READING 49 FIXED-INCOME ISSUANCE AND TRADING

Question 1

Which of the following issuer types is most likely to use a special purpose entity (SPE) to issue asset-backed securities?
A. Sovereign government
B. Corporate issuer
C. Securitization trust

Answer 1

Correct Answer: C

Explanation:

Special purpose entities (SPEs) are legal structures used to issue asset-backed securities (ABS). These are not sovereigns or corporations directly but separate legal entities created to hold assets and issue securities.

(A) Sovereign governments do not typically use SPEs to issue bonds.

(B) Corporates may originate the assets but will transfer them to an SPE to isolate risk.

Question 2

An issuer with a credit rating of Ba2 from Moody’s and BB from S&P is best classified as:
A. Investment-grade
B. High-yield
C. Money market issuer

Answer 2

Correct Answer: B

Explanation:

Ba2 (Moody’s) and BB (S&P) fall below the investment-grade threshold, making them high-yield (also known as junk or speculative grade).

(A) Investment-grade starts at Baa3 (Moody’s) and BBB- (S&P).

(C) This is unrelated to credit quality — money market classification depends on maturity, not rating.

Question 3

Which of the following best describes the money market segment of the fixed-income market?
A. Bonds with maturities of more than 10 years
B. Short-term instruments with original maturities of less than 1 year
C. High-yield bonds with floating rates

Answer 3

Correct Answer: B

Explanation:

Money market securities are defined by short-term maturities (<1 year) and are typically used for liquidity management.

(A) Describes long-term fixed-income.

(C) Describes a credit quality and coupon type, not maturity classification.

Question 4

Which of the following features distinguishes a bond issued by a non-sovereign government?
A. It is issued by an international organization
B. It typically carries a lower credit risk than a sovereign
C. It is issued by a regional or municipal authority

Answer 4

Correct Answer: C

Explanation:

Non-sovereign governments refer to local, municipal, or regional authorities (e.g., cities, provinces).

(A) International organizations (e.g., World Bank) are supranational issuers.

(B) Non-sovereign bonds may actually carry higher risk than sovereigns.

Question 5

Which bond segment is most likely to include commercial paper?
A. Long-term investment-grade
B. Money market instruments
C. High-yield secured debt

Answer 5

Correct Answer: B

Explanation:

Commercial paper is a short-term, unsecured debt instrument, typically maturing in less than 270 days — part of the money market.

(A) Long-term is >10 years.

(C) Secured high-yield debt is unrelated to the money market.

Question 6

Which issuer is least likely to have easy access to unsecured short-term financing?
A. Investment-grade multinational
B. Sovereign government
C. Risky corporation with unstable cash flows

Answer 6

Correct Answer: C

Explanation:

Risky companies often lack access to unsecured short-term financing (like commercial paper) and need to offer collateral or pay high rates.

(A) and (B) typically have easier market access due to strong creditworthiness.

Question 7

An issuer whose bonds were previously rated investment-grade but are now rated BB+ would be best classified as a:
A. Fallen angel
B. Rising star
C. Distressed debtor

Answer 7

Correct Answer: A

Explanation:

A fallen angel is a bond that has been downgraded from investment-grade to high-yield due to deteriorating financial conditions.

(B) A rising star is the opposite.

(C) Distressed debt typically involves default or near-default.

Question 8

Which of the following factors is least likely to segment fixed-income markets?
A. Original maturity
B. Coupon payment frequency
C. Credit quality

Answer 8

Correct Answer: B

Explanation:

Markets are segmented by maturity, credit quality, issuer type, geography, and ESG.

(B) Coupon frequency (e.g., semiannual vs annual) is not a primary segmentation method.

Question 9

What is the primary purpose of arranging short- or medium-term bond issues through a bank syndicate?
A. To issue equity in public markets
B. To access secured loans at a fixed rate
C. To obtain flexible credit facilities for working capital

Answer 9

Correct Answer: C

Explanation:

A syndicate of banks helps investment-grade issuers by offering credit facilities that allow companies to issue debt when needed.

(A) Refers to equity, not debt.

