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STC Series 7 Progress Exam 2A questions n answers
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STC Series 7 Progress Exam 2A questions n answers
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STC Series 7 Progress Exam 2AA municipality may issue a Direct Pay Build America Bond to finance all of the following activities, EXCEPT
to:
A. Refund a mass transportation bond
B. Raise capital to expand its school system
C. Make a primary offering to establish a public sewer system
D. Raise additional capital for a government housing project - correct answer ✔✔A. Refund a mass
transportation bond
A Direct Pay Build America Bond may be used to raise capital for the same purposes as regular tax-
exempt municipal debt, except for refunding’s, working capital, and private activity bonds.
Which of the following statements is TRUE concerning bonds issued by FNMA (Fannie Mae)?
A. They have yields that are lower than comparable Treasury securities
B. They are a direct obligation of the U.S. government
C. The value of these securities is highly dependent on current interest rates
D. They are generally not considered suitable for investors seeking income - correct answer ✔✔C. The
value of these securities is highly dependent on current interest rates
Government-Sponsored Enterprise (GSE) bonds, such as those issued by FNMA (Fannie Mae) or FHLMC
(Freddie Mac) are not direct obligations of the U.S. government. They are able to borrow funds from the
government, which makes their yield slightly higher than Treasury securities with the same maturities.
As with most fixed-income securities, their value is highly dependent on current interest rates, and they
are suitable for investors seeking income
A reverse convertible security would be MOST suitable for an investor who:
A. Is anticipating a dramatic decrease in the value of the underlying asset
B. Is willing to accept a lower yield in return for potential appreciation in the value of the underlying
asset
C. Desires higher yield and is anticipating the value of the underlying asset will remain stable
D. Is anticipating an increase in the value of the issuer's common stock - correct answer ✔✔C. Desires
higher yield and is anticipating the value of the underlying asset will remain stable
, Reverse convertible securities are short-term notes issued by banks and broker-dealers that usually pay a
coupon rate above prevailing market rates. They are considered structured products because, in addition
to the coupon rate, the investor may be required to purchase shares of an underlying asset at a fixed
price. The underlying asset may be an equity security unrelated to the issuer, or a basket of stock, or an
index. The issuer agrees to pay this higher coupon rate since it has an option to sell a security to the
investor if the price of the security falls below a specified value known as the knock-in level. If the price
of the underlying asset stays above the knock-in level, the investor will receive the high coupon and the
full return of his principal. If the underlying asset falls below the knock-in level, the investor will be
obligated to purchase shares of the underlying asset at a fixed price. The price of this asset may have
depreciated below the knock-in level and the investor may receive substantially less than the original
principal. The investor is anticipating a stable price for the underlying asset and is not able to participate
in any increase in the value of the underlying asset.
If the investor was anticipating an increase in the value of the underlying asset, buying this asset would
be more suitable. Anticipating an increase in the value of the issuer's common stock is incorrect since
any change in the value of the issuer's common stock would have little impact on the value of a reverse
convertible security.
If a bond has a basis of 6.35 and a coupon rate of 6.15%, the bond is selling at:
A. A discount
B. Par value
C. A premium
D. A price that cannot be determined from the information given - correct answer ✔✔A. A discount
Bonds may be quoted based on their yield-to-maturity, which in this example is 6.35 (basis and YTM are
synonymous). Since the bonds has a nominal yield (coupon rate) of 6.15%, which is lower than the 6.35%
YTM, the bond is selling at a price that is below the par value of $1,000 (i.e., a discount). On the other
hand, if the yield-to-maturity was lower than the nominal yield, the bond would be selling at a premium.
Which of the following choices is Standard and Poor's (S&P's) best rating for a municipal note?
A. SP-1
B. SP-3
C. Aaa
D. AAA - correct answer ✔✔A. SP-1
Standard and Poor's best rating for notes is SP-1 and its worst rating is SP-3. AAA is S&P's best rating for
bonds.
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