Bonds chp 4
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Questions and Answers

What is the term used to describe the amount of interest paid per year on a bond?

  • Coupon (correct)
  • Redemption date
  • Stock value
  • Face value

    • In the context of bonds, what does the term 'nominal' refer to?

  • The final interest payment
  • The amount of stock purchased (correct)
  • The price quoted on the New York Stock Exchange
  • The amount of interest paid per year

    • What is the convention for quoting bond prices in the bond markets?

  • Per $50 nominal of stock
  • Per $1,000 nominal of stock
  • Per $10,000 nominal of stock
  • Per $100 nominal of stock (correct)

    • What does the term 'stock' refer to in relation to bonds?

    <p>Amount of stock purchased and borrower name</p> Signup and view all the answers

    Which term is synonymous with 'maturity date' when discussing bonds?

    <p>Redemption date</p> Signup and view all the answers

    How is the market value of a bond holding calculated?

    <p>Multiplying the nominal amount by the coupon rate</p> Signup and view all the answers

    What is the total value of outstanding debt globally, as mentioned in the text?

    <p>Over US$128 trillion</p> Signup and view all the answers

    Which entity issues government bonds?

    <p>Supranational agencies</p> Signup and view all the answers

    What is the main purpose of issuing a bond?

    <p>To finance investment projects</p> Signup and view all the answers

    What is the primary characteristic of a bond?

    <p>Promise to repay loan on a fixed date</p> Signup and view all the answers

    Which type of bonds are issued by companies like large banks?

    <p>Corporate bonds</p> Signup and view all the answers

    Why has the difference in value between bonds and equity market capitalisation been closing?

    <p>Primarily due to large government bond issues since the financial crisis</p> Signup and view all the answers

    What is the primary difference between Treasury bills and Treasury notes?

    <p>Maturity date</p> Signup and view all the answers

    Which type of US Treasury security adjusts its principal value based on the consumer price index (CPI)?

    <p>Treasury inflation-protected securities</p> Signup and view all the answers

    What are the main types of German government bonds mentioned in the text?

    <p>Bunds, Schatz, Bobls</p> Signup and view all the answers

    In the UK, what financial instrument is known as 'gilts'?

    <p>Conventional government bonds</p> Signup and view all the answers

    Which type of bond pays interest semi-annually but has a coupon that remains constant while being paid on the changing principal value?

    <p>STRIPS</p> Signup and view all the answers

    What is the significance of the term 'gilts' for UK government bonds?

    <p>They have a gold or gilt edge when physical certificates were issued</p> Signup and view all the answers

    'Gilt-edged stock' refers to what type of financial instrument historically?

    <p>'Gilts' in the UK government</p> Signup and view all the answers

    What is one of the main advantages of investing in bonds?

    <p>Regular and certain flow of income for fixed interest bonds</p> Signup and view all the answers

    What is a significant disadvantage associated with investing in bonds?

    <p>Erosion of income by the effects of inflation</p> Signup and view all the answers

    What is a common risk associated with holding bonds?

    <p>Default risk</p> Signup and view all the answers

    Which type of government bond risk refers to the possibility that a government might be unable to meet its financial obligations?

    <p>Default risk</p> Signup and view all the answers

    How do bond prices typically react to an increase in general interest rates?

    <p>Fall</p> Signup and view all the answers

    What is early redemption risk in bond investments?

    <p>Risk associated with issuer invoking a call provision and redeeming the bond early</p> Signup and view all the answers

    In the context of bond investments, what is seniority risk focused on?

    <p>'Risk related to the seniority with which corporate debt is ranked in case of issuer liquidation'</p> Signup and view all the answers

    What is the main consequence of a bond suffering from seniority risk?

    <p>It impacts the repayment priority of the bond</p> Signup and view all the answers

    How does inflation risk affect the real value of a bond?

    <p>Decreases the nominal value</p> Signup and view all the answers

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

    <p>Liquidity risk</p> Signup and view all the answers

    What type of bonds are potentially subject to adverse exchange rate movements?

    <p>Bonds denominated in foreign currencies</p> Signup and view all the answers

    How do Standard & Poor's and Fitch Ratings refine their credit ratings within a category?

    <p>By adding a plus or minus sign</p> Signup and view all the answers

    What distinguishes investment grade bonds from non-investment grade bonds?

    <p>'High-yield' terminology used</p> Signup and view all the answers

    Why are government bonds issued by Western governments considered major borrowers of money?

    <p>To finance spending and investment plans</p> Signup and view all the answers

    What is the primary characteristic of the US government bond market?

    <p>Largest and most liquid market in the world</p> Signup and view all the answers

    What are US government bonds generally known as?

    <p>Treasuries</p> Signup and view all the answers

    What happens to the credit rating of a bond if circumstances change significantly?

    <p>It is upgraded or downgraded accordingly</p> Signup and view all the answers

    How long is the most common maturity for Bunds?

