FINRA SIE — Securities Industry Essentials — All Questions

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.

A bond is priced at $1,200 and has a modified duration of 5.0. Yields fall by 25 basis points. Which is the approximate change in the bond's price?

• a.An increase of about $12.50
• b.An increase of about $3.00
• c.A decrease of about $15.00
• d.An increase of about $15.00✓

Percentage change = 5.0 x 0.25% = 1.25%, which on a $1,200 price is $15.00, and the price rises because yields fell. $12.50 applies 1.25% to $1,000 par instead of the $1,200 price, $3.00 applies only 0.25%, and a decrease has the direction reversed.

An investor expects interest rates to rise over the next year and wants the bond with the least price risk. Which bond is best suited to this view?

• a.A 20-year bond with a 3% coupon
• b.A 2-year bond with a 6% coupon✓
• c.A 5-year zero-coupon bond
• d.A 10-year bond with a 6% coupon

When rates are expected to rise, the investor wants the lowest duration, which comes from the shortest maturity and the highest coupon. The 2-year 6% bond has both. A 10-year bond has a longer maturity, a 20-year 3% bond has both a longer maturity and a lower coupon, and a zero-coupon bond pays nothing until maturity, so even a 5-year zero is more price sensitive than a 2-year coupon bond.

An investor holds only 2-year bonds and 30-year bonds and owns nothing between those maturities. Which strategy does this describe?

• a.A bulleted strategy
• b.A barbell strategy✓
• c.A laddered strategy
• d.A matched-maturity strategy

A barbell concentrates holdings at both the short and long ends of the maturity range. A ladder spreads holdings evenly across many maturities, a bullet concentrates holdings at a single maturity, and a matched-maturity strategy lines up bond maturities with the date a liability is due.

Which statement about convexity is correct for an option-free bond?

• a.A yield decline raises the price by more than an equal yield rise lowers it✓
• b.For the same size change in yield, the price drop when yields rise exceeds the price rise when yields fall
• c.For any change in yield, the price changes only in proportion to the coupon rate
• d.For the same size change in yield, the price change is identical in both directions

Positive convexity means the price-yield relationship curves: a yield decline lifts the price by more than an equal yield increase lowers it. A straight-line relationship would give equal changes in both directions, and the coupon rate is only one input to price sensitivity.

Who creates Treasury STRIPS?

• a.The Federal Reserve, which issues them to carry out open market operations
• b.The Treasury, which auctions them directly to the public as zero-coupon securities
• c.Corporations, which repackage their own bonds into zero-coupon securities
• d.Dealers that separate the interest and principal of an eligible Treasury security✓

STRIPS are not issued by the Treasury. Financial institutions and government securities dealers strip the coupon and principal payments of eligible Treasury notes and bonds through the book-entry system, and each piece trades as a separate zero-coupon security. The Federal Reserve does not issue them for policy purposes, and corporate repackagings are not Treasury STRIPS.

In a Treasury auction, how does a noncompetitive bid differ from a competitive bid?

• a.A noncompetitive bidder accepts the auction yield and is filled in full✓
• b.A noncompetitive bidder pays more than competitive bidders because it receives priority
• c.A noncompetitive bidder names a yield and may be rejected if that yield is too high
• d.A noncompetitive bidder is limited to Treasury bills and may not buy notes

Noncompetitive bidders (typically individuals) do not name a yield. They accept the rate set at the auction and are assured of being filled, within the allowed limit. Competitive bidders name a yield and may receive less or nothing if the bid is too high. In a single-price auction, all successful bidders receive the same rate. Noncompetitive bids may be placed for bills, notes and bonds.

A 13-week (91-day) Treasury bill with a $10,000 face value is sold at a discount rate of 4.80% based on a 360-day year. What is the price?

• a.$9,520.00
• b.$9,878.67✓
• c.$9,880.00
• d.$9,880.33

Price = face x (1 - discount rate x days / 360) = $10,000 x (1 - 0.048 x 91 / 360) = $10,000 x 0.987867 = $9,878.67. $9,880.33 uses a 365-day year, $9,880.00 treats the bill as exactly one quarter of a year, and $9,520.00 applies a full year of discount.

An investor buys a TIPS with a $1,000 original principal and holds it to maturity. After a long period of deflation, the inflation-adjusted principal at maturity is $960. What principal is repaid at maturity?

• a.$960
• b.$980
• c.$1,000✓
• d.$1,040

At maturity a TIPS repays the greater of its inflation-adjusted principal or its original principal, so the $960 adjusted amount is replaced by the $1,000 original principal. $960 ignores that floor, $1,040 would apply the wrong sign to the adjustment, and $980 averages the two amounts.

