NASAA Series 66 — All Questions

An investor sells 100 shares at a $500 loss that is disallowed under the wash-sale rule, then holds the replacement shares bought for $4,000. The replacement shares' adjusted basis is:

• a.$3,500
• b.$4,000
• c.$500
• d.$4,500✓

A disallowed wash-sale loss is added to the replacement shares' basis: $4,000 + $500 = $4,500. This defers the loss until the replacement shares are eventually sold.

A donor gifts stock (original cost $10,000) now worth $15,000. The recipient later sells it for $18,000. The recipient's cost basis for computing the gain is generally:

• a.$0 (gifts carry no basis)
• b.$10,000 (the donor's carryover basis)✓
• c.$18,000 (the recipient's sale price)
• d.$15,000 (fair market value on the date of the gift)

For gifted securities sold at a gain, the recipient generally uses the donor's carryover basis ($10,000), producing an $8,000 gain. Inherited property instead gets a stepped-up basis.

An investor inherits stock the decedent had bought for $20,000; it is worth $50,000 on the date of death. The heir's cost basis is generally:

• a.$50,000 (stepped up to date-of-death value)✓
• b.$35,000 (the average of cost and date-of-death value)
• c.$0 (inherited property has no basis)
• d.$20,000 (the decedent's original purchase price)

Inherited securities generally receive a stepped-up basis equal to fair market value at the date of death ($50,000), so the decedent's prior appreciation escapes income tax.

For a dividend to be a 'qualified dividend' taxed at long-term capital-gains rates, the investor generally must:

• a.Hold the stock for more than one year after the dividend is paid
• b.Meet a minimum holding-period requirement around the ex-dividend date✓
• c.Receive it only from a U.S. corporation, since no foreign company's dividends ever qualify
• d.Be declared by a company with 25 straight years of dividend increases

A qualified dividend must be paid by a U.S. corporation or a qualified foreign corporation and the investor must meet a holding period: more than 60 days during the 121-day period that begins 60 days before the ex-dividend date (IRS Publication 550). The one-year period applies to long-term capital gains on the sale, not to dividends. Qualified foreign corporations can pay qualified dividends. A long record of dividend increases is not a requirement.IRS Publication 550, Qualified Dividends

Which of the following is generally the MOST tax-efficient 'asset location' decision?

• a.Placing the highest-growth equities in a traditional IRA, where all of the growth is eventually taxed as ordinary income
• b.Holding tax-inefficient bonds in tax-deferred accounts and tax-efficient stocks in taxable accounts✓
• c.Keeping every asset class in taxable accounts so capital losses can be harvested against gains each year
• d.Holding tax-exempt municipal bonds in a traditional IRA, so the interest is sheltered twice from tax

Asset location puts tax-inefficient, income-generating assets such as taxable bonds in tax-deferred accounts and tax-efficient assets such as long-term stock holdings in taxable accounts. Putting the highest-growth equities in a traditional IRA converts what would be lower-taxed long-term gains into ordinary income on withdrawal. Keeping everything in taxable accounts gives up tax deferral on the bond interest. Municipal bonds in an IRA waste the exemption, because IRA withdrawals are taxed as ordinary income anyway.

A traditional 401(k) contribution made through payroll:

• a.Reduces current taxable income, with withdrawals taxed later as ordinary income✓
• b.Can be withdrawn at any age with no tax and no penalty
• c.Is never subject to required minimum distributions during the owner's lifetime
• d.Is made with after-tax dollars, so qualified withdrawals in retirement are tax-free

Traditional 401(k) contributions are pre-tax, reducing current taxable income. Withdrawals in retirement are taxed as ordinary income, and required minimum distributions eventually apply.

