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  1. Which of the following statements concerning the level of business activity in the money and capital markets is (are) correct?
    (RM 612-613)

    I Generally a booming economy encourages business firms to do more borrowing in the money and capital markets than a sagging economy.

    II High interest rates and tight credit conditions generally lead to less borrowing by business firms in the money and capital markets than low interest rates and easy credit conditions. 

    A. I only   
    B. Both I and II   
    C. Neither I nor II 
    D. II only   
    B. Both I and II   

    Both I and II correctly describe the influence of general economic conditions on the level of activity by business firms in the money and capital markets.
     
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  2. Which of the following statements concerning participation in the financial markets by business firms is (are) correct?
    (RM 612-613)

    I             The amount of business fund-raising activity in the financial markets is highly stable from year to year.

    II            The financial markets are a supplemental source of funds for businesses, drawn upon to augment internal cash flows when needed or when financial market conditions are favorable. 

    A. I only   
    B. II only   
    C. Both I and II   
    D. Neither I nor II 
    B. II only 

    I is incorrect because the amount of business fund-raising activity in the financial markets is very volatile from year to year.
    (this multiple choice question has been scrambled)
  3. The basic difference between a corporate bond and a corporate note is that the corporate bond:
    (RM 613) 

    A. is unsecured.   
    B. is convertible.   
    C. has a longer duration.   
    D. has fewer restrictive covenants. 
    • C. has a longer duration.
    •    
    • Both corporate bonds and notes can be unsecured, and both may have few or many restrictive covenants. The fact that some bonds are convertible is not what differentiates bonds from notes. The key difference is that notes typically have original maturities of 5 years or less, whereas bonds have original maturities of more than 5 years. In recent years, however, a new type of note, called a medium-term note (MTN), has become popular. MTNs often have original maturities of up to 10 years.
    •  
  4. An indenture is:           
    (RM 614) 

    A. a provision that tends to weaken the value of a bond.   
    B. a third party who represents the interests of bondholders.   
    C. an agreement to provide collateral behind a bond issue.   
    D. a contract describing the rights, privileges, and obligations of bondholders and the borrowing corporation. 
    D. a contract describing the rights, privileges, and obligations of bondholders and the borrowing corporation. 

    a third party who represents the interests of bondholders.  - refers to the trustee of a bond issue an agreement to provide collateral behind a bond issue - refers to a mortgage several provisions in bonds may tend to weaken their value to investors, such as a call feature or an open end feature in a mortgage.
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  5. All the following statements concerning the call privilege in a bond are correct, EXCEPT:
    (RM 614)

    A. It provides for a call price that typically decreases as the bond approaches maturity.   
    B. It is a privilege possessed by the bondholder.   
    C. It provides a way to shorten the average maturity of a bond issue.   
    D. It usually is deferred for several years after the bond is issued. 
    B. It is a privilege possessed by the bondholder.

    The call privilege is a right possessed by the corporation, not by the bondholder.
    (this multiple choice question has been scrambled)
  6. A sinking fund provision in a bond requires the borrowing corporation to:
    (RM 614-615) 

    A. charge off depreciation on assets pledged as collateral behind the bond issue.   
    B. build up a fund for repayment of the face amounts of the bonds when they all reach their maturity dates. 
    C. retire a portion of the bonds periodically with funds set aside for this purpose.   
    D. set aside funds for the periodic payment of interest on the bonds.   
    C. retire a portion of the bonds periodically with funds set aside for this purpose.

    others may be restrictive covenants in a bond issue, but they do not describe a sinking fund provision.
     
     
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  7. Which of the following statements concerning a bond’s coupon rate is (are) correct?           
    (RM 615-616)

    I             The coupon rate is the rate of interest the borrowing corporation promises to pay as printed on the face of the bond.

    II            If a bond is issued at a premium, the coupon rate represents an understatement of the corporation’s true cost of borrowing. 

    A. Both I and II   
    B. I only   
    C. II only   
    D. Neither I nor II 
    B. I only 

    II is incorrect because if a bond is issued at a premium, the coupon rate overstates the corporation’s true cost of borrowing. For example, if an 8% coupon rate bond is sold for $1,020 by the corporation, the corporation will be paying $80 of annual interest for the use of $1,020, not $80 for the use of $1,000.
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  8. Which of the following is a type of bond that permits the borrowing corporation to issue additional bonds with the same level of priority of claim against the same assets as are pledged as collateral for the original bond issue?
    (RM 617) 

    A. Open-end mortgage bond 
    B. Second mortgage bond   
    C. Subordinated debenture   
    D. Income bond   
    A. Open-end mortgage bond 

    A subordinated debenture is one that has a claim against the corporation’s income and assets that is lower in priority than that of the debenture bonds. An income bond is one in which interest is required to be paid only if the corporation’s earnings are high enough to permit it to do so. A second mortgage bond has a lower priority claim against a specific asset pledged as collateral than does the first mortgage bond.
     