An investor buys a Treasury STRIP in a taxable account. Which statement about taxation is correct?

• a.The investor reports no income at all until the STRIP is sold or matures
• b.The investor reports the accreted discount as interest each year, though no cash is received✓
• c.The investor reports the discount as a capital gain each year as it accretes
• d.The investor reports all the interest in the year the STRIP matures

A STRIP is a zero-coupon security, and the discount is accreted as interest income each year for federal tax purposes, which is phantom income because no payments are made before maturity. The accretion is interest, not capital gain, and it is not deferred to maturity or sale.IRC §1272

An investor wants Treasury exposure and is concerned that interest rates will rise sharply. Which Treasury security is best suited to this concern?

• a.A zero-coupon Treasury STRIP security
• b.A 30-year Treasury bond
• c.A Treasury floating rate note✓
• d.A 10-year fixed-rate Treasury note

A floating rate note's interest rate resets weekly with the 13-week bill auction rate, so its coupon rises as rates rise and its price stays close to par. A 30-year bond, a STRIP and a 10-year note all have fixed returns and suffer price declines when rates rise, with the zero-coupon STRIP hurt the most.

Which of the following is typically included in the monthly payment an investor receives from a mortgage pass-through certificate?

• a.Interest, scheduled principal, and prepayments✓
• b.Scheduled principal only, with interest paid semiannually
• c.Interest and scheduled principal only, because prepayments go to the servicer
• d.Interest only, with principal returned at maturity

A pass-through passes along the borrowers' monthly payments, net of servicing and guarantee fees: interest, scheduled principal, and any prepayments. That is why the principal balance shrinks over time and the cash flow is not a bullet at maturity.

An investor owns a GNMA pass-through bought at a premium. Mortgage rates fall sharply. What is the most likely result?

• a.Prepayments speed up, and the premium paid becomes more valuable
• b.Prepayments slow down, and the average life of the security lengthens
• c.Prepayments are unchanged, because the security is guaranteed by the government
• d.Prepayments speed up, and principal is reinvested at lower rates✓

When mortgage rates fall, homeowners refinance and prepayments rise, which shortens the average life, exposes the holder to contraction and reinvestment risk, and hurts those who paid a premium. Slower prepayments and extension risk happen when rates rise. The government guarantee covers timely payment, not prepayment speed.

Interest rates fall sharply, and prepayments on a mortgage pool accelerate. What is the likely effect on the value of an interest-only (IO) strip and a principal-only (PO) strip from that pool?

• a.Both strips rise
• b.The IO strip falls and the PO strip rises✓
• c.The IO strip rises and the PO strip falls
• d.Both strips fall

An IO strip depends on interest from the outstanding balance, which shrinks faster when prepayments rise, so its value falls. A PO strip receives principal, which comes back sooner at par, so its value rises. The two strips move in opposite directions.

A mortgage pool is prepaying at 150% PSA. In month 20 of the pool's life, which is the annualized prepayment rate (CPR)? (100% PSA is 0.2% CPR in month 1, rising 0.2% each month to 6% in month 30.)

• a.2.7%
• b.4.0%
• c.9.0%
• d.6.0%✓

At 100% PSA, month 20 has a CPR of 20 x 0.2% = 4.0%. At 150% PSA, multiply by 1.5: 4.0% x 1.5 = 6.0%. 4.0% is the 100% PSA rate, 9.0% is the peak for 150% PSA (reached in month 30), and 2.7% divides by 1.5 instead of multiplying.

Which description fits the Z-tranche (accrual tranche) of a CMO?

• a.It accrues interest to principal and gets no cash until earlier tranches retire✓
• b.It has the most stable cash flows because it follows a planned amortization schedule
• c.It receives only the interest from the mortgages with no principal
• d.It receives only principal prepayments, which makes it rise in value when rates rise

A Z-tranche is paid last: it accrues interest like a zero-coupon bond that adds to its principal balance until the earlier tranches have been retired, so it has the longest duration. Interest-only describes an IO strip, a planned schedule describes a PAC, and a principal-only strip does not benefit when rates rise.

Which of the following is an asset-backed security (ABS) rather than a mortgage-backed security?

• a.A security backed by a pool of auto loans✓
• b.A CMO tranche backed by a pool of GNMA certificates
• c.A security backed by a pool of 30-year fixed-rate mortgages
• d.A security backed by FHA-insured mortgages

ABS are backed by consumer or business receivables such as auto loans, credit card balances or student loans. The other three choices are all backed by mortgages, so they are mortgage-backed securities.

What does a qualified legal opinion from municipal bond counsel indicate?

