General Obligation (GO) Bonds Flashcards

Correct Answer A. Special tax bond B. Industrial revenue bond Incorrect Answer C. Moral obligation bond D. General obligation bondThe best answer is A. A municipal bond which is secured by taxes other than ad valorem taxes is a special tax bond.

Incorrect Answer A. I only B. II and IV only Correct Answer C. II, III, IV D. I, II, III, IVhe best answer is C. A secured bondholder has a lien on a specific asset of the company - such as securities given as collateral in the form of a collateral trust certificate. A debenture and subordinated debenture (a second layer of debentures issued after the first debenture offering of a company, where the second layer of debentures will be paid after the first layer - thus, they are \"subordinate\" to the first layer of debentures) are promises to pay without any liens on corporate assets. Commercial paper is a short term IOU and is only backed by the issuer's promise to pay.

Incorrect Answer A. Treasury Receipts are U.S. Government bonds stripped of coupons Correct Answer B. Tax on interest earned is deferred until maturity C. Interest and principal are paid at maturity D. Tax on interest earned is due annuallyThe best answer is B. Treasury Receipts are U.S. Government bonds which have been stripped of coupons. The discount must be accreted annually, and the accretion amount is taxable as interest earned for that year. However, no monies are received from the issuer until maturity, when the security is redeemed at par. At this point, the owner receives the face amount but has no tax consequences (since the discount was taxed over the life of the bond).

Correct Answer A. I, II, III B. II, III, IV Incorrect Answer C. I, III, IV D. I, II, III, IVThe best answer is A. Thrift institutions do not operate in the foreign markets. They only conduct business in the State in which they are organized, with their primary purpose being to give mortgages on local real estate, funded by deposits raised locally. All the others participate in the Eurodollar bond market.

Incorrect Answer A. I and II only B. III and IV only C. I, II, III Correct Answer D. I, II, III, IVThe best answer is D. Market Index Linked CDs are a type of \"structured product\" that consists of a \"zero-coupon\" synthetic bond component that grows based on the returns of an equity index; and that has a maturity established by an embedded option, typically 3 years from issuance. Market Index Linked Certificates of Deposit tie their investment return to an equity index, usually the Standard and Poor's 500 Index. This can give a potentially better rate of return than that of a traditional CD. If held to maturity, there is no penalty imposed on any CD. For an early withdrawal, traditional CDs may reduce the interest earned, but there is no loss of principal. In contrast, market index linked CDs typically impose a 3-5% principal penalty for early withdrawal. This \"early withdrawal\" penalty is imposed because the embedded option that established the maturity of the instrument was paid for and now is not being used. Both regular and market index linked CDs qualify for FDIC insurance. Finally, the minimum life for market index linked CDs is typically 3 years; whereas traditional bank CDs can have lives as short as 3 months.

Correct Answer A. I and II B. III and IV C. I and IV Incorrect Answer D. II and IIIThe best answer is A. EMMA is the MSRB's retail oriented website for municipal investors (EMMA stands for Electronic Municipal Market Access). It includes \"RTRS\" - the Real Time Reporting System, which reports municipal bond trades occurring in the secondary market. Bloomberg gives daily electronic quotes for dealer offerings of municipal and corporate bonds in the secondary market. Munifacts is a wire service specializing in new issue (primary market) information. The Bond Buyer is a daily newspaper devoted to the municipal primary market. Both the Bond Buyer and Munifacts are published by the same company - essentially Munifacts is an electronic Bond Buyer with extra information on the municipal secondary market.

Incorrect Answer A. I and II only B. III and IV only Correct Answer C. II, III, IV D. I, II, III, IVThe best answer is C. School district bonds are G.O. issues, paid by unlimited ad valorem taxing power; applicable ratio tests would be debt per capita (How much debt is each citizen of the town responsible for?); debt to assessed valuation (How much debt is there outstanding against the real properties that are assessed taxes to pay for the interest expense on that debt?); and the collection ratio (Of the taxes assessed by the municipality, what percentage is actually collected?) The ratio of pledged revenues to debt service requirement applies to revenue bonds. Pledged revenues are those pledged to pay debt service and any other requirements set in the bond contract. The bondholder has a lien on these revenues. The higher this ratio, the safer a revenue bond, since there is a greater ratio of revenues to cover debt service.

