Question 1

Bubba want to buy a CMO. In general, how often should he expect to receive interest payments?
A)every week
B)every month
C)every year
D)at maturity

Accepted Answer

every month. Collateralized Mortgage Obligations generally pay interest each month. However, some CMOs pay interest quarterly or semiannually.

Question 2

A CMO is issued that has three tranches. One has an average life of 2 years. A second has an average life of 10 years. The third has an average life of 30 years. Initially, interest payments are distributed in this order:
A)first to the holders of the 2-year tranche
B)first to the holders of the 10-year tranche
C)first to the holders of the 30-year tranche
D)equally to all CMO holders of any tranche

Accepted Answer

equally to all CMO holders of any tranche. All bondholders share equally in the interest payments. Only principal payments are directed to the owners in each tranche in sequential order.

Question 3

Which of the following have a stated interest rate on the face of the certificates?
A)treasury bills
B)treasury notes
C)treasury bonds
D)both B and C

Accepted Answer

both B and C. Treasury notes and treasury bonds have stated interest rates. Treasury bills are always sold at a discount to the face amount payable at maturity.

Question 4

Bubba buys a US treasury bond. The interest he earns is:
A)subject to federal and state income tax
B)exempt from federal and state income tax
C)subject to state income tax but exempt from federal income tax
D)subject to federal income tax but exempt from state income tax

Accepted Answer

subject to federal income tax but exempt from state income tax. The interest on US government securities is taxed by the US government but not by state governments. The opposite is true of bonds issued by a state, which are exempt from federal tax but subject to state taxes-except for taxes of the state that issues them.

Question 5

Which of the following does not issue debt securities that trade in the open market?
A)Fannie Mae
B)Freddie Mac
C)Federal Reserve Banks
D)Federal Land Banks

Accepted Answer

Federal Reserve Banks. Debt securities are not issued by Federal Reserve Banks. All of the other entities do issue debt securities.

Question 6

When depositors withdraw money from savings institutions to invest in US treasury securities, this is called:
A)the multiplier effect
B)disintermediation
C)reverse repo
D)open market operations

Accepted Answer

disintermediation. An easier word would be preferable, but that's the correct term.

Question 7

Smart Company, Inc., has cash it intends to use in six months for purchase of equipment. The most prudent investment during the six-month period is:
A)common stock
B)preferred stock
C)treasury bills
D)treasury bonds

Accepted Answer

treasury bills. The most prudent investment provides the cash in the six-month short-term period. Common and preferred stock are subject to significant price uncertainty. US treasury issues provide the most safety of principal. Treasury bonds have longer maturities than the six-month terms available for treasury bills.

Question 8

Which of the following is identified as a funded debt instrument?
A)US treasury bond
B)Series EE savings bond
C)corporate bond
D)Fannie Mae bond

Accepted Answer

corporate bond. All of the other securities are issues backed by the US government, which are not considered funded debt.

Question 9

A typical money market instrument carries which of the following?
A)serial bond maturity date
B)long-term maturity date
C)medium-term maturity date
D)short-term maturity date

Accepted Answer

short-term maturity. A money market maintains liquidity and is defined as having maturity of less than one year.

Question 10

An offering price of 102 plus accrued interest applies to which of the following securities?
A)treasury bills
B)certificates of deposit
C)commercial paper
D)banker's acceptances

Accepted Answer

certificates of deposit. CDs trade with "accrued interest" as part of the price.

Question 11

Bubba Corporation owes income tax. Which of the following may be tendered at par value for payment of the tax?
A)term bond
B)tax anticipation bill
C)special tax bond
D)pre-issue bond

Accepted Answer

tax anticipation bill. These are specifically designated securities that may be used at face value for payment of corporate taxes.

Question 12

An advertisement for a CMO security by a member of FINRA should disclose which of the following?
A)the exact yield investor will earn
B)the yield based upon the prevailing discount rate
C)that the stated yield is an estimate that may vary passed upon prepayments and market factors
D)that the yield may be greater than the stated percentage but never less

Accepted Answer

that the stated yield is an estimate that may vary passed upon prepayments and market factors. The only guarantee is that nothing is guaranteed, especially the yield.

