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Question 1 of 10
1. Question
Which of the following statements is true regarding buying and selling bonds at a discount?
I. Buying bonds at a discount is the practice of investors paying less than par value for a bond
II. The reason a bond might be valued at more than par is in rising interest rate environments where bonds paying the old, higher rate of interest are not in demand
III. Because an investor will not pay par value to receive a lower rate of interest for a similar bond, bond sellers discount the prices of the bonds they hold to make them more attractive to investors
IV. The higher outlay of capital in conjunction with the lower coupon helps investors to receive similar yield to the new bonds with lower rates of interestCorrect
Buying and selling bonds at a discount
Buying bonds at a discount is the practice of investors paying less than par value for a bond. The reason a bond might be valued at less than par is in rising interest rate environments where bonds paying the old, lower rate of interest are not in demand. Because an investor will not pay par value to receive a lower rate of interest for a similar bond, bond sellers discount the prices of the bonds they hold to make them more attractive to investors. The lower outlay of capital in conjunction with the lower coupon helps investors to receive similar yield to the new bonds with higher rates of interest. This is a contributing factor in the valuation of a bond.Incorrect
Buying and selling bonds at a discount
Buying bonds at a discount is the practice of investors paying less than par value for a bond. The reason a bond might be valued at less than par is in rising interest rate environments where bonds paying the old, lower rate of interest are not in demand. Because an investor will not pay par value to receive a lower rate of interest for a similar bond, bond sellers discount the prices of the bonds they hold to make them more attractive to investors. The lower outlay of capital in conjunction with the lower coupon helps investors to receive similar yield to the new bonds with higher rates of interest. This is a contributing factor in the valuation of a bond. -
Question 2 of 10
2. Question
Which of the following statements is true regarding Zero coupon bonds?
I. Zero coupon bonds are bonds which sell at a discounted price because they pay interest
II. The bond is sold at less than face value but is repaid at face value when it reaches maturity
III. Zero coupon bonds generally have long-term maturities ranging from ten to twenty years
IV. Zero coupon bonds have a higher rate of price fluctuation on the open market than regular bondsCorrect
Zero coupon bonds
Zero coupon bonds are bonds which sell at a discounted price because they do not pay interest. The bond is sold at less than face value but is repaid at face value when it reaches maturity. Zero coupon bonds generally have long-term maturities ranging from ten to twenty years. Zero coupon bonds have a higher rate of price fluctuation on the open market than regular bonds. The advantage of zero coupon bonds is that an investor can pay a small amount of money up front which will grow into a much larger sum over time. This allows the investor to plan for a future goal like retirement or sending a child to college.Incorrect
Zero coupon bonds
Zero coupon bonds are bonds which sell at a discounted price because they do not pay interest. The bond is sold at less than face value but is repaid at face value when it reaches maturity. Zero coupon bonds generally have long-term maturities ranging from ten to twenty years. Zero coupon bonds have a higher rate of price fluctuation on the open market than regular bonds. The advantage of zero coupon bonds is that an investor can pay a small amount of money up front which will grow into a much larger sum over time. This allows the investor to plan for a future goal like retirement or sending a child to college. -
Question 3 of 10
3. Question
Which of the following statements is true regarding bond duration?
I. Bond duration is a product of multiple factors related to bonds and their issues
II. The factors used to calculate bond duration are the net present value, yield, coupon, final maturity, and call features
III. Bond duration is measured in months but not addresses interest rate risk related to the maturity of the bond
IV. All of the previously stated factors are used in a complex formula to determine the bond durationCorrect
Bond duration
Bond duration is a product of multiple factors related to bonds and their issues. The factors used to calculate bond duration are the net present value, yield, coupon, final maturity, and call features. Bond duration is measured in years and addresses interest rate risk related to the maturity of the bond. All of the previously stated factors are used in a complex formula to determine the bond duration. Duration gives the investor an idea of the value of a bond based on whether interest rates increase or decline. Longer duration periods tend to make the value of the bond fluctuate more because of the fluid nature of interest rates.Incorrect
Bond duration
Bond duration is a product of multiple factors related to bonds and their issues. The factors used to calculate bond duration are the net present value, yield, coupon, final maturity, and call features. Bond duration is measured in years and addresses interest rate risk related to the maturity of the bond. All of the previously stated factors are used in a complex formula to determine the bond duration. Duration gives the investor an idea of the value of a bond based on whether interest rates increase or decline. Longer duration periods tend to make the value of the bond fluctuate more because of the fluid nature of interest rates. -
Question 4 of 10
4. Question
Which of the following statements is true regarding maturity?