A. 6 month Treasury Bill Incorrect Answer B. 10 year Treasury Note C. 10 year Treasury \"TIP\" Correct Answer D. 10 year Treasury \"STRIP\"The best answer is D. Purchasing power risk is the risk that inflation will cause interest rates to increase; and therefore, bond prices will fall. Treasury \"TIPS\" are Treasury Inflation Protection Securities - the principal amount of these securities is adjusted upwards with the rate of inflation. Even though the interest rate is fixed, the holder receives a higher interest payment, due to the increased principal amount. When the bond matures, the holder receives the higher principal amount. Thus, there is no purchasing power risk with these securities. Treasury STRIPS are zero-coupon Treasury obligations - these have the highest level of purchasing power risk. In contrast, 6 month Treasury bills have a low level of purchasing power risk. Since they will mature at par in the near future, their value cannot fall very far below this if interest rates rise.

Incorrect Answer A. I and II only B. III and IV Correct Answer C. I, II, III D. I, II, III, IVThe best answer is C. Structured products are securities based on, or derived from, a basket of securities, an index, or other securities, commodities or currencies. There are many types of structured products, but generally they consist of a \"bond\" portion, which pays interest based on the performance of a well known index such as the S&P 500 Index. In addition, they have a derivative component (an embedded option) that allows the holder to sell the security back to the issuer (at par) at maturity. These are often marketed as debt instruments, but that is not really the case. Structured products are created by many different brokerage firms and each firm's version is somewhat different. Thus, they are not standardized, and they are fairly illiquid.

A. $875 B. $890 Correct Answer C. $8,750 Incorrect Answer D. $8,900The best answer is C. The bonds of 2021 have a stated interest rate of 8 3/4% x $100,000 principal amount = annual interest of $8,750. These bonds are initially offered at a discount to raise the effective yield of 8.90%.

A. I and III Correct Answer B. I and IV C. II and III Incorrect Answer D. II and IVThe best answer is B. GNMA certificates are quoted on a percentage of par basis in 32nds. Accrued interest on \"agency\" securities is computed on a 30 day month / 360 day year basis. (Do not confuse this with the accrued interest on U.S. Government obligations, which is computed on an actual day month / actual day year basis).

Correct Answer A. I only B. I, II C. II, III Incorrect Answer D. I, II, III, IVThe best answer is A. The government obligation trading market is the deepest and most active market in the world. Trading is performed by both the primary and secondary dealers, and by the Federal Reserve trading desk. While long term government and agency securities are quoted in 32nds, T-Bills are quoted on a discount yield basis. The market is unregulated - these are exempt securities under the Securities laws, however the Federal Reserve does exert influence over the primary dealers.

A. $500 Correct Answer B. $515 C. $1,000 Incorrect Answer D. $1,030The best answer is B. If a zero-coupon bond is called prior to maturity, it is called at the current accreted value plus any call premium specified in the bond contract. 103% of $500 = $515.

A. Commercial Paper Incorrect Answer B. Banker's Acceptance C. Negotiable Certificate of Deposit Correct Answer D. Federal FundsThe best answer is D. Loans of Fed Funds are made \"overnight,\" so the duration of the loan is 1 day. This, along with an overnight repurchase agreement, is the shortest term money market instrument.

Correct Answer A. I and III Incorrect Answer B. I and IV C. II and III D. II and IVThe best answer is A. Treasury bills are original issue discount obligations that mature at par, in minimum denominations of $100 each.

Incorrect Answer A. Money market instrument Correct Answer B. Non-callable funded debt C. Treasury bill D. Treasury noteThe best answer is B. The term \"funded\" debt refers to corporate debt that is considered part of a company's permanent long term financing. Included is all corporate debt with 5 years or more to maturity.

A. a customer Incorrect Answer B. a broker/dealer Correct Answer C. the corporate lessee D. a bankThe best answer is C. The interest income earned from Industrial Development Bond Issues that were issued prior to 1986 was generally tax exempt. The lease payments made by the corporation are used to fund the interest payments made on the outstanding debt. These lease payments are tax deductible to the corporate lessee. If the corporation were to buy the outstanding bond issue, it would receive interest payments on the bonds that are tax free. Effectively, the corporation has taken a tax deduction for the lease payments; and has converted these payments into tax free interest income. The IRS does not allow this. If the purchaser of the bonds is a \"substantial user\" of the facility being leased, then the interest income received becomes taxable to the corporate lessee.

