Chapter 20

Question 1

It is a commercial draft (a written instruction to make payment) drawn by a borrower for payment on a specified date.

Answer 1

Bankers’ acceptance

Question 2

These non-government debt securities are backed by a pool of financial assets.

Answer 2

asset-backed securities

Question 3

Evaluating an issuer’s ability to make timely payments is known as this.

Answer 3

credit analysis

Question 4

It is an unsecured promissory note issued by a corporation or backed by a pool of underlying financial assets in asset-backed security form.

Answer 4

commercial paper

because commercial paper is usually issued by corporations with high credit ratings, the risk of default is considered relatively low, which is why lenders are willing to loan money without requiring collateral. The high credit quality of the issuer serves as the lender’s protection.

Question 5

The most common option on a debt security whereby the borrower has the right to buy back the issue at specified times before the final maturity date.

Answer 5

call feature

Question 6

It simply represents the rating agency’s opinion of the creditworthiness of an issuer with respect to its debt securities or other financial obligations.

Answer 6

credit rating

Question 7

These are the shortest-term marketable debt instrument issued by governments.

Answer 7

treasury bills

Question 8

With this type of yield curve, short-term interest rates are exactly or very close to longer-term rates.

Answer 8

flat yield curve

Question 9

These issues are not traded as frequently as the benchmarks and are therefore less liquid.

Answer 9

off-the-run

Question 10

It is an approximate measure of the annual return on the security if it is held to maturity

Answer 10

yield to maturity

Question 11

With this type of yield curve, short-term interest rates are lower than longer-term interest rates.

Answer 11

normal yield curve

Question 12

These instruments are known as benchmarks and are the more liquid issues.

Answer 12

on-the-run

Question 13

For RRBs issued by the Government of Canada, the cumulative level of inflation is known as this.

Answer 13

inflation compensation

Question 14

The additional yield that a debt security should provide above a government-issued security.

Answer 14

spread

Question 15

The risk that an issuer may default on interest or principal payments (or both) is often referred to as this.

Answer 15

credit risk or Default risk

Question 16

With this type of yield curve, short-term interest rates are greater than longer-term rates.

Answer 16

inverted yield curve

Question 17

This option allows the issuer of a corporate bond to call a bond at a price based on the greater of two
amounts:
• Face value
• A price based on the yield of an equivalent-term Government of Canada bond plus a specified yield
spread

Answer 17

The Canadian yield call

Question 18

Corporate liabilities are normally ranked in the
following order based on which liabilities are repaid:

Answer 18

1. First mortgage liabilities and asset-backed securities
2. Secured debt
3. Unsecured debentures
4. Preferred shares
5. Common Shares

Question 19

under Canadian tax rules, the return on a strip bond is treated as

Answer 19

regular interest income, not as a capital gain.

Although no interest is paid until maturity, the investor must include as income the notional interest that
accrues each year, up to the bond’s anniversary date.

Question 20

Bonds that are indexed to inflation

Answer 20

Real Return Bonds (RRBs)

Question 21

represents the percentage of the original principal remaining in the mortgage pool after the current month’s payments.

Answer 21

Pool Factor

Question 22

There are four different NHA MBS pool categories available to investors:

Answer 22

• Exclusive homeowner
• Multi-family
• Social housing (such as co-ops and seniors’ residences)
• Mixed (a combination of any of the above)

Question 23

Furthermore, there are two NHA MBS types, as described below:

Answer 23

Open NHA MBS- The mortgages in an open NHA MBS pool contain clauses that permit the mortgagor (borrowers) to make early principal prepayments in addition to the regularly scheduled principal and interest payments. An open MBS, therefore, carries some uncertainty in that principal prepayments would alter the monthly cash flow stream.

Closed NHA MBS- The mortgages in a closed NHA MBS pool do not permit the mortgagors to make early principal prepayments. The monthly payments from a closed NHA MBS are therefore predictable and consistent.

Question 24

When based on pools of commercial mortgages, an MBS is known as a

Answer 24

commercial mortgage-backed security
(CMBS)

Question 25

Are debt instruments for which the issuer has the right at certain points (normally the anniversary date of issue) either to allow the bond to mature or to extend the maturity.

Answer 25

Issuer extendible notes

Question 26

This shift in the yield curve occurs when yields at all maturities move up or down by the same, or nearly the same, amount.

Answer 26

Parallel shift

Question 27

This shift in the yield curve occurs when yields toward one end of the yield curve move up or down by more than yields at the other end

Answer 27

Twist

Question 28

This shift in the yield curve occurs when the yield at a certain maturity moves up or down independently or in a greater amount than yields at all other maturities.

Answer 28

Hump

Question 29

Long term, Low Coupons

Short term, High Coupons have

Answer 29

Have higher interest rate risk

Lower risk

Question 30

Most yield curve shifts are either

Answer 30

parallel or twists

Humps are rare