Chapter 7 Practice Question Answers
- 1. Answer: B. A zero coupon security is a security that matures in more than two years and only pays an investment return upon redemption. The confirmation for zero coupon securities must indicate a 0% interest rate and state that no periodic interest payments will be made. It follows that accrued interest is not calculated or included on the confirmation. However, the confirmation must show the maturity value of the securities if it differs from par value.
- 2. Answer: D. Calculated yield must be disclosed on the customer’s trade confirmation. The yield listed on the trade confirmation will typically be the same yield that was quoted to the customer. The yield must be included on a customer confirmation for a Build America Bond (BAB). No yield calculation is required for the following: variable rate bonds, because the coupon rate is periodically reset, so calculation is not possible; bonds in default, because they are no longer paying interest; municipal fund securities; securities traded on a discounted basis; and municipal CMOs. Calculated yield will be the lower of the yield to maturity, yield to call, or yield to put.
- 3. Answer: C. When-issued securities are contingent on the issuance of the securities. For all when-issued transactions, the confirmation must include all the normal information, except settlement date, dollar price (for transactions executed on a yield basis), yield (for transactions executed on a dollar price), total costs, and accrued interest. These cannot be confirmed, because they are not yet known.
- 4. Answer: C. For municipal securities, dealers must send trade confirmations to their customers for all agency and principal transactions.
- 5. Answer: B. The customer must send notice of transfer on the MSRB’s Form G-26 to the receiving party, which will immediately forward it to the carrying party. The carrying party has three business days to validate and return the transfer in