A. monies to pay for extraordinary maintenance or replacement costs B. monies to pay for regularly scheduled major repairs and replacement costs Incorrect Answer C. monies to meet debt service requirements Correct Answer D. all gross revenues from the facilityThe best answer is D. Under the flow of funds (which states the priority of collecting and disbursing pledged revenues), the revenue fund would contain all gross revenues from the facility. All monies to be disbursed are taken from this fund.

A. BANs Incorrect Answer B. TANs Correct Answer C. GANs D. CLNsThe best answer is C. GAN stands for \"Grant Anticipation Note.\" A GAN can be issued by a municipality to \"pull forward\" and get immediate use of federal grant monies that are expected to be received in the upcoming months. These federal grant monies are used for mass transit, energy conservation and pollution control improvements.

Correct Answer A. CMO holders are paid interest semi-annually Incorrect Answer B. as interest payments on the underlying mortgages are received, they are distributed pro-rata to all tranches C. as mortgages are prepaid, payments are applied to earlier tranches first D. CMOs are a derivative securityThe best answer is A. CMO holders are paid interest monthly, not semi-annually. As payments are received from the underlying mortgages, interest is paid pro-rata to all tranches; but principal repayments are paid sequentially to the first, then second, then third tranche, etc. Thus, as mortgages are prepaid, payments are applied to earlier tranches first. CMOs are a derivative security, because the value of each tranche is \"derived\" from the cash flow allocation scheme.

A. revenue bond B. special tax bond Incorrect Answer C. moral obligation bond Correct Answer D. general obligation bondThe best answer is D. Public schools do not produce revenue and thus are not funded by revenue bond issues. Rather, school bond issues are general obligations of the issuer. Special tax bonds pledge collected \"special taxes,\" such as excise taxes, to pay for the financing of a project. For example, a road improvement district bond issue could be financed by a special gasoline tax. A moral obligation bond is only issued in times of municipal distress, when the municipality does not have enough taxing power or revenue generating ability to sell a normal bond issue. To bail out the local municipal issuer, the state can morally obligate itself to pay if the municipal issuer cannot.

Correct Answer A. 8.18% Incorrect Answer B. 9.00% C. 9.60% D. 10.30%The best answer is A. Since the bond is trading at a premium, its current yield must be lower than its coupon. The formula to find the current yield is: $90 $1,100 = 8.18%

A. and interest Incorrect Answer B. with accrued interest Correct Answer C. flat D. at par The best answer is C. Zero-coupon bonds do not make semi-annual interest payments, therefore they trade \"flat\" - that is, without accrued interest. The term \"and interest\" means trading with accrued interest.

A. Commercial paper with under 270 days to maturity Incorrect Answer B. Revenue bond with at least 5 years to maturity Correct Answer C. Corporate debt with at least 5 years to maturity D. Treasury bond with at least 5 years to maturityThe best answer is C. The term \"funded debt\" refers to CORPORATE debt that is considered part of a company's permanent long term funding. Included is all long term corporate debt. Revenue bonds are issued by municipalities and T-Bonds are issued by the Government. Commercial paper is a short term financing and is an \"unfunded\" debt.

Correct A. $4,906.25 Incorrect Answer B. $4,914.05 C. $4,920.00 D. $4,945.00The best answer is A. \"5M\" means that the customer is selling $5,000 par value of the bonds (M is Latin for $1,000) The customer sells to the dealer at the bid price, which is 98 and 4/32nds = 98.125% of $5,000 par = $4,906.25.

A. I, II, III Correct Answer B. III, II, I Incorrect Answer C. II, I, III D. I, III, IIThe best answer is B. When bonds are trading at a premium, the yield to maturity will be the lowest measure since the annual return is reduced by the annual amortized portion of the premium that will be \"lost\" over the life of the bond. Current yield will be higher than yield to maturity, since it does not include the annual premium loss. Stated yield will be the highest since it is the return based on par value.