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  9. A zero-coupon bond is a type of:
    (RM 618)   

    A. discount bond.   
    B. income bond.   
    C. equipment trust certificate. 
    D. floating-rate bond.   
    A. discount bond.   

    A zero-coupon bond is sold at a deep discount from its face value. It pays no interest during the lifetime of the bond, but pays the face amount at maturity. Thus, the investor’s remuneration consists solely of the difference between the face value of the bond and the purchase price. Income bonds are issued when a company is in reorganization or other distress situation. These bonds only promise to pay interest when the corporation’s earnings are sufficient. A floating-rate bond is one in which the coupon rate may change during the life of the bond. An equipment trust certificate is a type of lease arrangement used in the financing of heavy equipment and rolling stock.
     
    (this multiple choice question has been scrambled)
  10. Which of the following statements concerning asset-backed securities is correct?
    (RM 619-621) 

    A. The collateral backing these bonds is stock in the issuing corporation.   
    B. These bonds are secured by specific real assets such as industrial equipment.   
    C. These bonds can be created by the securitization of home mortgage loans.   
    D. The value of these securities is linked to an index for specified commodities. 
    C. These bonds can be created by the securitization of home mortgage loans. 

    Asset-backed securities can be created by the securitization of home mortgage loans and by securitization of other assets such as small business loans, credit-card loans, accounts receivable, and business equipment leases.   Securitization means the home mortgage loans are packaged into pools and transferred to a trust account. A special purpose entity or issuer then sells shares in this pool to investors. The shares represent claims to the payments made on the mortgage loans. These corporate bonds are not secured by assets such as industrial equipment, buildings, or homes. The assets are mortgages, loans, and receivables.
     
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  11. All the following are major categories of investors in corporate and foreign bonds, EXCEPT:
    (RM 622-624)  

    A. Private pension funds 
    B. Commercial banks   
    C. Government pension funds   
    D. Life insurance companies   
    B. Commercial banks   

    Pension funds and life insurance companies are major investors in bonds because of the long-term nature of most of their liabilities. Commercial bank liabilities are mostly short-term, so banks do not invest heavily in long-term assets such as corporate bonds.
     
    (this multiple choice question has been scrambled)
  12. Which of the following statements concerning the secondary market for corporate bonds is (are) correct?
    (RM 624)

    I             It is much larger than the secondary market for common stock.

    II            It consists solely of the trading that occurs on the New York and American exchanges. 

    A. II only   
    B. I only   
    C. Both I and II   
    D. Neither I nor II 
    D. Neither I nor II 

    I is incorrect because the secondary market for common stock is much larger than that for bonds. II is incorrect because trading of bonds occurs on many organized exchanges and over the telephone through brokers and dealers.
     
    (this multiple choice question has been scrambled)
  13. The most important buyers of privately-placed corporate bonds are:
    (RM 628) 

    A. life insurance companies   
    B. savings banks   
    C. investment bankers   
    D. individual investors 
    A. life insurance companies 

    Private placements are nonexistent in the case of individual investors and are not large for savings banks. Investment bankers are not buyers of privately placed bonds, though they sometimes assist in locating buyers for such bonds.
    (this multiple choice question has been scrambled)
  14. Which of the following is (are) typically among the advantages to the borrowing corporation of private placements as compared to public sale of its bonds?
    (RM 628-629)

    I             Lower cost of distribution

    II            More rapid placement of the bonds 

    A. Neither I nor II 
    B. Both I and II   
    C. I only   
    D. II only   
    B. Both I and II   

    Both I and II are advantages to the corporation of private placements as compared to the public sale of a new bond issue.
     
    (this multiple choice question has been scrambled)
  15. Which of the following statements concerning junk bonds is correct?
    (RM 629-630) 

    A. These bonds are issued when a company is in reorganization or other financial distress. 
    B. These bonds are secured by assets that have depreciated in value.   
    C. These bonds are short-term bank loans and require sinking funds.   
    D. These bonds are low quality and bear a high rate of interest.   
    D. These bonds are low quality and bear a high rate of interest.