For earnings in a Roth IRA to be withdrawn completely tax-free, the account generally must satisfy:

• a.A one-year holding period and that the owner be at least 59.5
• b.A five-year holding period and that the owner be 59.5 (or another qualifying event)✓
• c.A five-year holding period and that the owner have reached the age at which required minimum distributions begin
• d.A five-year period that restarts with each new contribution, and that the owner be 59.5 or older

A qualified Roth IRA distribution must come after the 5-tax-year period that begins with the first tax year for which any Roth IRA contribution was made, and must be made on or after age 59.5, because of disability, to a beneficiary after death, or for a qualifying first home (up to $10,000) (IRS Publication 590-B). The holding period is five years, not one. Roth IRAs have no required minimum distributions during the owner's life. The five-year clock starts once with the first contribution and does not restart with each new contribution.IRS Publication 590-B, What Are Qualified Distributions?

'Catch-up' contributions to IRAs and 401(k) plans are additional amounts allowed for individuals who are:

• a.Earning below an IRS income threshold
• b.Age 50 or older✓
• c.Self-employed
• d.First-time retirement savers

Catch-up contributions let individuals age 50 and older contribute above the standard annual limit to IRAs and 401(k) plans, helping accelerate late-career retirement saving.

Required minimum distributions from a traditional IRA generally must begin:

• a.At age 73 under current law✓
• b.Immediately upon retirement, regardless of age
• c.At age 65
• d.At age 59.5, when the 10% early-withdrawal penalty ends

Under SECURE 2.0, required minimum distributions from a traditional IRA begin at age 73. A Roth IRA has no RMDs during the original owner's lifetime.

Converting pre-tax traditional IRA assets to a Roth IRA:

• a.Is always completely tax-free, because both accounts are individual retirement arrangements under the federal tax code
• b.Is strictly prohibited for anyone whose income happens to exceed the annual limit for direct Roth IRA contributions
• c.Triggers an automatic 10% early-withdrawal penalty on the entire converted amount regardless of the owner's age
• d.Is a taxable event, adding the converted amount to ordinary income in the year of the conversion✓

A Roth conversion is taxable: pre-tax amounts converted are added to ordinary income for that year. Future qualified Roth withdrawals are then tax-free, and no income limit applies to conversions.

A key advantage of a 529 college-savings plan over a Coverdell ESA is that the 529 plan generally:

• a.Requires no beneficiary to be named
• b.Guarantees a fixed minimum return backed by the U.S. government
• c.Allows tax-free withdrawal for any purpose, including living expenses
• d.Permits much higher total contributions✓

A 529 plan allows substantially higher total contributions than a Coverdell ESA, which has a low annual cap. Both offer tax-free growth for qualified education expenses.

Assets held in an UGMA/UTMA custodial account:

• a.Are completely exempt from all taxation because they are held in the name of a minor child
• b.Belong irrevocably to the minor and pass to their control at the age of majority✓
• c.Can be reclaimed by the donor at any time for the donor's own expenses
• d.Remain the permanent legal property of the custodian and never transfer to the minor

UGMA/UTMA gifts are irrevocable; the minor legally owns the assets, which pass to the minor's control at the age of majority. Earnings may be subject to the 'kiddie tax.'

An investor takes an indirect (60-day) rollover distribution from a 401(k). A key pitfall is that:

• a.The plan must withhold 20% for taxes, which the investor must replace to roll over the full amount✓
• b.The rollover must be completed within just 24 hours of receiving the check, or else the entire distribution immediately becomes taxable ordinary income
• c.The investor may complete an unlimited number of such indirect rollovers within any single rolling twelve-month period
• d.Indirect rollovers are completely prohibited, and the only method ever permitted is a direct trustee-to-trustee transfer

Employer plans must withhold 20% on an indirect rollover. To roll over the full balance within 60 days, the investor has to make up the withheld amount from other funds; a direct rollover avoids this.

Under a commonly cited '4% rule,' a retiree with a $1,000,000 portfolio could plan to withdraw an initial annual amount of about:

• a.$100,000
• b.$4,000
• c.$400,000
• d.$40,000✓

The 4% guideline suggests an initial withdrawal of 4% of the portfolio: 4% x $1,000,000 = $40,000, adjusted for inflation thereafter, aiming to sustain income over a long retirement.

