Debt Markets: Types, Pricing, and Interest Rate Risk

Question 1

Which of the following is NOT a type of debt security issued by corporations?

Accepted Answer

Stocks

Answer

Bonds

Answer

Debentures

Answer

Notes

Question 2

What is the yield to maturity (YTM) of a corporate bond?

Accepted Answer

The annual return on a bond if held until maturity.

Answer

The interest rate paid on a bond.

Answer

The difference between the bond's price and its par value.

Answer

The total amount of interest paid on a bond over its life.

Question 3

Which of the following is NOT a fixed-income security?

Accepted Answer

Equity

Answer

Bond

Answer

Commercial paper

Answer

Treasury bill

Question 4

What is the primary determinant of a bond's price?

Accepted Answer

Interest rate environment

Answer

Face value

Answer

Maturity date

Answer

Credit rating

Question 5

Which type of bond typically carries the highest risk of default?

Accepted Answer

BB-rated corporate bond

Answer

AAA-rated corporate bond

Answer

Mortgage-backed security

Answer

Government bond

Question 6

What is the primary purpose of issuing debt securities?

Accepted Answer

Raising capital

Answer

Controlling inflation

Answer

Managing exchange rates

Answer

Stabilizing interest rates

Question 7

Which of the following is NOT a market participant in the debt markets?

Accepted Answer

Technology firms

Answer

Pension funds

Answer

Retail investors

Answer

Central banks

Question 8

What is the main role of the Bank of England in the UK debt markets?

Accepted Answer

Regulating the market and acting as lender of last resort

Answer

Issuing all government bonds

Answer

Being the primary dealer in the secondary market

Answer

Guaranteeing all corporate bond issuances

Question 9

How does interest rate risk impact bond prices?

Accepted Answer

Bond prices generally fall when interest rates rise.

Answer

Bond prices generally rise when interest rates rise.

Answer

Interest rate risk only affects long-term bonds.

Answer

Floating-rate bonds are immune to interest rate risk.

Question 10

What is the key difference between a coupon bond and a zero-coupon bond?

Accepted Answer

Coupon bonds pay interest regularly, while zero-coupon bonds pay interest at maturity.

Answer

Zero-coupon bonds pay interest regularly, while coupon bonds pay interest at maturity.

Answer

Coupon bonds are generally more volatile than zero-coupon bonds.

Answer

Both types of bonds are subject to credit risk.

Question 11

Which of the following is not a characteristic of debt securities?

Accepted Answer

Ownership rights to the issuer

Answer

Fixed income payments

Answer

Specified maturity date

Answer

Secured or unsecured status

Question 12

Which of the following is a potential risk associated with changes in interest rates?

Accepted Answer

Price risk

Answer

Market risk

Answer

Inflation risk

Answer

Credit risk

Question 13

What is the primary role of debt markets in the financial system?

Accepted Answer

Provide funding for businesses and governments

Answer

Regulate the supply of money in the economy

Answer

Facilitate financial speculation

Answer

Protect investors from financial losses

Question 14

Which type of bond typically carries the lowest interest rate?

Accepted Answer

Government bonds

Answer

Corporate bonds

Answer

Municipal bonds

Answer

High-yield bonds

Question 15

What impact do rising interest rates have on bond prices?

Accepted Answer

Bond prices fall

Answer

Bond prices rise

Answer

Bond prices remain unchanged

Answer

Bond prices may rise or fall depending on the maturity

Question 16

What is the key difference between a bullet bond and a serial bond?

Accepted Answer

Bullet bonds have a single maturity date, while serial bonds have multiple maturity dates.

Answer

Serial bonds have a single maturity date, while bullet bonds have multiple maturity dates.

Answer

Bullet bonds are secured by collateral, while serial bonds are not.

Answer

Serial bonds are secured by collateral, while bullet bonds are not.

Question 17

What is the main role of a credit rating agency?

Accepted Answer

Evaluate the creditworthiness of bond issuers

Answer

Set interest rates on bonds

Answer

Enforce debt contracts

Answer

Provide financial advice to investors

Question 18

Which debt security type represents borrowing that lacks specific collateral and relies on the issuer's overall financial strength for repayment?

Accepted Answer

Unsecured debenture

Answer

Secured bond

Answer

Mortgage-backed note

Answer

Commercial paper

Question 19

Interest rate risk is primarily caused by changes in:

Accepted Answer

Treasury bill yields

Answer

Stock market fluctuations

Answer

Economic growth rates

Question 20

Which of the following is a primary market for debt securities?

Accepted Answer

Initial issuance of new securities

Answer

Secondary market trading

Answer

Debt retirement

Answer

Conversion into other investments

Question 21

What is the primary difference between coupon and zero-coupon bonds?

Accepted Answer

Coupon bonds pay periodic interest, while zero-coupon bonds do not.

Answer

Maturity dates vary between coupon and zero-coupon bonds.

Answer

Face values are different for coupon and zero-coupon bonds.

Question 22

What is the function of a credit rating agency in debt markets?

Accepted Answer

Assessing the creditworthiness of debt issuers

Answer

Setting industry regulations for debt issuance

Answer

Determining appropriate interest rates for debt issuance

Answer

Providing investment recommendations to bondholders

Question 23

What differentiates a secured bond from an unsecured bond?

Accepted Answer

Secured bonds have collateral backing, while unsecured bonds do not.

Answer

Secured bonds possess higher interest rates.

Answer

Unsecured bonds have longer maturity timelines.

Question 24

What is the primary purpose of a sinking fund?

Accepted Answer

Accumulating funds for debt repayment

Answer

Financing new business ventures

Answer

Providing a financial cushion for unexpected expenses

Answer

Meeting interest payments on outstanding debt

Question 25

What is the distinction between a call option and a put option?

Accepted Answer

A call option grants the right to buy an asset at a set price, while a put option grants the right to sell an asset at a set price.

Answer

Call options are always more expensive than put options.

Question 26

What is the role of a bond trustee?

Accepted Answer

Representing the interests of bondholders

Answer

Providing investment advice

Answer

Setting interest rates

Answer

Issuing debt securities

Question 27

What sets convertible bonds apart from straight bonds?

Accepted Answer

Convertible bonds have the potential to be converted into equity.

Answer

Convertible bonds carry higher interest rates than straight bonds.

Answer

Maturities of convertible bonds are shorter than those of straight bonds.