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Question 1 of 10
1. Question
Which of the following statements is true regarding bond rating?
I. The three major bond rating agencies are Moody’s, Standard and Poor’s (S&P), and Fitc
II. The major rating agencies will reevaluate their bond grade and the grade they assigned the issuing company to determine if an upgrade or downgrade is warranted
III. Investors seeking exposure to the fixed income market use these ratings to help determine which bond is appropriate for their investing needs
IV. Investors who are seeking lower income and are more concerned with capital preservation may choose a higher-grade bond that is still investment gradeCorrect
Bond rating
The three major bond rating agencies are Moody’s, Standard and Poor’s (S&P), and Fitch. Bonds are graded at issue. Occasionally, the major rating agencies will reevaluate their bond grade and the grade they assigned the issuing company to determine if an upgrade or downgrade is warranted. Investors seeking exposure to the fixed income market use these ratings to help determine which bond is appropriate for their investing needs. An investor with the goal of capital preservation will most likely choose a highly rated bond such as the AAA rating issued by S&P. Investors who are seeking higher income and are less concerned with capital preservation may choose a lower-grade bond that is still investment grade.Incorrect
Bond rating
The three major bond rating agencies are Moody’s, Standard and Poor’s (S&P), and Fitch. Bonds are graded at issue. Occasionally, the major rating agencies will reevaluate their bond grade and the grade they assigned the issuing company to determine if an upgrade or downgrade is warranted. Investors seeking exposure to the fixed income market use these ratings to help determine which bond is appropriate for their investing needs. An investor with the goal of capital preservation will most likely choose a highly rated bond such as the AAA rating issued by S&P. Investors who are seeking higher income and are less concerned with capital preservation may choose a lower-grade bond that is still investment grade. -
Question 2 of 10
2. Question
Which of the following statements is true regarding credit spread for bonds?
I. Credit spread is the similarity in value between two bonds with different credit ratings that are otherwise identical
II. With the comparison often made in comparison to a U.S. Treasury bond, as such a bond is deemed to be maximally secure
III. Credit spread is measured or stated in terms of basis points
IV. Each point unequal to a hundredth of one percent, and all with reference to the bonds’ yieldCorrect
Credit spread for bonds
Credit spread is the difference in value between two bonds with different credit ratings that are otherwise identical, with the comparison often made in comparison to a U.S. Treasury bond, as such a bond is deemed to be maximally secure. Credit spread is measured or stated in terms of basis points, each point equal to a hundredth of one percent, and all with reference to the bonds’ yield. For example, if a proposed 5-year corporate bond had a yield of 3.89% and the corresponding 5-year U.S. Treasury bond had a yield of 2.36%, then the credit spread for these two bonds would be 389 – 236 = 153 basis points.Incorrect
Credit spread for bonds
Credit spread is the difference in value between two bonds with different credit ratings that are otherwise identical, with the comparison often made in comparison to a U.S. Treasury bond, as such a bond is deemed to be maximally secure. Credit spread is measured or stated in terms of basis points, each point equal to a hundredth of one percent, and all with reference to the bonds’ yield. For example, if a proposed 5-year corporate bond had a yield of 3.89% and the corresponding 5-year U.S. Treasury bond had a yield of 2.36%, then the credit spread for these two bonds would be 389 – 236 = 153 basis points. -
Question 3 of 10
3. Question
Which of the following statements is/are included in factors that affect bond liquidity?
I. How well-known or widely owned they are
II. The quality of the bond issuer
III. Whether it is trading at, above, or below par
IV. Whether it has any call featuresCorrect
Factors that affect bond liquidity
The following affect bond liquidity:
• how well-known or widely owned they are
• the bond rating (higher rating easier trades)
• the quality of the bond issuer
• how mature the bond is
• how high the interest rate is
• whether it is trading at, above, or below par
• whether it has any call featuresIncorrect
Factors that affect bond liquidity
The following affect bond liquidity:
• how well-known or widely owned they are
• the bond rating (higher rating easier trades)
• the quality of the bond issuer
• how mature the bond is
• how high the interest rate is
• whether it is trading at, above, or below par
• whether it has any call features -
Question 4 of 10
4. Question
Which of the following statements is true regarding additional risk when purchasing foreign bonds?
