Question 1

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

Accepted Answer

False

Question 2

Bond interest is exempt from income tax (in the current year)if it is held in an RRSP,a TFSA or an RESP.

Accepted Answer

Bond interest held in an RRSP, TFSA or an RESP is exempt from income tax.

Question 3

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.

Accepted Answer

This is correct, the yield to maturity takes into account both the interest earned and any changes in the bond's market price, resulting in either capital gains or losses, over the time period until the bond reaches maturity.

Question 4

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

Accepted Answer

The maturity matching strategy involves investing in bonds that will mature around the same time that the funds will be needed to meet a specific goal. This reduces the risk of interest rate fluctuations and ensures that the funds will be available when needed. Therefore, it is a reliable way to have money available to meet a specific goal.

Question 5

A government of Canada strip bond maturing in 22 years has lower interest rate risk than a real return bond maturing in 10 years.

Accepted Answer

Interest rate risk is generally higher for bonds with longer maturities. A strip bond maturing in 22 years would have a higher interest rate risk compared to a real return bond maturing in 10 years, regardless of the inflation protection offered by the real return bond.

Question 6

Real return bonds have their par value and coupon payments adjusted by the consumer price index.

Accepted Answer

This is true, as the purpose of real return bonds is to provide investors with a return that is adjusted for inflation. By indexing the bond's par value and coupon payments to the consumer price index, the purchasing power of the bond's payments is preserved over time.

Question 7

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

Accepted Answer

This statement accurately describes a passive strategy of bond investing. By holding onto bonds until maturity, investors receive the full principal and interest payments, and avoid fluctuations in market prices that can occur when buying and selling bonds.

Question 8

If you purchased a bond with face value $10 000 and coupon of 6 percent,then sold it for $10600 a half year later,you would have to pay tax on the capital gain as well as tax on the coupon payment of $300.

Accepted Answer

The capital gain from selling the bond for $10600 instead of its face value of $10000 would be $600. This gain would be taxable. Additionally, the coupon payment of $300 would also be taxable as income. Therefore, both the capital gain and the coupon payment would be subject to taxation.

Question 9

T-Bills and BAs are both very secure short-term debt securities which pay the same interest rate.

Accepted Answer

T-Bills (Treasury Bills) are issued by the government and are considered very secure, but Bankers' Acceptances (BAs) are issued by commercial entities with the backing of a bank. Their interest rates can differ due to the differing credit risks and market conditions.

Question 10

A bond with a call feature would pay a slightly higher interest rate than the same bond without this feature.

Accepted Answer

A bond with a call feature gives the issuer the right to recall the bond before its maturity date, which presents some risk to the investor. To compensate for this risk, the bond with a call feature offers a slightly higher interest rate than the same bond without this feature.

Question 11

If you paid $9600 for a bond with par value of $10 000 and a 5 percent coupon rate,the semi-annual payment would be $250.

Accepted Answer

The coupon rate of 5% on a par value of $10 000 means that the annual coupon payment would be $500 (5% x $10 000). Since it is a semi-annual payment, each payment would be half of that, which is $250. Therefore, if you paid $9600 for the bond, you would receive semi-annual payments of $250, which is lower than the annual coupon payment of $500.

Question 12

If you purchased a bond on August 1,2014 on the secondary market with face value $10000 and received $200 interest on January 1,2015,you would owe tax on the interest earned on your 2014 tax return.

Accepted Answer

The bond was purchased on the secondary market, so the interest earned up to the purchase date is not taxable to the new owner. The interest earned from the purchase date to the end of the year is taxable.

Question 13

If a new issue corporate bond offers a coupon rate of 6.2 percent and Government of Canada bonds with the same term and features are paying a 3.8 percent coupon,then the risk premium for the corporate bond is 2.4 percent.

Accepted Answer

The risk premium is calculated by subtracting the risk-free rate (in this case, the Government of Canada bond coupon rate) from the corporate bond coupon rate. Therefore, 6.2% - 3.8% = 2.4%, indicating a risk premium of 2.4%.

Question 14

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

Accepted Answer

Bonds are issued with a call feature when the issuers expect interest rates to fall. This allows them to refinance the debt at a lower interest rate in the future, saving the issuer money on interest payments.

Question 15

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

Accepted Answer

The bond par value or face value is the amount that an investor will receive when the bond matures.

Question 16

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

Accepted Answer

A convertible bond allows the investor to convert the bond into a predetermined number of shares of the issuing company's stock, not to exchange it for another issue of bonds.

Question 17

Canada Savings Bonds and T-Bills are both secure short-term debt securities which can be purchased on the secondary market.

Accepted Answer

Canada Savings Bonds are not traded on the secondary market; they are non-marketable securities, meaning they cannot be sold or transferred after purchase. T-Bills, on the other hand, can be bought and sold on the secondary market.

Question 18

If you expect that interest rates will decline,it would make sense to switch from a $10000 par value bond with a 4 percent semi-annual coupon maturing in three years to a bond with the same features,except maturing in 12 years.

Accepted Answer

If interest rates are expected to decline, the price of existing bonds will increase, resulting in a capital gain. By switching to a bond with a longer maturity, the investor can lock in a higher yield for a longer period of time, potentially resulting in higher returns. Therefore, it would make sense to switch to a bond with the same features, except maturing in 12 years.

Question 19

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

Accepted Answer

A real return bond is designed to adjust its coupon payments based on changes in inflation, so if inflation increases by 2 percent, the coupon payment will increase by the same percentage, which would result in an interest payment of $71.40 (7% x 1.02 = 7.14%).

Question 20

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

Accepted Answer

A bond with a coupon rate of 6.5 percent will pay annual interest based on its face value, not its trading price. If the face value is not given, it's typically assumed to be $1,000 for these types of problems, making the annual interest $65 (6.5% of $1,000).

Quiz 4: Personal Investing - Investing in Bonds