated before the common shareholders receive anything.
Correct Answer:
D
Common stock and preferred stock differ in that preferred stockholders will receive their part of the proceeds if the firm is liquidated before the common shareholders receive anything. Neither preferred stock nor common stock dividends are legal obligations of the firm. Preferred stock typically pays a fixed dividend that does not vary with the firms earnings, while the common stock dividend may.
Except in special circumstances specified in the preferred stock agreement, preferred shareholders have no voting rights.
D
Common stock and preferred stock differ in that preferred stockholders will receive their part of the proceeds if the firm is liquidated before the common shareholders receive anything. Neither preferred stock nor common stock dividends are legal obligations of the firm. Preferred stock typically pays a fixed dividend that does not vary with the firms earnings, while the common stock dividend may.
Except in special circumstances specified in the preferred stock agreement, preferred shareholders have no voting rights.
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Question #40
An ADR is:
- Aa bond issued by an American firm that is denominated in dollars, but is sold to foreign investors.
- Ba receipt designating ownership of shares of a foreign stock that are held in a trust.
- Canother name for bankers’ acceptances.
- Da certificate of deposit offered by a foreign bank that is denominated in U.S. dollars.
Correct Answer:
B
An ADR is a receipt designating ownership of shares of a foreign stock that are held in a trust. The acronym stands for American Depository Receipt.
B
An ADR is a receipt designating ownership of shares of a foreign stock that are held in a trust. The acronym stands for American Depository Receipt.
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