I. Maturity terms are the effective length of debt instruments, particularly bonds
II. When a debt instrument is issued at par value with a fixed interest rate, it is also assigned a maturity date
III. Bonds may then trade on the preliminary market at a discount or premium to par until maturity
IV. Duration is a function of maturity that harms the bond’s maturity as part of the calculationCorrect
Maturity terms are the effective length of debt instruments, particularly bonds. When a debt instrument is issued at par value with a fixed interest rate, it is also assigned a maturity date. For the length of time until maturity, the issuing entity promises to pay the fixed rate. Bonds may then trade on the secondary market at a discount or premium to par until maturity. At maturity, the issuing entity redeems the bond at par value and is no longer obligated to pay the fixed rate. Duration is a function of maturity that uses the bond’s maturity as part of the calculation.
Incorrect
Maturity terms are the effective length of debt instruments, particularly bonds. When a debt instrument is issued at par value with a fixed interest rate, it is also assigned a maturity date. For the length of time until maturity, the issuing entity promises to pay the fixed rate. Bonds may then trade on the secondary market at a discount or premium to par until maturity. At maturity, the issuing entity redeems the bond at par value and is no longer obligated to pay the fixed rate. Duration is a function of maturity that uses the bond’s maturity as part of the calculation.
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Question 5 of 10
5. Question
Which of the following statements is true regarding Yield-to-call?
I. Yield-to-call as related to the bond market is only applicable to security bonds
II. Callable bonds are issued with a clause stating times and conditions that a bond may be called back from investors, or redeemed early
III. These bonds are characterized by the additional risks of call risk, or the risk that the bond will be called before maturity
IV. These bonds tend to pay higher fixed rates as they contain more inherent risk and are less attractive to buyersCorrect
Yield-to-call
Yield-to-call as related to the bond market is only applicable to callable bonds. Callable bonds are those bonds that are issued with a clause stating times and conditions that a bond may be called back from investors, or redeemed early. These bonds are characterized by the additional risks of call risk, or the risk that the bond will be called before maturity, and investment risk, or finding a suitable investment to replace the investment called away. These bonds tend to pay higher fixed rates as they contain more inherent risk and are less attractive to buyers.Incorrect
Yield-to-call
Yield-to-call as related to the bond market is only applicable to callable bonds. Callable bonds are those bonds that are issued with a clause stating times and conditions that a bond may be called back from investors, or redeemed early. These bonds are characterized by the additional risks of call risk, or the risk that the bond will be called before maturity, and investment risk, or finding a suitable investment to replace the investment called away. These bonds tend to pay higher fixed rates as they contain more inherent risk and are less attractive to buyers. -
Question 6 of 10
6. Question
Which of the following statements is true regarding yield-to-maturity?
Correct
The yield-to-maturity, or YTM, of a bond is a characteristic that applies to all bonds. YTM is a function of the price an investor paid for a bond (whether at issue, a premium, or discount), the fixed rate of interest paid, and the time left to maturity. A bond purchased at a discount will have a higher YTM than a bond purchased at a premium or at par if the bonds have the same fixed rate of interest and date of maturity. YTM will help an investor to decide if there is more benefit to buying a bond at a large discount with a small coupon versus a bond with a high coupon bond, which will require a large premium to obtain.
Incorrect
The yield-to-maturity, or YTM, of a bond is a characteristic that applies to all bonds. YTM is a function of the price an investor paid for a bond (whether at issue, a premium, or discount), the fixed rate of interest paid, and the time left to maturity. A bond purchased at a discount will have a higher YTM than a bond purchased at a premium or at par if the bonds have the same fixed rate of interest and date of maturity. YTM will help an investor to decide if there is more benefit to buying a bond at a large discount with a small coupon versus a bond with a high coupon bond, which will require a large premium to obtain.
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Question 7 of 10
7. Question
Which of the following statements is true regarding coupon of a bond?
