FINRA SIE — Securities Industry Essentials — All Questions

An investor compares a fixed-rate preferred stock with an adjustable-rate preferred stock whose dividend resets every quarter to a short-term benchmark plus 2%. If market interest rates rise, which statement is most likely correct?

• a.The fixed-rate preferred price will rise, because its dividend is now above the benchmark
• b.The adjustable-rate preferred price will move less, as its dividend resets upward✓
• c.Both preferreds will fall by the same amount, because both rank ahead of common stock
• d.The adjustable-rate preferred price will fall more, because its dividend is no longer fixed

A dividend that resets toward market rates keeps the price near par, so an adjustable-rate preferred is far less rate-sensitive than a fixed-rate one. The fixed-rate preferred behaves like a bond: when rates rise its price falls, not rises. Ranking ahead of common affects credit risk, not interest-rate sensitivity.

Which feature of a participating preferred stock distinguishes it from a straight preferred stock?

• a.The holder can require the issuer to buy the shares back at par
• b.The holder can swap the shares for common stock at a fixed ratio whenever the holder chooses
• c.The holder is owed any missed dividends before common shareholders may be paid in later years
• d.The holder can receive extra dividends when common dividends exceed a set level✓

Participating preferred shares in additional distributions (for example, when the common dividend rises above a stated amount). Exchange into common is a convertible feature, recovery of missed dividends is the cumulative feature, and a put back to the issuer is a redeemable feature.

A company has five directors to elect under cumulative voting. A shareholder owns 200 shares and wants to give one candidate the most support possible. How many votes can she cast for that candidate?

• a.40
• b.1,000✓
• c.200
• d.1,200

Under cumulative voting a shareholder receives votes equal to shares owned x seats being filled: 200 x 5 = 1,000, all of which may go to one candidate. 200 is the statutory-voting figure for a single candidate, 40 comes from dividing instead of multiplying, and 1,200 adds a sixth seat that does not exist.

A corporation has 10,000,000 shares authorized, 6,000,000 issued, and 500,000 of the issued shares held in its treasury. The board declares a $0.40 per share cash dividend. What total dividend will be paid?

• a.$2,600,000
• b.$2,400,000
• c.$4,000,000
• d.$2,200,000✓

Dividends go only to outstanding shares: outstanding = issued - treasury = 6,000,000 - 500,000 = 5,500,000. 5,500,000 x $0.40 = $2,200,000. $2,400,000 uses issued shares, $4,000,000 uses authorized shares, and $2,600,000 adds the treasury shares instead of subtracting them.

A corporation liquidates. After secured and unsecured creditors are paid, $3,000,000 remains. The company has 20,000 shares of $100 par preferred stock (liquidation value equal to par) and 1,000,000 common shares. How much does each common share receive?

• a.$3.00
• b.$1.00✓
• c.$2.94
• d.$0.98

Preferred ranks ahead of common: 20,000 x $100 = $2,000,000 goes to preferred first. The remaining $1,000,000 / 1,000,000 common shares = $1.00 per share. $3.00 ignores the preferred claim, $2.94 spreads the money over common and preferred shares as if they were equal in total claims, and $0.98 divides the leftover $1,000,000 across both common and preferred share counts.

At a shareholder meeting, a small group owning 15% of the shares wants a seat on a five-seat board. Which voting method gives them the best chance to elect a director?

• a.Cumulative voting, because votes can be concentrated on one candidate✓
• b.Class voting, because every shareholder group is guaranteed one board seat
• c.Statutory voting, because each seat is decided by a separate share count
• d.Proxy voting, because management must vote the proxies for the minority nominee

Cumulative voting multiplies each holder's votes by the number of seats and lets them be concentrated on one nominee, so a 15% bloc can win a seat on a five-seat board. Under statutory voting the majority wins every seat. Proxies and class voting do not guarantee representation to a minority.

XYZ common trades at $50 cum-rights. A rights offering lets holders buy one new share at $40 for every four rights held. What is the theoretical value of one right while the stock still trades cum-rights?