I. Investors that purchase bonds in foreign countries take on many additional risks
II. The additional risk accepted varies by country
III. In a country characterized by stability and wealth, the additional risks are maximal
IV. In these counties, the safety is usually found in the form of political, legislative, and cultural riskCorrect
Additional risk when purchasing foreign bonds
Investors that purchase bonds in foreign countries take on many additional risks. The additional risk accepted varies by country. In a country characterized by stability and wealth, the additional risks are minimal. In these counties, the additional risk is usually found in the form of political, legislative, and cultural risk, with the first two forms also being present in the United States.Incorrect
Additional risk when purchasing foreign bonds
Investors that purchase bonds in foreign countries take on many additional risks. The additional risk accepted varies by country. In a country characterized by stability and wealth, the additional risks are minimal. In these counties, the additional risk is usually found in the form of political, legislative, and cultural risk, with the first two forms also being present in the United States. -
Question 5 of 10
5. Question
Which of the following statements is true regarding additional risk when purchasing foreign bonds?
I. Cultural risk addresses the ways in which a culture different than that of the United States views business, particularly their views on debt instruments
II. Investors shouldn’t also navigate the complex tax codes of these countries
III. In developing or unstable countries, investors are presented with the additional risk of government instability and revolution
IV. And independent like the political system, seizure, and nationalization of private industryCorrect
Cultural risk addresses the ways in which a culture different than that of the United States views business, particularly their views on debt instruments. Investors must also navigate the complex tax codes of these countries. In developing or unstable countries, investors are presented with the additional risk of government instability and revolution and dependent upon the political system, seizure, and nationalization of private industry.
Incorrect
Cultural risk addresses the ways in which a culture different than that of the United States views business, particularly their views on debt instruments. Investors must also navigate the complex tax codes of these countries. In developing or unstable countries, investors are presented with the additional risk of government instability and revolution and dependent upon the political system, seizure, and nationalization of private industry.
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Question 6 of 10
6. Question
Which of the following statements is true regarding advantages when purchasing foreign bonds?
I. Investors purchasing foreign bonds ignore higher risk when doing so than when purchasing domestic bonds
II. As with any security purchase, accepting higher risk results in being rewarded with greater returns
III. Foreign bonds, especially those in developing markets, tend to pay higher rates of interest than similar bonds purchased in the United States
IV. Foreign bonds issued in the United States are issued on the domestic market by a foreign companyCorrect
Advantages when purchasing foreign bonds
Investors purchasing foreign bonds accept higher risk when doing so than when purchasing domestic bonds. As with any security purchase, accepting higher risk results in being rewarded with greater returns. Foreign bonds, especially those in developing markets, tend to pay higher rates of interest than similar bonds purchased in the United States. Investors also benefit from a tax deduction calculated based on the amount of foreign tax associated with their investment that they may have paid to the foreign government. Foreign bonds issued in the United States are issued on the domestic market by a foreign company.Incorrect
Advantages when purchasing foreign bonds
Investors purchasing foreign bonds accept higher risk when doing so than when purchasing domestic bonds. As with any security purchase, accepting higher risk results in being rewarded with greater returns. Foreign bonds, especially those in developing markets, tend to pay higher rates of interest than similar bonds purchased in the United States. Investors also benefit from a tax deduction calculated based on the amount of foreign tax associated with their investment that they may have paid to the foreign government. Foreign bonds issued in the United States are issued on the domestic market by a foreign company. -
Question 7 of 10
7. Question
Which of the following statements is true regarding Brady bonds?
I. They are bonds issued developing countries, usually by the governments of Latin American nations
II. Brady bonds derive their name from former United States Treasury Secretary Nicholas Brady
III. Brady was a minor advocate for the reformation of emerging market debt issues for investors from the United States
IV. Brady bonds are harmful in that Brady bond transaction activity and demand provide a relevant and informed view of investor appetite for securitiesCorrect
Brady bonds
Brady bonds are bonds issued developing countries, usually by the governments of Latin American nations. Brady bonds derive their name from former United States Treasury Secretary Nicholas Brady. Brady was a major advocate for the reformation of emerging market debt issues for investors from the United States. Brady bonds are useful in that Brady bond transaction activity and demand provide a relevant and informed view of investor appetite for securities and debt instruments issued by emerging markets and developing countries.Incorrect
Brady bonds
Brady bonds are bonds issued developing countries, usually by the governments of Latin American nations. Brady bonds derive their name from former United States Treasury Secretary Nicholas Brady. Brady was a major advocate for the reformation of emerging market debt issues for investors from the United States. Brady bonds are useful in that Brady bond transaction activity and demand provide a relevant and informed view of investor appetite for securities and debt instruments issued by emerging markets and developing countries. -
Question 8 of 10
8. Question
Which of the following statements is true regarding implications associated with investing in foreign governmental debt?
