Deck 13: Personal Investing - Investing in Bonds

Question 1

To completely avoid the risk of default, investors can invest in A-rated corporate bonds.

Answer 1

False

Question 2

An advantage to owning bonds is that investors can sell them to other investors in the primary market before the bonds reach maturity.

Answer 2

False

Question 3

Bonds that have a call feature are less desirable to investors and therefore pay a slightly higher rate than bonds without this feature.

Answer 3

True

Question 4

A convertible bond allows the investor to exchange that bond for another issue of bonds within the convertible period.

Question 5

A call feature on bonds allows the issuer to buy back the bonds from investors before the maturity date.

Question 6

Corporate bonds are usually sold in increments of $100.

Question 7

Bonds are issued with a callable feature when the issuers expect interest rates to rise.

Question 8

CCC bonds offer a relatively high rate of return, but they are more likely to default than other bonds.

Question 9

The interest received from bonds is taxed at the same rate as employment income.

Question 10

When a bond has a par or face value of $1000 and a 6 percent coupon rate, the semi-annual payment would be $60.

Question 11

Bond interest is exempt from income tax if it is held in an RRSP.

Question 12

During their lifetime, bonds can be sold for more or less than their face value depending on the demand for these particular bonds.

Question 13

Bonds are equity investments issued by corporations or government agencies.

Question 14

As interest rates rise, the market price of your bond is also likely to rise.

Question 15

If you want to receive periodic income from your investments, you should consider investing in bonds rather than stocks.

Question 16

The bond par value or face value is the amount the investor will be paid when the bond matures.

Question 17

Generally, bonds have maturities between 1 and 30 years and pay interest annually.

Question 18

A bond's yield to maturity is the annualized percentage return of both interest and capital gains or losses if the bond were held until it matured.

Question 19

Farm Credit Corporation, a Crown agency, will have a lower coupon than a Government of Canada bond.

Question 20

The risk premium of bonds is the amount by which their annualized yield exceeds the Canada bond yields.

Question 21

A passive strategy of bond investing consists of buying bonds for the long term and not selling them until maturity.

Question 22

A bond with a coupon rate of 6.5 percent and trading at $960 will pay annual interest of $62.40.

Question 23

If you expect that interest rates will decline, you may consider investing in bonds with longer maturities than the time you will need the funds.

Question 24

The risk that the income earned from a bond cannot be reinvested at the same or higher rate is called interest rate risk.

Question 25

Bonds with longer maturities are more sensitive to interest rate movements than bonds that have shorter maturities.

Question 26

The risk that the purchasing power of a bond investment will diminish is called inflation risk.

Question 27

The maturity matching strategy of investing in bonds is the surest way to have money available to meet a specific goal.

Question 28

All bonds, except those issued by the Government of Canada are subject to interest rate risk.

Question 29

Prepayment risk is the risk that a bond will be called.

Question 30

The maturity matching strategy involves selecting bonds that will generate payments to match future expenses.

Question 31

In general, the bonds issued by ABC Ltd. will have lower risk and higher return than the bonds issued by the Government of Canada.

Question 32

To value a bond, you have to calculate the present value of all future cash flows from the coupon interests.

Question 33

Canada Mortgage and Housing Corporation bonds will have the same yield as Canada bonds because the federal government guarantees them.

Question 34

Calculating the present value of future coupon payments, along with the present value of the principal payment, is a good way to determine the value of a bond.

Question 35

Interest rate strategy is to select bonds based on the expectations of stock market returns.

Question 36

A real return bond with a 7 percent coupon will increase its interest payment annually to $71.40 if inflation rises by 2 percent.

Question 37

To determine the interest payments on a bond, you multiply the coupon rate by the market value.

Question 38

If you invest in a diversified portfolio of bonds that are held for a long period of time, you use an active strategy.

Question 39

The lower the risk rating, the higher the risk premium offered by a bond.

Question 40

If you expect interest rates to rise over time, you should consider investing in bonds with longer maturities.

Question 41

Which of the following is a feature of a bond?

A)Convertible
B)Dividends
C)Tax-free interest
D)No risk

Question 42

You should consider investing in bonds rather than stocks if you

A)are willing to take more risk.
B)wish to receive interest income from your investment.
C)are willing to tie up your investment for a long period.
D)think interest rates will increase significantly in the near future.

Question 43

Returns from investing in bonds include both capital gains and dividends.

Question 44

Bonds issued by the Government of Canada do not have a risk premium.

Question 45

The benefit of the extendable feature of a bond is that

A)it extends more credit, which means the investor has to put up money for additional bonds.
B)it allows the investor to continue receiving a higher interest rate for a longer period.
C)it provides the issuer with an option to extend the bond during lower interest rate periods.
D)it allows the investor a means of redeeming the bond before maturity.

Question 46

Canada Savings Bonds are fully guaranteed by the Government of British Columbia.

Question 47

The amount returned to the investor at the maturity date when the bond is due is called

A)principal.
B)interest gain.
C)capital gain.
D)terminal value.

Question 48

If an issuer wanted to protect against a drop in interest rates, the issuer of a bond would probably include which feature?

A)Callable
B)A put
C)Extendable
D)Convertible

Question 49

Investors purchase bonds because

A)they are a risk-free investment.
B)they pay interest income.
C)they pay dividends.
D)the returns are higher than with stocks.

