FINRA FINRA Municipal Securities and Fixed Income 2 — Questions and Answers
Question 1: What is 'yield to maturity' (YTM) on a bond?
- The total return if held until maturity, accounting for price and all coupon payments (Correct answer)
- The annual coupon payment divided by par value
- The current market price minus par value
- The bond's last coupon payment only
Correct answer: The total return if held until maturity, accounting for price and all coupon payments
YTM represents the total annualized return an investor earns if the bond is held to maturity, factoring in the purchase price, coupon payments, and face value repayment.
Question 2: A municipal bond trading at a price above its par value is said to be trading at a:
- Premium (Correct answer)
- Discount
- Par
- Yield spread
Correct answer: Premium
A bond trading above its face (par) value is trading at a premium, usually because its coupon rate exceeds current market interest rates.
Question 3: Which of the following best describes a 'callable' municipal bond?
- The issuer has the right to redeem the bond before its maturity date (Correct answer)
- The bondholder can sell back the bond at any time
- The bond can be converted into equity
- The bond pays variable interest rates
Correct answer: The issuer has the right to redeem the bond before its maturity date
A callable bond gives the issuer the option to redeem the bond before its stated maturity date, typically when interest rates decline.
Question 4: What is the 'coupon rate' of a bond?
- The annual interest rate paid on the bond's face value (Correct answer)
- The bond's current yield based on market price
- The yield to maturity of the bond
- The spread over Treasury rates
Correct answer: The annual interest rate paid on the bond's face value
The coupon rate is the fixed annual interest rate stated on the bond, calculated as a percentage of the bond's par value.
Question 5: Under MSRB rules, a registered municipal securities dealer must deliver an official statement to a customer by:
- Settlement of the transaction (Correct answer)
- One week after the trade date
- The end of the business day of trading
- 30 days after issuance
Correct answer: Settlement of the transaction
MSRB Rule G-32 requires dealers to deliver the official statement to customers no later than the settlement date of the transaction.
Question 6: What is a 'zero-coupon' municipal bond?
- A bond that pays no periodic interest and is issued at a deep discount to face value (Correct answer)
- A bond with a coupon rate of 0% but paying dividends
- A bond that pays interest only at maturity as a lump sum coupon
- A bond whose interest payments are tax-exempt federally and at state level
Correct answer: A bond that pays no periodic interest and is issued at a deep discount to face value
Zero-coupon bonds make no periodic interest payments; instead, they are sold at a discount and mature at face value, with the difference representing the investor's return.
FINRA FINRA Municipal Securities and Fixed Income 2
What is 'yield to maturity' (YTM) on a bond?