Reading 64: Overview of Bond Sectors and Instruments - LO statements, following, black, about

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1.Which of the following statements about municipal bonds is FALSE?

A)    A municipal bond guarantee is a form of insurance provided by a third party other than the issuer.

B)    Revenue bonds are serviced by the income generated from specific revenue-producing payments of the municipality.

C)    Bonds with municipal bond guarantees are more liquid in the secondary market and generally have lower required yields.

D)    Revenue bonds have lower yields than general obligation bonds because there are more revenue bands and they have higher liquidity.

2.Which of the following statements concerning municipal bonds is FALSE?

A)    Municipal bonds have lower risk than Treasury bonds because of their lower yield.

B)    The vast majority of municipal bonds sell at lower yields because their bond interest is exempt from federal income tax.

C)    Municipals are most appealing to individuals with high incomes.

D)    Before-tax yields on municipal bonds are usually lower than before-tax yields on Treasury bonds.

3.Which of the following statements about fixed income securities is FALSE?

A)    The corporate bond sector is more important in the US than in Japan and Germany.

B)    The main innovation of CMO is that they offer stable maturities to investors.

C)    Treasuries and agencies are quoted in 32^nds of a price point.

D)    Coupon interest and capital gains from municipal bonds are tax exempt at the federal level.

4.Which of the following statements concerning municipal securities is FALSE?

A)    General obligation municipal securities are backed by the taxing authority of the municipality.

B)    All interest on municipal securities is tax-exempt at the federal level.

C)    Investors may be taxed on any capital gains on municipal securities.

D)    A moral obligation bond has no legally binding requirement to be repaid.

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答案和详解如下：

1.Which of the following statements about municipal bonds is FALSE?

A)    A municipal bond guarantee is a form of insurance provided by a third party other than the issuer.

B)    Revenue bonds are serviced by the income generated from specific revenue-producing payments of the municipality.

C)    Bonds with municipal bond guarantees are more liquid in the secondary market and generally have lower required yields.

D)    Revenue bonds have lower yields than general obligation bonds because there are more revenue bands and they have higher liquidity.

The correct answer was D)

General obligation bonds are backed by the full faith, credit, and taxing power of the issuer. Revenue bonds are serviced by the income generated from specific income-producing projects and can not be paid from other proceeds unrelated to the project. Therefore, they are riskier than general obligation bonds.

2.Which of the following statements concerning municipal bonds is FALSE?

A)    Municipal bonds have lower risk than Treasury bonds because of their lower yield.

B)    The vast majority of municipal bonds sell at lower yields because their bond interest is exempt from federal income tax.

C)    Municipals are most appealing to individuals with high incomes.

D)    Before-tax yields on municipal bonds are usually lower than before-tax yields on Treasury bonds.

The correct answer was A)

Treasury bonds are considered default free and have the least amount of risk. After-tax yields are highest for individuals in the highest tax bracket who benefit the most from the municipal bond’s tax-exempt status. Before tax yields on municipal bonds are lower due to their tax shield.

3.Which of the following statements about fixed income securities is FALSE?

A)    The corporate bond sector is more important in the US than in Japan and Germany.

B)    The main innovation of CMO is that they offer stable maturities to investors.

C)    Treasuries and agencies are quoted in 32^nds of a price point.

D)    Coupon interest and capital gains from municipal bonds are tax exempt at the federal level.

The correct answer was D)

Coupon or interest income is exempt from federal income taxes. Capital gains taxes associated with municipal bonds are not exempt from federal taxes.

4.Which of the following statements concerning municipal securities is FALSE?

A)    General obligation municipal securities are backed by the taxing authority of the municipality.

B)    All interest on municipal securities is tax-exempt at the federal level.

C)    Investors may be taxed on any capital gains on municipal securities.

D)    A moral obligation bond has no legally binding requirement to be repaid.

The correct answer was B)

Some interest on municipal bonds, such as municipal bond issues to build stadiums/arenas, is taxable at the federal level. Note though that most municipal bonds are tax-exempt – taxable munis tend to be the exception rather than the rule.