(B) Syndicates help with issuance, not necessarily fixed-rate secured loans.

Question 10

The term “secured high-yield bond” typically implies:
A. Government bonds with a collateral backing
B. Bonds issued by risky corporations that pledge assets
C. Investment-grade debt issued with a covenant package

Answer 10

Correct Answer: B

Explanation:

Companies with weaker credit (high-yield) often need to offer collateral to attract investors, thus issuing secured high-yield bonds.

(A) Government bonds are generally unsecured and investment-grade.

(C) Covenant packages don’t imply collateral or credit quality.

Question 11

Which of the following would most likely be considered investment-grade?
A. A bond rated Baa2 by Moody’s
B. A bond rated BB+ by S&P
C. A bond with maturity of 3 months

Answer 11

Correct Answer: A

Explanation:

Baa2 (Moody’s) = investment-grade.

(B) BB+ (S&P) is high-yield.

(C) 3-month maturity relates to term, not credit quality.

Question 12

Which issuer is most likely to rely on asset-backed commercial paper (ABCP) to meet funding needs?
A. Sovereign central bank
B. Non-bank finance company
C. AAA-rated corporate issuer

Answer 12

Correct Answer: B

Explanation:

ABCP is often issued by special purpose vehicles on behalf of non-bank finance firms, using loans, leases, or receivables as collateral.

(A) Central banks do not issue ABCP.

(C) AAA corporates may issue commercial paper, but not necessarily asset-backed.

Question 13

Which of the following statements is most accurate regarding high-yield issuers?
A. They have strong, predictable cash flows and credit access
B. They are typically able to issue unsecured debt freely
C. They often require collateral or higher yields to attract investors

Answer 13

Correct Answer: C

Explanation:

High-yield issuers face higher credit risk, so they usually offer collateral or high interest to compensate investors.

(A) Describes investment-grade.

(B) High-yield issuers rarely have access to unsecured funding.

Question 14

Which of the following best describes the primary investment strategy for pension funds and insurance companies in the credit/maturity spectrum?
A. Primarily short-term, high-yield securities to maximize liquidity.
B. Long-term, investment-grade securities to match long-term liabilities.
C. Intermediate-term, default-risk-free securities for monetary policy.

Answer 14

Correct Answer: B

Explanation:

B is correct: The key points state, “Pension funds and insurance companies invest in long-term, investment-grade securities to match their long-term liabilities (paying pensions and claims on insurance policies).” This strategy aligns their asset duration with their liability duration and prioritizes safety with adequate returns.

A is incorrect: Short-term, high-yield securities are inconsistent with the long-term, low-risk nature of pension and insurance liabilities. High yield carries too much credit risk for these institutions, and they are typically prohibited from owning them.

C is incorrect: While intermediate-term, default-risk-free securities are important for central banks’ monetary policy, they do not align with the long-term liability matching needs of pension funds and insurance companies.

Question 15

According to Figure 49.2, which type of investor is explicitly prohibited by regulations from owning high-yield securities?
A. Hedge funds
B. Corporations
C. Pension funds and insurance companies

Answer 15

Correct Answer: C

Explanation:

C is correct: The key points explicitly state, “These institutions [pension funds and insurance companies] are often prohibited by regulations from owning high-yield securities.” This is due to their fiduciary duty and the need to protect policyholders/pension beneficiaries from excessive risk.

A is incorrect: Hedge funds are known for investing in higher-risk assets, including high-yield securities, as part of their strategy to generate higher returns.

B is incorrect: Corporations might invest in various securities depending on their internal policies, but there is no general regulatory prohibition mentioned against them owning high-yield securities for their excess liquidity.

Question 16

A corporate treasurer seeking to earn a return on the company’s excess short-term cash liquidity would most likely invest in:
A. Long-term Treasury bonds.
B. Unsecured corporate bonds.
C. Commercial paper and repos.

Answer 16

Correct Answer: C

Explanation:

C is correct: The key points mention, “Corporations seek to earn returns on excess liquidity by investing in commercial paper, repos, and ABCP.” These instruments are short-term and highly liquid, suitable for managing excess cash.

