Deck 8: The Bond Market

Question 1

Most bonds pay a series of coupon payments and are redeemed on their maturity date by the payment of their face value.

Answer 1

True

Question 2

Non-government bonds only make up a small proportion of the total amount of bonds issued in the Australian market.

Answer 2

False

Question 3

Australia's principal bond market is the wholesale, OTC, primary market for Commonwealth government, state governments and non-government issuers.

Answer 3

False

Question 4

A convertible bond is a medium term security where the coupon rate is based on the reference rate at the start of each coupon period.

Question 5

Treasury bonds are long-term securities issued by state governments or their borrowing authorities.

Question 6

The turnover in Treasury bonds dominates the secondary bond market.

Question 7

Bonds are traded over-the-counter by dealers who provide bid-offer prices.

Question 8

Credit spreads change over time, reflecting changes in investors' attitudes to risk.

Question 9

The bonds issued by a particular borrower are referred to as a bond series.

Question 10

Treasury bonds are issued through a competitive tender process where dealers submit bids as interest rates and bonds are allocated to the highest bidders.

Question 11

A bond trade is settled after three business days.

Question 12

Treasury bonds tenders can be for extra bonds of an existing bond series or they can be the first bonds issued in a new series.

Question 13

Credit spreads are measured by the difference between the market yields for risky bonds less the yield on Treasury bonds with the same term.

Question 14

A Treasury bond's coupon rate is based on the market yield at the time it is first issued.

Question 15

Bonds are a high-risk, high-return asset class compared with shares.

Question 16

The amount of Treasury and semi-government bonds outstanding has increased in recent years because of the impact of the GFC.

Question 17

Investors in the bond market face the issuer's credit risk and the securities' market risk.

Question 18

Australia has a large low-grade (or speculative-grade)bond market.

Question 19

Australia's bond market is conducted by the ASX.

Question 20

Trading in Treasury bonds reveals the interest rate that applies on long-term loans.

Question 21

Prior to the mid-1990s, the issue of non-government bonds was very low in Australia.

Question 22

A discount bond represents a better value investment than a premium bond.

Question 23

'Credit wrapping' is a credit enhancement practice that allows lower-rated borrowers to issue bonds at a lower yield.

Question 24

The secondary market for semis is not as liquid as the market for Treasury bonds.

Question 25

The cost of credit ratings is borne by investors who want access to the ratings information.

Question 26

'Kangaroo bonds' are issues by Australian borrowers in offshore bond markets.

Question 27

Long-term bonds have greater potential for capital gains than short-term bonds.

Question 28

Bonds issued by non-financial companies only make-up a small proportion of the market because each borrower just issues a small amount of bonds.

Question 29

The market for fixed-interest TCorp bonds would be just as effective as the Treasury bond market in performing the price discovery function for long-term interest rates.

Question 30

The coupon component of a bond can be valued as a perpetuity.

Question 31

The major banks mostly issue long-term fixed-rate bonds in the bond market.

Question 32

Fixed-rate Treasury bonds pay coupons six-monthly on the first day of the coupon month.

Question 33

MBSs issued by Australian institutions proved to be reliable unlike MBSs issued by US institutions.

Question 34

If bond yields rise above the coupon rate, the bond will trade at a discount to its face value.

Question 35

Mortgage-backed securities are mainly 25-year fixed-rate bonds.

Question 36

Bonds issued by state governments are referred to as semi-government bonds.

Question 37

Bonds are rated when issued and this rating is kept under review (and may be modified)up until when the bonds are redeemed.

Question 38

The 4.5 per cent 15 April 2020 Treasury bond will pay coupons of $2.25 (per $100 of face value)on 15 April and 15 October each year up to and including maturity.

Question 39

The ex-interest period is one week before the coupon payment date.

Question 40

Bond portfolio managers typically reinvest the coupons received in money market securities.

Question 41

A bond that is secured and issued to retail investors is a:

A)Treasury bond
B)semi-government bond
C)convertible bond
D)debenture
E)floating-rate note.

Question 42

Which of the following is NOT one of the major categories of issuer within the bond market?

A)Commonwealth Treasury
B)State government
C)Local government
D)Non-government issuers
E)None of these.

Question 43

In the Fisher equation, risk premiums are embedded in the expected inflation rate.

Question 44

An investment strategy to buy bonds which are then held until their maturity poses price risk.

Question 45

All managers of bond portfolios will buy and sell with the aim of achieving higher returns than the market.

Question 46

Bond prices fall a week before coupon payments.

Question 47

At least to some extent, the effects of price risk and reinvestment risk on bonds offset one another (for investors who plan to sell before maturity).

Question 48

The degree of price risk faced by bond investors increases in proportion to the period for which they hold the bonds.

Question 49

An upward movement in the 10-year bond yield from say, 6 to 7 per cent could indicate an increase in inflation expectations over the long term.

Question 50

The correlation between bond yields and the expected inflation rate is known as the Fisher effect.

Question 51

Given a two-year investment in 10-year bonds, the selling price is calculated for an eight-year bond and the investment yield is calculated over two years.

Question 52

If movements in yields cause bond prices to change, it follows that bond prices will not change provided yields remain the same.

Question 53

Of the following, which is NOT a standard bond feature?

A)Floating-interest rate coupons.
B)Half-yearly coupons.
C)Redeemed by the payment of face value.
D)Face value payable at the maturity date.
E)All of these are standard bond features.

Question 54

The main factor that influences demand for bonds is the cash rate.

Question 55

The majority of trades in Treasury bonds are on a cum-interest basis.

