Which type of government security holders to earn interest on the accumulated unpaid interest each year?
a)Regular interest CSBs
b)Compound interest CSBs
c)T-bills
d)Strip bonds
b)Compound interest on CSBs is calculated only on November 1st.
Compound interest CSBs allow the holder to forgo receiving interest each year so that the unpaid interest can compound. The holder earns interest on the accumulated interest. The compound int
Which of the following types of government securities has an active secondary market?
a)Compound interest Canada Saving Bonds
b)Regular interest Canada Saving Bonds
c)Canada Premium Bonds (CPBs)
d)Government of Canada marketable bonds
d)The type of government securities that trade in the secondary market are Government of Canada bonds.
These issues are called marketable bonds because, as well as having a specific maturity date and a specified interest rate, they are transferable, which
How do CSBs differ from CPBs?
a)CSBs have a fixed coupon, while CPBs have a variable coupon.
b)CSBs are cashable at any time, while CPBs are cashable only once a year.
c)CSBs are non-transferable, while CPBs have an active primary market.
d)CSBs are offer
b)Unlike other bonds, Canada Savings Bonds can be purchased only between October and April of each year but can be cashed by the owner at any bank in Canada at any time.
Canada Premium Bonds are very similar to CSBs but offer a higher interest rate when t
If you have a five-year investment horizon and expect inflation to rise each year, what type of government-issued security would you consider a good choice?
a)Regular marketable bonds
b)CSBs
c)Real return bonds
d)T-bills
c)If inflation is expected to increase, real return bonds are a good choice since they offer the bondholder inflation protection.
The nominal return on real return bonds is linked to the consumer price index (CPI). Both the semi-annual interest payments a
Which of the following securities can have a term to maturity of less than one year when issued?
a)T-bills
b)CSBs
c)Government of Canada bonds
d)CPBs
a)Treasury bills T-bills can have a term of less than one year.
Treasury bills are short-term government obligations. These bills have original terms to maturity of approximately three months, six months or one year.
Every two weeks, Treasury bills are so
What type of security do municipalities generally use to raise funds?
a)Municipal bonds
b)Instalment debentures
c)T-bills
d)Savings bonds
b)Today, the instrument that most municipalities use to raise money from capital market is the instalment debenture or serial bond. Part of the bond matures each year of the term of the bond.
How would you classify a bond issued by a Crown corporation of the Province of Alberta?
a)Direct bond
b)T-bill
c)Serial bond
d)Guaranteed bond
d)You would classify a bond issued by a Crown corporation of Alberta as a guaranteed bond.
Many provinces guarantee the bond issues of provincially appointed authorities and commissions.
Provincial guarantees may also be extended to cover municipal loans
If you were to rank government borrowers from least risky to most risky, where would municipal securities likely rank?
a)First
b)Second
c)Third
d)Fourth
c)Municipalities rank third of public borrowers, following federal and provincial authorities; however, not all municipal credit ratings rank below those of each province.
It is not unusual for debenture issues of some large metropolitan areas to be favou
Which of the following corporate bonds is secured by physical property?
a)Mortgage bond
b)Preferred security
c)Corporate note
d)Collateral trust bond
a)A mortgage bond is secured by physical property.
There is no fundamental difference between a mortgage and a mortgage bond except in form. Both are issued to allow the lender to secure property if the borrower fails to repay the loan.
You are interested in purchasing a five-year corporate bond. If you believe that interest rates will trend higher over the period, what type of bond would you select?
a)First mortgage bond
b)T-bill
c)Floating-rate security
d)Strip bond
c)You would select a floating-rate security since it would automatically adjust to changing interest rates.
They have proved popular because they offer investors protection during periods of very volatile interest rates.
For example, when interest rates a
Encana Corporation, a Canadian company, issues a euro-denominated bond in the United States. How would you classify this type of bond?
a)Canadian domestic bond
b)Foreign bond
c)Eurobond
d)Currency bond
c)You would classify this bond as a Eurobond.
Eurobonds are issued and sold outside a domestic market and are typically denominated in a currency other than that of the domestic market in which the bond is issued.