A qualified retirement plan under ERISA is characterized by:

• a.Pre-tax contributions and tax-deferred growth, subject to nondiscrimination rules✓
• b.No limit on annual contributions and no required distributions at any age
• c.Benefits that may be limited to selected executives, with no coverage or nondiscrimination testing
• d.After-tax contributions producing fully taxable distributions of principal and earnings

Qualified (ERISA) plans offer pre-tax contributions and tax-deferred growth in exchange for meeting nondiscrimination and coverage rules; contributions or benefits may not favor highly compensated employees (IRC 401(a)(4)). They are subject to annual contribution limits and required minimum distributions, so unlimited contributions with no required distributions describes neither. Benefits limited to selected executives without testing is a non-qualified arrangement, and after-tax contributions with fully taxable distributions of principal do not describe a qualified plan.26 U.S.C. 401(a)(4)

An investor buys a stock at $50, receives $2 in dividends, and sells it at $54. The total return is:

• a.12%✓
• b.4%
• c.20%
• d.8%

Total return = (price change + income) / cost = ($4 + $2) / $50 = $6 / $50 = 12%. It captures both price appreciation and income.

An investment gains 21% in total over a 3-year holding period. Its approximate annualized (compound) return is:

• a.63%
• b.About 7%✓
• c.About 21%
• d.About 10.5%

Annualized return = (1.21)^(1/3) - 1, which is about 6.6%, roughly 7%. The compound annual figure is less than the simple total divided by the number of years.

A fund reports a 9% nominal return in a year when inflation was 4%. Its real return is closest to:

• a.36%
• b.About 2.25%
• c.About 5%✓
• d.About 13%

Real return is approximately nominal return minus inflation = 9% - 4% = 5%. It reflects the gain in purchasing power after accounting for inflation.

To evaluate a portfolio MANAGER's skill independent of the timing of client cash flows, the preferred measure is:

• a.The nominal coupon yield of the bonds held
• b.The time-weighted return✓
• c.The simple average of beginning and ending account values
• d.The dollar-weighted IRR

Time-weighted return removes the effect of client cash-flow timing, isolating the manager's performance. Dollar-weighted return (an IRR) instead reflects the investor's own timing decisions.

A large-cap U.S. equity fund returned 15% while its benchmark, the S&P 500, returned 18%. The most accurate assessment is that the fund:

• a.Beat its benchmark by 3 points of return
• b.Matched its benchmark, since both returns are in the double digits
• c.Outperformed its benchmark, since 15% is above the long-run average stock return
• d.Underperformed its benchmark by 3 percentage points✓

Performance is judged relative to an appropriate benchmark: 15% versus 18% is 3 percentage points of underperformance. Calling it a 3-point win reverses the sign of the gap. Both returns being in double digits does not make them equal. A return above the long-run average stock return says nothing about how the fund did against the market in the same period.

Two index funds track the same benchmark; Fund A charges 0.05% and Fund B charges 0.75%. Over time, Fund A will most likely:

• a.Perform identically, since expenses do not affect net return
• b.Outperform Fund B by roughly the difference in fees✓
• c.Outperform Fund B by exactly 0.75%
• d.Underperform Fund B, because higher expenses signal superior active management

For funds tracking the same index, net return differs mainly by cost. Lower expenses (0.05% versus 0.75%) give roughly a 0.70-percentage-point annual edge that compounds over time.

The Treynor ratio measures a portfolio's excess return per unit of:

• a.Systematic risk, as measured by beta✓
• b.Total risk, as measured by standard deviation
• c.Unsystematic, company-specific risk
• d.Liquidity risk, reflecting how quickly holdings can be sold at a fair price

The Treynor ratio divides excess return (over the risk-free rate) by beta, measuring reward per unit of systematic risk. The Sharpe ratio instead uses total risk (standard deviation).