I. Investors in the governmental debt of foreign countries should be careless
II. Foreign countries are often characterized by cultures with which investors from the United States are not familiar
III. This can result in political and legislative risk to which the investor is unaccustomed
IV. A stable foreign government debt issue offers additional riskCorrect
Implications associated with investing in foreign governmental debt
Investors in the governmental debt of foreign countries should be cautious. Foreign countries are often characterized by cultures with which investors from the United States are not familiar. This can result in political and legislative risk to which the investor is unaccustomed. An unstable foreign government debt issue offers additional risk. If the government experiences revolution, the new government may refuse to honor the debts of the previous leadership.Incorrect
Implications associated with investing in foreign governmental debt
Investors in the governmental debt of foreign countries should be cautious. Foreign countries are often characterized by cultures with which investors from the United States are not familiar. This can result in political and legislative risk to which the investor is unaccustomed. An unstable foreign government debt issue offers additional risk. If the government experiences revolution, the new government may refuse to honor the debts of the previous leadership. -
Question 9 of 10
9. Question
Which of the following statements is true regarding foreign corporate bonds?
I. Investors seeking exposure to foreign debt markets may target corporate debt to maximize their return for capital outlay
II. While this is an effective method to diversify a portfolio, there is additional safety inherent to investing in debt issues of foreign corporations
III. Foreign corporations are subject to different laws than companies participating in domestic debt markets
IV. Investors should also be aware that an unstable government in a foreign market can lead to unfavorable outcomesCorrect
Foreign corporate bonds
Investors seeking exposure to foreign debt markets may target corporate debt to maximize their return for capital outlay. While this is an effective method to diversify a portfolio, there are also additional risks inherent to investing in the debt issues of foreign corporations. Foreign corporations are subject to different laws than companies participating in domestic debt markets. Also of unique consideration is the sociopolitical environment of the region. Social unrest can quickly derail production in a company and affect its ability to honor its debts. Investors should also be aware that an unstable government in a foreign market can lead to unfavorable outcomes.Incorrect
Foreign corporate bonds
Investors seeking exposure to foreign debt markets may target corporate debt to maximize their return for capital outlay. While this is an effective method to diversify a portfolio, there are also additional risks inherent to investing in the debt issues of foreign corporations. Foreign corporations are subject to different laws than companies participating in domestic debt markets. Also of unique consideration is the sociopolitical environment of the region. Social unrest can quickly derail production in a company and affect its ability to honor its debts. Investors should also be aware that an unstable government in a foreign market can lead to unfavorable outcomes. -
Question 10 of 10
10. Question
Which of the following statements is true regarding bond premium?
I. The term bond premium describes the amount over par value an investor is willing to pay for a bond
II. In an increasing interest rate environment, bonds that pay a lower coupon than the current rate are in high demand
III. If a bond is held to maturity and a premium was paid for that bond, it may only be redeemed for par value and will result in a capital loss
IV. Capital appreciation should not be a goal for those who invest in bonds at a premiumCorrect
Bond premium
The term bond premium describes the amount over par value an investor is willing to pay for a bond. In a decreasing interest rate environment, bonds that pay a higher coupon than the current rate are in high demand. This increased demand leads investors who are seeking a higher current income to offer a premium price above par value for the bond with the higher coupon rate. This is a contributing factor in the valuation of a bond. If a bond is held to maturity and a premium was paid for that bond, it may only be redeemed for par value and will result in a capital loss. Capital appreciation should not be a goal for those who invest in bonds at a premium. The main objective for premium bond buying should be higher current income.Incorrect
Bond premium
The term bond premium describes the amount over par value an investor is willing to pay for a bond. In a decreasing interest rate environment, bonds that pay a higher coupon than the current rate are in high demand. This increased demand leads investors who are seeking a higher current income to offer a premium price above par value for the bond with the higher coupon rate. This is a contributing factor in the valuation of a bond. If a bond is held to maturity and a premium was paid for that bond, it may only be redeemed for par value and will result in a capital loss. Capital appreciation should not be a goal for those who invest in bonds at a premium. The main objective for premium bond buying should be higher current income.