A. $31.25 B. $62.50 Correct Answer C. $156.25 Incorrect Answer D. $312.50The best answer is C. \"5M\" means that 5-$1,000 bonds are being purchased (M is Latin for $1,000). Annual interest on the bonds is 6.25% of $5,000 face amount equals $312.50. Since interest is paid twice per year, each payment will be for $156.25.

A. Treasury Bills B. Commercial paper Correct Answer C. Banker's Acceptances Incorrect Answer D. Repurchase AgreementsThe best answer is C. Banker's Acceptances are a money market instrument used to finance imports and exports with Third World countries. The bank agrees to pay a fixed amount at a date in the future, which is the expected date of receipt of the goods. The exporter then has assurance that he will be paid and will ship the goods. BAs trade at a discount to their face amount until maturity, but the trading market is rather thin since the use of BAs is declining as international payment systems are modernized.

A. I and III Correct Answer B. I and IV C. II and III Incorrect Answer D. II and IVThe best answer is B. U.S. Government Agency Bonds (as with any fixed income security), have market risk. If interest rates rise, their prices will drop, with longer maturity and lower coupon issues dropping much faster than shorter maturity and higher coupon issues. Agencies also have virtually no credit risk since they are implicitly backed by the U.S. Government (with the exception of Ginnie Mae issues which are directly backed).

Incorrect Answer A. II, III, IV B. I, II, III Correct Answer C. I, III, IV D. I, II, III, IVThe best answer is C. When the yield curve is inverted, short term rates are higher than long term rates. This typically occurs when the Federal Reserve pursues a \"tight money\" policy to slow the economy. The tightening of credit raises interest rates overall, slows economic activity, and thus business defaults increase. Long term rates remain lower than short term rates since investors do not expect the tightening to last far into the future. During periods when the yield curve is inverted, interest rates on all maturities tend to shift upwards, with short term rates rising the most. During these periods of high interest rates, issuers are likely to sell callable issues (not non-callable ones). If interest rates decrease in the future (as expected), the issuer can call in the old debt and refinance at lower current interest rates.

A. $1 increase B. $1 decrease Correct Answer C. $10 increase Incorrect Answer D. $10 decrease

A. $.01 B. $.10 Incorrect Answer C. $1.00 Correct Answer D. $10.00The best answer is D. One basis point = .01% in interest, or .01% of $1,000 par in annual interest = $.10. 100 basis points equal 1% of annual interest on a $1,000 per bond = $10.00.

A. I and III Incorrect Answer B. I and IV C. II and III Correct Answer D. II and IVThe best answer is D. A municipal variable rate demand note is a long-term municipal security because it has no stated maturity, but it is issued at short-term (lower) interest rates, because the holder has the right to \"put\" the bond to the issuer at par at each interest payment date. The interest rate is reset, usually weekly at the interest payment date, to an indexed rate for the next week. Thus, the interest rate will vary. With any variable rate note, the interest rate varies as market rates move; therefore the market price remains at, or very close to, par. Thus, these instruments have almost no market risk.

A. I and III Correct Answer B. I and IV C. II and III Incorrect Answer D. II and IVThe best answer is B. The School district bonds have a coupon of 4.20% and were scheduled to mature in 2025. However, the issuer has pre-refunded (P/R) the bonds by escrowing U.S. government securities to retire the bonds prior to maturity (at the call date of 6/15/15). At that time, the bondholder will receive 102 (call premium of 2 points). The bonds are currently being offered at a price to yield 2.50%, so they are trading at a premium (coupon is 4.20%).

A. divide 7% by 28% Incorrect Answer B. divide 7% by 72% C. divide 7.25% by 28% Correct Answer D. divide 7.25% by 72%The best answer is D. The formula for the equivalent taxable yield is: 7.25% (100% - 28%) = 7.25% .72 = 10.07%

A. I and III Correct Answer B. I and IV Incorrect Answer C. II and III D. II and IVThe best answer is B. Newer CMOs divide the tranches into PAC tranches and Companion tranches. The PAC tranche is a \"Planned Amortization Class.\" Surrounding this tranche are 1 or 2 Companion tranches. Interest payments are still made pro-rata to all tranches, but principal repayments made earlier than that required to retire the PAC at its maturity are applied to the Companion class; while principal repayments made later than expected are applied to the PAC maturity before payments are made to the Companion class. Thus, the PAC class is given a more certain maturity date; while the Companion class has a higher level of prepayment risk if interest rates fall; and a higher level of so-called \"extension risk\" - the risk that the maturity may be longer than expected, if interest rates rise.

