Investment Trade Counterparties Quiz

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Questions and Answers

What is the fair price of the bond when calculated at a discount rate of 10%?

$100.00

$96.77 (correct)

$97.50

$95.00

How does a Treasury bill generate return for investors?

By reinvesting the interest income

Through a premium price on sale

From the difference between the purchase price and the maturity value (correct)

By paying periodic interest

What does the current yield measure in an investment?

The cash flows relative to the current market price (correct)

The total return over the life of the investment

The initial amount invested in the security

The historical performance of the investment

What is the term used to describe the discount at which a Treasury bill is purchased?

Purchase price Signup and view all the answers

Which of the following formulas correctly calculates the yield on a T-bill?

Yield = (100 - Price) / Price * (365 / Term) * 100 Signup and view all the answers

How is earnings from a T-bill classified for tax purposes?

Interest income Signup and view all the answers

What is the primary purpose of the Committee on Uniform Security Identification Procedure (CUSIP)?

To identify all securities in North America Signup and view all the answers

What is the yield calculation for an 89-day T-bill purchased for 99.5 yielding 2.061% based on?

Its initial purchase price Signup and view all the answers

What information is NOT typically included on a retail trade ticket?

The discount rate of the bond Signup and view all the answers

Which component is not included in the fair price calculation of a bond?

Future market price Signup and view all the answers

When does the change in legal ownership of a securities transaction become effective?

Immediately after the transaction has been confirmed Signup and view all the answers

In calculating current yield, which factor is irrelevant?

Original investment amount Signup and view all the answers

Which type of securities typically settles on the day of the transaction?

T-bills Signup and view all the answers

What is the duration of the T-bill used to calculate its yield that falls within the given example?

89 days Signup and view all the answers

Which of the following represents the face amount of a transaction?

Nominal amount Signup and view all the answers

What does the total settlement amount on a trade summary often include?

The amount of accrued interest separately shown Signup and view all the answers

What is indicated on a buy ticket from the trading desk’s perspective?

The client is selling to the trading desk Signup and view all the answers

Which of the following is typically required for full identification of a bond?

The issuer’s name and coupon rate Signup and view all the answers

What is the general sequence when a securities transaction is completed?

Confirmation, delivery, payment Signup and view all the answers

What is the present value of the bond’s income stream based on the coupon payments provided?

$29.08 Signup and view all the answers

What format are most bond issues now issued in?

Book-based format Signup and view all the answers

How many coupon payments remain for the bond described?

Eight Signup and view all the answers

What does a negative present value indicate when using a financial calculator?

An outflow of cash Signup and view all the answers

When are bond interest payments typically made?

Every February 15 and every August 15 Signup and view all the answers

What is the total amount of coupon payments over time for the bond?

$36.00 Signup and view all the answers

What is the role of accrued interest in bond transactions?

To ensure equitable transactions between buyer and seller Signup and view all the answers

What type of bond may pay interest annually instead of semiannually?

Eurobonds Signup and view all the answers

What is the value to be entered for 'FV' when calculating the present value of the coupon payments?

$0.00 Signup and view all the answers

What input is used for 'N' in the financial calculator for the bond described?

8 Signup and view all the answers

Which organization in Canada is responsible for clearing bond transactions?

CDS Clearing and Depository Services Inc. Signup and view all the answers

Which button might be used on some financial calculators to compute present value?

COMP Signup and view all the answers

What may happen if a bond is purchased just before its interest payment date?

The buyer must pay the previous holder any accrued interest. Signup and view all the answers

What does the present value tell an investor about future coupon payments?

They are worth $29.08 today Signup and view all the answers

What is the semi-annual payment amount per coupon for the bond's income stream?

$4.50 Signup and view all the answers

Which input is used for 'PMT' when calculating the present value of the bond's income stream?

4.50 Signup and view all the answers

Which bond is generally less volatile in price, assuming both have the same term to maturity and yield?

The bond with a higher coupon rate Signup and view all the answers

What generally increases the price volatility of a bond?

Longer maturity with lower coupon Signup and view all the answers

What is the primary risk faced by investors holding fixed-income securities?

Interest rate risk Signup and view all the answers

How is duration defined in the context of bond investments?

The approximate percentage change in price for a 1% change in interest rates Signup and view all the answers

If two bonds have the same coupon rate and yield, how does their term to maturity affect their price volatility?

Longer term bond is usually more volatile Signup and view all the answers

What factor affects how different bonds react to changes in interest rates?

The bond's coupon, maturity, and protective covenants Signup and view all the answers

How does a bond's duration help investors?

Estimate the volatility due to interest rate changes Signup and view all the answers

Which bond is likely to have higher duration?

A zero-coupon bond with a long term Signup and view all the answers

What typically happens to the price of a bond when interest rates increase?

The price decreases Signup and view all the answers

Why is it important to understand a bond's duration?

To evaluate its price sensitivity to interest rate changes Signup and view all the answers

Study Notes

Trade Details

Includes specific information about the counterparties involved in a trade, such as the investment advisor's employer and the client's name and account number.
Retail trade tickets are prepared from the client's perspective; a buy ticket indicates the trading desk sells to the client.
Identification details of bonds include the issuer’s name, maturity date, and coupon rate.
Bond identification uses the CUSIP number, a unique code for North American securities, established in 1964 for trade clearing and settlement.

Settlement Process

Legal ownership changes immediately upon confirmation of a securities transaction, while payment occurs later.
Settlement period varies by security type: T-bills settle on transaction day; other securities like bonds settle the next clearing day.
Essential information in trade documentation includes nominal amount, price, yield, settlement date, custodian name, and total settlement amount.

Bond Valuation

A bond's fair price is the total present value of its principal and its coupon payments.
At a 10% discount rate, a bond may be valued at approximately $96.77 based on its cash flow calculations.

Treasury Bill Yield Calculation

T-bills are short-term securities sold at a discount and yield returns based on the price difference at maturity.
Formula for calculating yield:
[ \text{Yield} = \left(\frac{100 - \text{Price}}{\text{Price}}\right) \times \left(\frac{365}{\text{Term}}\right) \times 100 ]
Example: An 89-day T-bill purchased at 99.5 gives a yield of approximately 2.061%.

Current Yield on Bonds

Current yield is calculated by focusing on cash flows and current market price rather than the initial investment amount.
Example: A bond with semi-annual payments can have its present value calculated using financial calculators to determine cash flow values.

Duration and Interest Rate Sensitivity

Duration measures a bond's price sensitivity to interest rate changes, indicating the percentage price change for a 1% rate shift.
A bond with a higher duration is more sensitive to interest rate volatility.
Comparison can be made between bonds of varying coupons and maturities based on their duration.

Bond Ownership and Trade Management

Modern bond transactions often utilize electronic record-keeping through book-based formats instead of physical certificates.
Canada’s CDS (Clearing and Depository Services Inc.) provides trade clearing and settlement for bond transactions.

Accrued Interest Calculation

Most bonds pay interest biannually on set dates which coincide with their maturity date.
Accrued interest may be payable when purchasing bonds, ensuring equitable transactions between buyers and sellers.

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Description

Test your knowledge on the specifics of investment trade counterparties, including important details about clients and investment advisors. This quiz covers critical information like names, addresses, and account specifics that are vital for retail trade tickets. Enhance your understanding of the trading processes and documentation involved in client investments.