CSC Chapter 6

Question 1

Which type of government security is issued at a discount, trades in the market, and matures at par?

Answer 1

Treasury bills (T-Bills) are issued at a discount and mature at par.

Question 2

Your client has a five-year investment horizon and expects inflation to rise each year. Which type of government-issued security would you recommend?

Answer 2

Real Return Bonds are a good choice since they offer the bondholder inflation protection.

Question 3

Which type of bond is issued by a Crown corporation of the Province of Alberta?

Answer 3

You would classify a bond issued by a Crown corporation of Alberta as a Guaranteed Bond

Question 4

Which corporate bond is secured by physical property?

Answer 4

A mortgage bond is secured by physical property.

Question 5

Your client is interested in purchasing a five-year corporate bond that pays interest, but he is concerned about rising interest rates. Which type of fixed-income instrument would you recommend?

Answer 5

You would select a Floating-rate Security since it would automatically adjust to changing interest rates.

Question 6

Encana Corporation, a Canadian company, issues a euro-denominated bond in the United States. Which type of bond did Encana issue?

Answer 6

Eurobond

Question 7

Japanese Yen-denominated bond issued by a Canadian company in Japan.

Answer 7

Foreign Bond

Question 8

A bond secured by stocks or bonds of companies controlled by the issuing company.

Answer 8

Collateral Trust Bond

Question 9

Japanese Yen-denominated bond issued by a Canadian company in Germany and Norway.

Answer 9

Eurobond

Question 10

A type of debt security that was historically used to finance “rolling stock” or railway cars.

Answer 10

Equipment Trust Certificate

Question 11

A bond originally issued in bearer form where the interest coupons have been detached.

Answer 11

Strip Bond

Question 12

The senior securities of the company, as they constitute a first charge on the company’s assets and earnings before unsecured current liabilities are paid.

Answer 12

First Mortgage Bond

Question 13

A bond that may be exchanged by the owner for the common shares of the same company.

Answer 13

Convertible Bond

Question 14

Canadian dollar-denominated bond issued by a U.S. company in Canada.

Answer 14

Foreign Bond

Question 15

US dollar-denominated bond issued by a Canadian company in Belgium.

Answer 15

Eurobond

Question 16

A bond issued in Canada by a Canadian issuer but pays interest and principal in a foreign currency.

Answer 16

Foreign Pay Bond

Question 17

You are interested in the Provincial Bond Manitoba 10%, due May 15, 27. When is interest paid on this bond?

Answer 17

May 15 and November 15 each year.

Question 18

You purchased a 10-year Province of Ontario 4.5% bond. That purchase was made six years ago. How would this bond now be categorized?

Answer 18

This bond would be categorized as a short-term bond.

The Province of Ontario bond at the time of purchase had 10 years to maturity. If that purchase took place six years ago, the bond only has four years left until it matures. Therefore, the bond is now considered a short-term bond.

Question 19

For the 10% May 15, 27 121.44 Manitoba bond, calculate the price you are willing to pay for a face value of $10,000 (ignoring commissions and accrued interest).

Answer 19

A $10,000 bond would cost $12,144.

The bond is currently priced at 121.44. A $10,000 investment in the bond would cost $12,144, calculated as $10,000 × 1.2144.

Question 20

Calculate the principal amount you will receive at maturity if you purchase the Manitoba bond today at $121.44 and hold it until maturity.

Answer 20

The principal amount you will receive at maturity is $10,000.

A bond matures at its face or par value. In this case, the Manitoba bond is priced at a premium to par value today; however, at maturity it will only pay the bondholder its par value of $10,000.

Question 21

Let’s assume the Manitoba bond is currently rated AA by the S&P Bond Rating Service. The bond is subsequently downgraded to BBB status. What impact is this likely to have on the bond?

Answer 21

A downgrading will likely lead to a lower price on the bond.

Question 22

Why are Government of Canada Real Return bonds attractive to investors?

Answer 22

The interest payment and principal repayment are adjusted for inflation.

Question 23

Hardeep wishes to invest in a GIC that will allow him to continue to contribute money each month towards this investment. What type of GIC would you recommend to him?

Answer 23

An Instalment GIC allows the investor to contribute towards the GIC each month.

Question 24

Will a sinking fund or a purchase fund result in a greater proportion of a bond being retired early?

Answer 24

A sinking fund because retirements are mandatory.

Question 25

A bond quoted as trading at 98, but with a $1,000 par value, would mean that:

Answer 25

Bond is trading at a discount All bond prices are quoted based on an index with a base of 100. A bond trading at 100 is said to be trading at face value, or par. A bond trading below par, say at a price of 98, is said to be trading at a discount (the 98, based on the index of 100, indicates the bond is trading at 98% of par, or $980). A bond trading above par is said to be trading at a premium.

Question 26

During what time period can Ngoc, who owns an extendible bond, decide to extend the maturity date of the bond?

Answer 26

The election period.

Question 27

The 5.25% ABC convertible bond is convertible into 50 shares of common stock for each $1,000 of face value. Identify the correct statement regarding the relationship between the convertible bond and the common stock.

Answer 27

If the common stock is currently trading at $22 a share, the ABC convertible will rise to a value of at least $1,100 Market prices of convertible debentures are influenced by their investment value and by the price of the underlying common shares into which they can be converted. The conversion price of the ABC debenture is $20 a share. When the common shares of the issuing company trade well below the conversion price, the debenture acts like a straight debenture. When the common stock begins to trade above the conversion price, the value of the debenture begins to rise. When the ABC share price is $22, the value of the debenture rises to at least $1,100, for the following reason. If the stock increases in price to $22 per share, and an investor owns a $1,000 face value bond that can be converted into 50 shares, the investor could convert the bond and would now hold 50 shares worth $1,100 ($22 x 50). If, instead of converting the bond, the investor were to sell it to another buyer for only $1,000, that buyer could purchase the investor’s bond and then convert the bond into 50 shares worth a total value of $1,100. So it wouldn’t make sense for the investor to sell the bond for anything less than $1,100

Question 28

Identify the correct statement regarding a bond with a Moody’s rating of “A”?

Answer 28

They are upper-medium grade.

Question 29

What type of company would issue a collateral trust bond?

Answer 29

Collateral trust bonds are issued by holding companies. These companies usually do not own many fixed assets. They own securities in subsidiaries that can be pledged to secure bonds.

Question 30

Why might Vladimir invest in a strip bond?

Answer 30

Vladimir does not require cash until after the bond matures.

Question 31

ABC Inc. has just received a higher credit rating from Moody’s Canada Inc. What impact will this have on its ability to raise funds?

Answer 31

A high rating provides benefits, such as the ability to set lower coupon rates on issues of new securities.

Question 32

DDD Co. Inc. has an outstanding 12-year bond with a coupon of 8.75%. The financial press is quoting a yield of 6% for this bond. What does this imply?

Answer 32

Interest rates have fallen as the yield is now below the coupon rate.

Question 33

In November of the current year, Silpa has $10,000 to invest. She needs the full amount in one year. Select a suitable investment for her.

Answer 33

5-year Cashable GIC.

Question 34

Natalie is concerned about the impact of inflation on her investments. She wishes to purchase an investment that shields her from the negative impact of rising prices. What security would you recommend to her?

Answer 34

Real return bond.

Question 35

Interest rates have been declining dramatically over the last two years. Identify the investment that would be most affected by this decline.

Answer 35

Floating Rate Bond