A. I and III Incorrect Answer B. I and IV Correct Answer C. II and III D. II and IVThe best answer is C. When a government dealer enters into a repurchase agreement with the public, the dealer is \"getting liquid\" by selling government securities to the customer, with an agreement to buy them back at a later date. Thus, the customer is lender of cash to the government dealer.

Incorrect Answer A. Revenue Fund B. Debt Service Reserve Fund Correct Answer C. Sinking Fund D. Surplus FundThe best answer is C. Monies to meet debt service requirements are deposited to the sinking fund. The bondholders are paid their annual debt service requirements from this fund. The Debt Service Reserve fund is used for \"extra\" deposits above and beyond the annual requirement.

A. debt per capita ratio Correct Answer B. collection ratio Incorrect Answer C. pledged revenue to debt service requirements ratio D. debt to assessed valuation ratioThe best answer is B. The collection ratio of a municipality is: One looks for a very high ratio (better than 95%), meaning that the municipality is truly collecting the taxes it is assessing.

A. I and III Incorrect Answer B. I and IV Correct Answer C. II and III D. II and IVThe best answer is C. Corporate bonds are usually term bonds - all bonds of an issue having the same interest rate and maturity. Term bonds are quoted on a percentage of par basis in 1/8ths, which is the same as a \"dollar\" quote.

A. 5% G.O., M '34, callable in 2015 at par B. 6% G.O., M '34, callable in 2015 at 102 Incorrect Answer C. 7% G.O., M '34, callable in 2015 at 102 Correct Answer D. 8% G.O., M '34, callable in 2015 at parThe best answer is D. In a refunding, an issuer refinances an outstanding debt by issuing new bonds. The proceeds of the new issue are used to retire the old debt; or are placed in escrow to \"pre-refund\" an older issue that cannot be immediately repaid. This is either done to reduce interest cost or to remove an onerous restrictive covenant. The bonds most likely to be refunded are those with the highest interest rates (to be replaced by lower interest rate bonds) and low call premiums (so it will not be too expensive to the issuer to call in the debt for refunding).

Correct Answer A. Debt service coverage ratio B. Collection ratio C. Debt per capita Incorrect Answer D. Debt to assessed valuationThe best answer is A. The debt service coverage ratio applies to revenue bonds. This ratio gives us the pledged revenues of the municipality and divides this by the debt service requirement. Pledged revenues are those pledged to pay debt service and any other requirements set in the bond contract. The bondholder has a lien on these revenues. The higher this ratio, the safer a revenue bond, since there is a greater ratio of revenues to cover debt service. The other ratios are used to analyze G.O. issues.

A. bond payments are subject to U.S. withholding taxes B. bonds are issued outside the United States Incorrect Answer C. bonds are issued in bearer form D. bonds pay interest and repay principal in U.S. DollarsThe best answer is A. Eurodollar bond issues are issued in bearer form and are sold overseas (in Europe), but pay in U.S. Dollars. They are not issued in the U.S. and are not subject to U.S. withholding taxes.

Correct Answer A. $1,350 B. $1,395 C. $13,350 Incorrect Answer D. $13,950The best answer is A. One mill = .001; 9 mills = .009. Taxes are based on assessed valuation, not fair market value. .009 x $150,000 = $1,350. Another way to think about it is that 1 mill = $1 of tax for each $1,000 of assessed value.

A. borrower of the bond proceeds Correct Answer B. lender of the bond proceeds C. guarantor of the payment of debt service on the bond issue Incorrect Answer D. fiduciary acting for the benefit of the bondholdersThe best answer is B. The \"bondholder\" of a bond issue is the party that is owed the debt service on the bonds. This is the \"legal\" name for the lender or creditor.

