50 VALUATION EXAMINATION MCQS FIXED INCOME SECURITIES FOR PRACTICE IBBI EXAMINATION WITH ANSWERS FOR PRACTICE
WITH A FOCUS ON 1 MARK
General Overview of SFA in Insolvency
1. Which of the following is a characteristic of a fixed-income security?
A) No maturity date
B) Variable coupon payments
C) Regular interest payments
D) Ownership in a company
Answer: C) Regular interest payments
2. Which of the following is a type of fixed-income security?
A) Equity shares
B) Corporate bonds
C) Warrants
D) Options
Answer: B) Corporate bonds
3. What is the coupon rate of a bond?
A) The annual interest paid as a percentage of the bond’s market price
B) The price at which the bond is issued
C) The annual interest paid as a percentage of the bond’s face value
D) The bond’s yield to maturity
Answer: C) The annual interest paid as a percentage of the bond’s face value
4. Which of the following bonds has the least amount of interest rate risk?
A) A 1-year bond
B) A 10-year bond
C) A 20-year bond
D) A zero-coupon bond
Answer: A) A 1-year bond
5. What is the yield to maturity (YTM) of a bond?
A) The annual coupon rate of the bond
B) The current market price of the bond
C) The total return anticipated on a bond if held until it matures
D) The price at which the bond is purchased
Answer: C) The total return anticipated on a bond if held until it matures
6. If interest rates rise, what typically happens to bond prices?
A) Bond prices increase
B) Bond prices decrease
C) Bond prices remain unchanged
D) Bond prices become more volatile
Answer: B) Bond prices decrease
7. Which of the following is NOT a factor that affects the price of a bond?
A) Interest rates
B) Credit rating of the issuer
C) Maturity date
D) The number of outstanding shares of the issuer
Answer: D) The number of outstanding shares of the issuer
8. What does a bond’s credit rating indicate?
A) The risk of interest rate changes
B) The price of the bond
C) The issuer’s ability to make timely payments of principal and interest
D) The liquidity of the bond
Answer: C) The issuer’s ability to make timely payments of principal and interest
9. Which of the following bonds is most likely to have the highest yield?
A) A U.S. Treasury bond
B) A highly rated corporate bond
C) A bond with a low credit rating
D) A municipal bond
Answer: C) A bond with a low credit rating
10. What is a zero-coupon bond?
A) A bond that pays interest only at maturity
B) A bond that pays regular interest payments
C) A bond with a coupon rate of zero but still trades at a premium
D) A bond that pays interest daily
Answer: A) A bond that pays interest only at maturity
11. Which of the following is an example of a callable bond?
A) A bond that can be redeemed by the issuer before its maturity date
B) A bond that is issued with a fixed interest rate
C) A bond with a fixed maturity date
D) A bond with variable coupon payments
Answer: A) A bond that can be redeemed by the issuer before its maturity date
12. Which of the following is the main risk associated with callable bonds?
A) Reinvestment risk
B) Interest rate risk
C) Default risk
D) Liquidity risk
Answer: A) Reinvestment risk
13. What is duration in the context of fixed-income securities?
A) The time to maturity of a bond
B) A measure of a bond’s sensitivity to interest rate changes
C) The average maturity of the bond’s coupon payments
D) The bond’s current yield
Answer: B) A measure of a bond’s sensitivity to interest rate changes
14. Which of the following bonds would be least sensitive to changes in interest rates?
A) A short-term bond
B) A long-term bond
C) A zero-coupon bond
D) A high-yield bond
Answer: A) A short-term bond
15. What is a bond’s convexity?
A) The risk of default associated with the bond
B) The bond’s yield to maturity
C) A measure of the bond’s price sensitivity to changes in interest rates
D) A measure of the bond’s potential for call option exercise
Answer: C) A measure of the bond’s price sensitivity to changes in interest rates
16. Which of the following best describes a “bullet bond”?
A) A bond that can be called early by the issuer
B) A bond with a sinking fund
C) A bond with a single payment of principal at maturity
D) A bond that has a variable interest rate
Answer: C) A bond with a single payment of principal at maturity
17. In bond pricing, what does “par value” refer to?
A) The market price of the bond
B) The interest rate paid by the bond
C) The face value or principal amount of the bond
D) The bond’s coupon rate
Answer: C) The face value or principal amount of the bond
18. A bond with a coupon rate of 6% is trading at a premium. What can be inferred about the prevailing interest rates in the market?
