READING 51 FIXED-INCOME MARKETS FOR GOVERNMENT ISSUERS Flashcards
(35 cards)
Which of the following most accurately describes a key feature of sovereign bonds?
A. They are secured by specific assets of the government.
B. They are typically backed by the government’s ability to tax.
C. They are primarily issued by state-owned enterprises.
Correct Answer: B
Explanation:
B is correct: Sovereign bonds are issued by national governments and are backed by the government’s power to collect taxes, not by specific collateral.
A is incorrect: Sovereign bonds are not asset-backed like secured corporate bonds.
C is incorrect: Sovereign bonds are issued by the government itself, not by state-owned enterprises.
Which of the following most likely distinguishes public sector accounting from private sector accounting?
A. It focuses on earnings per share.
B. It is more heavily based on accruals.
C. It emphasizes cash transactions more than accrual accounting.
Correct Answer: C
Explanation:
C is correct: Public sector financial reporting often emphasizes cash-based accounting, rather than the accrual-based systems common in private companies.
A is incorrect: Earnings per share is a private sector concept and not typically used in public sector accounting.
B is incorrect: The opposite is true; public sector accounting tends to downplay accruals.
An “economic balance sheet” for a government most likely includes:
A. Only the liabilities disclosed in the government’s financial statements.
B. Only tangible assets and financial liabilities.
C. Implied assets and liabilities such as future tax revenues and promised expenditures.
Correct Answer: C
Explanation:
C is correct: Analysts consider an “economic balance sheet” to include both tangible and implied elements, such as expected tax revenues and future obligations.
A and B are incorrect: These options miss the broader view that includes future revenues and expenditures not listed in official reports.
Which of the following most accurately characterizes developed market sovereign issuers?
A. They issue debt in illiquid domestic currencies.
B. Their economies are stable and diversified.
C. Their debt is usually tied to commodity exports.
Correct Answer: B
Explanation:
B is correct: Developed market sovereigns tend to have stable, diversified economies and issue debt in reserve currencies.
A is incorrect: Developed markets typically issue in reserve currencies, which are liquid and widely used.
C is incorrect: That characteristic applies more to emerging market issuers.
Which of the following most likely distinguishes external debt of emerging market governments?
A. It is issued only in the home currency.
B. It eliminates all currency risk for foreign investors.
C. It may expose investors to indirect currency risk
Correct Answer: C
Explanation:
C is correct: Even if external debt is issued in a reserve currency, the issuer still needs to generate that currency, exposing investors to indirect currency risk.
A is incorrect: External debt can be in the home or a foreign currency.
B is incorrect: Currency risk may still exist in the form of repayment ability in the reserve currency.
A country with domestic debt issued in its own currency and restricted capital flows is most likely to:
A. Have highly liquid and convertible debt.
B. Be classified as a developed market issuer.
C. Have limited foreign investor participation.
Correct Answer: C
Explanation:
C is correct: Restrictions on capital flows and non-convertibility typically reduce foreign investor interest.
A is incorrect: Illiquidity and restrictions make the debt less attractive and harder to trade.
B is incorrect: These traits are more common in emerging markets.
A government most likely uses fiscal policy to:
A. Determine central bank interest rates.
B. Stimulate economic activity during downturns.
C. Adjust monetary supply directly.
Correct Answer: B
Explanation:
B is correct: Governments often cut taxes and increase spending to stimulate the economy when it is below full employment.
A and C are incorrect: These are functions of monetary policy, not fiscal policy.
Ricardian equivalence assumes all of the following EXCEPT:
A. Taxpayers pass savings to future generations.
B. Capital markets have high transaction costs.
C. Taxpayers increase savings if they expect higher future taxes.
Correct Answer: B
Explanation:
B is correct: Ricardian equivalence assumes no transaction costs, so B is the exception.
A and C are incorrect: These are core assumptions of Ricardian equivalence.
According to Ricardian equivalence, the maturity structure of government debt should not matter if:
A. Investors require different returns based on maturity.
B. Taxpayers behave rationally and markets are perfect.
C. The central bank controls the yield curve.
Correct Answer: B
Explanation:
B is correct: Ricardian equivalence holds only under assumptions like rational expectations and perfect capital markets.
A and C are incorrect: These are real-world considerations not consistent with Ricardian equivalence theory.
Governments typically issue a mix of short- and long-term debt primarily to:
A. Minimize total debt outstanding.
B. Stabilize the economy through monetary policy.
C. Maintain a balance between liquidity and rollover risk.
Correct Answer: C
Explanation:
C is correct: Governments diversify maturities to gain liquidity benefits while managing rollover risk.
A is incorrect: The focus is on managing maturity and risk, not minimizing debt.
B is incorrect: Fiscal policy relates to government spending and taxes; monetary policy is the central bank’s role
One of the primary benefits of short-term government securities is that they:
A. Are usually high-yield and speculative.
B. Are seen as highly liquid and safe.
C. Protect investors from long-term inflation.
Correct Answer: B
Explanation:
B is correct: Short-term government debt is typically liquid and considered low risk.
A is incorrect: These securities are low-yield, low-risk.
C is incorrect: Long-term inflation protection is more relevant to indexed bonds.
Rollover risk in government debt is best described as the risk that:
A. The government will default on long-term bonds.
B. Interest rates will rise significantly before the next debt issuance.
C. Maturing debt cannot be refinanced at acceptable terms.
Correct Answer: C
Explanation:
C is correct: Rollover risk arises when governments depend heavily on short-term debt and might face difficulty refinancing it.
A is incorrect: Long-term default is a separate credit risk.
B is incorrect: Rising rates affect cost, not the ability to refinance per se.