• a.$2.50
• b.$5.00
• c.$2.00✓
• d.$10.00

Cum-rights value = (market price - subscription price) / (number of rights + 1) = ($50 - $40) / (4 + 1) = $2.00. $2.50 is the ex-rights formula ($10 / 4), $5.00 comes from dividing by 2, and $10.00 is the full discount before it is spread over the rights.

ABC now trades ex-rights at $62. Holders may buy one new share at $50 by surrendering five rights. What is the theoretical value of one right?

• a.$2.00
• b.$10.00
• c.$2.40✓
• d.$12.00

Ex-rights value = (market price - subscription price) / number of rights = ($62 - $50) / 5 = $2.40. $2.00 wrongly adds one to the denominator (the cum-rights formula), $12.00 is the whole discount before spreading it over the rights, and $10.00 divides the $50 subscription price by the five rights.

A warrant gives its holder the right to buy one share at $25. The stock trades at $31.50 and the warrant trades at $9.00. What is the warrant's time value?

• a.$22.50
• b.$9.00
• c.$2.50✓
• d.$6.50

Intrinsic value = stock price - exercise price = $31.50 - $25.00 = $6.50. Time value = warrant price - intrinsic value = $9.00 - $6.50 = $2.50. $6.50 is the intrinsic value, $9.00 is the total premium, and $22.50 subtracts the warrant price from the stock price.

A corporation's warrants are exercised by their holders. What happens to the issuer?

• a.It retires debt and issues new shares, with no cash received
• b.It buys shares in the market and delivers them to the holders
• c.It receives no cash, because the warrants were sold earlier
• d.It receives the exercise price in cash and issues new shares to the holder✓

Exercising a warrant is a purchase from the issuer: the holder pays the exercise price and the issuer creates new shares, so shares outstanding rise. Debt exchange with no cash describes conversion of a bond, market purchases describe how option writers cover, and the cash is received at exercise rather than when the warrant was sold.

A corporate bond with a $1,000 par value is convertible at a conversion price of $50 per share. How many common shares does a bondholder receive on conversion?

• a.2
• b.25
• c.50
• d.20✓

Conversion ratio = par value / conversion price = $1,000 / $50 = 20 shares. 50 is the conversion price itself, 25 would require a $40 conversion price, and 2 results from dividing by $500.

A $1,000 convertible bond is convertible at $40 per share. The common stock trades at $44. What is the bond's parity price (conversion value)?

• a.$1,760
• b.$44
• c.$1,100✓
• d.$1,000

Conversion ratio = $1,000 / $40 = 25 shares. Parity = 25 x $44 = $1,100. $1,000 is par, $1,760 multiplies the stock price by the conversion price instead of the ratio, and $44 is the price of one share.

A $1,000 convertible bond converts into 20 shares. The bond is callable at 104 ($1,040). The stock now trades at $62 and the issuer calls the bond. How much more does the holder receive by converting than by taking the call price?

• a.$240
• b.$200✓
• c.$1,240
• d.$40

Conversion value = 20 x $62 = $1,240. The call price is $1,040, so converting is worth $1,240 - $1,040 = $200 more. $240 compares conversion with par, $40 is just the call premium, and $1,240 is the total value of the shares, not the difference.

When a convertible bondholder converts the bond into common stock, what does the issuer receive?

• a.The shares' current market value in cash, paid by the holder
• b.The bond's par value in cash, paid by the holder at conversion
• c.No cash; the debt is exchanged for new shares✓
• d.The conversion price in cash for each share issued to the holder

Conversion is an exchange: the bond is surrendered and the issuer cancels the debt and issues shares, receiving no cash. This differs from exercising a warrant, where the holder pays the exercise price to the issuer.

Which statement correctly distinguishes a sponsored ADR from an unsponsored ADR?

• a.A sponsored ADR trades in the foreign issuer's home currency
• b.A sponsored ADR is set up under an agreement with the issuer✓
• c.A sponsored ADR is covered by SIPC, unlike unsponsored ADRs
• d.A sponsored ADR is issued by the foreign company directly

A sponsored ADR is created under a deposit agreement with the foreign issuer, and the depositary generally arranges proxy voting and passes on shareholder communications; unsponsored programs usually do not. Both types trade in U.S. dollars, so the home-currency choice is wrong. Both are issued by a U.S. depositary bank rather than the foreign company, and SIPC coverage does not depend on sponsorship.

