Questions and Answers
As an investor in a commercial paper issued by a leading corporate, you are:
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 rate of return from investing in a commercial paper for one year is close to:
Yield of a bond includes:
Signup and view all the answers
Cash flows from a bill includes:
Signup and view all the answers
The value of a single coupon from a corporate bond issued at GBP 93.25 with a coupon rate of 5% paid annually is:
Signup and view all the answers
Maximum capital gains possible from a corporate bond purchased at GBP 93.25 with a coupon rate of 5% paid semi-annually is:
Signup and view all the answers
Which of the following could not be an original maturity period for a UK Treasury bill?
Signup and view all the answers
Your comment can be if it is correct to say any government is the highest creditworthy borrower within the economy:
Signup and view all the answers
The credit quality of a corporate debt instrument is presented by:
Signup and view all the answers
The implied credit rating for a government security is:
Signup and view all the answers
Credit rating grades of AAA to A are recognized as:
Signup and view all the answers
Non-investment grade credit ratings are the ratings:
Signup and view all the answers
Which of the following debt instruments will not be subject to default risk?
Signup and view all the answers
Which of the following debt instruments will be subject to least exposure to interest rate risk?
Signup and view all the answers
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:
Signup and view all the answers
Which of the following is a par bond?
Signup and view all the answers
Which of the following is a premium bond?
Signup and view all the answers
A bond will be termed as a 'Bullet Maturity Bond' if its maturity proceeds are:
Signup and view all the answers
A bond carries a coupon rate defined as 3 months LIBOR + 1.25%. This bond is termed as a:
Signup and view all the answers
A bond carries a coupon rate defined as 3 months LIBOR + 1.25%. This bond most probably pays the coupon interest on:
Signup and view all the answers
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:
Signup and view all the answers
Monetary authority signals a contractionary monetary policy. What will be the impact to a floating rate bond?
Signup and view all the answers
Which of the following is not a special feature of a bank?
Signup and view all the answers
The main source of funding for a bank is:
Signup and view all the answers
Asset-liability mismatch of a bank arises as:
Signup and view all the answers
Which of the following is incorrect regarding a systemically important bank?
Signup and view all the answers
You deposited GBP 10,000 with a commercial bank, most probably what amount of your deposit will be kept in cash by the bank?
Signup and view all the answers
You deposited GBP 10,000 with a commercial bank, most probably what amount of your deposit money will be given to borrowers as loans?
Signup and view all the answers
Which entity or set of entities print money in the economy as recognized by economists and finance experts?
Signup and view all the answers
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:
Signup and view all the answers
Which of the following bonds can most probably be a zero coupon bond?
Signup and view all the answers
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.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Description
Test your understanding of investment risks associated with commercial paper, including interest rate and default risks. Learn how to calculate returns and bond yield components effectively. This quiz will challenge your knowledge of financial investments.
