FINRA SIE — Securities Industry Essentials — All Questions

An investor puts $10,000 into a 3-year index-linked note that pays, at maturity, 150% of the index's percentage gain, with a maximum total return of 20% of principal. The index rises 14% over the term, and the issuer pays in full. What is the maturity payment?

• a.$11,400, because the 150% participation rate is not applied
• b.$13,000, because the 150% rate is applied to the 20% cap
• c.$12,000, because the 21% result is limited to the 20% cap✓
• d.$12,100, because the 20% cap is not applied

150% x 14% = 21%, which exceeds the 20% cap, so the return is limited to 20% and the payment is $10,000 x 1.20 = $12,000. $12,100 ignores the cap, $11,400 ignores the 150% participation rate (14% only), and $13,000 wrongly applies the 150% participation rate to the cap itself (30%).

A bond with a $1,000 par value and a 7% coupon is quoted at 87.5. What is its current yield?

• a.7.0%, the $70 interest divided by the $1,000 par value
• b.12.5%, the $125 discount divided by the $1,000 par value
• c.14.3%, the $125 discount divided by the $875 price
• d.8.0%, the $70 interest divided by the $875 price✓

A quote of 87.5 means 87.5% of par, or $875. Current yield is annual interest divided by market price: $70 / $875 = 8.0%. Dividing by par gives the 7.0% nominal yield, which ignores the price paid. The two discount-based figures measure how far below par the bond trades, not the income it produces.

A 15-year, 6% bond is bought at 108 and can be called at 100 in three years. Which of the bond's yields is likely the lowest?

• a.Yield to call, since the $80 premium is amortized over only three years✓
• b.Nominal yield, which stays fixed at the 6% coupon rate regardless of price
• c.Current yield, which divides the $60 coupon by the $1,080 market price
• d.Yield to maturity, which spreads the $80 premium over all fifteen years

If the bond is called at par in three years, the investor loses the full $80 premium over a very short period, which drags yield to call well below the other measures. Yield to maturity spreads the same premium over fifteen years, so it is higher. Current yield (about 5.6%) ignores premium amortization, and the 6% nominal yield is the highest of the four.

A bond fund has a modified duration of 7. If market interest rates rise by one percentage point, the fund's price should change by approximately:

• a.Falls about 7%, roughly $70 on each $1,000 invested✓
• b.Falls about 14%, since coupons are paid semiannually
• c.Falls about 1%, the same size as the rate move
• d.Rises about 7%, roughly $70 gained on each $1,000

Modified duration estimates the percentage price change for a one-percentage-point move in yields, and the price moves in the opposite direction from rates. A duration of 7 therefore implies a decline of about 7%. A gain has the direction backwards, a 1% decline ignores the duration entirely, and doubling the figure for semiannual coupons is not part of the estimate.

A company grants shareholders one right per share owned, and five rights plus $40 are needed to buy one new share. A shareholder owns 300 shares and exercises all of her rights. How many new shares does she buy, and what does she pay?

• a.60 new shares for a total of $12,000
• b.60 new shares for a total of $2,400✓
• c.300 new shares for a total of $12,000
• d.1,500 new shares for a total of $60,000

She receives 300 rights, and each new share takes five of them, so she can buy 300 / 5 = 60 shares at $40 each, or $2,400. Buying 300 shares ignores the five-to-one ratio. Multiplying rights by five reverses the ratio. Paying $40 for every right, rather than for every five, overstates the cost of 60 shares.

A sponsored ADR represents 5 ordinary shares of a foreign company, and each ordinary share is worth $6.00 in U.S. dollar terms in its home market. Ignoring fees, about where should the ADR trade?

• a.Near $11.00, the share value plus the 5-share ratio
• b.Near $1.20, the share value divided by the 5-share ratio
• c.Near $30.00, the value of the 5 underlying shares✓
• d.Near $6.00, the value of a single ordinary share

Each ADR is a claim on five ordinary shares held by a custodian, so its price tracks 5 x $6.00 = $30.00, and arbitrage keeps the two markets aligned. Pricing it at one share's value ignores the ratio. Dividing by five applies the ratio in the wrong direction, and adding the ratio to the share price is not a valuation method.

