Asset Classes - Debt Valuation

Question 1

In a normal market, which one of the following is true?

Answer 1

The price of a short-term 5% gilt will be higher than the price of the 5% long-term gilt

Question 2

An investor has £10,000 nominal of a convertible bond. Its conversion terms are 50 shares per £100 nominal at a price of £1 (per share). The share price is currently £4.00 per share. What would happen to the price of the convertible bond if the share price fell?

Answer 2

Fall

Question 3

flat yield formula

Answer 3

FY = coupon / bond price

Question 4

What primary feature of a bond price is reflected in the yield curve?

Answer 4

Inflation

Question 5

If a company’s credit rating changed from AA to AAA, what would you expect to happen to the yield?

Answer 5

Price increases, yield decreases

Question 6

Which ONE of the following best represents ten basis points?

Answer 6

0.1%

Question 7

Which of the following is true if the UK government bond yield curve is inverted?

Answer 7

Yields on short-dated gilts are greater than yields on medium- and long-dated gilts

Question 8

gross redemption yield

Answer 8

GRY = flat yield + yield on redemption

Question 9

Why, when interest rates rise, do bond prices fall?

Answer 9

Bond yields stay in line with interest rates

Question 10

Which of the following is true for a gilt trading above par?

Answer 10

Flat-yield > GRY > NRY

Question 11

When the price of a bond changes, the yield also changes. An approximate change in the yield can be predicted using:

Answer 11

Modified duration

Question 12

For which of these can you calculate a gross redemption yield?

Answer 12

ABC’s step-up bond 2031

Question 13

Which of the following is the best description of the modified duration of a bond?

Answer 13

The change in the price of a bond for a given change in interest rates

Question 14

Which of the following is TRUE with respect to the flat-yield and gross redemption yield on a bond trading BELOW par?

Answer 14

The GRY will be higher than the flat-yield

There will be a capital gain on the bond

Question 15

If a 10% coupon paying bond has a price of £100 and a 15% coupon paying bond has a price of £150, which of the following is false assuming they both have the same maturity?

Answer 15

The gross redemption yield for both is identical

Question 16

Which one of the following is not a usual method of bond quotation?

Answer 16

Price spread

Question 17

If the credit rating on a corporate bond is upgraded, which ONE of the following is TRUE?

Answer 17

Coupon will remain the same and price will rise

Question 18

A registered UK charity has invested in gilts. Which of the measures below is the most relevant to them?

Answer 18

Gross redemption yield

Question 19

Which of the following would determine the shape of a normal yield curve?

Answer 19

Liquidity

Question 20

Price paid

Answer 20

Price paid = clean price + accrued interest.

Question 21

Modified duration

Answer 21

Modified duration is a measure of a bond’s volatility to interest rate movements. Modified duration is highest for bonds with:

• Low coupons
• Long maturity
• Low yields

Question 22

Which of the following would lead to the highest increase in price of a convertible trading at a zero premium to par?

Answer 22

A large increase in the price of the underlying shares

Question 23

According to the pure expectations theory, which of the following is the principal reason for an inverted risk-free government bond yield curve?

Answer 23

Short-term interest rates are high and expected to fall

Question 24

What are inter-bank lending rates used to determine?

Answer 24

LIBOR

Question 25

What happens to a bond if its credit-rating changes from sub-investment grade to investment grade?

Answer 25

Price increases, coupon stays the same