A is incorrect: Long-term Treasury bonds expose the corporation to significant interest rate risk and do not meet the need for short-term liquidity.

B is incorrect: Unsecured corporate bonds typically have intermediate to long maturities (as per Figure 49.1), making them less suitable for short-term liquidity management compared to commercial paper.

Question 17

The primary reason central banks utilize intermediate-term Treasury notes is to:
A. Fund government spending programs.
B. Increase or decrease the monetary reserves of commercial banks.
C. Match their long-term liabilities.

Answer 17

Correct Answer: B

Explanation:

B is correct: The key points state, “Central banks use intermediate-term Treasury notes as a monetary policy tool to increase or decrease the monetary reserves of commercial banks.” This action directly impacts the money supply and interest rates.

A is incorrect: Central banks typically do not directly fund government spending by buying newly issued debt from the government in the primary market. Their operations are in the secondary market to manage monetary policy, not fiscal policy.

C is incorrect: Central banks do not have “long-term liabilities” in the same sense as pension funds or insurance companies that require matching. Their balance sheet management is related to monetary policy objectives.

Question 18

Based on Figure 49.2, bond funds and ETFs that follow their stated mandates would primarily invest in:
A. High-yield long-term bonds.
B. Investment-grade intermediate securities, excluding Treasuries.
C. Default-risk-free short-term bills.

Answer 18

Correct Answer: B

Explanation:

B is correct: The key points indicate, “Bond funds and ETFs will position according to their stated mandate, usually in investment-grade intermediate securities excluding Treasuries.” This reflects their common focus on diversified corporate and agency bonds.

A is incorrect: High-yield long-term bonds are generally for more aggressive mandates, not the typical “stated mandate” of broad bond funds and ETFs.

C is incorrect: While some bond funds might hold short-term securities for liquidity, their primary focus as “bond funds” (especially intermediate) is not short-term default-risk-free bills; those are more typical for money market funds.

Question 19

An asset manager whose primary goal is to generate higher returns for clients, even if it means taking on more credit risk, would most likely invest in:
A. Treasury bonds.
B. Leveraged loans.
C. Repo Commercial Paper.

Answer 19

Correct Answer: B

Explanation:

B is correct: The key points note, “Asset managers seeking higher returns would invest in riskier high-yield intermediate securities, alongside hedge funds and… distressed debt funds.” Leveraged loans are typically high-yield (per Figure 49.1) and align with a higher-risk, higher-return strategy.

A is incorrect: Treasury bonds are default-risk-free and offer low returns, inconsistent with a “higher returns” objective.

C is incorrect: Repo Commercial Paper is short-term and investment-grade, offering low risk and low returns, not suitable for a “higher returns” mandate.

Question 20

Financial intermediaries (banks) utilize Treasuries across the whole maturity spectrum primarily to:
A. Speculate on interest rate movements.
B. Manage interest rate and liquidity risks.
C. Provide direct funding to government projects.

Answer 20

Correct Answer: B

Explanation:

B is correct: The key points state, “Financial intermediaries (banks) use Treasuries across the whole maturity spectrum to manage interest rate and liquidity risks.” Treasuries are the most liquid and safest assets for these purposes.

A is incorrect: While banks might engage in some speculation, their primary, systemic use of Treasuries is for fundamental risk management, not speculation.

C is incorrect: Banks buy Treasuries in the primary and secondary markets but their role is not to “provide direct funding to government projects” in the sense of directly allocating funds to specific projects. They facilitate government borrowing by buying its debt.

Question 21

Based on Figure 49.2, which of the following best characterizes the typical positioning of money market funds?
A. Long-term, high-yield.
B. Short-term, primarily default risk-free to investment grade.
C. Intermediate-term, secured corporate bonds.

Answer 21

Correct Answer: B

Explanation:

B is correct: The diagram shows “Money market funds” in the “Short-Term” column, spanning the “Default Risk Free” and “Investment Grade” rows. This indicates their focus on highly liquid, very low-risk short-term instruments like T-bills (default risk-free) and commercial paper (investment grade).

A is incorrect: Long-term and high-yield instruments are completely contrary to the capital preservation and liquidity objectives of money market funds.

