Question 1

Which of the following ratings indicate that a bond is low quality?
I.Baa
II.BB
III.B
IV.Ba

Accepted Answer

The ratings that indicate a low quality bond are those with a BB rating and lower. The options II, III, and IV all fall within this range, while option I has a Baa rating which is considered a medium-quality bond. Therefore, the correct answer is option E, which includes all the ratings that indicate a low quality bond.

Question 2

Bondi Beachwear Pty Ltd takes out a short-term loan through Witch Bank using a bill of exchange.The face value of the bill is $200 000 and it will mature in 60 days.If the interest rate quoted by the bank is 6.50% per annum what is the amount that Bondi Beachwear will receive (to the nearest dollar)?

Accepted Answer

The answer of Bondi Beachwear Pty Ltd takes out a...

Question 3

An unsecured note is:

Accepted Answer

An unsecured note is debt that is not backed by any collateral, which means it is not secured by any specific asset of the borrower. It is generally payable within the next ten years. Choice A describes secured debt, while choice B describes a specific type of secured debt. Choice D describes a type of loan that is secured by real estate, which is not relevant to the definition of an unsecured note. Choice E describes the documentation of a bond issue, which is also not relevant to the definition of an unsecured note.

Question 4

Aussie Investments Pty Ltd is an investor in the money market and regularly buys and sells bank-accepted bills.Today they are selling a bill that matures in 60 days.Sixty-day bills of a similar risk are priced at an interest rate of 6.00% per annum.What price can Aussie Investments expect to receive if the face value is $250 000?

Accepted Answer

We can use the formula for calculating the price of a bank-accepted bill, which is:
Price = Face Value x (1 - (interest rate x maturity/365))

Plugging in the given values, we get:
Price = $250,000 x [1 - (0.06 x 60/365)]
Price = $247,558

Therefore, the price that Aussie Investments can expect to receive is $247,558, which is closest to option C ($247,548).

Question 5

Zero-coupon bonds:

Accepted Answer

Zero-coupon bonds do not make periodic interest payments; instead, they are sold at a discount to their face value and the investor receives the face value at maturity. This means that there is no annual taxable income for individual bondholders until maturity, at which point they receive the full face value, which is subject to income tax.

Question 6

A $1000 face value bond currently has a yield to maturity of 6.69 per cent.The bond matures in 3 years and pays interest annually.The coupon rate is 7 per cent.What is the current price of this bond?

Accepted Answer

The answer of A $1000 face value bond currently has...

Question 7

An Australian Government 5.5%,$1000 bond matures in 7 years,pays interest semi-annually,and has a yield to maturity of 6.23 per cent.What is the current market price of the bond if a coupon payment has just been made?

Accepted Answer

To find the current market price of the bond, we need to use the present value formula:

PV = C / (1+r/2)^n + C / (1+r/2)^(n-1) + ... + C + F / (1+r/2)^n

Where:
C = semi-annual coupon payment
r = yield to maturity (YTM) / 2 (since the bond pays semi-annually)
n = number of semi-annual periods (in this case, 7 years = 14 semi-annual periods)
F = face value of the bond

Plugging in the given values, we get:

PV = 27.5 / (1+0.03115)^1 + 27.5 / (1+0.03115)^2 + ... + 27.5 + 1000 / (1+0.03115)^14
PV = $959.09 (rounded to two decimal places)

Therefore, the correct answer is D.

Question 8

Which party to a bill is the borrower?

Accepted Answer

The borrower is the one who initiates the bill and draws it, requesting the payee to make a payment. Therefore, the party to the bill who is the borrower is the drawer.

Question 9

A bond has a $1000 face value,a market price of $1036,and pays interest payments of $70 every year.What is the coupon rate?

Accepted Answer

The coupon rate is calculated as the annual interest payment divided by the face value of the bond. Here, $70 / $1000 = 0.07 or 7.00%.

Quiz 6: Interest Rates and Bond Valuation

Which of the following ratings indicate that a bond is low quality? I.Baa II.BB III.B IV.Ba