Which of the following describes one distinctive feature of strip bonds?
a)The bond generates a capital gain if purchased at issue and held to maturity
b)The bond pays regular interest based on the discounted purchase price and not on the full face value
c)Bondholders of strip bonds must annually report the interest income earned even though interest is not received until maturity.
A strip bond is created when a dealer acquires a block of high-quality bonds and separates the individual future-dated intere
You are interested in the following provincial bond:
Manitoba 10% 15 May 14
When is interest paid on this bond?
a)May 11 each year
b)May 5 each year
c)May 15 and November 15 each year
d)May 11 and November 11 each year
c)This Province of Manitoba bond will pay interest on May 15 and November 15 each year.
The majority of bonds pay interest on a semi-annual basis (or twice a year).
If you purchased a Province of Manitoba bond (Manitoba 10% 15 May 14) in May 2010, how would the bond be categorized at the time of purchase?
a)Money market bond
b)Short-term bond
c)Medium-term bond
d)Long-term bond
b)This bond would be categorized as a short-term bond.
The Province of Manitoba bond matures on May 15, 2011, thus the term to maturity is four years (short-term).
Here's some additional information about the Manitoba bond:
10% 15 May 14 121.44
If you were interested in buying a $10,000 Manitoba bond, what would the purchase cost you (ignoring commissions and accrued interest)?
a)$10,000
b)$11,000
c)$12,144
d)$13,35
c)A $10,000 bond would cost $12,144.
The bond is currently priced at 121.44. A $10,000 investment in the bond would cost $12,144, calculated as $10,000 � 1.2144.
Let's assume the Manitoba bond is currently rated AA by the S&P Bond Rating Service.
The bond is subsequently downgraded to BBB status. What impact is this likely to have on the bond?
a)The price of the bond will rise
b)The price of the bond will fall
c)T
b)A downgrading will likely lead to a lower price on the bond.
The downgrading of a bond generally has a negative effect on its price. A BBB rating implies that the bond is considered riskier than an A-rated bond. Higher risk requires a higher yield, whic
What are some of the reasons an A-rated bond would be dropped to a BBB rating?
There are a number of reasons that would lead to a drop in a bonds rating to BBB:
operations are increasingly susceptible to swings in the business cycle
long-term investment characteristics are less favourable
the company is more susceptible to adverse t
Why are Government of Canada Real Return bonds attractive to investors?
a. The interest payment and principal repayment are indexed to inflation.
b. The principal repayment is indexed to inflation.
c. Interest payments are indexed to inflation.
d. Governm
a)Real Return bonds are attractive as a hedge against inflation. Both the interest payment and the principal repayment are calculated based on an inflation compensation calculation. Interest payments are determined as the real return multiplied by the bon
What limit does the Canada Deposit Insurance Corporation (CDIC) impose on its coverage of GICs?
a. It does not cover amounts in excess of $25,000.
b. It does not cover GICs with terms in excess of 10 years.
c. It does not cover amounts in excess of $75,00
d)CDIC does not cover GICs with terms in excess of 5 years.
Score: 1/1
Which feature will result in a greater proportion of a bond being retired early - a sinking fund or a purchase fund?
a. A sinking fund because retirements are mandatory.
b. A purchase fund because retirements are mandatory.
c. A purchase fund because reti
a)A sinking fund will result in a greater proportion of an issue being retired because a specified amount of the bond must be redeemed each year. With a purchase fund, redemptions will be made if the market price of the bond is at or below a specified pri
A bond quoted as trading at 98, but with a $1,000 par value, would mean that:
a. the bond is trading at par.
b. the bond is trading at a discount.
c. the bond is trading at a premium.
d. an investor would pay $1,000 plus any accrued interest for each bond
b)All bond prices are quoted based on an index with a base of 100. A bond trading at 100 is said to be trading at face value, or par. A bond trading below par, say at a price of 98, is said to be trading at a discount (the 98, based on the index of 100, i
With both extendible and retractable bonds, the holder's decision to exercise the maturity option must be made during the time period called ______.
a. The election period.
b. The subscription period.
c. The accrual period.
d. None of the above.