Fund X returned 14% with a standard deviation of 20%; Fund Y returned 10% with a standard deviation of 8%. The risk-free rate is 2%. Which statement is best supported?

• a.Fund X is superior, because a higher raw return always indicates better performance
• b.Fund Y has the higher Sharpe ratio (1.0 vs 0.6), indicating better risk-adjusted performance✓
• c.The two funds are identical on a risk-adjusted basis, because higher returns always compensate for higher risk
• d.Fund Y is inferior, because its 10% return is lower than Fund X's 14%

Sharpe X = (14 - 2) / 20 = 0.6; Sharpe Y = (10 - 2) / 8 = 1.0. Fund Y earns more return per unit of total risk despite its lower raw return.

A bond fund advertises a '6% distribution yield,' but its share price fell during the year. An investor should understand that:

• a.A distribution yield and a total return are the same measure
• b.The 6% distribution yield guarantees a 6% total return regardless of the share price
• c.A decline in the fund's share price has no bearing on the investor's total return for the year
• d.Total return also reflects price changes, so it can be lower than the distribution yield✓

Total return equals income (the yield) plus price change. A high distribution yield can be offset by price declines, so total return may end up well below the stated yield.

A client needs their portfolio to at least preserve purchasing power. If inflation is 3%, the MINIMUM nominal return required just to break even in real terms is:

• a.About 3%✓
• b.About 1.5%
• c.About 6%
• d.0%

To merely preserve purchasing power, the nominal return must at least equal inflation (about 3%), leaving a real return near zero. Beating inflation requires earning more than that.

A company has cumulative preferred stock and skips a dividend during a difficult year. Before the company may pay any dividend to common shareholders, it must:

• a.Pay the common dividend first, then make up the preferred arrears from later earnings
• b.Convert the preferred shares into common stock
• c.Redeem the preferred at par plus a call premium
• d.Pay all the omitted (in-arrears) preferred dividends✓

Cumulative preferred stock accrues any skipped (in-arrears) dividends, and those arrears must be paid in full before common shareholders receive any dividend. Paying common first reverses that priority. Conversion is a feature of convertible preferred, not of cumulative preferred. Redemption at a premium is a call feature that the issuer may exercise, not a condition for paying common dividends. Non-cumulative preferred, by contrast, simply loses a skipped dividend.

Participating preferred stock gives its holders the right to:

• a.Convert automatically into a fixed number of the issuer's common shares at maturity
• b.Force the issuer to repurchase the outstanding shares at par value at any time the holder chooses
• c.Vote on the same one-share-one-vote basis as common stockholders in all corporate elections
• d.Receive extra dividends beyond the fixed rate when earnings are strong✓

Participating preferred stock lets holders share in additional dividends above the stated fixed rate when the company performs well, over and above the regular preferred dividend. It is a way to give preferred holders some upside participation. Standard preferred receives only the fixed rate.

From the issuer's perspective, a corporation is MOST likely to call its callable preferred stock when:

• a.Market interest rates and dividend yields have risen substantially since the shares were issued
• b.Preferred holders demand that the issuer redeem their shares
• c.Market interest rates have fallen, letting it refinance at a lower cost✓
• d.The company's common stock has declined sharply in value on the open market recently

A corporation is most likely to call preferred stock when market rates have fallen, so it can redeem the high-cost shares and reissue at a lower dividend rate. Rising rates make the old, lower-rate preferred cheap to keep and a call pointless. A call is the issuer's right, so holders cannot compel redemption. A drop in the common stock price has no bearing on the refinancing economics.

A convertible preferred share with a par value of $100 is convertible into common stock at a conversion price of $25. The conversion ratio is:

• a.4 common shares per preferred share✓
• b.25 common shares per preferred share
• c.0.25 common shares per preferred share
• d.40 common shares per preferred share

The conversion ratio equals par value divided by the conversion price: $100 / $25 = 4 shares of common per preferred share. Knowing the ratio lets an investor compute the parity price and decide whether converting is worthwhile. The concept applies identically to convertible bonds.

