Podcast
Questions and Answers
As an investor in a commercial paper issued by a leading corporate, you are:
As an investor in a commercial paper issued by a leading corporate, you are:
- Exposed only to default risk
- Exposed to both interest rate risk and default risk (correct)
- Exposed only to interest rate risk
- Exposed none of interest rate risk or default risk
Your total return from purchasing a commercial paper with an original maturity period of 364 days for GBP 96.50 after one year's time is:
Your total return from purchasing a commercial paper with an original maturity period of 364 days for GBP 96.50 after one year's time is:
- Cannot be accessed due to lack of data given
- GBP 96.50
- GBP 3.50 (correct)
- GBP 100.00
Your rate of return from investing in a commercial paper for one year is close to:
Your rate of return from investing in a commercial paper for one year is close to:
- 3.5%
- 3.6% (correct)
- 5%
- Cannot be accessed due to lack of data given
Yield of a bond includes:
Yield of a bond includes:
Cash flows from a bill includes:
Cash flows from a bill includes:
The value of a single coupon from a corporate bond issued at GBP 93.25 with a coupon rate of 5% paid annually is:
The value of a single coupon from a corporate bond issued at GBP 93.25 with a coupon rate of 5% paid annually is:
Maximum capital gains possible from a corporate bond purchased at GBP 93.25 with a coupon rate of 5% paid semi-annually is:
Maximum capital gains possible from a corporate bond purchased at GBP 93.25 with a coupon rate of 5% paid semi-annually is:
Which of the following could not be an original maturity period for a UK Treasury bill?
Which of the following could not be an original maturity period for a UK Treasury bill?
Your comment can be if it is correct to say any government is the highest creditworthy borrower within the economy:
Your comment can be if it is correct to say any government is the highest creditworthy borrower within the economy:
The credit quality of a corporate debt instrument is presented by:
The credit quality of a corporate debt instrument is presented by:
The implied credit rating for a government security is:
The implied credit rating for a government security is:
Credit rating grades of AAA to A are recognized as:
Credit rating grades of AAA to A are recognized as:
Non-investment grade credit ratings are the ratings:
Non-investment grade credit ratings are the ratings:
Which of the following debt instruments will not be subject to default risk?
Which of the following debt instruments will not be subject to default risk?
Which of the following debt instruments will be subject to least exposure to interest rate risk?
Which of the following debt instruments will be subject to least exposure to interest rate risk?
Total cash inflow received by the investor from a corporate bond carrying a fixed coupon rate of 6% paid on a semiannual frequency purchased at GBP 98.56 is:
Total cash inflow received by the investor from a corporate bond carrying a fixed coupon rate of 6% paid on a semiannual frequency purchased at GBP 98.56 is:
Which of the following is a par bond?
Which of the following is a par bond?
Which of the following is a premium bond?
Which of the following is a premium bond?
A bond will be termed as a 'Bullet Maturity Bond' if its maturity proceeds are:
A bond will be termed as a 'Bullet Maturity Bond' if its maturity proceeds are:
A bond carries a coupon rate defined as 3 months LIBOR + 1.25%. This bond is termed as a:
A bond carries a coupon rate defined as 3 months LIBOR + 1.25%. This bond is termed as a:
A bond carries a coupon rate defined as 3 months LIBOR + 1.25%. This bond most probably pays the coupon interest on:
A bond carries a coupon rate defined as 3 months LIBOR + 1.25%. This bond most probably pays the coupon interest on:
A bond carries a coupon rate defined as 3 months LIBOR + 1.25%. Value of 3 months LIBOR for the current coupon period comes to 6.5%. Annual coupon rate applicable for this coupon period comes to:
A bond carries a coupon rate defined as 3 months LIBOR + 1.25%. Value of 3 months LIBOR for the current coupon period comes to 6.5%. Annual coupon rate applicable for this coupon period comes to:
Monetary authority signals a contractionary monetary policy. What will be the impact to a floating rate bond?
Monetary authority signals a contractionary monetary policy. What will be the impact to a floating rate bond?