    <p>10 years</p> Signup and view all the answers

    What is the settlement period for domestic trades?

    <p>T+1</p> Signup and view all the answers

    Which category of bonds is not included in the classifications for Japanese government bonds (JGBs)?

    <p>Municipal bonds</p> Signup and view all the answers

    What is the typical range of maturities for policy bank bonds in China?

    <p>6 months - 50 years</p> Signup and view all the answers

    What are the characteristics of ZCBs (Zero Coupon Bonds) in Japan?

    <p>Issued at a discount and carry no interest</p> Signup and view all the answers

    How do Inflation-indexed bonds work in Japan?

    <p>Principal adjusts with CPI, fixed interest payments based on adjusted principal</p> Signup and view all the answers

    Where do smaller investors submit non-competitive bids for new gilts in the UK?

    <p><strong>Debt Management Office (DMO)</strong></p> Signup and view all the answers

    In which country's bond market are policy bank bonds quasi-sovereign?

    <p><strong>China</strong></p> Signup and view all the answers

    Which government department manages the issuance of new gilts in the UK?

    <p>The Debt Management Office (DMO)</p> Signup and view all the answers

    What settlement period applies to JGB trades in Japan?

    <p>T+1 settlement</p> Signup and view all the answers

    What term is commonly used for instruments with a maturity of less than 12 months?

    <p>Commercial paper</p> Signup and view all the answers

    In which market do the majority of corporate bond trading activities occur in most developed markets?

    <p>Over-the-counter (OTC) market</p> Signup and view all the answers

    What is the key feature that helps differentiate corporate bonds?

    <p>Credit rating</p> Signup and view all the answers

    What type of bonds are typically listed on stock exchanges?

    <p>Corporate bonds</p> Signup and view all the answers

    Which term is often applied to debt instruments with a maturity exceeding 12 months?

    <p>Corporate bonds</p> Signup and view all the answers

    What does a company seeking to raise funds through a bond issue often have to provide to assure investors of the bond repayment?

    <p>Security</p> Signup and view all the answers

    What is the main benefit to the bank of engaging in securitisation of mortgages?

    <p>Removing mortgages from its balance sheet</p> Signup and view all the answers

    Which of the following is NOT a form of credit enhancement for mortgage-backed securities?

    <p>Investor fees</p> Signup and view all the answers

    In securitisation, what role does the special purpose vehicle (SPV) play?

    <p>Selling a pool of mortgages to create bonds</p> Signup and view all the answers

    What is one notable advantage of asset-backed securities (ABSs) as mentioned in the text?

    <p>They easily convert illiquid assets into tradeable instruments</p> Signup and view all the answers

    What was a significant consequence of including sub-prime mortgages in bond pools during the sub-prime crisis?

    <p>Bond prices collapse</p> Signup and view all the answers

    Why did banks start issuing mortgage bonds backed by sub-prime loans?

    <p>To attract more investors with lower credit quality bonds</p> Signup and view all the answers

    How do mortgage-backed securities differ from traditional bonds?

    <p>Mortgage-backed securities are backed by a pool of mortgages</p> Signup and view all the answers

    What is the primary reason for investors to find mortgage-backed bonds attractive?

    <p>Asset backing and credit enhancements</p> Signup and view all the answers

    How are mortgage-backed bonds created through securitisation offered to investors?

    <p>Through issuance by a special purpose vehicle (SPV)</p> Signup and view all the answers

    What financial process do mortgage certificates represent?

    <p>Issuance of government-backed mortgage securities in 1970</p> Signup and view all the answers

    What is a potential attraction for an investor holding convertible bonds?

    <p>The opportunity to convert the bond into ordinary shares for capital gains</p> Signup and view all the answers

    What could be a consideration for a company issuing preferred bonds?

    <p>Potential dilution of existing shareholder interests</p> Signup and view all the answers

    What distinguishes zero coupon bonds (ZCBs) from other types of bonds?

    <p>They provide returns only through capital growth, not income</p> Signup and view all the answers

    What is a defining characteristic of asset-backed securities (ABSs)?

    <p>Composed of marketable assets bundled together</p> Signup and view all the answers

    In what scenario would an investor holding convertible bonds rank ahead of existing shareholders?

    <p>If the company becomes insolvent and bondholders are repaid first</p> Signup and view all the answers

    What distinguishes preferred bonds from ordinary shares?

    <p>Lower ranking in the issuer's capital structure</p> Signup and view all the answers

    Why might investors pay a higher price for convertible bonds?

    <p>'Equity-like features' leading to higher yields</p> Signup and view all the answers

    How are zero coupon bonds different in terms of returns compared to traditional coupon-paying bonds?

    <p>'Capital growth' as the sole source of returns</p> Signup and view all the answers

    What is a key difference between preferreds and senior debt in an issuer's capital structure?

    <p>'Lower ranking' for preferreds compared to senior debt</p> Signup and view all the answers

    'Asset-backed securities (ABSs)' are primarily characterized by:

    <p>'Marketable nature' from bundling non-marketable assets</p> Signup and view all the answers

    What is the primary purpose of yield to maturity in bond investing?

