Series 7 – General Securities Representative Exam Fixed Income Securities 1 — Questions and Answers
Question 1: What is the standard par value (face value) of a typical corporate bond?
- $100
- $500
- $1,000 (Correct answer)
- $10,000
Correct answer: $1,000
The standard par value of a corporate bond is $1,000, which is the amount the issuer repays at maturity.
Question 2: When market interest rates rise, what generally happens to existing bond prices?
- They rise proportionally with rates
- They fall (Correct answer)
- They remain unchanged
- They double in value
Correct answer: They fall
Bond prices and interest rates have an inverse relationship — when rates rise, existing bonds with lower coupons become less attractive, so their prices fall.
Question 3: A bond is said to be trading at a premium when its market price is:
- Below par value
- Equal to par value
- Above par value (Correct answer)
- Below its coupon rate
Correct answer: Above par value
A bond trades at a premium when investors pay more than the $1,000 par value, typically because its coupon rate exceeds current market rates.
Question 4: Which type of bond is backed by the full faith and credit of the U.S. government?
- Corporate bonds
- Municipal bonds
- Treasury bonds (Correct answer)
- Agency bonds
Correct answer: Treasury bonds
U.S. Treasury bonds are direct obligations of the federal government, backed by its full faith and credit and taxing authority.
Question 5: A zero-coupon bond is best described as one that:
- Pays interest monthly at a variable rate
- Pays no periodic interest and is issued at a discount to par (Correct answer)
- Has no stated maturity date
- Can only be issued by the U.S. Treasury
Correct answer: Pays no periodic interest and is issued at a discount to par
Zero-coupon bonds make no periodic interest payments; instead, they are sold at a deep discount and mature at par value, with the difference representing the investor's return.
Question 6: Interest income from which type of bond is generally exempt from federal income tax?
- Treasury bonds
- Corporate bonds
- Municipal bonds (Correct answer)
- Agency bonds
Correct answer: Municipal bonds
Interest on municipal bonds is generally exempt from federal income tax, making them attractive to investors in higher tax brackets.
Question 7: The coupon rate of a bond refers to:
- The bond's current yield based on its market price
- The annual interest rate stated on the bond at issuance (Correct answer)
- The yield to maturity calculated at purchase
- The discount rate used to determine present value
Correct answer: The annual interest rate stated on the bond at issuance
The coupon rate is the fixed annual interest rate stated on the bond certificate at issuance, expressed as a percentage of par value.
Series 7 – General Securities Representative Exam Fixed Income Securities 1
What is the standard par value (face value) of a typical corporate bond?