    Junk bonds are low quality (below investment grade) and bear a high rate of interest. They are unsecured bonds and are not bank loans. Income bonds, not junk bonds, are issued when a company is in reorganization or other financial distress.
     
    (this multiple choice question has been scrambled)
  16. Which of the following is a purchase by a small group of investors of the publicly owned stock of a firm in which the purchase is financed mostly with borrowed funds?
    (RM 630) 

    A. A leveraged buyout 
    B. A private placement   
    C. A shark repellant   
    D. A poison pill   
    A. A leveraged buyout 

    The fact that the purchase of the stock is financed mostly with borrowed funds is the reason it is called a "leveraged" buyout. Poison pills and shark repellents are techniques for combating a hostile takeover. A private placement is the direct selling of a large bond issue to one or a few institutional investors, rather than selling the bonds to the general investing public.
    (this multiple choice question has been scrambled)
  17. Which of the following statements concerning loans made at the prime interest rate is (are) correct?
    (RM 631-632)

    I             Most prime loans are unsecured.

    II            Loans made at prime sometimes include a compensating balance requirement. 

    A. Both I and II   
    B. Neither I nor II 
    C. I only   
    D. II only   
    A. Both I and II 

    Both I and II correctly describe characteristics of loans made at the prime rate. They are typically unsecured and often contain a compensating balance requirement.
     
    (this multiple choice question has been scrambled)
  18. Which of the following techniques have commercial mortgage lenders used to protect their loan returns from inflation?
    (RM 633-634)  

    A. LIBOR   
    B. Equity kicker
    C. Securitization   
    D. Fixed rate mortgages   
    B. Equity kicker

    To protect their returns from inflation, commercial mortgage lenders will sometimes require an equity kicker. The lender will then receive a percentage of net earnings from the building in addition to the interest payments. Fixed rate mortgages will not provide this protection against inflation because the interest payments remain the same. Securitization does not protect a commercial lender’s loan returns although it does remove loans from the lender’s balance sheet. LIBOR is a base rate used for many large corporate loans.
     
    (this multiple choice question has been scrambled)
  19. All the following statements concerning common stock are correct, EXCEPT:           
    (RM 641-642) 

    A. In the event a corporation fails, the holders of its common stock have unlimited liability for the corporation’s debts.   
    B. Holders of common stock normally have the right to vote for a corporation’s board of directors
    C. Common stock represents a residual claim against the assets of the issuing corporation.   
    D. The amount of common stock a corporation may issue is limited by the terms of its charter of incorporation.   
    A. In the event a corporation fails, the holders of its common stock have unlimited liability for the corporation’s debts.   

    Holders of common stock have limited liability if a corporation fails. In general, the maximum they can lose is the amount they paid for the stock. A small exception is that those who buy a new issue of stock for less than its par or stated value are liable for the difference in time of the corporation’s bankruptcy.
     
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  20. Most preferred stock is characterized by all the following, EXCEPT:           
    (RM 642-643) 

    A. It is participating, so that the holder shares in the dividends that otherwise would belong solely to the common stockholders.   
    B. It is nonvoting unless preferred dividends are omitted by the corporation for a specified period.   
    C. It is callable, so that the issuing corporation may retire it at a specified price. 
    D. It is cumulative, so that dividends in arrears must be paid in full before common stockholders can be paid any dividends.   
    A. It is participating, so that the holder shares in the dividends that otherwise would belong solely to the common stockholders.   

    The participating feature, which is correctly described in C, is found in only a few preferred stock issues.
    (this multiple choice question has been scrambled)
  21. The principal investors in U.S. corporate stock are:
    (RM 645) 

    A. commercial banks.   
    B. life insurance companies.   
    C. private pension funds. 
    D. households.   
    D. households. 

    Commercial banks are very small holders of common stock. Life insurers and pension funds hold more, but over 50% of all U.S. corporate stock was owned by households in 1995.
     
    (this multiple choice question has been scrambled)
  22. Which of the following statements concerning the effect of market interest rates on stock prices is correct?
    (RM 647-648) 
     
    A. Market rates of interest correlate better with stock prices than does inflation.   
    B. Higher interest rates tend to pull money out of bonds and into stocks. 
    C. Higher interest rates increase the discount rate for calculating the present value of dividends.   
    D. Stock prices are directly correlated to changes in the level of interest rates.   
    C. Higher interest rates increase the discount rate for calculating the present value of dividends.   