C is incorrect: Intermediate-term securities are too long for money market funds, and while they might invest in some secured instruments, “secured corporate bonds” are typically intermediate to long-term, not the primary focus of MMFs.

Question 22

Distressed debt funds are primarily found in which section of the credit/maturity spectrum?
A. Investment Grade, Long-Term.
B. High Yield, Intermediate-Term.
C. Default Risk Free, Short-Term.

Answer 22

Correct Answer: B

Explanation:

B is correct: Figure 49.2 explicitly places “Distressed debt funds” in the “High Yield” row and “Intermediate-Term” column. These funds specialize in buying debt of companies in financial distress, which is inherently high-yield (speculative) and often involves debt with remaining intermediate maturities.

A is incorrect: Investment grade is the opposite of distressed debt.

C is incorrect: Default risk-free and short-term are far too conservative for distressed debt investment.

Question 23

Consider a bond with a maturity of 8 years and a credit rating of AA. According to Figure 49.1, this bond would most likely be classified as:
A. Treasury note.
B. Unsecured corporate bond.
C. Secured corporate bond.

Answer 23

Correct Answer: B

Explanation:

B is correct: An 8-year maturity falls into the “1y-10y Intermediate-Term” column. An AA rating indicates “Investment Grade.” Figure 49.1 lists “Unsecured corporate bonds” in the cell corresponding to “Investment Grade” and “Intermediate-Term.”

A is incorrect: Treasury notes are “Default Risk Free,” not “Investment Grade” (as per Figure 49.1’s classification).

C is incorrect: Secured corporate bonds are listed under “High Yield” in the “Intermediate-Term” column.

Question 24

Which statement correctly distinguishes the investor types in the “Default Risk Free” row across the maturity spectrum?
A. Money market funds focus on short-term for liquidity, while pension funds focus on long-term for liability matching.
B. Central banks are exclusively short-term, while financial intermediaries are exclusively long-term.
C. Corporate issuers are always short-term, while insurance companies are always intermediate-term.

Answer 24

Correct Answer: A

Explanation:

A is correct: Money market funds are positioned in the “Short-Term” column under “Default Risk Free” for high liquidity, while pension funds are in the “Long-Term” column under “Default Risk Free” (and Investment Grade) for matching long-term liabilities.

B is incorrect: Central banks also use intermediate-term Treasuries, and financial intermediaries use Treasuries across the whole maturity spectrum.

C is incorrect: Corporate issuers are shown under “Investment Grade” short-term, not “Default Risk Free,” and insurance companies are long-term, not exclusively intermediate-term.

Question 25

If "Bond funds and ETFs" are specifically stated to usually exclude Treasuries in their investment-grade intermediate securities, which type of bond would they primarily hold in this category? A. Treasury notes. B. Asset-Backed Securities (ABS). C. Leveraged loans.

Answer 25

Correct Answer: B Explanation: B is correct: Figure 49.1 lists "ABS" (Asset-Backed Securities) under "Investment Grade" and "Intermediate-Term." Since the text states bond funds and ETFs typically exclude Treasuries in this category, ABS are a likely alternative for their investment-grade intermediate holdings. Unsecured corporate bonds are also a strong candidate, but ABS is specifically listed in the figure for this cell. A is incorrect: The question specifically states they exclude Treasuries. C is incorrect: Leveraged loans are explicitly listed under "High Yield," which is not the primary focus of standard "Bond funds and ETFs" according to their usual stated mandate of investment grade

Question 26

Which of the following is a key difference between fixed-income indexes and equity indexes? A. Fixed-income indexes typically have fewer constituents than equity indexes. B. Fixed-income indexes experience lower turnover due to less frequent bond issuance and maturity. C. Fixed-income indexes often have a higher number of constituents compared to equity indexes.

Answer 26

Correct Answer: C Explanation: C is correct: The text states, "Corporate bond issuers can, and often do, have many different bonds outstanding... This leads to fixed-income indexes having many more constituents than equity indexes." A is incorrect: This contradicts the text, which indicates fixed-income indexes have many more constituents. B is incorrect: The text states that bonds maturing and being issued more frequently cause a higher frequency of removal and replacement of constituents (turnover) in fixed-income indexes versus equity indexes.