A U.S. investor owns ADRs of a foreign company. The company pays dividends that equal $200 in U.S. dollars before tax, and the foreign government withholds 15%. What dividend does the investor receive, before any depositary fee?

• a.$30
• b.$170✓
• c.$230
• d.$200

Withholding of 15% on $200 is $30, so the investor receives $200 - $30 = $170. $200 ignores the withholding, $230 adds the tax instead of subtracting it, and $30 is the amount withheld, not the amount received.

A U.S. investor owns an ADR of a foreign company. The local share price is unchanged, but the foreign currency strengthens 8% against the dollar. What is the most likely effect on the ADR's dollar price?

• a.It stays unchanged, because the depositary hedges the currency exposure
• b.It falls by about 8%, because the local price converts to fewer dollars
• c.It rises by about 8%, as the local price converts to more dollars✓
• d.It stays unchanged, because the ADR is quoted and traded in dollars

The ADR's dollar price reflects the local share price converted at the current exchange rate, so a stronger foreign currency raises the dollar value by roughly the same percentage. Trading in dollars does not remove currency exposure, and depositaries do not hedge it for ADR holders.

Under the Securities Exchange Act definition of an equity security, each of the following is an equity security EXCEPT:

• a.A bond convertible into common stock
• b.A listed put option on a stock
• c.A limited partnership interest
• d.A corporate bond with no conversion feature✓

Section 3(a)(11) of the Exchange Act, as extended by Rule 3a11-1, defines equity security to include stock, limited partnership interests, securities convertible into equity, warrants and rights, and puts, calls and similar options on those securities. A plain bond without a conversion feature is a debt security.Securities Exchange Act s.3(a)(11); Rule 3a11-1

An issuer's common stock has averaged 800,000 shares of daily trading volume over the last four calendar weeks. To stay inside the Rule 10b-18 safe harbor volume condition (ignoring the once-a-week block exception), what is the most shares it may repurchase in one day?

• a.160,000 shares
• b.80,000 shares
• c.400,000 shares
• d.200,000 shares✓

The Rule 10b-18 volume condition caps a day's purchases at 25% of the average daily trading volume for the preceding four calendar weeks: 25% x 800,000 = 200,000 shares. 80,000 is 10%, 160,000 is 20%, and 400,000 is 50%.SEC Rule 10b-18

A municipal issuer sells a single issue in which a portion of the principal comes due each year for 15 years. Which term describes this structure?

• a.Serial maturities✓
• b.A balloon maturity
• c.A sinking fund maturity
• d.A term maturity

A serial issue spreads principal over a series of annual maturity dates. A term issue has all principal due on one date, a balloon maturity puts an unusually large share of principal in the final year, and a sinking fund is a repayment mechanism, not a maturity structure.

A corporate bond issue repays 2% of its principal each year for 19 years, with the remaining 62% due in year 20. Which feature does the final payment represent?

• a.A refunding
• b.A balloon maturity✓
• c.A term maturity
• d.A serial maturity

A balloon maturity is a final maturity that is much larger than the earlier installments. The earlier installments alone would be a serial structure, a refunding replaces old debt with new debt, and a term maturity has all principal due on a single date.

Which statement about a sinking fund provision in a bond indenture is correct?

• a.It guarantees that the bond price will rise as the issuer deposits cash
• b.It prevents the issuer from ever calling the bond before maturity
• c.It lowers the risk of nonpayment of principal at maturity✓
• d.It converts the bond into common stock if deposits are missed

A sinking fund makes the issuer retire part of the issue on a schedule, usually by depositing cash with the trustee or buying bonds in the market, which lowers the repayment burden at maturity. Sinking fund calls are themselves a form of early redemption, so the fund does not bar calls. It does not promise a price rise, and a missed deposit is a default issue rather than a conversion trigger.

A 20-year bond with a 6% coupon is issued in 2026 with a call feature that begins in 2031 at 103. In 2031, comparable bonds yield 4%. What will the issuer most likely do, and what is the main risk to the holder?

