chp 4 - mock exam

What will happen to the value of a bond when interest rates increase?

The value of the bond will fall (correct)
The value of the bond will fluctuate unpredictably
The value of the bond will rise
The value of the bond will remain the same

What is seniority risk related to in corporate debt?

Issuer invoking a call provision
Inflation rising unexpectedly
The ease with which a security can be converted into cash
Ranking in the event of issuer's liquidation (correct)

What risk is associated with the ease of converting a security into cash?

Exchange rate risk
Seniority risk
Liquidity risk (correct)
Inflation risk

What happens to bond prices when interest rates fall?

Bond prices increase (C) Signup and view all the answers

Which type of bond risk is associated with adverse exchange rate movements?

Exchange rate risk (A) Signup and view all the answers

What is the primary reason why turmoil occurred in government bond markets following the last financial crisis?

Fears that European governments might not meet their obligations (A) Signup and view all the answers

What is the main concern for bondholders in a rising interest rate environment?

Interest rate risk (A) Signup and view all the answers

How does a general upward movement in interest rates affect bond prices?

Decreases bond prices (A) Signup and view all the answers

Why is price risk a significant concern for bondholders?

It can lead to significant impacts on bond values due to interest rate movements (D) Signup and view all the answers

What happens to the value of a bond when interest rates rise substantially?

The value of the bond falls (D) Signup and view all the answers

What is a sinking fund requirement associated with in corporate bonds?

Requires the issuer to redeem a specified amount at regular intervals (D) Signup and view all the answers

How do puttable bonds differ from callable bonds?

Puttable bonds give the bondholder the right to demand early redemption (C) Signup and view all the answers

What is the primary disadvantage of a call provision to investors?

Higher yield demanded as compensation (A) Signup and view all the answers

Why are puttable bonds considered attractive to investors?

Allow the investor to demand early redemption (C) Signup and view all the answers

How does a call provision benefit the issuer?

Enables buying back all or part of the bond before maturity (B) Signup and view all the answers

What is one of the attractions for investors holding convertible bonds?

Priority in repayment over existing shareholders in case of bankruptcy (B) Signup and view all the answers

How does the potential dilution of current shareholder interests affect the attractiveness of convertible bonds?

Decreases attractiveness as it can lower the value per share for existing shareholders (B) Signup and view all the answers

What financial benefit does a company derive from issuing convertible bonds?

Access to cheap finance compared to other forms of funding (A) Signup and view all the answers

In what scenario might a bondholder holding an unsecured convertible bond still face a loss?

If the company goes out of business, and they are not repaid due to insolvency (C) Signup and view all the answers

Why are investors willing to pay a higher price for convertible bonds compared to non-convertible ones?

Because of the possibility of capital gains through conversion (A) Signup and view all the answers

Why would a logical investor be interested in purchasing a Zero Coupon Bond (ZCB) that pays no interest?

To benefit from all the return being provided in the form of capital growth rather than income. (C) Signup and view all the answers

What distinguishes Zero Coupon Bonds (ZCBs) from other types of bonds in terms of how returns are generated?

ZCBs provide returns only through capital growth, not through regular interest payments. (C) Signup and view all the answers

How does the price paid for a Zero Coupon Bond (ZCB) relate to its par value redemption?

The price paid is lower than the par value, and the difference is recouped upon redemption. (A) Signup and view all the answers

What differentiates the return on investment from a Zero Coupon Bond (ZCB) compared to a traditional bond?

ZCBs provide returns through capital growth, while traditional bonds provide returns through regular interest payments. (B) Signup and view all the answers

What aspect of Zero Coupon Bonds (ZCBs) makes them potentially attractive for certain investors?

Providing an opportunity for investors to obtain a return without relying on regular interest payments. (D) Signup and view all the answers

What is the main purpose of calculating the yield to maturity for a bond?

To assess the capital gain or loss if the bond is held to maturity (C) Signup and view all the answers

In what scenario would the yield to maturity be less than the flat yield for a bond?

When the market price is higher than the par value (C) Signup and view all the answers

What does the yield to maturity (YTM) offer that makes it a more comprehensive measure for comparing bond returns?

It accounts for potential capital gains and losses (B) Signup and view all the answers

Why would the yield to maturity be higher than the flat yield for a bond priced below its par value?

To reflect the discount on the market price compared to par value (B) Signup and view all the answers

What effect does holding a bond until its maturity have on both the flat yield and the yield to maturity?

Can lead to different values for flat yield and yield to maturity (C) Signup and view all the answers