Fixed Income MCQ - Fixed Income Section 1

1 Which of the following statements is the most accurate description of nonsovereign and quasi-government bonds?

A
Non-sovereign bonds are issued by agencies that are owned or sponsored by governments. Quasi-government bonds are issued by local government authorities.
B
Non-sovereign bonds are issued by companies. Quasi-government bonds are issued by supranational organizations.
C
Non-sovereign bonds are issued by local government authorities. Quasigovernment bonds are issued by agencies that are owned or sponsored by governments.

Bonds issued by local government authorities are called non-sovereign bonds. Bonds issued by agencies that are owned or sponsored by governments are called quasi-government bonds. Additionally, bonds issued by supranational organizations are called supranational bonds. Bonds issued by national governments are called sovereign bonds. Bonds issued by companies are called corporate bonds.

2 Red-star Inc. issued bonds 2.5 years ago with an original maturity of 3 years. Voltas Inc. issued bonds 3 months ago with an original maturity of 9 months. Currently, both these bonds have a remaining tenure of 6 months. The bonds would most likely be classified as:

A bond with an original maturity of more than one year it is called capital market security. A bond with an original maturity of one year or less is called money market security.

3 Which of the following statements are most likely to be correct about coupon payment structures? Statement I: Floating rate notes are affected more when interest rates increase and as a result have greater interest rate risk. Statement II: Bonds with step-up coupons offer bondholders some protection against rising interest rates. Statement III: A credit-linked coupon bond has a coupon that changes with the bond’s credit rating while a payment-in-kind coupon bond allows the issuer to pay interest in the form of additional amounts of bond issue rather than cash payment.

Statements II and III are correct. Statement I is incorrect because floating rate notes are less affected when interest rate changes and therefore have less interest rate risk.

4 A bond with a par value of $10,000 is currently quoted at 102. What is the current market price of the bond? Is it trading at a discount or a premium to its par value?

A bond quoted at 102 reflects a premium of 2% over its par value. This results in current market price of $10,200. Since the market price is greater than the par value, the bond is trading at a premium.

5 An organization issued bonds of par value $1,000 and a coupon rate of 5%. The coupons are paid quarterly. The periodic interest payment is:

Coupon rate of 5% paid quarterly means 5/4 = 1.25% of par is paid every quarter. On a face value of $1,000, this results in a periodic interest payment of $12.5. This amount is paid every quarter i.e. four times a year.