• a.Leave the bond outstanding, leaving the holder with prepayment risk
• b.Call the bond and refinance at the lower rate, leaving the holder with purchasing power risk
• c.Call the bond and refinance at the lower rate, leaving the holder exposed to reinvestment risk✓
• d.Leave the bond outstanding, leaving the holder with credit risk

When rates fall well below the coupon, calling at 103 and issuing new debt at 4% saves the issuer money. The holder then has to reinvest the proceeds at lower rates, which is reinvestment risk. Purchasing power risk is about inflation eroding the value of fixed payments, credit risk is about default, and prepayment risk relates to mortgage-backed pools. An issuer has no reason to leave a 6% bond outstanding when 4% funding is available.

How is the redemption price of a make-whole call typically determined?

• a.Present value of the remaining payments, discounted at a Treasury yield plus a spread✓
• b.The market price of the bond on the day before the call is announced by the issuer
• c.Par plus a call premium that declines each year until the final maturity date
• d.The price fixed in the sinking fund schedule of the indenture

A make-whole call is priced so the holder is compensated for the remaining coupons and principal, usually discounted at a benchmark Treasury yield plus a stated spread. A declining premium over par describes an ordinary call schedule, and the previous day's market price does not apply.

An investor owns a bond with a 4.5% coupon that the holder may put back to the issuer at par in two years. Interest rates for comparable bonds have risen to 7%. What is the most likely action?

• a.Put the bond at par and reinvest at the higher market yield✓
• b.Sell the bond at a premium because the coupon is below market
• c.Wait for the issuer to call the bond at par and reinvest then
• d.Hold the bond to maturity because the put right expires if rates rise

A put gives the holder the right to sell back at par. When market rates exceed the coupon, the bond would trade below par, so exercising at par and reinvesting at 7% is the better choice. The put does not lapse when rates rise, a below-market coupon causes a discount rather than a premium, and an issuer will not call a below-market bond that is cheap financing.

Which statement describes a step-up bond?

• a.Its coupon resets with a short-term benchmark rate at set intervals
• b.Its principal increases with changes in the Consumer Price Index
• c.Its coupon is paid only when the issuer has sufficient earnings
• d.Its coupon rises on preset dates over the life of the bond✓

A step-up bond has a stated coupon schedule that rises at preset dates. A coupon tied to a benchmark rate describes a floating-rate note, principal indexed to the CPI describes an inflation-linked bond such as TIPS, and interest paid only when earned describes an income bond.

A corporation pledges the shares and bonds of its subsidiaries as security for a bond issue and deposits them with a trustee. What type of bond is this?

• a.A mortgage bond
• b.A subordinated debenture
• c.A collateral trust bond✓
• d.An equipment trust certificate

A collateral trust bond is secured by securities the issuer owns, held by a trustee. An equipment trust certificate is secured by equipment such as railcars or aircraft, a mortgage bond is secured by real property, and a subordinated debenture is unsecured and ranks behind senior debt.

Which statement about a book-entry bond is correct?

• a.The investor must surrender a physical certificate to receive principal
• b.The investor clips coupons and presents them to a paying agent for interest
• c.Ownership is recorded electronically and no certificate is issued✓
• d.The investor holds a certificate registered in the investor's own name

With book-entry, ownership is recorded electronically through a depository and the investor's broker; no certificate is delivered. A certificate in the holder's name describes a certificated registered bond, clipping coupons describes a bearer bond, and surrendering a certificate for principal is not needed when no certificate exists.

Which statement describes the role of the trustee under a corporate bond indenture?

• a.It underwrites the bonds and takes unsold bonds into its own account
• b.It represents bondholders and enforces the terms of the indenture✓
• c.It sets the coupon rate and offering price when the bonds are issued
• d.It guarantees the payment of interest and principal if the issuer defaults

The trustee represents the bondholders as a group: it monitors the issuer's covenants, handles the paying function and takes action if there is a default. It does not insure or guarantee payment, and pricing and underwriting are done by the issuer and underwriting syndicate.

A bond indenture says that the issuer may not issue additional senior debt unless its interest coverage ratio stays above a stated level. What type of provision is this?