Government debt yields are commonly used by market participants to:
A. Forecast central bank interest rates only.
B. Benchmark the credit risk of corporate debt.
C. Set minimum wage policies.
Correct Answer: B
Explanation:
B is correct: Sovereign debt yields serve as benchmarks for pricing corporate or non-government debt.
A is incorrect: Government yields may reflect market expectations but aren’t used directly for forecasting.
C is incorrect: Unrelated to debt yields.
Which of the following is a common use of long-term sovereign bonds in financial markets?
A. Avoiding taxes on capital gains.
B. Collateral in repurchase agreements.
C. Funding insurance payouts.
Correct Answer: B
Explanation:
B is correct: Long-term sovereign bonds are often used as collateral in repo markets.
A is incorrect: Tax treatment is not the primary use case.
C is incorrect: Insurance companies may invest in them, but they aren’t used to fund payouts directly.
A central bank most likely conducts monetary policy by:
A. Purchasing or selling sovereign bonds of various maturities.
B. Managing government fiscal deficits.
C. Setting the minimum wage.
Correct Answer: A
Explanation:
A is correct: Central banks use open market operations—buying and selling government debt—to influence interest rates and money supply.
B is incorrect: Fiscal deficits are the responsibility of the government, not the central bank.
C is incorrect: Labor market policy, not monetary policy.
Which of the following is most likely an example of nonsovereign government debt?
A. Bonds issued by the Ministry of Finance of a national government
B. Bonds issued by the state of California to finance hospital construction
C. Bonds issued by a private corporation for infrastructure development
Correct Answer: B
Explanation:
B is correct: Bonds issued by a state (e.g., California) for public infrastructure are nonsovereign government debt, as they are issued by a subnational entity.
A is incorrect: This is sovereign debt since it is issued by a national government.
C is incorrect: A private corporation’s bond is corporate debt, not government-related.
Which statement best describes agency bonds?
A. They are always guaranteed by the central government.
B. They are issued by private firms authorized to lend public funds.
C. They are issued by entities created by national governments for specific public policy objectives
Correct Answer: C
Explanation:
C is correct: Agency bonds (or quasi-government bonds) are issued by entities created by national governments for purposes like housing or infrastructure.
A is incorrect: Not all agency bonds are guaranteed by the government (e.g., Fannie Mae is not fully guaranteed).
B is incorrect: These are not private firms; they are government-sponsored entities (GSEs).
Which of the following best describes the repayment source for a general obligation (GO) bond?
A. Project-specific revenues such as toll collections
B. Taxes raised by the issuing local government
C. Income from government-owned enterprises
Correct Answer: B
Explanation:
B is correct: GO bonds are backed by the full faith and taxing power of the issuing municipality or local authority.
A is incorrect: This applies to revenue bonds, not GO bonds.
C is incorrect: While possible, enterprise revenues are not the primary source for GO bonds.
A municipality issues a bond to fund the construction of a toll bridge, and bondholders are repaid through toll collections. This is an example of a:
A. General obligation bond
B. Revenue bond
C. Sovereign bond
Correct Answer: B
Explanation:
B is correct: Revenue bonds are repaid from the revenue generated by the specific project they finance.
A is incorrect: GO bonds are backed by taxes, not specific project revenue.
C is incorrect: Sovereign bonds are issued by national governments.
Agency bonds that are explicitly guaranteed by the national government typically:
A. Have lower credit ratings than the sovereign
B. Are considered risk-free
C. Have yields closely aligned with sovereign bonds
Correct Answer: C
Explanation:
C is correct: If an agency bond is explicitly backed by the sovereign, its yield and credit quality closely resemble that of sovereign bonds.
A is incorrect: Their ratings are often similar to or just slightly below sovereign ratings.
B is incorrect: Only sovereign bonds of highly stable governments (like U.S. Treasuries) are considered “risk-free.”
Which of the following statements is most accurate regarding supranational bonds?
A. They are issued by private companies authorized by multiple governments
B. They are typically high credit quality due to support from multiple sovereigns
C. They are classified as sovereign debt because they serve global economic goals
Correct Answer: B
Explanation:
B is correct: Supranational bonds often enjoy strong credit ratings because of support from multiple member countries.
A is incorrect: Supranational institutions are not private companies.
C is incorrect: Supranational bonds are not sovereign; they are nonsovereign debt issued by global public institutions.
What is the key distinction between general obligation (GO) bonds and revenue bonds?
A. GO bonds are riskier because they depend on user fees
B. Revenue bonds offer lower interest rates than GO bonds
C. GO bonds are backed by taxation powers; revenue bonds by project income
Correct Answer: C
Explanation:
C is correct: GO bonds are backed by the issuer’s taxing authority; revenue bonds rely on income from a specific project.
A is incorrect: Revenue bonds are generally riskier because project revenues can fluctuate.
B is incorrect: Revenue bonds may offer higher yields to compensate for added risk.
A bond issued by the World Bank would most likely be categorized as:
A. Sovereign debt
B. Corporate debt
C. Supranational debt
Correct Answer: C
Explanation:
C is correct: The World Bank is a supranational institution created by multiple countries, and its bonds are supranational debt.
A is incorrect: Sovereign debt is issued by national governments.
B is incorrect: Corporate debt is issued by private sector firms.
Which of the following is most likely true regarding bonds issued by supranational institutions?
A. They typically carry low credit ratings due to international exposure
B. They are often illiquid due to niche investor interest
C. They are considered high-quality and some issues are highly liquid
Correct Answer: C
Explanation:
C is correct: Supranational bonds are often of high credit quality and may trade actively in the market.
A is incorrect: Their credit ratings are usually high due to multilateral backing.
B is incorrect: While not all are highly liquid, many major supranational bonds are.