Question 27

Due to the high number of constituents in fixed-income indexes, bond tracker funds typically employ which strategy? A. Purchasing every bond constituent to ensure perfect replication. B. Using sampling techniques to manage transaction complexity. C. Focusing solely on sovereign bonds to reduce the number of constituents.

Answer 27

Correct Answer: B Explanation: B is correct: The text mentions, "bond tracker funds employ sampling techniques rather than purchasing all the constituents of a fixed-income index to keep transaction complexity reasonable." This is a practical approach given the large number of bonds. A is incorrect: Purchasing every bond constituent would be impractical and lead to excessive transaction complexity, as noted in the text. C is incorrect: While sovereign bonds are a large part of many broad indexes, focusing solely on them would result in a very narrow fund, not a tracker of a broad index, and doesn't address the general issue of many constituents in any fixed-income index.

Question 28

A characteristic unique to fixed-income indexes, not typically seen in equity indexes, is: A. The inclusion of a broad selection of securities. B. A higher frequency of constituent turnover. C. Sensitivity to interest rate changes.

Answer 28

Correct Answer: B Explanation: B is correct: The text highlights, "Bonds maturing and being issued more frequently cause a higher frequency of removal and replacement of constituents (called turnover) in fixed-income indexes versus in equity indexes." A is incorrect: Both fixed-income and equity indexes can contain a broad selection of securities. C is incorrect: While fixed-income indexes are sensitive to interest rate changes, this is a characteristic of bonds themselves, not a unique differentiating factor of the index structure when compared to equity indexes in the context of the provided text.

Question 29

Which of the following best explains why fixed-income indexes generally contain more securities than equity indexes? A. Bonds are traded more frequently than stocks. B. Bond issuers typically have multiple bond issues outstanding. C. Bond indexes aim to include securities from global markets.

Answer 29

Correct Answer: B Explanation: B is correct: Corporate bond issuers often have multiple bond issues with different maturities, coupon rates, and terms outstanding at the same time, unlike equity issuers who typically have only a few classes of shares. This results in fixed-income indexes having significantly more constituents. A is incorrect: While bond trading can be frequent, this is not the reason for the number of securities in the index. C is incorrect: Although some indexes do include global securities, this does not explain why they contain more securities than equity indexes.

Question 30

Why do bond tracker funds commonly use a sampling approach rather than full replication when tracking a fixed-income index? A. Fixed-income markets are less regulated than equity markets. B. Many bonds in the index are illiquid or difficult to purchase. C. Most bond funds aim to outperform their benchmark.

Answer 30

Correct Answer: B Explanation: B is correct: Due to the large number of bonds in most indexes and the frequent turnover, it is often impractical and costly to purchase every bond in the index. Sampling is used to create a representative portfolio while minimizing transaction costs. A is incorrect: Regulation is not the primary reason for using sampling. C is incorrect: Bond funds that use indexes for tracking are typically passive funds, not aiming to outperform.

Question 31

Compared to equity indexes, fixed-income indexes are more likely to have higher turnover primarily because: A. Bonds frequently change credit ratings. B. Bonds mature and are replaced more frequently. C. Bond funds are rebalanced more often.

Answer 31

Correct Answer: B Explanation: B is correct: Bonds have fixed maturity dates and new ones are issued regularly, leading to constant additions and removals from fixed-income indexes. A is incorrect: While ratings can change, they do not result in as much turnover as maturities do. C is incorrect: The frequency of fund rebalancing doesn't drive index turnover; it's the structure of bonds themselves.

Question 32

Which of the following is most likely to cause changes in the sector weights of a broad fixed-income index over time? A. Changes in exchange rates. B. Trends in debt issuance by governments and corporations. C. Inclusion of non-investment-grade bonds.