• a.The opinion confirms the bonds are backed by the issuer's full faith and credit
• b.The opinion is conditional or subject to qualifications✓
• c.The opinion confirms the bonds are exempt from state taxes but not federal taxes
• d.The opinion was written by counsel for the underwriter and not the issuer

A qualified (or reasoned) opinion is conditional or subject to qualifications, in contrast to the traditional unqualified opinion, which states that the bonds are valid and the interest is tax-exempt with no reservations. It does not specify which taxes apply, who retained counsel, or the security pledged.

Which municipal offering must an underwriter handle in compliance with SEC Rule 15c2-12 (assuming no exemption applies)?

• a.A $500,000 offering sold to a single bank
• b.A $750,000 public offering in $5,000 denominations to retail investors
• c.A $900,000 public offering in $1,000 denominations to retail investors
• d.A $5 million public offering in $5,000 denominations✓

Rule 15c2-12 applies to primary offerings of municipal securities with an aggregate principal amount of $1,000,000 or more, which includes the $5 million offering. The other offerings are each below that threshold.SEC Rule 15c2-12

Under a continuing disclosure undertaking required by Rule 15c2-12, the issuer must file notice of a material event, such as a rating change, with the MSRB's EMMA system within what period?

• a.At the end of the issuer's next fiscal year
• b.5 business days after the event
• c.10 business days after the event✓
• d.Within 30 calendar days after the event

The rule requires event notices to be submitted to EMMA in a timely manner, not in excess of 10 business days after the event. A 30-day window and a fiscal-year window are too long, and 5 business days is shorter than the rule requires.SEC Rule 15c2-12

A municipal bond is insured by a bond insurer. What does the insurance protect against?

• a.The risk that interest becomes subject to federal income tax
• b.The risk that the bond's market price falls when interest rates rise
• c.The risk that the issuer misses a scheduled payment of interest or principal on the bonds✓
• d.The risk that the bond is called before maturity at the issuer's option

Municipal bond insurance guarantees timely payment of interest and principal if the issuer defaults. It does not protect against market price changes, calls or a loss of tax-exempt status.

A municipal issuer sells new bonds and places the proceeds in an escrow account invested in Treasury securities, to pay off an outstanding issue on its first call date. How is the outstanding issue described?

• a.Moral obligation
• b.Subordinated
• c.Pre-refunded✓
• d.Pass-through

Bonds whose payment is secured by an escrow of Treasury securities until the call date are pre-refunded. They are typically viewed as extremely safe, and they trade on a yield to the call date. Moral obligation and subordination describe different credit arrangements.

A state housing finance agency issues revenue bonds that are backed by a moral obligation pledge from the state. What does the pledge mean?

• a.The state is legally required to pay debt service from its general fund
• b.The bonds are secured by a mortgage on property owned by the agency
• c.The state legislature may, but need not, appropriate funds to cover a shortfall in debt service✓
• d.The bonds are guaranteed by the federal government

A moral obligation is a non-binding commitment: the legislature is expected to consider an appropriation to cover a shortfall, but it has no legal duty to do so. That makes it weaker than a full faith and credit pledge. It is not a federal guarantee, and it is not a lien on property.

A city builds a new sewer line and issues bonds that will be repaid from charges on the owners of the properties that benefit from it. Which type of bond is this, and what is the main risk?

• a.A special assessment bond, with the risk that the city sells the sewer line
• b.A general obligation bond, with the risk that voters reject a tax increase
• c.A revenue bond, with the risk that fewer people use the sewer line
• d.A special assessment bond, with the risk that the property owners fail to pay assessments✓

Special assessment bonds are repaid from assessments levied on the benefited property owners, so the credit depends on those owners paying. A GO bond is backed by general taxing power, and a revenue bond is repaid from operating revenue of the facility, such as user charges.

An investor in a high tax bracket who pays the alternative minimum tax is considering four municipal bonds. For which is the interest most likely to be an AMT preference item?

• a.A revenue bond that finances a public water system
• b.A general obligation bond that finances a public school
• c.An industrial development revenue bond that finances a private company's factory✓
• d.A general obligation bond that finances a municipal road

Interest on certain private activity bonds, such as industrial development revenue bonds that benefit a private user, can be an AMT preference item. Bonds that finance essential governmental functions, such as schools, roads and public water systems, are not.IRC §57(a)(5)

A state transportation department issues short-term notes that will be repaid from federal highway grants it has been awarded but not yet received. What type of note is this?

• a.A revenue anticipation note
• b.A grant anticipation note✓
• c.A bond anticipation note
• d.A tax and revenue anticipation note

A grant anticipation note (GAN) is repaid from expected grant money. A BAN is repaid from the proceeds of a later bond sale, a TRAN from expected taxes and revenues, and a RAN from expected revenues such as tolls.