    <p>To compare different bonds based on their interest rates</p> Signup and view all the answers

    In what market condition is the yield curve described as 'positive'?

    <p>When it slopes upward</p> Signup and view all the answers

    Why do investors demand a higher rate of interest for longer maturity bonds according to the text?

    <p>To compensate for greater risk and opportunity cost</p> Signup and view all the answers

    What does the term 'yield curve' illustrate in the bond market?

    <p>Interest rates for bonds with similar maturities</p> Signup and view all the answers

    How does the yield to maturity help investors in bond comparison?

    <p>It allows for direct comparison of returns from different bonds</p> Signup and view all the answers

    What is the purpose of a 'negative pledge' clause in eurobonds issued by companies?

    <p>To prevent subordination of bondholders' interests to subsequent bond issues</p> Signup and view all the answers

    What is the main advantage of the eurobond market over domestic bond markets for companies?

    <p>Ability to tap international lenders</p> Signup and view all the answers

    What is the flat yield of a bond calculated as?

    <p>Annual coupon divided by the bond's price, then multiplied by 100</p> Signup and view all the answers

    What is the yield to maturity of a bond a combination of?

    <p>Income and capital return assuming holding until maturity</p> Signup and view all the answers

    In what situation would the yield to maturity be less than the flat yield?

    <p>Market price higher than par value</p> Signup and view all the answers

    What innovative feature is commonly associated with dual-currency bonds?

    <p>'Par value in one currency and coupon payments in another'</p> Signup and view all the answers

    How are yields on bonds typically measured?

    <p>'Interest rate payable on the nominal amount'</p> Signup and view all the answers

    What does the investor need to take into account when calculating the 'yield to maturity' of a bond?

    <p>'Income and capital return' until maturity</p> Signup and view all the answers

    'Gilt-edged stock' historically refers to what type of financial instrument?

    <p>'UK government bonds'</p> Signup and view all the answers

    'Convertible bonds' mentioned in the text typically offer what feature?

    <p>'Ability to convert into shares'</p> Signup and view all the answers

    What distinguishes covered bonds from asset-backed securities?

    <p>Covered bonds have assets on the issuer's balance sheet, while ABSs do not.</p> Signup and view all the answers

    Why are covered bonds an important source of term funding for banks in Europe?

    <p>They are backed by assets that provide security to bondholders.</p> Signup and view all the answers

    What is the defining characteristic of Eurobonds?

    <p>They are denominated in a currency different from that of the issuing financial center.</p> Signup and view all the answers

    In which scenario would a foreign bond typically be issued?

    <p>A German company issuing a sterling bond to US investors.</p> Signup and view all the answers

    Why did the Eurobond market expand significantly in the 1970s?

    <p>To facilitate the recycling of revenues from US oil sales.</p> Signup and view all the answers

    Why are Eurobonds named as such despite not being restricted to European financial centers?

    <p>'Euro' originates from US dollar deposits in the European market.</p> Signup and view all the answers

    Which defining characteristic makes Eurobonds stand out among other types of international bonds?

    <p>Their denomination currency differs from that of the issuing financial center or centers.</p> Signup and view all the answers

    What is a main reason for Eurobonds being a popular choice for multinational companies?

    <p>They facilitate raising capital in multiple currencies simultaneously.</p> Signup and view all the answers

    What is a key benefit of Eurobonds for governments when compared to domestic bonds?

    <p>They provide access to a broader investor base due to their cross-border nature.</p> Signup and view all the answers

    What risk do investors potentially face when investing in Eurobonds denominated in a foreign currency?

    <p>Inflation risk due to currency devaluation.</p> Signup and view all the answers

    What is the main benefit for bondholders when security is offered over an issuer's assets?

    <p>Increased safety compared to unsecured borrowings</p> Signup and view all the answers

    What distinguishes fixed security from floating charge as forms of security for corporate debt?

    <p>Floating charge implies specific assets are charged.</p> Signup and view all the answers

    What is the purpose of a call provision in a corporate bond?

    <p>To give the issuer the option to repurchase the bond before maturity</p> Signup and view all the answers

    What feature makes Medium-Term Notes (MTNs) different from other debt instruments?

    <p>They are continuously offered to investors over time.</p> Signup and view all the answers

    What determines the interest rate on Floating Rate Notes (FRNs)?

    <p>Benchmark rates like SOFR or SONIA</p> Signup and view all the answers

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

    <p>'Call' provisions for periodic redemptions</p> Signup and view all the answers

    Why might an issuer find call provisions attractive when issuing corporate bonds?

    <p>To facilitate refinancing at lower interest rates</p> Signup and view all the answers

    How do Fixed-Rate Bonds differ from Floating Rate Notes (FRNs)?

    <p>'Fixed-Rate Bonds have predetermined interest rates.</p> Signup and view all the answers

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