a)With both extendible and retractable bonds, the holder's decision to exercise the maturity option must be made during the time period called the election period. This time period normally lasts for six months. In the case of an extendible bond, the elec
The 5.25% ABC convertible bond is convertible into 50 shares of common stock for each $1,000 of face value. Which of the following statements about the ABC convertible is true?
a. If the common stock is currently trading at $20 a share, the ABC convertibl
c)Market prices of convertible debentures are influenced by their investment value and by the price of the underlying common shares into which they can be converted. The conversion price of the ABC debenture is $20 a share. When the common shares of the i
Which of the following definitions are applicable to a bond with a Standard & Poor's rating of "A"?
a. They are more susceptible to adverse trade or economic conditions relative to higher grade bonds.
b. They are generally considered to be of superior in
a)Bonds with an S&P "A" rating are considered to be good quality securities with favourable long-term investment characteristics. However, companies that issue these bonds tend to be more susceptible to adverse trade or economic conditions relative to bon
What type of company would issue a collateral trust bond?
a. A company which has already issued significant amounts of other types of bonds and debentures.
b. A junior company with a low credit rating.
c. A holding company that does not have fixed assets
c)Collateral trust bonds are issued by holding companies. These companies usually do not own many fixed assets. They own securities in subsidiaries that can be pledged to secure bonds.
What is one reason an investor would buy a strip bond?
a. The investor does not require cash until after the bond matures.
b. The investor requires a steady stream of cash.
c. Strips can be paid in installments over time.
d. Strips are frequently lower qu
a)A strip bond is created when a dealer acquires a block of high-quality bonds and separates the interest coupons from the principal. Each part is sold separately with the principal part known as a strip bond. It is attractive to investors who do not need
Which of the following statements regarding long-term debt is correct?
i) Bonds are usually secured by real assets.
ii) Subordinated debentures rank behind some other long term debt security.
iii) A collateral trust bond is usually secured by financial as
a)i) A bond is secured by physical assets in a trust deed written into the bond contract. If the bond goes into default, the trust deed provisions allow certain specified physical assets to be seized by the bondholders and sold to recover their investment
ABC Inc. has just received a higher credit rating from Standard and Poor's. What impact will this have on its ability to raise funds?
a. ABC will have to pay a higher coupon rate on its new bonds as investors know it is a successful company.
b. ABC will b
b)A high rating provides benefits, such as the ability to set lower coupon rates on issues of new securities.
DDD Co. Inc. has an outstanding 12 year bond with a coupon of 8.75%. The financial press is quoting a yield of 6%. What does this imply with respect to the bond?
a. Interest rates have gone up since the bond was first issued.
b. Interest rates have gone d
b)Interest rates have fallen as the yield is now below the coupon rate.
In November of the current year, Silpa has $10,000 to invest. She needs the full amount in 3 months time. Select a suitable investment for her.
a. Canada Premium Bond (CPB).
b. 5-year GIC.
c. Canada Savings Bond (CSB).
d. Corporate Bond.
c)CSBs can be cashed at any time. CPBs can only be cashed only on the anniversary date of the purchase. A 5-year GIC would lock her money in for 5 years. Corporate bonds are more volatile and less liquid. She may not be able to get her money back when she
Natalie is concerned about the impact of inflation on her investments. She wishes to purchase an investment that shields her from the negative impact of rising prices. What security would you recommend to her?
a. Canada Savings bond.
b. 7-year GIC.
c. Flo
d)The Government of Canada also issues real return bonds (RRB). A RRB resembles a conventional bond because it pays interest throughout the life of the bond and repays the original principal amount on maturity. Unlike conventional bonds, however, the coup
Interest rates have been declining dramatically over the last two years. Which of the following debt instruments would be most affected by this decline?
a. Floating Rate Bonds.
b. Strip Bonds.
c. Canada Savings Bonds.
d. Government of Canada Bonds.
a)The disadvantage of floating rate bonds is that when interest rates fall, the interest payable on them is adjusted downwards at six-month intervals, so their yield tends to fall faster than that of most bonds. A minimum rate on the bonds can provide som