Question 50

Which of the following is wrong?

A)The par value of a bond is its face value.
B)The par value of a bond is always its market value.
C)The par value of a bond will be paid to the bondholder at maturity.
D)The par value multiplied by the coupon rate equals the interest paid to investors annually.

Question 51

A bond with a credit rating of Aa is riskier than a bond with a credit rating of A.

Question 52

In Canada, mortgage-backed securities represent a pool of CMHC-issued residential mortgages.

Question 53

If the province of British Columbia issues a long-term debt security that does not offer coupon payments, it may be a strip bond.

Question 54

A put feature on a bond allows the investor to extend the bond before it matures.

Question 55

When the economic conditions are weak, bonds with higher default risk become more susceptible.

Question 56

If interest rates go up, in general, the market price of bonds also goes up.

Question 57

If an investor is expecting a period of higher interest rates, which bond feature would she prefer?

A)Callable
B)A put
C)Convertible
D)Extendible

Question 58

The extendable feature of a bond allows

A)the buyer to increase interest frequency.
B)longer tax benefits to the buyer.
C)the buyer to lengthen the maturity date of the bond.
D)the issuer to lengthen the maturity date of the bond.

Question 59

The interest income you receive from a bond is taxed as ordinary income for federal income tax purposes.

Question 60

Bonds usually pay interest

A)annually.
B)semi-annually.
C)quarterly.
D)monthly.

Question 61

Current bond yield is valued at market rates by

A)annual interest divided by par.
B)annual interest divided by market price.
C)interest to maturity divided by par.
D)interest to maturity divided by market price.

Question 62

Callable bonds are issued when interest rates are expected to

A)stay the same.
B)decline.
C)rise.
D)convert.

Question 63

Which of the following features of a bond could result in the company never paying out cash to redeem the bonds?

A)Extendability
B)Callability
C)Convertibility
D)Annuitization

Question 64

The least risky, lower interest paying bonds are

A)federal government bonds.
B)provincial bonds.
C)Crown corporation bonds.
D)corporate AAA bonds.

Question 65

Bonds issued by the City of Winnipeg are

A)Treasury bonds.
B)municipal bonds.
C)BAs.
D)corporate bonds.

Question 66

If a bond's market price was lower than the principal amount, its yield to maturity would be

A)lower than the coupon rate.
B)higher than the coupon rate.
C)a shorter maturity.
D)longer than the maturity date.

Question 67

Investing in bonds gives you the possibility of

A)having a capital gain.
B)recouping your investment if the company goes bankrupt.
C)receiving dividends.
D)deferring taxes on accrued interest.

Question 68

If a company's stock price is expected to increase substantially over the next few years, which of the following may entice potential bondholders to accept a lower coupon rate?

A)Extendability
B)Call feature
C)Convertibility
D)Reserve feature

Question 69

Bonds that may be exchanged for common stock at the option of the bondholders are called

A)option bonds.
B)convertible bonds.
C)callable bonds.
D)stock bonds.

Question 70

Investors are willing to purchase bonds with a call feature only if the bonds offer a

A)slightly lower return than similar bonds without a call feature.
B)slightly higher number of shares of the issuer's stock.
C)slightly higher interest rate than similar bonds without a call feature.
D)sinking fund provision.

Question 71

One difference between a regular bond and a convertible bond is that a regular bond has

A)a higher interest rate.
B)a lower interest rate.
C)a shorter maturity.
D)an indexed coupon rate.

Question 72

Business Development Bank of Canada bonds are an example of bonds issued by

A)a corporation.
B)the Treasury.
C)a municipality.
D)a Crown corporation.

Question 73

The contractual rate of interest on a bond is always stated as a(n)

A)daily rate.
B)monthly rate.
C)semi-annual rate.
D)annual rate.

Question 74

The total return on a bond with a coupon rate of 6 percent will be most favourable if interest rates

A)increase to 8 percent.
B)decrease to 4 percent.
C)increase to 7 percent.
D)decrease to 5 percent.

Question 75

On the secondary bond market,

A)only new bonds can be sold.
B)bonds are guaranteed to bring at least par value.
C)bond prices vary with interest rate movement.
D)bonds usually take several days to sell.

Question 76

A corporate bond trading at below par will have

A)a higher yield to maturity than the coupon rate.
B)a lower yield to maturity than the coupon rate.
C)a current yield lower than the equivalent government maturity.
D)the same yield it had when it was issued.

Question 77

A feature on a bond that allows the issuer to buy back the bond from the investor before maturity is called

A)convertible.
B)dividend.
C)callable.
D)recall.

Question 78

If a company anticipates a substantive decline in interest rates in the future, which feature is it likely to be included in its bond offering?

A)Extendable
B)Callable
C)Convertibility
D)Reverse dividend

Question 79

What is a disadvantage of issuing bonds compared to shares?

A)The dividends must be paid indefinitely.
B)Bond interest expense is not tax deductible.
C)Interest must be paid on a periodic basis regardless of earnings.
D)Bondholders may require early repayment.

Question 80

Convertible bonds are suitable for investors who

A)want to maximize interest returns in periods when interest rates are low.
B)want to convert the bond into a longer term at the same rate of interest.
C)want the possibility of benefiting from a rise in the issuer's share price.
D)have a lower risk tolerance and are seeking income.