A) The prevailing interest rates are lower than 6%
B) The prevailing interest rates are higher than 6%
C) The prevailing interest rates are equal to 6%
D) The market is experiencing high inflation
Answer: A) The prevailing interest rates are lower than 6%
19. Which of the following is true about the yield to call (YTC) of a callable bond?
A) YTC is always greater than yield to maturity (YTM)
B) YTC is calculated assuming the bond will not be called before maturity
C) YTC can be less than YTM if the bond is called early
D) YTC is not impacted by changes in interest rates
Answer: C) YTC can be less than YTM if the bond is called early
20. Which of the following is an example of a floating-rate bond?
A) A bond with a fixed coupon rate
B) A bond with coupon payments tied to an index, such as LIBOR
C) A bond that does not pay any coupon
D) A bond with a variable principal amount
Answer: B) A bond with coupon payments tied to an index, such as LIBOR
21. Which of the following types of risk is associated with floating-rate bonds?
A) Reinvestment risk
B) Credit risk
C) Price risk
D) Inflation risk
Answer: A) Reinvestment risk
22. Which of the following describes a “subordinated bond”?
A) A bond that is paid off before other debts in case of liquidation
B) A bond that is paid after other debts in case of liquidation
C) A bond that is guaranteed by the government
D) A bond with a fixed coupon rate
Answer: B) A bond that is paid after other debts in case of liquidation
23. Which of the following would likely increase the yield on a bond?
A) A decrease in the credit rating of the issuer
B) A decrease in interest rates
C) An increase in the bond’s price
D) A decrease in the bond’s maturity
Answer: A) A decrease in the credit rating of the issuer
24. What is the difference between a corporate bond and a government bond?
A) Corporate bonds have a lower risk of default
B) Government bonds generally offer higher yields than corporate bonds
C) Government bonds are backed by the government, while corporate bonds are backed by a corporation
D) Corporate bonds are typically exempt from taxes, while government bonds are not
Answer: C) Government bonds are backed by the government, while corporate bonds are backed by a corporation
25. What does the term “spread” refer to in the context of bond investing?
A) The difference between the bond’s coupon rate and yield to maturity
B) The difference between the bond’s yield and the yield of a benchmark bond, typically a risk-free bond
C) The difference between a bond’s price and its par value
D) The amount of coupon paid by a bond above its face value
Answer: B) The difference between the bond’s yield and the yield of a benchmark bond, typically a risk-free bond
26. What does the term “basis point” refer to in the context of bonds?
A) A measure of interest rate risk
B) 1/100th of a percent, or 0.01%
C) The total return on a bond
D) The price change of a bond
Answer: B) 1/100th of a percent, or 0.01%
27. Which of the following best describes the risk of default in bonds?
A) The risk that the issuer will fail to make scheduled interest payments or repay principal at maturity
B) The risk that market interest rates will increase
C) The risk that the bond issuer will call the bond early
D) The risk that the bond’s price will fluctuate
Answer: A) The risk that the issuer will fail to make scheduled interest payments or repay principal at maturity
28. Which of the following is the main advantage of investing in municipal bonds?
A) They are not subject to interest rate risk
B) They are exempt from federal taxes (and sometimes state taxes)
C) They offer higher yields than corporate bonds
D) They have longer maturities than corporate bonds
Answer: B) They are exempt from federal taxes (and sometimes state taxes)
29. What is the primary feature of a convertible bond?
A) It can be redeemed by the issuer before maturity
B) It can be converted into a predetermined number of shares of the issuer’s stock
C) It has an adjustable coupon rate
D) It offers higher yields than non-convertible bonds
Answer: B) It can be converted into a predetermined number of shares of the issuer’s stock
30. Which of the following describes a bond with a “sinking fund” provision?
A) A bond that is secured by collateral
B) A bond that allows the issuer to redeem a portion of the bond issue each year
C) A bond that cannot be called by the issuer
D) A bond that pays a fixed coupon rate for its entire term
Answer: B) A bond that allows the issuer to redeem a portion of the bond issue each year