Answer 32

Correct Answer: B Explanation: B is correct: As governments or corporations issue more or fewer bonds over time (especially of different maturities or credit quality), the composition and sector weights in indexes adjust accordingly. A is incorrect: Exchange rates affect returns in multi-currency portfolios but not index weightings directly. C is incorrect: High-yield bonds are usually excluded from investment-grade indexes, and their inclusion would depend on the index criteria, not weight shifts.

Question 33

Which of the following is best described as an aggregate index? A. An index of sovereign bonds rated below investment grade B. An index that includes corporate, government, and securitized bonds across various sectors and currencies C. An index focused on municipal bonds in a single country

Answer 33

Correct Answer: B Explanation: B is correct: An aggregate index includes a broad mix of bonds from multiple sectors and currencies. A prominent example is the Bloomberg Barclays Aggregate Index. A is incorrect: This describes a high-yield sovereign index, not an aggregate index. C is incorrect: This describes a sector-specific or geographically narrow index.

Question 34

Which of the following is a characteristic of the JP Morgan Emerging Markets Bond Index Plus? A. It includes investment-grade corporate bonds from developed markets. B. It contains U.S. dollar-denominated emerging market sovereign debt rated Baa1/BBB+ or below. C. It includes municipal bonds from U.S. states with high credit ratings.

Answer 34

Correct Answer: B Explanation: B is correct: This index includes emerging market sovereign bonds that are denominated in USD and typically rated Baa1/BBB+ or below, with minimum size and maturity requirements. A is incorrect: It does not focus on developed markets or corporate bonds. C is incorrect: This describes a U.S. municipal bond index, which is unrelated.

Question 35

A bond index screens out companies involved in alcohol production and requires a minimum ESG rating of BBB. This is most likely an example of a(n): A. High-yield index B. ESG-integrated bond index C. Regional government bond index

Answer 35

Correct Answer: B Explanation: B is correct: ESG-integrated indexes consider environmental, social, and governance (ESG) factors in the construction of the index. Screening out certain industries (like alcohol or thermal coal) and applying a minimum ESG rating are typical ESG criteria. A is incorrect: High-yield indexes are based on credit quality, not ESG factors. C is incorrect: A regional government bond index is based on geography and issuer type, not sustainability criteria.

Question 36

Which of the following best describes a primary market transaction? A. A hedge fund buys distressed corporate bonds from another investor. B. A government issues a new bond and sells it through an auction to the public. C. An investor sells a bond to a dealer on an electronic trading platform.

Answer 36

Correct Answer: B Explanation: B is correct: A government issuing a new bond to raise capital is a classic example of a primary market transaction — new capital is raised and the bond is newly created. A is incorrect: This describes a secondary market trade between investors. C is incorrect: This is also a secondary market transaction (already issued bonds being traded).

Question 36

A company planning its first bond issue to replace bank loans would most likely be described as: A. A repeat issuer B. A debut issuer C. A seasoned issuer

Answer 36

Correct Answer: B Explanation: B is correct: A debut issuer is one offering bonds for the first time, often to replace bank loans and diversify funding sources. A is incorrect: A repeat issuer has issued bonds in the past. C is incorrect: A seasoned issuer refers to one whose bonds are already trading in the secondary market.

Question 36

Which of the following is a feature of an underwritten bond offering? A. The issuer bears all the risk of unsold bonds. B. The investment bank guarantees to buy the entire issue. C. The issue price is set solely by market demand.

Answer 36

Correct Answer: B Explanation: B is correct: In an underwritten offering, the bank commits to buying the full issue at a set price, assuming the risk of resale. A is incorrect: The bank bears the risk, not the issuer. C is incorrect: Though market demand influences pricing, the underwriter guarantees the price to the issuer.

Question 36

A bond offering in which the intermediaries do not guarantee the issue price is referred to as: A. A firm commitment B. A best-efforts offering C. A shelf registration

Answer 36

Correct Answer: B Explanation: B is correct: In a best-efforts offering, intermediaries try to sell the bonds at the best possible price without guaranteeing it. A is incorrect: A firm commitment is another name for an underwritten offering. C is incorrect: Shelf registration refers to regulatory pre-approval for issuing bonds over time.

