Deck 2: Debt Securities and Markets

Question 1

In Standard & Poor's credit ratings system, a rating of CCC indicates:

A) default is likely.
B) default risk has dropped to zero.
C) no rating has been formally decided.
D) default is unlikely.

Answer 1

A

Question 2

The term 'stripping a bond' refers to the practice of:

A) converting a bond into foreign currency to reduce the impact of the $A on bond returns.
B) transacting in Commonwealth Government bonds where neither party is the government.
C) failing to declare interest returns on a bond in order to evade tax.
D) quarantining the coupon stream of a bond and trading it separately.

Answer 2

D

Question 3

Because of their regular cash flow, coupon bonds are attractive to:

A) young investors.
B) the Reserve Bank.
C) private companies.
D) retirees.

Answer 3

D

Question 4

Which of the following is NOT a debt security?

A) Government bond.
B) Commercial bill.
C) Unlisted share.
D) Corporate debenture.

Question 5

The market that plays the most crucial role in Reserve Bank liquidity management is the:

A) credit market.
B) bill market.
C) bond market.
D) cash market.

Question 6

A security embodied in a certificate that gives ownership to the holder is known as a(n) security.

A) inscribed
B) bearer
C) government
D) listed

Question 7

Market makers play a key role in maintaining:

A) monetary policy.
B) default risk.
C) speculation.
D) liquidity.

Question 8

As at 2009, the total amount of CGS on issue in Australia was around:

A) $22 billion.
B) $34 billion.
C) $101 billion.
D) $96 billion.

Question 9

The turnover of Treasury notes from 2005 to 2008:

A) has dropped to zero.
B) has been rising.
C) has been declining.
D) has remained steady.

Question 10

Which of the following is an example of a fixed- interest security?

A) Foreign exchange.
B) Treasury bond.
C) Commercial bill.
D) Listed shares.

Question 11

A characteristic of fixed- interest securities is:

A) you cannot exit the market.
B) they are more risky than shares.
C) they are usually of short- term maturity.
D) they are issued by both governments and corporations.

Question 12

'Junk' bonds are also known as:

A) high- yield bonds.
B) high- grade bonds.
C) consol bonds.
D) US bonds.

Question 13

Which of the following best describes a debt security?

A) Collateral demanded by a bank when approving a customer loan.
B) An instrument that promises to make certain payments on specified future dates.
C) Any dividend- yielding instrument.
D) An instrument that gives the holder ownership rights.

Question 14

A 'repo' is a transaction where:

A) a bearer security is changed to an inscribed security.
B) the RBA issues debt securities on behalf of State governments.
C) a hybrid security is created involving both a debt and equity instrument.
D) a security is bought or sold under an agreement that the transaction will be reversed a short time later.

Question 15

The term 'inscribed stock' is used in relation to:

A) certificates of deposit.
B) government bonds.
C) promissory notes.
D) bank- accepted bills.

Question 16

A university student holds a $10 note. This is an example of a:

A) inscribed security.
B) bearer security.
C) Treasury note.
D) securitised asset.

Question 17

The cash market represents one segment of the market.

A) credit
B) equity securities
C) debt securities
D) derivatives

Question 18

Which of the following is NOT a credit rating agency?

A) Drexel Burnham Lambert.
B) Fitch Ratings.
C) Standard & Poor's.
D) Moody's.

Question 19

Interest rate instruments that combine features of both debt and equity are known as securities.

A) floating rate
B) convertible
C) perpetual
D) hybrid

Question 20

The main purpose of Treasury bonds is to:

A) make a trading profit for the Reserve Bank.
B) stabilise the currency.
C) finance the Commonwealth budget deficit.
D) inject funds into the banking system.

Question 21

A Treasury indexed bond is one in which the capital repayment is linked with inflation.

Question 22

In the process of 'securitisation':

A) a parcel of small- denomination assets is sold by issuing a large- denomination certificate backed by those assets.
B) the cash shortfall caused by Commonwealth budget deficit is funded by the issue of debt securities.
C) a borrower fully repays a debt security.
D) a company that has never issued shares before becomes listed on the stock exchange.

Question 23

Deregulation has had the unfortunate side effect of narrowing the range of debt securities available in Australia.

Question 24

The default risk of a security is typically measured by a credit rating.

Question 25

Which of the following statements is NOT true?

A) Treasury notes are fixed- interest securities.
B) Treasury notes are traditionally issued in 5, 13 and 26- week maturities.
C) Treasury notes are used by the RBA in its liquidity operations.
D) Treasury notes are issued by weekly tender.