Which of the following is not a special feature of a bank?
Which of the following is not a special feature of a bank?
The main source of funding for a bank is:
The main source of funding for a bank is:
Asset-liability mismatch of a bank arises as:
Asset-liability mismatch of a bank arises as:
Which of the following is incorrect regarding a systemically important bank?
Which of the following is incorrect regarding a systemically important bank?
You deposited GBP 10,000 with a commercial bank, most probably what amount of your deposit will be kept in cash by the bank?
You deposited GBP 10,000 with a commercial bank, most probably what amount of your deposit will be kept in cash by the bank?
You deposited GBP 10,000 with a commercial bank, most probably what amount of your deposit money will be given to borrowers as loans?
You deposited GBP 10,000 with a commercial bank, most probably what amount of your deposit money will be given to borrowers as loans?
Which entity or set of entities print money in the economy as recognized by economists and finance experts?
Which entity or set of entities print money in the economy as recognized by economists and finance experts?
You purchased a bond at a price of USD 623.25. Its maturity period is 10 years and the maturity value is USD 1,000. Most probably, this bond can be recognized as:
You purchased a bond at a price of USD 623.25. Its maturity period is 10 years and the maturity value is USD 1,000. Most probably, this bond can be recognized as:
Which of the following bonds can most probably be a zero coupon bond?
Which of the following bonds can most probably be a zero coupon bond?
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Study Notes
Investment Risks
- Commercial paper investment exposes investors to both interest rate risk and default risk.
- Understanding the return from commercial paper involves knowing its issue price and maturity.
Commercial Paper and Returns
- A commercial paper purchased at an issue price of GBP 96.50 for 364 days will yield a total return of GBP 100.00.
- The rate of return for this investment approximates to 3.5%.
Bond Yield Components
- Yield of a bond comprises coupon interest, capital gains, and reinvestment income, considering all potential returns.
Bill Cash Flows
- Cash flows from a bill include both coupon interest and maturity value for a complete understanding of income.
Corporate Bond Calculations
- A corporate bond issued at GBP 93.25 with a 5% coupon rate yields a single coupon payment of GBP 5.
- Maximum capital gains from a bond purchased at GBP 93.25 with a 5% coupon rate, held to maturity, amount to GBP 6.75.
Treasury Bills
- UK Treasury bills can have original maturity periods of 91, 182, or 364 days, but not 2 years.
Government Borrowing Credibility
- Governments are often considered the highest creditworthy borrowers, especially for local currency borrowing.
Corporate Debt Ratings
- Credit quality of corporate debt is assessed by its credit rating, which indicates default risk.
- Ratings from AAA to A are classified as high quality, while non-investment grade ratings range from BB+ to D.
Bond Maturity Types
- Bullet maturity bonds pay the principal amount fully at maturity.
- Serial maturity bonds are paid in installments over time.
Floating vs Fixed Rate Bonds
- Bonds linked to measures like LIBOR are classified as floating rate bonds, reflecting variable coupon payments.
Impact of Monetary Policy on Bonds
- A contractionary monetary policy can lead to reduced coupon interest for floating rate bonds.
Banking Characteristics
- Banks typically have a higher financial leverage, funded mainly by customer deposits while maintaining systemic risk.
- Asset-liability mismatches arise when assets have longer tenures compared to liabilities.
Bank Objectives and Operations
- The main objectives of central banks include maintaining monetary stability and supporting economic growth.
Fractional Reserve Banking
- Fractional reserve banking involves maintaining only a portion of deposits in cash for withdrawals, with the rest loaned out.
Money Creation Entities
- Only central banks are recognized entities with the authority to print money within an economy.
Bond Characteristics
- Bonds purchased at lower prices than their maturity values, such as USD 623.25 for a USD 1,000 bond, could indicate fixed coupon or potentially zero-coupon characteristics.
Identifying Zero-Coupon Bonds
- Zero coupon bonds do not provide periodic payments but are sold at a discount, maturing at face value.
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