Correct
Coupon of a bond
The coupon of a bond is the fixed rate of interest paid to the investor holding the bond. A high coupon is very attractive for an investor seeking current income. In low interest rate environments, high coupon bonds command a premium due to the fact that the investor is seeking higher income and cannot find it in the low interest rate environment. It is a classic example of supply and demand. The supply of low coupon bonds in low interest rate environments is plentiful because they are being issued regularly.Incorrect
Coupon of a bond
The coupon of a bond is the fixed rate of interest paid to the investor holding the bond. A high coupon is very attractive for an investor seeking current income. In low interest rate environments, high coupon bonds command a premium due to the fact that the investor is seeking higher income and cannot find it in the low interest rate environment. It is a classic example of supply and demand. The supply of low coupon bonds in low interest rate environments is plentiful because they are being issued regularly. -
Question 8 of 10
8. Question
Which of the following statements is false regarding implications of valuing convertible bonds?
Correct
Implications of valuing convertible bonds
Convertible bonds differ from conventional bonds in that they may be converted from debt instruments to equity securities by the investor. Convertible bonds are attractive to investors because they provide investments in the more stable bond market while providing the investor with the opportunity to participate in the equity gains of a company should it begin to perform well. While this is an attractive option for the investor, it comes with a price. Because of this advantage, lower coupons are offered on convertible bonds. Lower coupons result in lower valuations of the bonds because they don’t provide as much current income as may be available in other debt instruments.Incorrect
Implications of valuing convertible bonds
Convertible bonds differ from conventional bonds in that they may be converted from debt instruments to equity securities by the investor. Convertible bonds are attractive to investors because they provide investments in the more stable bond market while providing the investor with the opportunity to participate in the equity gains of a company should it begin to perform well. While this is an attractive option for the investor, it comes with a price. Because of this advantage, lower coupons are offered on convertible bonds. Lower coupons result in lower valuations of the bonds because they don’t provide as much current income as may be available in other debt instruments. -
Question 9 of 10
9. Question
Which of the following statements is true regarding effect of rating on valuation?
Correct
Effect of rating on valuation
The risk/reward theory states that an investment that bears high risk should return high rewards to be worth accepting the risk associated with the investment. While this results in risky bonds commanding high coupon payments, or fixed interest payments, the inherent risk diminishes the attractiveness of the bond to investors looking to bonds for capital preservation. This causes investors with different investing needs to value the bonds differently. While bonds that are rated lowly may be very attractive to a young investor looking to take on risk to help his or her savings grow, they may be eschewed by the retiree seeking to preserve his or her capital.Incorrect
Effect of rating on valuation
The risk/reward theory states that an investment that bears high risk should return high rewards to be worth accepting the risk associated with the investment. While this results in risky bonds commanding high coupon payments, or fixed interest payments, the inherent risk diminishes the attractiveness of the bond to investors looking to bonds for capital preservation. This causes investors with different investing needs to value the bonds differently. While bonds that are rated lowly may be very attractive to a young investor looking to take on risk to help his or her savings grow, they may be eschewed by the retiree seeking to preserve his or her capital. -
Question 10 of 10
10. Question
Which of the following statements is true regarding discounted cash flow?
Correct
Discounted cash flow
Discounted cash flow as related to fixed income securities is a function of present value calculations. To calculate the discounted cash flow of a bond, the investor should apply the net present value formula to all expected cash flows from the bond (i.e., fixed interest payments) using the rate of inflation as the discount rate. This effectively provides the investor with a measurement of the time value of money. Investors use discounted cash flow in their evaluation of bonds by applying the time value discounts to their overall return on investment in today’s dollars. If a bond has a very long maturity, at some point, the fixed interest payments may not be enough to justify today’s expenditure of capital. This would devalue the bond and make it less attractive.Incorrect
Discounted cash flow
Discounted cash flow as related to fixed income securities is a function of present value calculations. To calculate the discounted cash flow of a bond, the investor should apply the net present value formula to all expected cash flows from the bond (i.e., fixed interest payments) using the rate of inflation as the discount rate. This effectively provides the investor with a measurement of the time value of money. Investors use discounted cash flow in their evaluation of bonds by applying the time value discounts to their overall return on investment in today’s dollars. If a bond has a very long maturity, at some point, the fixed interest payments may not be enough to justify today’s expenditure of capital. This would devalue the bond and make it less attractive.