Question 37

A shelf registration allows an issuer to: A. Issue bonds in stages without re-registering with regulators each time. B. Sell bonds exclusively through public auctions. C. Issue bonds only to institutional investors

Answer 37

Correct Answer: A Explanation: A is correct: Shelf registration involves pre-approving a total bond value, allowing the issuer to offer portions of it over time. B is incorrect: Public auctions are a separate mechanism, often used for government bonds. C is incorrect: Shelf-registered bonds can be offered to both public and institutional investors, depending on the issuer’s plan.

Question 38

Which issuer type would most likely require a longer marketing period involving roadshows before launching a bond? A. Investment-grade frequent issuer B. Debut issuer C. Sovereign issuer

Answer 38

Correct Answer: B Explanation: B is correct: Debut issuers typically need extended roadshows to educate and build trust with investors. A is incorrect: Frequent issuers with shelf registration often need minimal marketing. C is incorrect: Sovereign issuers, especially developed markets, often use public auctions and have high investor familiarity.

Question 39

A secondary market is best described as: A. The issuance of new securities to raise capital B. The trading of existing securities among investors C. A market used exclusively for government bonds

Answer 39

Correct Answer: B Explanation: B is correct: Secondary markets involve the buying and selling of already issued bonds between investors. A is incorrect: This describes primary markets. C is incorrect: Secondary markets cover government, corporate, and other types of bonds.

Question 40

In an over-the-counter (OTC) bond market, which of the following best describes how prices are quoted? A. By regulators using benchmark rates B. By dealers posting bid and ask prices C. Through a centralized clearinghouse

Answer 40

Correct Answer: B Explanation: B is correct: Dealers quote bid (buy) and ask (sell) prices in OTC markets. A is incorrect: Prices are market-driven, not regulator-set. C is incorrect: OTC markets are decentralized and don’t rely on a single clearinghouse.

Question 41

The difference between the price a dealer is willing to pay for a bond and the price at which they will sell it is known as the: A. Coupon rate B. Bid-ask spread C. Discount margin

Answer 41

Correct Answer: B Explanation: B is correct: The bid-ask spread is the dealer’s profit margin and reflects market liquidity. A is incorrect: The coupon rate is the interest paid by the bond. C is incorrect: Discount margin applies to floating-rate securities, not dealer pricing.

Question 42

Which of the following bonds would likely have the smallest bid-ask spread? A. A recently issued investment-grade corporate bond B. A distressed bond from a company nearing bankruptcy C. An older high-yield bond from a small issuer

Answer 42

Correct Answer: A Explanation: A is correct: Newer, investment-grade bonds tend to be more liquid and have narrow spreads. B is incorrect: Distressed bonds are less liquid and riskier — spreads are wider. C is incorrect: Older high-yield bonds also tend to have wider spreads due to reduced liquidity.

Question 43

A corporate bond becomes distressed when: A. It receives an investment-grade rating B. The issuer is expected to restructure debt or declare bankruptcy C. It is issued through a public auction

Answer 43

Correct Answer: B Explanation: B is correct: Distressed debt refers to bonds from issuers in or near bankruptcy or major restructuring. A is incorrect: Investment-grade means low risk, not distress. C is incorrect: Public auctions are unrelated to distress status.

Question 44

Why might trading volume increase for a bond that has become distressed? A. Because retail investors are required to buy more B. Because distressed debt investors may buy from institutions forced to sell C. Because the issuer increases coupon payments

Answer 44

Correct Answer: B Explanation: B is correct: Institutions like mutual or pension funds often must sell distressed bonds, creating opportunities for others to buy, increasing volume. A is incorrect: Retail investors are not obligated to buy distressed debt. C is incorrect: Coupon payments usually do not increase in distress situations.

Question 45

Which of the following is most likely a reason a company replaces bank loans with proceeds from a bond issue? A. To reduce transparency requirements B. To raise equity capital C. To access broader funding sources and longer maturities

Answer 45

Correct Answer: C Explanation: C is correct: Bonds allow companies to raise capital with longer terms and broader investor reach than typical bank loans. A is incorrect: Bonds usually increase transparency due to disclosures. B is incorrect: Bonds raise debt, not equity.