A preemptive right granted to existing common stockholders allows them to:

• a.Vote their shares cumulatively, concentrating all of their votes on one director nominee
• b.Be paid ahead of bondholders from the company's assets if it is liquidated
• c.Inspect the company's books and records and receive annual financial statements
• d.Maintain proportional ownership by buying new shares before the public✓

A preemptive right lets current common shareholders buy newly issued shares in proportion to their existing stake before the shares are offered to the public, protecting them from dilution. Cumulative voting is a separate voting right. Stockholders rank behind bondholders in liquidation, so they are not paid ahead of them. Inspecting the books and receiving financial statements is a separate stockholder right that does nothing to protect against dilution.

A warrant attached to a new bond offering typically gives the holder:

• a.A right to convert the bond into the issuer's common stock at a stated ratio
• b.A long-term right to buy the issuer's stock at a set price, often initially above market✓
• c.A short-term right, expiring within weeks, to buy new shares at a discount to market
• d.A binding obligation to buy the issuer's stock at a preset price on a set future date

A warrant is a long-term right, often lasting years, to buy the issuer's stock at a fixed exercise price that is typically set above the market price when issued. Warrants are frequently used as a sweetener on bond or preferred offerings. A conversion right belongs to a convertible bond, which exchanges the bond itself for stock. The short-term, discounted right is a stockholder right in a rights offering. A binding obligation to buy at a set date is a forward contract.

An American Depositary Receipt (ADR) is BEST described as:

• a.A bond issued by a foreign government and denominated entirely in that country's local currency
• b.A negotiable receipt representing shares of a foreign company that trades in U.S. markets✓
• c.A pooled mutual fund that invests exclusively in emerging-market government debt securities
• d.A U.S. Treasury security whose principal value is adjusted for changes in the foreign exchange rate

An ADR is a negotiable certificate issued by a U.S. bank that represents shares of a foreign company, allowing those shares to trade in U.S. dollars on U.S. markets. It simplifies foreign investing but still carries currency (exchange-rate) risk. Dividends are received in dollars after conversion.

Cumulative voting, as compared with statutory voting, generally:

• a.Requires shareholders to split their votes equally among all open seats, with no option to concentrate them
• b.Gives each share one vote per seat with each seat voted on separately, which favors the majority holder
• c.Benefits minority shareholders by letting them concentrate all their votes on one director✓
• d.Is required by federal law for every publicly traded company, so every issuer must offer it to its shareholders

Cumulative voting lets a shareholder pool all votes (shares times open seats) and cast them for a single candidate, which helps minority holders elect at least one director. Splitting votes equally among all seats is the opposite of what the method allows. One vote per seat with each seat voted separately describes statutory voting, which favors the majority holder. Cumulative voting comes from state law and the corporate charter, not from a federal requirement.

Treasury stock refers to shares that:

• a.Are issued by the U.S. Treasury Department to finance the ongoing operations of the federal government
• b.The issuing company has repurchased and holds, carrying no votes or dividends✓
• c.Have been authorized in the corporate charter but have never actually been issued to any investor
• d.Represent a special class of preferred stock that is guaranteed by the federal government's credit

Treasury stock is stock that a corporation has issued and later reacquired; while held in treasury it has no voting rights and receives no dividends. It reduces the shares outstanding used in per-share calculations. It is unrelated to U.S. Treasury securities.

After a 2-for-1 stock split, an investor who held 100 shares priced at $80 each will have:

• a.200 shares worth $40 each, with total value unchanged✓
• b.50 shares worth $160 each
• c.100 shares worth $40 each, halving the position's total value
• d.200 shares worth $80 each

A 2-for-1 split doubles the share count and halves the price, so 100 shares at $80 become 200 shares at $40, leaving total value at $8,000 unchanged. A split changes the number and price of shares, not the investor's total value. Cost basis per share is adjusted accordingly.