A city offers $10 million of bonds for competitive sale. Bidders submit sealed bids using net interest cost (NIC). Bidder A offers total interest of $4,150,000 and a $50,000 premium. Bidder B offers $4,100,000 of total interest and a $30,000 discount. Bidder C offers $4,200,000 and a $120,000 premium. Bidder D offers $4,090,000 and no premium or discount. Which bidder wins the award?

• a.Bidder B
• b.Bidder C✓
• c.Bidder A
• d.Bidder D

NIC = total interest + discount - premium. A: $4,150,000 - $50,000 = $4,100,000. B: $4,100,000 + $30,000 = $4,130,000. C: $4,200,000 - $120,000 = $4,080,000. D: $4,090,000. The lowest NIC is C's, so it wins the award, even though C has the highest stated interest. D has the lowest stated interest but not the lowest cost.

Which statement distinguishes a negotiated municipal underwriting from a competitive one?

• a.In a negotiated underwriting, the issuer awards the bonds to the lowest bidder from sealed bids
• b.In a negotiated underwriting, the issuer must choose a syndicate managed by a bank
• c.In a negotiated underwriting, the issuer selects the underwriter in advance and negotiates the terms of the sale✓
• d.In a negotiated underwriting, the issuer sells the bonds directly to investors without an underwriter

In a negotiated sale the issuer picks the underwriter before the sale and they negotiate price and terms. In a competitive sale, underwriters submit sealed bids and the issuer awards the bonds to the lowest TIC or NIC bidder. A direct placement avoids an underwriter, and no rule requires a bank to manage the syndicate.

A dealer sells $5 million of Treasury securities to a bank and agrees to repurchase them the next day at a slightly higher price. How is the transaction described from the bank's side?

• a.A repurchase agreement with a dealer
• b.A commercial paper purchase
• c.A federal funds loan in the open market
• d.A reverse repurchase agreement✓

The party that sells securities and agrees to buy them back is in a repo; the party on the other side, buying the securities with an agreement to sell them back, is in a reverse repo. A plain repo is the dealer's side of this trade. Federal funds are overnight reserve loans between banks and are not secured by Treasuries in this way, and commercial paper is unsecured corporate debt.

An investor holds $400,000 in negotiable certificates of deposit at one FDIC-insured bank, all in the investor's individual name. The bank fails. What is the maximum amount covered by FDIC insurance?

• a.$400,000
• b.$200,000
• c.$250,000✓
• d.$100,000

FDIC insurance covers $250,000 per depositor, per insured bank, per ownership category. All the CDs are in one category at one bank, so the coverage is $250,000. $400,000 treats each CD as separately insured, and $100,000 and $200,000 reflect old or invented limits.12 U.S.C. §1821(a)

A U.S. importer buys goods from a foreign exporter and pays with a time draft that the importer's bank accepts, promising to pay the holder at maturity. The exporter may sell the accepted draft at a discount before maturity. What money market instrument is this?

• a.A repurchase agreement, in which the exporter sells the draft and agrees to buy it back
• b.A negotiable certificate of deposit, which the importer's bank issued to a depositor
• c.Commercial paper, which is backed only by the importer's own credit
• d.A banker's acceptance, which is backed by the credit of the bank that accepted it✓

A time draft that a bank has accepted becomes a banker's acceptance, a short-term discount instrument that finances trade and is backed by the accepting bank's credit. Commercial paper is an unsecured note of the issuer itself, a negotiable CD is a deposit that a bank issues to a depositor, and a repurchase agreement involves a sale with a commitment to repurchase, which does not describe the exporter's sale of the draft.

What are Eurodollars?

• a.Dollar-denominated bonds issued by European governments
• b.Euro-denominated deposits held at U.S. banks
• c.Dollar deposits at banks outside the United States✓
• d.Dollar loans between banks made through the Federal Reserve

Eurodollars are dollar-denominated deposits at foreign banks or foreign branches of U.S. banks, outside U.S. banking regulation. Euro deposits at U.S. banks reverse the currency and location, and interbank loans through the Fed describe federal funds.

An investor buys a zero-coupon corporate bond in a taxable account. Which statement about taxation is correct?

• a.The investor owes tax each year only on the cash interest that is actually received
• b.The investor owes tax each year on the accreted OID, though no interest is paid✓
• c.The investor owes no tax if the bond is held to maturity
• d.The investor owes tax only when the bond matures, because no interest is paid before then

OID on a zero-coupon bond is taxed annually as interest income as it accrues, and this is phantom income because no cash is received until maturity. The accretion also increases the investor's cost basis. Tax deferral to maturity applies in tax-deferred accounts, not in a taxable account.IRC §1272