• a.An affirmative covenant requiring the issuer to take an action
• b.A call provision that lets the issuer redeem the bonds
• c.A negative covenant that restricts what the issuer may do in the future✓
• d.An event of default that automatically accelerates the debt

Limits on additional borrowing restrict what the issuer may do, so they are negative covenants. Affirmative covenants require actions such as paying taxes, maintaining insurance and furnishing financial statements. A call provision gives the issuer a right, and a covenant breach becomes an event of default only as the indenture specifies.

A corporate bond rated BBB- by S&P is downgraded to BB+. Which result is most likely?

• a.The bond falls out of the investment-grade category, and its price falls and its yield rises✓
• b.The bond falls out of the investment-grade category, and its price rises and its yield falls
• c.The bond remains investment grade, and its price falls and its yield rises
• d.The bond remains investment grade, and its price rises and its yield falls

BBB- is the lowest S&P investment-grade rating, so BB+ is speculative (high yield). The added credit risk lowers the bond's price and raises its yield, and some institutions that may only hold investment-grade debt must sell. The other results each get either the rating category or the direction of price and yield wrong.

An investor buys 10 corporate bonds with a 6% coupon that pay interest on January 15 and July 15. The trade is executed on Monday, March 9, 2026, and settles on the next business day. How much accrued interest does the buyer pay in total?

• a.$91.67✓
• b.$90.00
• c.$93.33
• d.$90.41

Corporate bonds use a 30/360 count. Settlement is Tuesday, March 10, and interest accrues from January 15 up to, but not including, the settlement date: 15 days left in January (30 - 15) plus 30 days of February plus 10 days of March = 55 days. Accrued per bond = $1,000 x 6% x 55/360 = $9.1667, so 10 bonds = $91.67. $90.00 uses 54 actual days, $93.33 counts the settlement day (56 days), and $90.41 divides by 365.FINRA Rule 11620

An investor buys $100,000 face of a 4% Treasury note that pays interest on May 15 and November 15. The trade settles on September 10, 2026. How much accrued interest does the buyer pay?

• a.$1,282.61✓
• b.$1,277.78
• c.$1,311.11
• d.$1,293.15

Treasury securities accrue on an actual/actual basis. Days from May 15 to September 10 = 16 + 30 + 31 + 31 + 10 = 118; days in the coupon period May 15 to November 15 = 184. Semiannual interest = $100,000 x 4% / 2 = $2,000, and $2,000 x 118/184 = $1,282.61. $1,277.78 uses the 30/360 corporate method (115 days), $1,311.11 uses 118 days over 360 for the whole year, and $1,293.15 divides actual days by 365.

An investor buys 25 municipal bonds with a 4.5% coupon that pay interest on March 1 and September 1. The trade is executed on Tuesday, July 14, 2026 and settles on Wednesday, July 15. How much accrued interest does the buyer pay in total?

• a.$421.88
• b.$418.75✓
• c.$425.00
• d.$419.18

Municipal bonds use a 30/360 count, from the last coupon date up to but not including settlement: March 1 to July 15 = 4 months x 30 + 14 days = 134 days. Accrued = 25 x $1,000 x 4.5% x 134/360 = $418.75. $425.00 uses 136 actual days over 360, $419.18 uses 136 actual days over 365, and $421.88 counts 135 days by including the settlement date.MSRB Rule G-33

An investor buys 8 corporate bonds with a 6.75% coupon that pay interest on April 1 and October 1. The trade is executed on Friday, June 12, 2026 and settles on Monday, June 15. How much accrued interest does the buyer pay in total?

• a.$112.50
• b.$108.00
• c.$106.50
• d.$111.00✓

Accrued interest runs from April 1 up to, but not including, the settlement date of June 15 (30/360): 2 months x 30 + 14 days = 74 days. Per bond = $1,000 x 6.75% x 74/360 = $13.875, so 8 bonds = $111.00. $106.50 stops at the trade date (71 days), $108.00 stops at the Saturday after the trade (72 days), and $112.50 counts the settlement day (75 days).FINRA Rule 11620

A customer buys 5 corporate bonds quoted at 98. The accrued interest is $12.50 per bond. What is the total amount due from the customer, excluding commission?

