QUESTION: 29

A corporate bond is quoted as having a net change in value of plus one point. By how much did the bond price increase?

$1,000
$100
$10
$1

Answer(s): C

Explanation:

$10. A point is 1% and bonds are priced in $1,000 increments. Multiplying $1,000 by 1% equals $10.

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QUESTION: 30

A basis point is:

0.10%
0.01%
1.00%
0.001%

Answer(s): B

Explanation:

0.01%. A basis point is one-hundredth of a point. Since a point is 1%, a basis point is 0.01%. A bond price change of one basis point is ten cents ($1,000 x 0.01%).

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Bubba buys a $4 convertible preferred with a $50 par value that is exchangeable for common stock at 47.50. If the preferred stock is trading at 52 and the common stock at 51, Bubba determines that the preferred stock is:

overpriced and will quickly decline
selling at a 4% premium over conversion value
underpriced and should rise quickly
going to be called when the common stock price is $52

Answer(s): C

Explanation:

underpriced and should rise quickly. The parity price for the common stock is about $49.38 - determined as:50 / 47.50 = 1.053 52 / 1.053 = 49.38 Since the common stock is trading at 51, the preferred is underpriced.

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QUESTION: 32

A case of leverage is:

selling common stock short and buying warrants for the equivalent number of shares followed by subscribing to the shares and covering the short
borrowing at 6% and investing the funds at 10%
buying stock on the NYSE and later selling it the same day on the CBOE
redeeming a convertible bond before maturity

Answer(s): B

Explanation:

borrowing at 6% and investing the funds at 10%. Leverage is all about using money obtained at a lower cost than what can be earned deploying the funds elsewhere. It is unrelated to arbitrage.

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Free SERIES 7 Exam Braindumps (page: 9)

QUESTION: 29

Explanation:

QUESTION: 30

Explanation:

QUESTION: 31

Explanation:

QUESTION: 32

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