SIE: Chapter 2 Practice Question Answers

Taken from our SIE Online Guide

Chapter 2 Practice Question Answers

  1. 1. Answer: B. When a company issues a set of new bonds and puts the proceeds in an escrow fund to pay off a set of older bonds, it is called pre-refunding or advance refunding. The pre-refunded bonds are typically AAA rated. The funds that will be used in advance refunding must be kept in an escrow account. The pre-refunded bonds will no longer count as debt on the issuer’s balance sheet, and when this occurs, the bonds are considered defeased.
  2. 2. Answer: B. A bondholder of a bearer bond or a partially registered bond will have to present the coupons to the issuer to receive payment because the coupons are not registered in the bondholder’s name. Owners of fully registered and book-entry bonds could have their coupon payments sent to them through the mail because the issuer has the bondholder’s name and address on file.
  3. 3. Answer: D. A corporation would be most likely to call the issue of bonds with the highest interest payments. It would also prefer to call the issue without a call premium.
  4. 4. Answer: A. Basis points refer to one-hundredths of a percent on a yield quote. So 60 basis points would be equivalent to 0.6%. On a $1,000 par bond, 0.06% would be equivalent to $6 (0.6% x $1,000).
  5. 5. Answer: C. In order for a bond to be trading at parity, it needs to be trading at the conversion value. To calculate this value, first find the conversion ratio by dividing the conversion price into $1,000 ($1,000 / $25 = 40 shares per bond). Then take the ratio times the share price, which is equal to $1,800 ($45 x 40). Parity is the price of the bond that is equal to the bond’s value if converted to common stock.
  6. 6. Answer: A. A sinking fund redemption requires the issuer to set money aside regularly in a reserve account for the redemption of the bonds before maturity.
  7. 7. Answer: A. A bond refunding is the replacement of existing bonds with new “refunding” bonds. The issuer of re

Since you're reading about SIE: Chapter 2 Practice Question Answers, you might also be interested in:

Solomon Exam Prep Study Materials for the SIE
Please Enable Javascript
to view this content!