An investor buys one XYZ 60 put at a premium of $4.00. At what stock price does the investor break even at expiration, ignoring commissions?

• a.$64 per share, the strike price plus the premium
• b.$52 per share, the strike minus twice the premium
• c.$60 per share, equal to the strike price
• d.$56 per share, the strike minus the premium✓

A put buyer profits only when the stock falls far enough below the strike to recover the premium, so breakeven is $60 - $4 = $56. Adding the premium is the call buyer's formula. At the strike itself the put is worth zero and the $4 premium is lost. Subtracting the premium twice counts the cost double.OCC Characteristics and Risks of Standardized Options

An investor buys 100 shares of ABC at $48 and sells one ABC 50 call for a $2 premium. Ignoring commissions, which statement about the position is correct?

• a.Breakeven is $48 and the maximum gain is $200
• b.Breakeven is $50 and the gain is uncapped
• c.Breakeven is $46, and the maximum gain is $400✓
• d.Breakeven is $46 and the maximum gain is $200

The $2 premium lowers the breakeven to $48 - $2 = $46. The most the investor can make is the $2 stock gain up to the strike plus the $2 premium, or $4 per share and $400 in total, because the shares are called away at $50. A breakeven of $48 ignores the premium, a $200 maximum leaves out either the stock gain or the premium, and the upside is capped rather than unlimited.OCC Characteristics and Risks of Standardized Options

XYZ trades at $62. An XYZ 70 put sells for a premium of $10. What is the put's time value?

• a.$2, the premium minus $8 of intrinsic value✓
• b.$18, the premium plus the intrinsic value
• c.$10, the full premium paid for the put
• d.$8, the amount the put is in the money

The put is $8 in the money ($70 - $62), so $8 of the $10 premium is intrinsic value and the remaining $2 is time value. The $8 figure is the intrinsic value itself. The full premium is intrinsic value plus time value, not time value alone, and adding the two components together double counts the intrinsic value.

An investor writes one DEF 40 put and collects a $3 premium. Ignoring commissions, what is the most the writer can lose?

• a.$3,700, reached if DEF falls all the way to zero✓
• b.$4,000, the strike price times 100 shares
• c.$4,300, the strike plus premium times 100
• d.$300, the premium that the writer collected

If DEF falls to zero, the writer must buy 100 shares at $40 for $4,000 and the stock is worthless, but the $300 premium offsets part of that, leaving a maximum loss of $3,700. The premium is the writer's maximum gain, not the maximum loss. Ignoring the premium gives $4,000, and adding the premium instead of subtracting it gives $4,300.OCC Characteristics and Risks of Standardized Options

A TIPS was issued with $1,000 of principal and a 2% fixed coupon. After a year of inflation, its adjusted principal is $1,030. What annual interest does the coupon produce at that point?

• a.$50.60, the interest plus the $30 principal adjustment
• b.$20.00, the coupon applied to the original principal
• c.$20.60, 2% of the adjusted $1,030 principal✓
• d.$30.90, 3% applied to the adjusted principal

A TIPS coupon rate is fixed, but it is applied to the inflation-adjusted principal, so the interest is 2% x $1,030 = $20.60. Using the original $1,000 ignores the adjustment. The $30 adjustment raises principal, it is not interest, and 3% is the inflation rate, not the coupon rate.Treas. Reg. 1.1275-7

An investor holds a TIPS in a taxable account, and the CPI adjustment raises its principal by $30 during the year. How is the $30 increase treated for federal income tax?

• a.It is taxable that year, though the cash arrives only at maturity or sale✓
• b.It is deferred and taxed as a capital gain when the TIPS matures
• c.It is exempt from federal tax, just as it is exempt from state and local tax
• d.It is taxed at the lower qualified-dividend rate because no cash is received

TIPS principal adjustments are treated as taxable interest in the year they occur, creating tax on income the holder has not yet received. They are not deferred until maturity and they are not capital gains. The state and local exemption on Treasury interest does not extend to federal tax, and qualified-dividend rates apply to stock dividends, not to bond income.Treas. Reg. 1.1275-7

A resident of State A buys a State A general obligation municipal bond and, separately, a State B general obligation bond of the same quality. How is the interest on the two bonds generally taxed?