The ex-dividend date is significant because an investor who buys shares on or after that date:

• a.Must also pay the seller the dividend
• b.Will still receive the dividend if the shares are held to the payment date
• c.Is not entitled to the upcoming declared dividend✓
• d.Is guaranteed the dividend if the trade settles before the payment date

On or after the ex-dividend date, a buyer is not entitled to the recently declared dividend; it goes to the seller who owned the shares before that date. The stock's price typically drops by roughly the dividend amount on the ex-date. To receive the dividend, an investor must buy before the ex-date.

The book value per share of common stock is calculated as:

• a.The current market price per share multiplied by the total number of shares outstanding
• b.Common stockholders' equity divided by common shares outstanding✓
• c.Total company assets divided by the combined number of preferred and common shares
• d.Annual earnings per share divided by the stock's current market price per share

Book value per share equals common stockholders' equity (net worth attributable to common) divided by common shares outstanding, giving an accounting measure of value per share. It often differs substantially from market price. Analysts compare price to book value to gauge valuation.

In a rights offering, the subscription price at which existing shareholders may buy new shares is typically:

• a.Equal to the par value of the common stock
• b.Below the current market price, giving the rights value✓
• c.Above the market price, to raise the most capital
• d.Exactly equal to the current market price on the distribution date

The subscription price in a rights offering is normally set below the current market price, which gives the rights intrinsic value and encourages shareholders to exercise or sell them. Par value is an accounting figure unrelated to the subscription price. A price above market would leave no reason to exercise. A price exactly at market would give the rights no value at issuance. Rights are short-term and trade separately.

The par value assigned to a share of common stock:

• a.Sets the dividend the company must pay, as a percentage of par
• b.Sets the floor price below which the exchange will halt trading and delist the stock
• c.Is the price at which the issuer must repurchase shares from holders on request
• d.Is an arbitrary accounting figure with little relation to market price✓

For common stock, par value is an arbitrary bookkeeping figure, often a penny or a few dollars, with essentially no relationship to market price. A dividend set as a percentage of par is a feature of preferred stock, not common. Exchanges do not set trading floors or delist based on par value. Issuers have no obligation to repurchase common shares at par or at any other price.

A bond with a 5% coupon (paying $50 annually) is currently trading at $1,250. Its current yield is:

• a.6.25%
• b.4%✓
• c.3.75%
• d.5%

Current yield equals the annual coupon divided by the current market price: $50 / $1,250 = 4%. Because the bond trades at a premium, its current yield (4%) is below its 5% coupon rate. Current yield ignores any gain or loss at maturity.

A bond is trading at a discount to par. Which ranking of its yields is correct?

• a.All three yields are exactly equal
• b.Current yield > yield to maturity > nominal yield
• c.Yield to maturity > current yield > nominal yield✓
• d.Nominal yield is greater than current yield, which is greater than yield to maturity

For a discount bond, yield to maturity is highest, followed by current yield, then the nominal (coupon) yield — the classic yield 'seesaw.' The discount adds capital appreciation at maturity, pushing YTM above the coupon. For a premium bond the order reverses.

For a bond purchased at a premium above par, the yield to maturity will be:

• a.Higher than both the current yield and the nominal (coupon) yield
• b.Between the current yield and the nominal yield, closer to the coupon
• c.Equal to the nominal yield, because the coupon is fixed for the life of the bond
• d.Lower than both the current yield and the nominal yield✓

A premium bond is redeemed at par, below the price paid, so the holder takes a built-in capital loss that pulls yield to maturity under both the current yield and the coupon rate: nominal yield > current yield > YTM. Yield to maturity higher than both is the discount-bond relationship, not the premium one. A yield between the two would ignore the capital loss, and YTM equals the coupon only for a bond bought at par.