• a.$4,900.00
• b.$4,837.50
• c.$5,062.50
• d.$4,962.50✓

A quote of 98 is 98% of the $1,000 par value, or $980 per bond. The buyer pays the price plus accrued interest: $980 + $12.50 = $992.50 per bond, and 5 x $992.50 = $4,962.50. $4,900.00 omits the accrued interest, $4,837.50 subtracts it, and $5,062.50 uses a price of 100 (par) instead of 98.

A Treasury bond is quoted at 99-24. What is the price of $100,000 face amount?

• a.$99,024.00
• b.$99,375.00
• c.$99,750.00✓
• d.$99,240.00

Treasury notes and bonds are quoted in 32nds. 99-24 means 99 and 24/32 = 99.75, so $100,000 x 99.75% = $99,750.00. $99,240.00 reads the 24 as a decimal (99.24), $99,024.00 reads it as 99.024, and $99,375.00 uses 12/32.

A bond that is in default on its interest payments is sold in the secondary market. How is accrued interest handled in the trade?

• a.The bond trades with accrued interest, and the buyer pays it to the seller
• b.The bond trades with accrued interest, and the trustee collects it for the bondholders
• c.The bond trades flat, so the buyer pays the price with no accrued interest✓
• d.The bond trades with accrued interest, and the buyer receives credit from the seller

A bond in default is traded flat: the price covers any interest eventually recovered, and no accrued interest is added. The other choices assume accrued interest is settled between buyer and seller or through the trustee, which does not happen for bonds trading flat.

An investor buys $50,000 face of a 3.6% Federal Home Loan Bank bond that pays interest on June 10 and December 10. The trade settles on Tuesday, October 20, 2026. How much accrued interest does the buyer pay?

• a.$660.00
• b.$630.00
• c.$650.00✓
• d.$650.96

Agency bonds accrue on a 30/360 basis, like corporate and municipal bonds, unlike Treasuries. From June 10 to October 20 = 4 months x 30 + 10 days = 130 days. Accrued = $50,000 x 3.6% x 130/360 = $650.00. $660.00 uses 132 actual days over 360, $650.96 uses 132 actual days over 365, and $630.00 uses an understated count of 126 days.FINRA Rule 11620

A $1,000 bond with a 5% coupon matures in 10 years and is purchased at 92. Using the approximation formula, which is closest to its yield to maturity?

• a.5.80%
• b.5.43%
• c.6.04%✓
• d.6.30%

Annual interest = $50. The discount is $80, accreted over 10 years = $8 per year. Average of price and redemption value = ($920 + $1,000) / 2 = $960. YTM is about ($50 + $8) / $960 = 6.04%. 5.43% is the current yield ($50 / $920), 6.30% divides by the purchase price instead of the average, and 5.80% divides by par.

A $1,000 bond with a 7% coupon matures in 8 years and is purchased at 106. Using the approximation formula, which is closest to its yield to maturity?

• a.6.07%✓
• b.6.60%
• c.5.90%
• d.7.52%

Annual interest = $70. The premium is $60, amortized over 8 years = $7.50 per year, which reduces the yield. Average of price and redemption value = ($1,060 + $1,000) / 2 = $1,030. YTM is about ($70 - $7.50) / $1,030 = 6.07%. 6.60% is the current yield ($70 / $1,060), 7.52% adds the amortization instead of subtracting it, and 5.90% divides the net income by the purchase price instead of the average.

A $1,000 bond with an 8% coupon is purchased at 108. It has 15 years to maturity and can be called in 5 years at 104. Using the approximation formula, which is closest to its yield to call?

• a.7.41%
• b.6.79%✓
• c.6.15%
• d.7.18%

Annual interest = $80. Premium amortized to the call = ($1,080 - $1,040) / 5 = $8 per year. Average of price and call price = ($1,080 + $1,040) / 2 = $1,060. YTC is about ($80 - $8) / $1,060 = 6.79%. 7.18% is the YTM to the 15-year maturity (($80 - $5.33) / $1,040), 7.41% is the current yield ($80 / $1,080), and 6.15% wrongly assumes the call price is par.

A premium bond has the following yields: yield to maturity 4.9%, yield to the first call date 4.2%, and yield to the second call date 4.5%. What is its yield to worst?

