Chapter 1 Flashcards
Zane, a higher-rate taxpayer, owns a conventional gilt that he inherited from his father. It has eleven years remaining until redemption. He should be aware that:
a.
he will not be able to sell the gilt prior to its maturity.
, chapter reference 1C4A
b.
the yield on the gilt will always be the same as the coupon.
c.
the price of the gilt will always rise as it reaches its maturity.
d.
if the coupon is above current interest rates, the bond should trade above par.
D
Companies often raise long-term finance by issuing bonds rather than borrowing from banks. What are the advantages of doing this?
Select one or more:
a.
Bonds are often the cheapest method of borrowing money.
chapter reference 1C
b.
The interest rate on a bond can be renegotiated partway through its term.
c.
Bonds do not have to be repaid unless the company is wound up.
d.
Banks may not be prepared to lend the amount required.
e.
The bond market offers a wide range of lenders to tap into.
A,D,E
The differences between gilts and corporate bonds include:
Select one or more:
a.
prices of gilts are typically less volatile than prices of corporate bonds.
Correct, chapter reference 1C8
b.
the risk attaching to corporate bonds is generally higher than that attaching to gilts.
c.
only gilts can be sold on the secondary market.
d.
the spread between buying and selling prices is generally wider for gilts than for corporate bonds.
e.
yields on gilts are generally higher than corporate bonds.
A,B
Caroline purchases a fixed-interest security with a coupon of 6% for £125. She should be advised that the:
Select one or more:
a.
redemption yield is a more accurate calculation of the yield on the security than an interest yield.
Correct, chapter reference 1C4
b.
redemption yield takes into account any tax that Caroline will have to pay.
c.
interest yield is 4.8%.
d.
redemption yield will be higher than the interest yield.
A,C
A company’s credit rating has been marked down unexpectedly. The yield from bonds previously issued by it will:
Answer
a.
fall heavily.
Incorrect, chapter reference 1C5B
b.
rise.
c.
fall gradually.
d.
be unaffected.
B
Henry purchased a fixed-interest security cum dividend 30 days before the next income payment was due. This means that:
Select one or more:
a.
the amount paid by Henry for the security will be the dirty price.
b.
he will receive the full six months’ interest on the next interest payment date.
Correct, chapter reference 1C2C
c.
he will pay the clean price less interest accrued up to the settlement date.
d.
the seller will receive the next interest payment.
e.
he will pay less for the security than if the purchase had been ex dividend.
A,B
Mr and Mrs Evans hold £90,000 in a joint bank account with ABC Bank. In addition, Mr Evans has £35,000 in a single account with Hedges Bank and Mrs Evans has £55,000 in a single account with Shine Bank. The amount of protection that they have together under the Financial Services Compensation Scheme is:
Answer
a.
£180,000.
b.
£140,000.
c.
£175,000.
Incorrect, chapter reference 1B2A
d.
£120,000.
A
Gautum has invested in Treasury bills. Which of these characteristics of his investment is INCORRECT?
Answer
a.
Their prevailing rate of return is often used as the benchmark ‘risk-free rate of return’.
Incorrect, chapter reference 1B5B
b.
He must have purchased a minimum of £500,000 nominal of bills.
c.
He could have obtained them at a routine weekly auction.
d.
The interest he will receive is linked to RPI three months prior to issue.
D
Anita directly owns a corporate bond. Should interest rates rise, the most likely outcome to the capital value and yield will be a:
Answer
a.
fall in capital value with the yield also decreasing.
b.
rise in capital value with the yield also increasing.
c.
rise in capital value with the yield decreasing.
Incorrect, chapter reference 1C5A
d.
fall in capital value with the yield increasing.
D
Simone owns corporate bonds issued by Masters Ltd. In the event of the business being wound up, repayment of her unsecured bonds:
Answer
a.
is guaranteed, provided there are no preference shareholders.
Incorrect, chapter reference 1C8A
b.
would rank alongside ordinary shareholders of the company.
c.
is guaranteed, provided there are no secured creditors.
d.
would rank alongside ordinary creditors of the company.
D
Guaranteed Growth Bonds from National Savings and Investments [NS&I]:
Answer
a.
are available only to those over the age of 18.
b.
have a taxable interest that cannot be offset against the investor’s personal savings allowance.
Incorrect, chapter reference 1B4F
c.
are offered for a maximum period of three years.
d.
have a minimum investment of £500.
D
Noah wishes to save into a Green Savings Bond. This would be suitable as he:
Question 30Answer
a.
is aged 15.
b.
wants a variable rate as he hopes interest rates will rise.
c.
needs to access the funds in three years’ time.
Correct, chapter reference 1B4G
d.
wishes to achieve equity-like returns.
C
A company has recently had its credit rating improved. As a result, the yield demanded by investors from the stock is likely to:
Question 31Answer
a.
stay the same.
b.
fluctuate.
c.
reduce.
d.
increase.
Incorrect, chapter reference 1C5B
C
When comparing the different types of money market instruments:
Question 33Select one or more:
a.
Treasury bills are often issued to finance the long-term cash needs of the Government.
Incorrect, chapter reference 1B5B
b.
commercial bills are issued at a discount to their maturity value.
c.
banks and building societies can raise funds by issuing certificates of deposit.
d.
commercial bills are short-term negotiable debt that carry a fixed rate of interest.
B,C
