Series 7 Test Prep
Assuming all of the following bonds from the same issuer are callable now, which one would most likely get called first?
A) 8% maturing 1-15-2016
B) 8% maturing 1-15-2006
C) 4% maturing 1-15-2012
D) 4% maturing 1-15-2006
Correct answer is A: Bonds with the highest coupon rates would be the first to most likely get called. The issuer will look to issue new debt at a lower rate. Since there are two 8% bonds, the one that would most likely get called, would be the issue with the longest maturity. This is because the bond is potentially more expensive with the amount of years it has compared to the shorter one.
A customer sells a 6% corporate bond on Tuesday October 4th for regular way settlement. The bond pays interest on July 1st and January 1st. How many days of accrued interest is this customer owed?
Correct answer is C: Accrued interest is the interest that is due a seller of a bond since the last day they were paid. Corporate bonds pay on a 30 day month/360 day year. They also settle on the 3rd business day following the trade date (T+3). The trade settles on Friday October 7th. The last pay date was July 1st. The customer is owed 30 days for July, 30 days for August , 30 days for September and 6 days for October. You do not include the settlement date of the 7th.
Interest income from which of the following is exempt from state and local taxation?
B) Corporate bonds
C) Commercial paper
D) Treasury notes
Correct answer is D: Treasury notes are federally taxed, but are exempt from state and local tax. CMO’s and all corporate debt are fully taxable.
Which of the following debt securities are direct obligations of the U.S. Government?
C) Commercial paper
D) Secured corporate bonds
Correct answer is A: Government National Mortgage Association (GNMA) is a direct obligation of the Government. FNMA is a private agency. Commercial paper and all corporate debt are only guaranteed by the issuing company.
More Series 7 questions and answers are added to this blog every week.
Which of the following securities have initial maturities of one year or less?
I Treasury notes
II Treasury bills
III Commercial paper
IV Treasury stock
A) I and IV
B) I, II and III
C) II and III
D) I, II and IV
Correct answer is C: Treasury bills have initial maturities of 1 month, 3 months and 6 months. Commercial paper has maturities of 270 days or less. Treasury notes have maturities out to two years. Treasury stock is not a debt security and has no maturity.
Zero coupon bonds pay interest:
A) At maturity
B) Semi annual
D) None of the above
Correct answer is D: 0 Coupon bonds do not pay interest at all. The rate of return is based on the discount price that is paid, and the par that is received at maturity.
A customer places an order to buy ten 4% US Treasury Notes on Monday August 3rd for regular way settlement. This trade will settle on:
A) Monday August 3rd
B) Tuesday August 4th
C) Wednesday August 5th
D) Thursday August 6th
Correct answer is B: All US Government Securities, including Treasury Notes, settle on the next business day. This trade will settle on Tuesday August 4th.
Treasury Notes pay interest:
B) Semi annually
D) At maturity
Correct answer is B: Treasury notes and treasury bonds pay interest semi annually. Treasury bills are non interest bearing and pay par value at maturity.
A customer wants to invest in a bond that has the least amount of reinvestment risk. Which of the following would be the most appropriate?
A) Treasury bond
B) Treasury note
C) Treasury STRIP
D) None of the above
Correct answer is C: Reinvestment risk occurs with income paying investments that are reinvested into lower paying vehicles. Treasury STRIPs are zero coupon bonds issued by the US Government. They do not pay any income or interest during the term of the bond. There would be no reinvestment risk, since there is no income to reinvestment.
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