U.S. Treasury bills are BEST described as:

• a.Inflation-indexed securities whose principal adjusts with the CPI
• b.Short-term instruments sold at a discount, paying no periodic interest✓
• c.Notes maturing in 2 to 10 years that pay a semiannual coupon
• d.Bonds with 20 to 30 year maturities that pay semiannual interest

Treasury bills are short-term obligations (one year or less) issued at a discount to face value; the return is the difference between the discounted price and par at maturity, with no periodic coupon. Inflation-indexed principal describes TIPS. Notes (2 to 10 years) and bonds (20 to 30 years) both pay semiannual interest.

Treasury Inflation-Protected Securities (TIPS) protect investors from inflation by:

• a.Guaranteeing a minimum real rate of return that is set by the Federal Reserve each year
• b.Allowing early redemption whenever inflation rises sharply
• c.Adjusting the bond's principal up or down with changes in the CPI✓
• d.Paying a fixed coupon plus a one-time cost-of-living bonus at final maturity

TIPS adjust their principal value with the Consumer Price Index, so the semiannual interest (a fixed rate applied to the adjusted principal) and the final payout rise with inflation. This preserves purchasing power. In deflation, the principal can adjust downward, though maturity payout is floored at the original par.

The lowest rating a bond can carry and still be considered 'investment grade' is:

• a.BB+, the highest speculative grade
• b.A-
• c.BBB- (Baa3)✓
• d.CCC

The lowest investment-grade rating is BBB- from Standard & Poor's (Baa3 from Moody's); anything below that is speculative or 'junk.' Many institutions are restricted to investment-grade bonds. Knowing this dividing line is essential for suitability and portfolio quality analysis.

A general obligation (GO) municipal bond is backed by:

• a.The full faith, credit, and taxing power of the issuer✓
• b.A private corporation's guarantee of any debt-service shortfall
• c.The revenue of a specific toll road or bridge
• d.Insurance provided by a U.S. federal agency

A general obligation bond is backed by the full faith, credit, and taxing power of the issuing municipality, which can levy taxes to make payments. A revenue bond, by contrast, is repaid only from a specific project's income. GO bonds are generally considered safer than revenue bonds of the same issuer.

Debt service on a municipal revenue bond is paid from:

• a.A reserve fund guaranteed by the U.S. Treasury
• b.Ad valorem property taxes levied by the municipality
• c.The general taxing authority of the state where the project is located
• d.The income produced by the specific facility it financed✓

A revenue bond is repaid solely from the income generated by the specific facility or project it financed, such as a toll bridge, airport, or utility. It is not backed by the issuer's general taxing power. Investors therefore analyze the project's projected revenues and coverage.

A debenture is a type of corporate bond that is:

• a.Secured by a pledge of the issuer's real estate and equipment
• b.Guaranteed by a third-party insurance company
• c.Collateralized by securities the issuer owns in other companies
• d.Backed only by the general credit of the issuer✓

A debenture is an unsecured corporate bond backed only by the general credit and full faith of the issuer, with no specific collateral pledged. Investors rely on the company's overall creditworthiness. Secured bonds, such as mortgage bonds, are instead backed by specific assets.

An investor holding a callable bond faces the greatest risk that the bond will be called when:

• a.The issuer's credit rating has recently been downgraded
• b.The stock market has entered a prolonged decline
• c.Interest rates have risen above the coupon
• d.Interest rates have declined below the coupon✓

Issuers call bonds when market rates fall below the bond's coupon, letting them refinance at a lower cost — leaving the investor to reinvest at lower prevailing rates (call and reinvestment risk). Rising rates make a call unlikely. Call features usually include a set period of call protection.

When a corporate bond is purchased in the secondary market between interest payment dates, the buyer generally pays the seller:

• a.The quoted price minus the interest accrued since the last payment date
• b.A price reduced by the full next coupon payment
• c.The quoted price plus interest accrued since the last coupon✓
• d.Only the quoted price, with no adjustment for interest

The buyer pays the bond's price plus accrued interest — the interest earned by the seller since the last coupon date — because the buyer will receive the full next coupon. Most corporate and municipal bonds accrue on a 30/360-day basis. This compensates the seller for the interest earned while holding.