31. Which of the following would be most appropriate for a bondholder seeking to protect against rising interest rates?
A) Buying a callable bond
B) Buying a long-duration bond
C) Buying a floating-rate bond
D) Buying a zero-coupon bond
Answer: C) Buying a floating-rate bond
32. What happens when a bond is priced at a premium?
A) The coupon rate is higher than the yield to maturity
B) The coupon rate is lower than the yield to maturity
C) The bond is trading below its par value
D) The bond’s maturity is longer than its stated duration
Answer: A) The coupon rate is higher than the yield to maturity
33. What is a “junk bond”?
A) A bond issued by a government entity
B) A bond that is rated below investment grade
C) A bond with a fixed interest rate
D) A bond that can be converted into stock
Answer: B) A bond that is rated below investment grade
34. Which of the following is true regarding bond pricing and interest rates?
A) Bond prices move inversely to interest rates
B) Bond prices move in the same direction as interest rates
C) Bond prices are not affected by interest rate changes
D) Bond prices always rise when interest rates fall
Answer: A) Bond prices move inversely to interest rates
35. What is the main purpose of a “credit spread”?
A) To determine the price at which a bond should trade
B) To measure the difference in yields between bonds of different credit qualities
C) To assess the bond’s liquidity risk
D) To reflect changes in interest rates
Answer: B) To measure the difference in yields between bonds of different credit qualities
36. Which of the following is a characteristic of a “duration” of a bond?
A) It is the time remaining until the bond matures
B) It measures the bond’s sensitivity to interest rate movements
C) It determines the coupon payments for the bond
D) It is the yield to maturity of the bond
Answer: B) It measures the bond’s sensitivity to interest rate movements
37. What does “modified duration” account for in bond pricing?
A) The total interest paid on the bond over its lifetime
B) The change in the bond’s price with a 1% change in interest rates
C) The number of coupon payments remaining
D) The time it takes for the bond to reach maturity
Answer: B) The change in the bond’s price with a 1% change in interest rates
38. Which of the following best describes a “floating-rate note (FRN)”?
A) A bond with a fixed coupon rate
B) A bond with a coupon rate that is adjusted periodically based on a reference rate
C) A bond that can be converted into shares of stock
D) A bond that does not pay any coupon
Answer: B) A bond with a coupon rate that is adjusted periodically based on a reference rate
39. What does “liquidity risk” refer to in the context of bonds?
A) The risk that the issuer will default on interest payments
B) The risk that a bond cannot be sold at its market value in a timely manner
C) The risk that interest rates will increase
D) The risk that the bond price will fall due to inflation
Answer: B) The risk that a bond cannot be sold at its market value in a timely manner
40. Which of the following is a key feature of a “sovereign bond”?
A) It is issued by a corporate entity
B) It is backed by the government of a country
C) It can be converted into shares of stock
D) It offers a floating coupon rate
Answer: B) It is backed by the government of a country
41. What is meant by “reinvestment risk” for a bond investor?
A) The risk that interest rates will rise, reducing the bond’s market price
B) The risk that the issuer may call the bond early
C) The risk that coupon payments cannot be reinvested at the same yield
D) The risk that the bond will not pay the promised interest
Answer: C) The risk that coupon payments cannot be reinvested at the same yield
42. Which of the following risks is associated with bonds with longer maturities?
A) Call risk
B) Credit risk
C) Interest rate risk
D) Liquidity risk
Answer: C) Interest rate risk
43. What does the term “yield curve” represent?
A) The relationship between a bond’s maturity and its interest payments
B) The relationship between bond yields and their maturities
C) The relationship between bond price and bond rating
D) The relationship between credit spreads and bond prices
Answer: B) The relationship between bond yields and their maturities
44. What is the effect of inflation on bond returns?
A) Inflation increases the value of bond returns
B) Inflation decreases the value of bond returns
C) Inflation has no effect on bond returns
D) Inflation reduces the risk of bond defaults
Answer: B) Inflation decreases the value of bond returns
45. Which of the following bonds would generally have the lowest yield?
A) A bond issued by a government with a high credit rating
B) A junk bond
C) A bond with a short maturity
D) A bond issued by a corporation with a low credit rating
Answer: A) A bond issued by a government with a high credit rating
46. Which of the following bond types is typically issued to finance public infrastructure projects?
A) Corporate bonds
B) Municipal bonds
C) Treasury bonds
D) Convertible bonds
Answer: B) Municipal bonds
47. What is the relationship between bond price and bond yield?
A) They are positively related: as the price increases, the yield increases
B) They are inversely related: as the price increases, the yield decreases
C) There is no relationship between price and yield
D) They are directly proportional: price and yield move in the same direction
Answer: B) They are inversely related: as the price increases, the yield decreases
48. Which of the following is NOT a feature of a Treasury bond?
A) Issued by the U.S. government
B) Exempt from state and local taxes
C) Offers higher yields than corporate bonds
D) Has a fixed interest rate
Answer: C) Offers higher yields than corporate bonds
49. What is the “par value” of a bond?
A) The market price of the bond
B) The amount the issuer pays at maturity
C) The coupon rate of the bond
D) The amount the bondholder must pay to buy the bond
Answer: B) The amount the issuer pays at maturity
50. What is the primary function of a bond’s “indenture”?
A) To set the bond’s maturity date
B) To specify the bond’s coupon rate
C) To outline the terms and conditions under which the bond is issued
D) To determine the bond’s yield to maturity
Answer: C) To outline the terms and conditions under which the bond is issued
