mechanism by which an issuer may be able to offer additional bonds to the general public without preparing a new and separate offering circular best describes:
A. the grey market.
B. a shelf registration.
C. a private placement.
10. Which of the following statements related to secondary bond markets is most accurate?
A. Newly issued corporate bonds are issued in secondary bond markets.
B. Secondary bond markets are where bonds are traded between investors.
C. The major participants in secondary bond markets globally are retail investors.
11. A bond market in which a communications network matches buy and sell orders initiated from various locations is best described as an:
A. organized exchange.
B. open market operation.
C. over-the-counter market.
12. A liquid secondary bond market allows an investor to sell a bond at:
A. the desired price.
B. a price at least equal to the purchase price.
C. a price close to the bond's fair market value.
13. Sovereign bonds are best described as:
A. bonds issued by local governments.
B. secured obligations of a national government.
C. bonds backed by the taxing authority of a national government.
14. Agency bonds are issued by:
A. local governments.
B. national governments.
C. quasi-government entities.
15. The type of bond issued by a multilateral agency such as the International Monetary Fund (IMF) is best described as a:
A. sovereign bond.
B. supranational bond.
C. quasi-government bond.
16. Which of the following statements relating to commercial paper is most accurate?
A. There is no secondary market for trading commercial paper.
B. Only the strongest, highly rated companies issue commercial paper.
C. Commercial paper is a source of interim financing for long-term projects.
17. Eurocommerical paper is most likely:
A. negotiable.
B. denominated in euro.
C. issued on a discount basis.
18. When issuing debt, a company may use a sinking fund arrangement as a means of reducing:
A. credit risk.
B. inflation risk.
C. interest rate risk.
19. Which of the following is a source of wholesale funds for banks?
A. Demand deposits
B. Money market accounts
C. Negotiable certificates of deposit
20. A characteristic of negotiable certificates of deposit is:
A. they are mostly available in small denominations.
B. they can be sold in the open market prior to maturity.
C. a penalty is imposed if the depositor withdraws funds prior to maturity.
21. A repurchase agreement is most comparable to a(n):
A. interbank deposit.
B. collateralized loan.
C. negotiable certificate of deposit.
22. The repo margin on a repurchase agreement is most likely to be lower when:
A. the underlying collateral is in short supply.
B. the maturity of the repurchase agreement is long.
C. the credit risk associated with the underlying collateral is high.
CHAPTER 3
INTRODUCTION TO FIXED-INCOME VALUATION
LEARNING OUTCOMES
After completing this chapter, you will be able to do the following:
● calculate a bond's price given a market discount rate;
● identify the relationships among a bond's price, coupon rate, maturity, and market discount rate (yield-to-maturity);
● define spot rates and calculate the price of a bond using spot rates;
● describe and calculate the flat price, accrued interest, and the full price of a bond;
● describe matrix pricing;
● calculate and interpret yield measures for fixed-rate bonds, floating-rate notes, and money market instruments;
● define and compare the spot curve, yield curve on coupon bonds, par curve, and forward curve;
● define forward rates and calculate spot rates from forward rates, forward rates from spot rates, and the price of a bond using forward rates;
● compare, calculate, and interpret yield spread measures.
SUMMARY OVERVIEW
This chapter covers the principles and techniques that are used in the valuation of fixed-rate bonds, as well as floating-rate notes and money market instruments. These building blocks are used extensively in fixed-income analysis. The following are the main points made in the chapter:
● The market discount rate is the rate of return required by investors given the risk of the investment in the bond.
● A bond is priced at a premium above par value when the coupon rate is greater than the market discount rate.
● A bond is priced at a discount below par value when the coupon rate is less than the market discount rate.
● The amount of any premium or discount is the present value of the “excess” or “deficiency” in the coupon payments relative to the yield-to-maturity.
●
