Chapter 2 - MCQs Flashcards
What is the main limitation of using flat yield as a measure of bond returns?
Question 1Answer
A.
It ignores the coupon payments
B.
It only works for fixed-rate bonds
C.
It overlooks the time value of money
D.
It doesn’t consider capital gains or losses
D.
It doesn’t consider capital gains or losses
What is another term for open-ended investment companies (OEICs)?
Question 1Answer
A.
Investment companies with variable capital (ICVCs).
B.
Investment trusts.
C.
Exchange-traded funds (ETFs).
D.
Closed-ended collective investments.
The correct answer is: Investment companies with variable capital (ICVCs).
What is secured debt, and how does it reduce the impact of default for corporate borrowers?
Question 5Answer
A.
Debt secured by higher interest rates
B.
Debt secured by government backing
C.
Debt secured by personal guarantees
D.
Debt secured by collateral or assets
B.
Debt secured by government backing
What is the main concern of ordinary shareholders regarding their investments?
Question 6Answer
A.
Fixed dividends
B.
Decline in the value of shares
C.
Voting rights
D.
Liquidity
The correct answer is: Decline in the value of shares
What is the calculation for the flat yield of a bond?
Question 9Answer
A.
(Yield to maturity/price) x 100
B.
(Redemption value/price) x 100
C.
(Annual coupon/price) x 100
D.
(Nominal value/price) x 100
(Annual coupon/price) x 100
Although structured as companies, what distinguishes investment trusts from traditional companies?
Question 10Answer
A.
Investment trusts are managed by individual investors.
B.
Investment trusts make their profit solely from investments.
C.
Investment trusts provide goods and services.
D.
Investment trusts operate at a discount to NAV.
The correct answer is: Investment trusts make their profit solely from investments.
What is the main limitation of using flat yield as a measure of bond returns?
Question 12Answer
A.
It only works for fixed-rate bonds
B.
It overlooks the time value of money
C.
It ignores the coupon payments
D.
It doesn’t consider capital gains or losses
The correct answer is: It doesn’t consider capital gains or losses
Why were investors willing to buy bonds with negative yields in early September 2021?
Question 13Answer
A.
To speculate on future bond price increases
B.
To preserve the security of their capital
C.
To earn a high return on their investment
D.
To capitalize on rising interest rates
D.
To capitalize on rising interest rates
What is the key role of the bid-offer spread in the FX market?
Question 14Answer
A.
To calculate the forward exchange rate.
B.
To determine the interest rate parity.
C.
To enable market makers to profit from transactions.
D.
To establish a fixed exchange rate.
The correct answer is: To enable market makers to profit from transactions.
Which type of bonds typically pay interest gross, making the buyer responsible for paying their own tax?
Question 25Answer
A.
Treasury bonds
B.
Corporate bonds
C.
Eurobonds
D.
Municipal bonds
Eurobonds
What is the primary purpose of plotting the GRYs of government bonds on a yield curve?
Question 26Answer
A.
To visualize the relationship between yields and time to maturity
B.
To predict future interest rate movements
C.
To calculate the present value of government bonds
D.
To determine the default risk of government bonds
Feedback
The correct answer is: To visualize the relationship between yields and time to maturity
The correct answer is: To visualize the relationship between yields and time to maturity
What is the term for expressing the value of a future sum in terms of its value today by considering the prevailing interest rate?
Question 29Answer
A.
Present value
B.
Interest compensation
C.
Discounting
D.
Future valuation
The correct answer is: Present value