• a.4.5%
• b.4.2%✓
• c.4.55%
• d.4.9%

Yield to worst is the lowest yield the investor could receive across the maturity and all call dates, which here is the first call at 4.2%. 4.9% is the YTM and 4.5% is the second call, and 4.55% is an average that does not represent an outcome the issuer's choices could produce.

A 4.5% bond matures in 10 years, is callable at par in 3 years, and is purchased at 95. Using the approximation formula, which is closest to its yield to worst?

• a.4.50%, the nominal yield
• b.4.74%, the current yield
• c.5.13%, the yield to maturity of the bond✓
• d.6.32%, the yield to call

Annual interest = $45. To maturity: accretion = $50 / 10 = $5, average price = ($950 + $1,000) / 2 = $975, YTM = ($45 + $5) / $975 = 5.13%. To the call: accretion = $50 / 3 = $16.67, YTC = ($45 + $16.67) / $975 = 6.32%. The yield to worst is the lowest of the possible yields, and for a discount bond callable at par it is the YTM, because a call at par would give the holder a higher yield. The current yield and nominal yield are not yields to worst.

A bond has a 6% coupon and is purchased at 104. Which list shows its yields from highest to lowest, assuming it is callable at par in 5 years?

• a.Nominal yield, current yield, yield to maturity, yield to call✓
• b.Current yield, nominal yield, yield to maturity, yield to call
• c.Yield to call, yield to maturity, current yield, nominal yield
• d.Nominal yield, yield to call, current yield, yield to maturity

For a premium bond, the coupon (nominal yield) is highest, the current yield is lower because it divides by a price above par, and the yield to maturity is lower still because the premium is amortized. A call at par in 5 years shortens the amortization period, which lowers the yield to call below the YTM. The other lists reverse or reorder this pattern.

A Treasury note yields 4.15%. A corporate bond trades at a yield spread of 180 basis points over the note. What is the corporate bond's yield?

• a.5.95%✓
• b.4.33%
• c.2.35%
• d.6.00%

A basis point is 0.01%, so 180 basis points = 1.80%. 4.15% + 1.80% = 5.95%. 4.33% adds 0.18%, treating 180 basis points as 18, 6.00% rounds the sum, and 2.35% subtracts the spread.

An investor buys a 10-year bond, issued 2 years ago, at 104. The bond has 8 years left. Using the approximation formula, how much premium amortization should be used per year?

• a.$4.00
• b.$40.00
• c.$5.00✓
• d.$2.50

The $40 premium is amortized over the 8 years remaining until maturity: $40 / 8 = $5.00 per year. $4.00 divides by the original 10-year life, $2.50 divides by 16 semiannual periods but reports a half-year amount, and $40.00 is the total premium.

An investor buys a 5.5% bond with 12 years to maturity at par. Which statement about its yields is correct?

• a.Its nominal yield, current yield, and YTM are all 5.5%✓
• b.Its current yield is below 5.5% because of the 12-year maturity
• c.Its yield to maturity is above 5.5% because the coupons are reinvested
• d.Its yield to maturity is below 5.5% because of the time value of money

At par there is no discount to accrete and no premium to amortize, so the coupon, current yield and yield to maturity all equal 5.5%. Maturity length does not change the current yield, and YTM already includes the time value of money and does not exceed the coupon for a par bond.

All of the following bonds are priced to yield 5%. Which one has the greatest price volatility when market yields change?

• a.A 30-year bond with a 3% coupon✓
• b.A 15-year bond with a 5% coupon
• c.A 10-year bond with a 3% coupon
• d.A 30-year bond with a 7% coupon

Price sensitivity rises with longer maturity and falls with a higher coupon, because a higher coupon returns cash sooner. The 30-year 3% bond has both the longest maturity and the lowest coupon, so it has the highest duration. Each other bond has a shorter maturity, a higher coupon, or both.

A bond has a duration of 7.5 years. Market yields rise by 40 basis points. Which is the approximate change in the bond's price?

• a.A decline of about 0.30%
• b.A decline of about 3.0%✓
• c.A rise of about 3.0%
• d.A decline of about 30.0%

Approximate percentage price change = -duration x yield change = -7.5 x 0.40% = -3.0%. Price moves opposite to yield, so a rise is wrong. 0.30% and 30.0% come from misplacing the decimal point when converting 40 basis points to a percentage.