Incorrect Answer A. 4.68% B. 4.75% Correct Answer C. 4.98% D. 5.12%The best answer is C. The bond is purchased at 95 and 15/32nds = 95.46875% of $1,000 = $954.6875. The formula for current yield is: $47.50 $954.6875 = 4.98%

Correct Answer A. I and III B. I and IV C. II and III Incorrect Answer D. II and IVThe best answer is A. Banker's Acceptances are time drafts on a bank used to finance imports and exports. BAs trade at a discount to their face amount until maturity, but the trading market is rather thin.

Incorrect Answer A. I and III B. I and IV Correct Answer C. II and III D. II and IVThe best answer is C. Eurodollars are U.S. dollar deposits held in foreign branches of U.S. banks or foreign banks. Eurodollar deposits are used to finance international trade.

A. I and III Correct Answer B. I and IV C. II and III Incorrect Answer D. II and IVThe best answer is B. A bond with a put option allows the holder to put back the bond to the issuer at par value. Thus, this bond, once the put option is exercisable, is always worth at least par. Therefore, if interest rates rise or if market demand falls, this bond's price cannot fall below par (unlike traditional bonds).

Correct Answer A. I and III B. I and IV C. II and III Incorrect Answer D. II and IVThe best answer is A. Treasury notes are issued at par in minimum denominations of $100 each, and pay interest semi-annually. At maturity, the bondholder receives par.

Correct Answer A. I and II only B. III and IV only C. II and IV only Incorrect Answer D. I, II, III, IVThe best answer is A. Under a \"repurchase agreement,\" a government securities dealer sells some of its inventory to another dealer or to the Federal Reserve, with an agreement to buy back the securities at a later date for a pre-established price. In this manner, the dealer gets a temporary inflow of cash. Since government dealers finance their inventory, by reducing the amount of inventory on hand, they are reducing inventory finance charges when such an agreement is employed. Thus, Choices I and II are true. Choice III is false. Under a \"reverse repurchase agreement,\" the dealer is buying securities from the Federal Reserve (instead of selling), draining the dealer of cash. Choice IV is also false. Under any repurchase agreement, the underlying government securities are the collateral. The collateral that underlies the agreement must be transferred from seller to buyer to support the transaction. In the \"good old days,\" dealers could do repurchase agreements that were backed by a promise to deliver the underlying securities (a \"due bill\" for the securities) instead of making physical delivery. Due bill repurchase agreements are no longer permitted

A. I only Correct Answer B. I and II C. III and IV Incorrect Answer D. I, II, III, IVThe best answer is B. Municipal brokers' brokers handle large block trades of municipal securities for institutions such as banks. These middlemen perform the trades without disclosing the identity of the bank - which helps the bank acquire or dispose of large blocks without alerting the market as to its activities. Municipal broker's brokers perform this very specialized service (there are only about 12 such firms in the U.S.) on an agency basis only - they do not carry inventory positions. As with all municipal traders, they are subject to MSRB rules - therefore all quotes disseminated by brokers' brokers must be bona-fide. There is no requirement that their quotes be disseminated through quote providers such as Bloomberg or Reuters. The broker's broker may publish its quotes in Bloomberg or can simply phone other firms to attempt trades. The MSRB does not establish or regulate fees - the MSRB requirement is simply that charges be \"fair and reasonable.\"

A. I and II only Incorrect Answer B. III and IV only Correct Answer C. I, II, III D. I, II, III, IV

A. loss of $11 B. loss of $26 C. gain of $10 Correct D. gain of $26The dealer purchases these bonds at par less 1 1/2 points, so the bonds were purchased at 98.5. Since these 9% coupon bonds were reoffered on an 8.90 basis, they must have been reoffered at a premium price. Since these are long term bonds (30 years), we can approximate the reoffering price by dividing 9% (nominal yield) by the 8.90 reoffering yield. 9.00/8.90 = 1.011. Thus, the bonds were reoffered at an approximate price of 1.011% of par (note, this only works for long term maturities - not short term maturities). The bonds were reoffered at a price that is .026% higher than the cost to the dealer (.985 cost versus 1.011 reoffer price). .026% x $100,000 face amount = $26 gain on the transaction. (Note that \"100M\" of bonds is $100,000 face amount, where M = $1,000.)