• a.Both are federally exempt, but State A taxes the interest on both of them
• b.Both are exempt from federal and State A tax, since state tax follows the federal exemption
• c.Only the State A bond is federally exempt, because the State B bond is out-of-state
• d.Both are federally exempt, but only the State A bond is generally exempt from State A tax✓

Municipal interest is generally exempt from federal income tax regardless of the issuing state. State exemption usually applies only to bonds issued within the investor's own state, so the State B interest is generally taxable by State A. Exemption does not automatically follow from the federal rule, a state does not tax its own bonds in this situation, and out-of-state status does not affect the federal exemption.IRC Section 103

An investor buys a tax-exempt municipal bond at par and sells it 18 months later at 104 after market rates fall. The $40 per-bond profit is:

• a.taxed at ordinary income rates, because bond profits are treated as interest income
• b.taxed federally as a long-term capital gain, though the coupon stays exempt✓
• c.exempt from federal tax but counted as income under the alternative minimum tax
• d.exempt from federal tax, because the bond itself was issued as a tax-exempt security

The exemption covers the coupon interest, not a profit from selling the bond at a higher price. That profit is a capital gain, and since the bond was held for more than one year it is long-term. Treating the gain as exempt, as ordinary interest, or as an AMT item misreads what the exemption covers.

A company's 5% non-cumulative preferred stock misses its dividend this year, and the company resumes paying dividends the next year. What is the status of the missed payment?

• a.It accrues as a dividend in arrears that must be paid before any common dividend
• b.It is a default that lets preferred holders force liquidation of the company
• c.It is lost, and the company owes only the current dividend ahead of any common dividend✓
• d.It converts into additional preferred shares issued to the holders

Non-cumulative preferred holders have no claim on dividends that were not declared, so the missed payment is gone and only the current dividend has priority over common. Arrears accrue only on cumulative preferred. Preferred dividends do not convert into extra shares, and, unlike missed bond interest, an omitted dividend is not a default.

A struggling company's board omits the dividend on its common stock and, in the same quarter, the company misses a scheduled interest payment on its bonds. Which statement is correct?

• a.Only the omitted dividend is a default, since common holders are the company's owners
• b.Both are defaults, because each is a payment the company promised to its investors
• c.Neither is a default unless the board has formally declared the interest payable
• d.The missed interest is a default under the bond terms; the dropped dividend is not✓

Bond interest is a contractual obligation in the indenture, so missing it is a default that gives bondholders legal remedies. A common dividend is paid only if the board declares it, so omitting one creates no default. Stockholders have no promise to be paid, interest is not discretionary like a dividend, and ownership does not turn an omitted dividend into a default.

A preferred stock has a $25 par value and pays a 6% dividend. It currently trades at $30 per share. What are its annual dividend per share and current yield?

• a.$1.50 dividend; 6.00% current yield
• b.$1.50 dividend; 5.00% current yield✓
• c.$1.80 dividend; 6.00% current yield
• d.$1.80 dividend; 7.20% current yield

The dividend is set on par, not market price: 6% x $25 = $1.50. Current yield = annual dividend / market price = $1.50 / $30 = 5.00%. A 6.00% yield would only result if the stock traded at par. A $1.80 dividend comes from wrongly applying the 6% rate to the $30 market price, and dividing that $1.80 by the $25 par gives the 7.20% figure.

An issuer has 10,000 shares of 5% cumulative preferred stock outstanding, $100 par. It has paid no preferred dividends for the last three years, and this year's dividend is also due. The board wants to pay a common dividend this year. What is the minimum total it must pay the preferred holders first?

• a.$150,000
• b.$50,000
• c.$250,000
• d.$200,000✓

Annual preferred dividend = 5% x $100 x 10,000 shares = $50,000. Cumulative preferred must receive all three years of arrears ($150,000) plus the current year ($50,000) = $200,000 before common is paid. $150,000 leaves out the current year, $50,000 treats the stock as non-cumulative, and $250,000 counts one year too many.

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