Question 13

Which of the following statements incorrectly describes US securities markets?
A)a capital market comprised of long-term debt and equity issues
B)a money market comprised of short-term debt and equity issues
C)a municipal market comprised of tax-exempt issues of state and local governments
D)a government and agency market comprised of both short-term and long-term debt issues

Accepted Answer

a money market comprised of short-term debt and equity issues. This is the statement that is "incorrect". Equity issues are not traded in the money market, which consists only of high-quality short-term debt securities.

Question 14

What rate of return takes into consideration appreciation or depreciation in market value relating to the par value of a debt security?
A)current yield
B)yield to maturity
C)nominal yield
D)basis yield

Accepted Answer

yield to maturity. The premium or discount in the security price relative to par value is considered when computing the yield to maturity.

Question 15

Which of the following is not an attribute of US treasury bills?
A)an unusually high degree of liquidity
B)always sells at a discount to face value
C)is most often issued with three-month, six-month, and one-year maturities
D)interest is exempt from federal income taxes

Accepted Answer

interest is exempt from federal income taxes. This is the choice that is "not" an attribute of treasuries. All of the other choices are attributes of US treasury bills, which are subject to federal income taxes.

Question 16

Under which of the following conditions are homeowners most likely to refinance existing mortgages?
A)when interest rates rise
B)when interest rates fall
C)when interest rates are stable
D)when the yield curve is inverted

Accepted Answer

when interest rates fall. Homeowners are most likely to refinance when rates are lower than the past.

Question 17

Which of the following is not true about US treasury bills?
A)they are issued at a discount
B)they are money market instruments
C)they are issued in denominations of $1,000 to $1,000,000
D)they are general obligations of the US government

Accepted Answer

they are issued in denominations of $1,000 to $1,000,000. Remember, the question asks what is "not" true. The smallest denomination for a US treasury bill is $10,000.

Question 18

CMOs are sold and priced based upon which of the following:
A)expected average life
B)stated maturity
C)current yield
D)par value

Accepted Answer

expected average life. The average life of a CMO is the length of time that each dollar of invested principal is expected to remain outstanding. Pricing of CMOs is based upon this factor.

Question 19

FINRA advertising standards permit a dealer to state that a CMO has an implied AAA rating if the securities are issued:
A)with an average life no longer than ten years
B)by a US government agency
C)by a private issuer who has not yet received an expected AAA rating
D)in amounts less than $1,000,000

Accepted Answer

by a US government agency. Since government agencies do not apply for ratings, it is permissible to state that its issues have an "implied AAA rating". Private issuers must receive a rating in order to state it in advertising.

Question 20

What is the term applied to a classification of CMO securities having a stated maturity, average life, and estimated yield?
A)tranche
B)tier
C)bracket
D)bucket

Accepted Answer

tranche. That's the term used to describe a separate class within a CMO issue.

Quiz 2: Investment and Securities

Bubba want to buy a CMO. In general, how often should he expect to receive interest payments?

A CMO is issued that has three tranches. One has an average life of 2 years. A second has an average life of 10 years. The third has an average life of 30 years. Initially, interest payments are distributed in this order:

Which of the following have a stated interest rate on the face of the certificates?

Bubba buys a US treasury bond. The interest he earns is:

Which of the following does not issue debt securities that trade in the open market?

When depositors withdraw money from savings institutions to invest in US treasury securities, this is called:

Smart Company, Inc., has cash it intends to use in six months for purchase of equipment. The most prudent investment during the six-month period is:

Which of the following is identified as a funded debt instrument?

A typical money market instrument carries which of the following?

An offering price of 102 plus accrued interest applies to which of the following securities?

Bubba Corporation owes income tax. Which of the following may be tendered at par value for payment of the tax?

An advertisement for a CMO security by a member of FINRA should disclose which of the following?

Which of the following statements incorrectly describes US securities markets?

What rate of return takes into consideration appreciation or depreciation in market value relating to the par value of a debt security?

Which of the following is not an attribute of US treasury bills?

Under which of the following conditions are homeowners most likely to refinance existing mortgages?

Which of the following is not true about US treasury bills?

CMOs are sold and priced based upon which of the following:

FINRA advertising standards permit a dealer to state that a CMO has an implied AAA rating if the securities are issued:

What is the term applied to a classification of CMO securities having a stated maturity, average life, and estimated yield?