    Higher interest rates increase the discount rate used to calculate the present value of the future dividends from stock. Since the higher discount rate reduces the present value of the dividends, the share valuations will fall. Thus, interest rates are inversely related to stock prices. Stock price changes correlated better with inflation than with interest rates according to recent research. Higher interest rates are generally expected to pull money out of stocks and into bonds.
     
    (this multiple choice question has been scrambled)
  23. One of the most important advantages to a corporation of having its stock listed on an organized stock exchange is that:
    (RM 652) 

    A. a listed security can be traded only in round lots, thus giving the corporation added prestige. 
    B. it improves the liquidity of the corporation’s stock.   
    C. once it is listed, it can never be delisted.   
    D. it can then be traded on the exchange by persons who are not members of the exchange.   
    B. it improves the liquidity of the corporation’s stock.  

    A company’s stock can be delisted either voluntarily or involuntarilyonly members of an exchange may trade securities that are listed thereodd-lot trading is permitted in listed securities.
    (this multiple choice question has been scrambled)
  24. Which of the following types of members of the New York Stock Exchange has the primary responsibility for maintaining an orderly and continuous market in certain securities?
    (RM 652) 

    A. Floor traders   
    B. Floor brokers   
    C. Commission brokers   
    D. Specialists 
    D. Specialists 

    Commission brokers execute orders for customers. Floor brokers carry out orders from other brokers not present on the floor of the exchange. Floor traders buy and sell securities only for their own account.
    (this multiple choice question has been scrambled)
  25. All the following statements concerning the over-the-counter (OTC) market are correct, EXCEPT:
    (RM 652-653) 

    A. Securities in the OTC market are bought by investors at dealer ask prices and sold by investors at dealer bid prices.   
    B. Only capital market instruments are traded in the OTC market. 
    C. Many dealers in the OTC market act as principals.   
    D. Most securities that are bought and sold are traded in the OTC market, rather than on organized exchanges.   
    B. Only capital market instruments are traded in the OTC market. 

    Both money market instruments and capital market instruments are traded over the counter.
    (this multiple choice question has been scrambled)
  26. The "third market" for securities is:
    (RM 654)  

    A. the market served by discount brokers on the organized exchanges. 
    B. the market for securities that are listed on a stock exchange but traded over the counter.   
    C. the market for U.S. Treasury securities.   
    D. another name for The American Stock Exchange.   
    B. the market for securities that are listed on a stock exchange but traded over the counter. 

    The term "third market" refers to the purchase and sale over the counter by large investors in securities that are listed on an organized exchange. By trading these securities away from the exchange, these investors are able to lower their transactions expenses, particularly brokerage commissions.
     
    (this multiple choice question has been scrambled)
  27. Which of the following is a role of an investment banker?
    (RM 657-658) 

    A. To underwrite IPOs   
    B. To maintain orderly and continuous trading on exchanges   
    C. To act as a principal on the organized exchanges   
    D. To direct capital into small or expanding businesses 
    A. To underwrite IPOs   

    An investment banker engages in underwriting corporate securities including initial public offerings or IPOs. A specialist is responsible for maintaining orderly and continuous trading on exchanges. Dealers act as principals buying and selling for their own portfolios on the organized exchanges. A venture capitalist directs capital into small or expanding businesses.  
     
    (this multiple choice question has been scrambled)
  28. An investment banker engages in underwriting corporate securities including initial public offerings or IPOs. A specialist is responsible for maintaining orderly and continuous trading on exchanges. Dealers act as principals buying and selling for their own portfolios on the organized exchanges. A venture capitalist directs capital into small or expanding businesses.  
    What was the effect of the Shelf Registration Rule?
    (RM 660) 

    A. Companies could register a new issue and sell it during the next two years.   
    B. Institutions were allowed to trade large private placements without disclosures. 
    C. Companies could no longer backdate stock options for their executives.   
    D. Trading firms could "pass the book" to their overseas branch offices after trading hours.   
    A. Companies could register a new issue and sell it during the next two years.   

    The Shelf Registration Rule allows companies to register a new issue and sell it during the next two years. This rule reduces the costs of offering new securities and gives companies greater flexibility in selecting the time for offering new securities. 
     
    (this multiple choice question has been scrambled)

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