A. There can be a penalty applied to the principal amount of early withdrawals of funds Incorrect Answer B. The annual rate of return may be capped to an amount that is lower than the actual index return Correct Answer C. A market index linked CD can be redeemed at any time D. A market index linked CD is FDIC insuredThe best answer is C. Market Index Linked CDs are a type of \"structured product\" that consists of a \"zero-coupon\" synthetic bond component that grows based on the returns of an equity index; and that has a maturity established by an embedded option, typically 3 years from issuance. Market Index Linked Certificates of Deposit tie their investment return to an equity index, usually the Standard and Poor's 500 Index. This can give a potentially better rate of return than that of a traditional CD. If held to maturity, there is no penalty imposed on any CD. For an early withdrawal, traditional CDs may reduce the interest earned, but there is no loss of principal. In contrast, market index linked CDs typically impose a 3-5% principal penalty for early withdrawal. This \"early withdrawal\" penalty is imposed because the embedded option that established the maturity of the instrument was paid for and now is not being used. Both regular and market index linked CDs qualify for FDIC insurance. Finally, the minimum life for market index linked CDs is typically 3 years; whereas traditional bank CDs can have lives as short as 3 months.

A. I only B. III and IV only Correct C. I, III, IV D. I, II, III, IVThe best answer is C. Legislative risk for holders of municipal issues is the risk that the Federal Government will tax the interest income on the bonds. This risk cannot be diversified away. All the other risks can be diversified away. Default risk is minimized with a diversified portfolio; interest rate risk is minimized by mixing maturities. Marketability risk is also reduced by diversification, since it is unlikely that all the issues in the portfolio would become unmarketable at one time.

A. firm offer B. firm bid Correct Answer C. indication of a likely bid Incorrect Answer D. indication of a likely offerThe best answer is C. A municipal \"workable quote\" is used to get an indication of a likely price at which a dealer will buy specified bonds. The municipal trading market is very thin, so quotes are not readily available for all bonds. Assume that a customer wants to sell certain municipal bonds and wants to know what price he can get. By calling other dealers, you can get a \"workable\" from each of the dealers giving a likely price at which they would buy. Now you can go back to the customer with a likely price at which the bonds would be bought. If the customer agrees, you can recall the dealer with the best \"workable\" and sell the bonds.

A. 4.58 Correct Answer B. 4.78 Incorrect Answer C. 5.50 D. 6.00%The best answer is B. The formula for yield to maturity for a premium bond is: $60 - ($90 premium / 9 years to maturity) ($1,090 + $1,000) / 2 = $60 - $10 $1,045 = $50 $1,045 = 4.78%

Incorrect Answer A. issuing municipality Correct Answer B. corporate lessee of the facility C. bond trustee D. bond underwriterThe best answer is B. Industrial development bonds are backed by the rental revenues paid by the corporate lessee as well as by the guarantee of the corporate lessee. These bonds, therefore, take on the credit rating of the corporation leasing the facility.

Incorrect Answer A. BBB Correct Answer B. BB C. B D. CCC The best answer is B. The highest speculative bond rating is BB or Ba. Any rating above that would be considered investment grade.

Incorrect Answer A. geographical location of the issuers B. revenue sources backing each issue C. credit ratings of each issue Correct Answer D. denomination of bonds in the portfolioThe best answer is D. When constructing a diversified municipal bond portfolio, one is trying to diversify away as much risk as possible. It would be logical to make sure that the portfolio is geographically diversified since having too great a concentration in one state or region is unwise if the local economy goes bad. A mix of credit ratings also helps to diversify the portfolio. Lower credit rated bonds give higher yields and make sense in a large portfolio, as long as the concentration is not too great. A mix of revenue sources also helps diversify away risk. The denominations of the bonds in the portfolio have no bearing on the risks inherent in those bonds.

A. dates on which bondholders will be paid interest and principal on the issue B. dates and prices on which the issue can be called by the issuer Correct Answer C. priority of collecting and disbursing pledged revenues Incorrect Answer D. priority of the bondholder's claim to the assets of the issuerThe best answer is C. The trust indenture for a revenue bond issue will contain the flow of funds. The flow of funds details the priority of collecting and disbursing pledged revenues.