Question 26

Tenders for Commonwealth Government securities are submitted via:

A) RITS.
B) BIS.
C) Austraclear.
D) AFMA.

Question 27

Settlement of money market transactions occurs through which of the following clearing systems?

A) AFMA.
B) Austraclear.
C) SWIFT.
D) RITS.

Question 28

An opinion on the creditworthiness of a particular financial obligation is called:

A) issue credit rating.
B) issuer credit rating.
C) credit receivable.
D) credit rating agency.

Question 29

Commonwealth Government securities are regarded by the market as free of default risk.

Question 30

Which factor does NOT help explain the recent expansion of the corporate bond market in Australia?

A) The desire by fund managers to diversify their portfolio.
B) Strong institutional demand for fixed- interest securities.
C) Declining supply of government securities.
D) Excess reserves held by the banking system.

Question 31

Which of the following statements is INCORRECT?

A) Repurchase agreements are mainly to protect against inflation.
B) Repurchase agreements can be based on any type of debt security.
C) Repurchase agreements are used often by the RBA.
D) Repurchase agreements provide a short- term investment for excess cash holdings.

Question 32

In the US the term 'bills' is used to describe securities issued by the federal government.

Question 33

Securitisation can be based on:

A) mortgages.
B) credit card receivables.
C) student loans.
D) all of the above.

Question 34

An investor who wishes to be protected against unexpected high inflation could invest in:

A) inscribed stock.
B) a zero- coupon bond.
C) an indexed bond.
D) none of the above.

Question 35

A repurchase agreement involves two transactions which are agreed on simultaneously by two parties.

Question 36

A security embodied in a certificate that confers ownership is known as a(n):

A) leasing security.
B) accepted bill.
C) indexed bond.
D) bearer security.

Question 37

A promissory note is a promise to pay that is issued by a bank.

Question 38

A long- term bond with a non- government issuer may also be known as:

A) a commercial bill.
B) a company debenture.
C) an annuity.
D) a certificate of deposit.

Question 39

No more than 10% of the total face value of a bond tender is reserved for non- competitive bidders.

Question 40

A security that pays a single cash flow at maturity is called a(n):

A) inscribed bond.
B) annuity.
C) zero- coupon bond.
D) Australian Government bond.

Question 41

Around 50% of all repurchase agreements in Australia are based on Commonwealth Government securities.

Question 42

Repos provide a cheaper cost of financing.

Question 43

'At- call' funds on the short- term money market are repayable at the end of each calendar month.

Question 44

The role of the Australian Financial Markets Association (AFMA) is to maintain the Stock Register for recording the ownership of inscribed stock bonds.

Question 45

A commercial bill is a bill of exchange issued by the drawer which instructs the acceptor to pay the payee a certain sum of money on maturity of the bill.

Question 46

A 'long- term' debt security is defined as a security having a maturity of 10 years or over.

Question 47

The higher the capital value risk, the more attractive a security is.

Question 48

An example of an instrument in the cash market is bank bills.

Question 49

The relatively low turnover of mortgage- backed securities in Australia reflects the fact these securities are held by long- term investors rather than short- term traders.

Question 50

Short- term securities pay regular coupons.

Question 51

In Australia, zero- coupon bonds can be used as tax- avoidance devices, with holders seeking to defer payment of tax until the cash flow actually occurs at maturity.

Question 52

A disadvantage of bearer securities is that holders are exposed to physical loss of title through misadventure.

Question 53

Securitisation refers to the issue of certificates backed by an aggregate of income- generating assets.

Question 54

The Reserve Bank holds around 28% of outstanding Commonwealth Government securities.

Question 55

One benefit from securitising mortgages is funding base diversification.

Question 56

Weekly Treasury note tenders are held by the RBA every Tuesday.

Question 57

An adverse side effect from securitisation is that the home loan market is made less efficient.

Question 58

Short- term debt securities are sold on a discount basis.

Question 59

Commercial bills typically have terms of two or three years.

Question 60

Most government securities are of the fixed- interest form.

Question 61

Almost all mortgage- backed securities are fixed- rate securities.

Question 62

Coupon bonds are attractive to retirees because such investors are insulated from inflation.

Question 63

Critically evaluate the role of credit rating agencies.

Question 64

Why securitise?

Question 65

The range of securities available in the debt securities markets has increased dramatically.

Question 66

Commonwealth Government bonds are commonly purchased by households and small business.

Question 67

Identify and explain three desirable features of securities markets.

Question 68

Distinguish between bills, certificates of deposit and promissory notes.

Question 69

What are 'repos'?

Question 70

The system used to clear money market transactions is called RITS.