Question 56

Bond investors face reinvestment risk because they are assumed to reinvest the coupons they are paid.

Question 57

Bond yields equal the real interest rate plus the current inflation rate.

Question 58

Say an active bond manager believed that bond market yields were going to fall in the near future.In order to achieve higher returns the manager would sell short-term bonds and buy long-term bonds now.

Question 59

In terms of the amount of bonds outstanding, which is the largest bond category by issuer?

A)Treasury bonds
B)Semi-government bonds
C)Foreign issuer bonds
D)Non-government bonds
E)Local-government bonds

Question 60

An investor in bonds who intends to sell them before they mature is exposed to price risk.

Question 61

The GFC has greatly reduced the amount of MBSs issued in the Australian bond market because:

A)it became apparent that Australian MBSs did not deserve their high rating
B)of high levels of non-performing loans
C)of the weakness of the Australian economy
D)these securities funded non-performing loans in the US
E)of the loss of investor interest in MBSs resulting from the losses incurred on US MBSs.

Question 62

Credit wrapping is generally used by:

A)corporate borrowers with speculative-grade credit ratings
B)financial institutions
C)issuers of mortgage backed securities
D)non-resident issuers
E)corporate borrowers with investment-grade credit ratings.

Question 63

According to Standard & Poor's rating definitions, speculative grade securities are rated:

A)below AAA
B)below AA
C)BBB and above
D)BB and belowD.

Question 64

Wide credit spreads:

A)represent a low price for risk
B)show that investors are concerned about the risks posed by bonds
C)occur when investors are very confident in the ability of borrowers to repay debt
D)tend to narrow during times of crisis, like the GFC
E)increase the profitability of trading for bond dealers.

Question 65

The ratings provided by ratings agencies are NOT:

A)a trading recommendation
B)useful to investors in bond securities
C)reflected in the market yield for securities
D)based on a qualitative and quantitative analysis of the issuer
E)reviewed after the securities are first issued.

Question 66

A Treasury bond trade requires the buyer and seller agree on:

A)the bond series, the quantity and the yield
B)the bond series, the quantity and the price
C)the quantity, the clearinghouse and the yield
D)the quantity, the clearinghouse and the price
E)the bond series, the coupon rate and the yield.

Question 67

The major banks raise funds from the Australian bond market mainly through the issue of:

A)mortgage-backed securities
B)fixed-rate bonds
C)floating-rate medium term notes
D)debentures
E)convertible bonds.

Question 68

Treasury bonds:

A)trade 'ex-interest' between the 9th and 15th of each month
B)are priced using a semi-annual compound rate
C)pay interest once or twice a year
D)are mostly traded on an 'ex-interest' basis.
E)All of these.

Question 69

In the wholesale bond market, trading is settled on what basis?

A)T + 0
B)T + 1
C)T + 2
D)T + 3
E)T + 4

Question 70

Treasury bond investors are exposed to:

A)credit risk
B)price risk
C)reinvestment risk
D)price risk and reinvestment risk
E)credit risk, price risk and reinvestment risk.

Question 71

Treasury bonds:

A)have a number of series
B)have a range of terms (i.e.maturities)
C)are (approximately)par bonds when a new bond series is first issued
D)have a range of coupon rates
E)All of these.

Question 72

Non-government bond issuer categories do NOT include:

A)financials
B)non-residents
C)infrastructure funds
D)asset-backed securities
E)non-financial corporates.

Question 73

Which of the following is NOT a role of the bond market?

A)Being a source of long-term capital for wholesale borrowers.
B)Providing wholesale investors with access to a long-term, defensive investment.
C)Performing the price discovery process for long-term interest rates.
D)Providing a mechanism for the RBA to implement its monetary policy.
E)All of these are bond market functions.

Question 74

The price discovery role of the Treasury bond market:

A)reveals default-free rates for terms up to 15 years
B)reveals the three-year and 10-year benchmark rates
C)is enhanced by a liquid market
D)allows the credit spread at which riskier bonds trade to be calculated.
E)All of these.

Question 75

Semi-government bonds:

A)are always floating rate bonds
B)are more liquid than Treasury bonds
C)trade at higher yields than Treasury bonds
D)are issued by the AOFM on behalf of the issuer
E)are listed on the ASX.

Question 76

Calculate the price (per $100 of face value to 6 dps)of the 4.5 per cent 15 April 2020 Treasury bond when purchased on 15 April 2015 at 5 per cent.

A)$97.811984
B)$97.835262
C)$100
D)$102.216554
E)None of these.

Question 77

The advantages of central borrowing authorities established by state governments do NOT include which of the following?

A)A better credit rating than some state agencies would achieve in their own name.
B)The ability to source funds from retail investors.
C)Preventing state agencies from competing with each other for funds.
D)Larger issues which makes securities more liquid.
E)All of these are advantages.

Question 78

Which of the following are NOT major investors in the Australian bond market?

A)Non-Australian residents
B)Foreign central banks
C)Banks
D)Fund managers
E)Retail investors

Question 79

Dealers in the bond market:

A)trade in both wholesale and retail amounts
B)can bid for Treasury bonds in a competitive tender
C)must trade in accordance with the rules of the exchange
D)trade in 'same day' funds
E)earn a commission when a trade is completed.

Question 80

Say you are a dealer who needs to sell some of your long-term bonds.You receive a bid-offer quote of 6.25-6.22% from dealer X and of 6.24-6.21% from dealer Y.What quote is the most attractive?

A)6.25%
B)6.22%
C)6.24%
D)6.21%
E)Dealers don't sell to other dealers.