Chap 7

Question 1

How do T Bills work?

Answer 1

They are sold below par and mature at 100. The difference is taxed as interest income.

Question 2

Does the CDIC cover GICs?

Answer 2

Only for those under 5 years.

Question 3

If a bond’s yield is higher than its coupon rate, it is selling at a _______?

Answer 3

Discount

Question 4

Which bonds of the same yield are more volatile in price - shorter or longer term bonds?

Answer 4

longer

Question 5

Which is more volatile - a lower-coupon or higher-coupon bond?

Answer 5

lower-coupon

Question 6

What is the current yield used for?

Answer 6

To compare short-term bonds returns

Question 7

What are the two services provided by underwriters?

Answer 7

1) Advising corporation in preparation of prospectus.

2) Arrange for purchase of new issue and bears risk that some securities may remain unsold.

Question 8

Distinguish between an option and futures contract.

Answer 8

Options are based on the price of shares. Futures are based on commodities or financial assets.

Question 9

What kind of risk are corporate bonds subject to?

Answer 9

Interest rate risk and default risk.

Question 10

What kind of risk are government bonds subject to?

Answer 10

Interest rate risk.

Question 11

What is a call vs put option?

Answer 11

call gives you option to buy, put gives you option to sell

Question 12

Municipalities issue debt called…?

Answer 12

Installment debentures/serial bonds.