Debt Instruments: Bonds, Debentures, and More - Financial Economics

Question 1

Identify the primary characteristic of a bond:

Accepted Answer

Regular interest payments

Answer

Ownership of the issuing company

Answer

Short-term maturity

Answer

Lack of security

Question 2

What is the primary purpose of a sinking fund?

Accepted Answer

Repaying the principal amount of a bond issue

Answer

Paying interest payments on a bond issue

Answer

Providing additional security for bondholders

Answer

Investing in new projects

Question 3

Explain the difference between a callable and a non-callable bond:

Accepted Answer

A callable bond can be redeemed by the issuer before maturity, while a non-callable bond cannot

Answer

A non-callable bond can be redeemed by the issuer before maturity, while a callable bond cannot

Answer

There is no distinction between a callable and a non-callable bond

Answer

Callable bonds offer higher interest rates than non-callable bonds

Question 4

Identify an advantage associated with investing in corporate bonds:

Accepted Answer

Potentially higher returns compared to government bonds

Answer

Lower risk compared to investing in stocks

Answer

Tax-free income

Answer

Guaranteed return of principal

Question 5

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

Accepted Answer

Assessing the creditworthiness of bond issuers

Answer

Determining interest rates on bonds

Answer

Providing financial advice to investors

Answer

Regulating the issuance of bonds

Question 6

What is the primary reason for a company to issue debt instruments?

Accepted Answer

Raising capital for investment

Answer

Reducing the cost of equity financing

Answer

Improving the company's credit rating

Answer

Increasing shareholder dividends

Question 7

Which of the following is a characteristic of bonds?

Accepted Answer

Generally less risky than stocks

Answer

Maturity period of one year or less

Answer

Unaffected by interest rate changes

Answer

Issued exclusively by governments

Question 8

Which of these is NOT a type of debt instrument?

Accepted Answer

Stock

Answer

Bond

Answer

Debenture

Answer

Loan

Question 9

Which of the following is a defining characteristic of a bond?

Accepted Answer

Regular, fixed-income payments

Answer

Ownership equity

Answer

Voting rights

Answer

Unlimited liability

Question 10

What is the main distinction between a debenture and a secured loan?

Accepted Answer

Secured loans are backed by collateral.

Answer

Debentures offer higher returns.

Answer

Debentures have longer repayment periods.

Answer

Secured loans are only available to large enterprises.

Question 11

What is the core role of a bond rating agency?

Accepted Answer

Evaluating the creditworthiness of bond issuers

Answer

Determining bond interest rates

Answer

Regulating the bond market

Question 12

How does bond maturity impact its market price?

Accepted Answer

Generally, bonds with longer maturities tend to have higher prices.

Answer

Shorter maturity bonds consistently yield higher prices.

Answer

Maturity does not affect bond prices.

Question 13

What is the primary benefit of investing in bonds?

Accepted Answer

Regular income payments

Answer

Currency diversification

Answer

High growth potential

Answer

Tax incentives

Question 14

Which of the following is NOT a characteristic of a debenture?

Accepted Answer

Secured by a specific asset

Answer

Long-term debt

Answer

Issued by companies and governments

Answer

Pays fixed interest

Question 15

What is the primary purpose of a sinking fund in relation to debt instruments?

Accepted Answer

Repay the principal amount at maturity

Answer

Reduce the risk of fluctuations in interest rates

Answer

Increase the interest rate

Answer

Protect investors from default

Question 16

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

Accepted Answer

Coupon bond pays periodic interest payments, while a zero-coupon bond does not

Answer

Zero-coupon bond is issued at a premium

Answer

Coupon bond has a higher yield-to-maturity

Question 17

What is the primary role of a credit rating agency in the debt market?

Accepted Answer

Assess the creditworthiness of debt issuers

Answer

Provide investment advice to investors

Answer

Set interest rates for debt instruments

Answer

Regulate the issuance of debt instruments

Question 18

Which of the following is an example of a floating-rate debt instrument?

Accepted Answer

LIBOR-linked loan

Answer

Fixed-rate bond

Answer

Convertible bond

Answer

Asset-backed security

Question 19

What does the term 'yield to maturity' represent?

Accepted Answer

The annualized rate of return from a bond held until maturity

Answer

The interest rate paid on a bond

Answer

The initial price of a bond

Question 20

Which of the following is a potential advantage for a company issuing debt instruments?

Accepted Answer

Raise capital without diluting ownership

Answer

Reduce operating costs

Answer

Avoid paying taxes

Answer

Guarantee profits for shareholders

Question 21

What is the defining characteristic that distinguishes a callable bond from a putable bond?

Accepted Answer

Callable bond can be redeemed by the issuer, while a putable bond can be redeemed by the holder

Answer

Callable bond has a higher interest rate

Answer

Putable bond has a shorter maturity

Question 22

Which of the following is an example of a secured debt instrument?

Accepted Answer

Mortgage-backed security

Answer

Corporate bond

Answer

Treasury bill

Answer

Equity share

Question 23

Which of the following attributes does NOT belong to a bond?

Accepted Answer

Represents equity ownership

Answer

Provides fixed interest payments

Answer

Ranks senior to equity

Answer

Bears a maturity date

Question 24

What is the primary function of a sinking fund in the context of bond issuance?

Accepted Answer

Provides a systematic method of repaying a bond issue prior to its maturity date.

Answer

Covers unanticipated expenses related to bond issuance

Answer

Serves as a reserve for surplus cash investment

Answer

Enhances bondholder security by providing additional collateral

Question 25

Which of the following options correctly classifies a type of debenture?

Accepted Answer

Secured debenture

Answer

Treasury bill

Answer

Mortgage bond

Answer

Commercial paper

Question 26

How do coupon bonds differ from zero-coupon bonds in terms of interest payments?

Accepted Answer

Coupon bonds pay regular interest payments, whereas zero-coupon bonds do not make periodic interest payments.

Answer

Zero-coupon bonds exhibit higher price volatility compared to coupon bonds.

Answer

Coupon bonds have a higher face value in comparison to zero-coupon bonds.

Question 27

Which factors are considered when determining the yield of a bond?

Accepted Answer

Risk profile, maturity duration, and prevailing market conditions

Answer

Only determined by the face value and coupon rate

Answer

Exclusively dependent on the issuer's credit rating

Answer

Solely influenced by the tax status of investors

Question 28

What is the primary role of a bond rating agency?

Accepted Answer

Evaluates the creditworthiness of entities issuing bonds.

Answer

Regulates and monitors the activities of the bond market

Answer

Establishes the face value of bonds to be issued

Answer

Provides investment advice and guidance to bondholders

Question 29

What is the key difference between a convertible bond and a callable bond?

Accepted Answer

Convertible bonds can be converted into equity, while callable bonds can be redeemed by the issuer.

Answer

Convertible bonds generally carry higher interest rates compared to callable bonds.

Answer

Callable bonds typically have shorter maturity periods than convertible bonds.

Question 30

What is the purpose of issuing a prospectus in relation to a new bond offering?

Accepted Answer

Provides potential investors with comprehensive information about the bond offering, including its terms and risks.

Answer

Serves as a means to obtain regulatory approval for the bond issuance.

Answer

Determines the price at which the bond will be sold.

Question 31

How do changes in interest rates typically affect the market price of existing bonds?

Accepted Answer

Bond prices tend to move inversely to changes in interest rates.

Answer

Bond prices are not significantly impacted by changes in interest rates.

Answer

Bond prices generally move in the same direction as changes in interest rates.

Question 32

Which of the following is NOT a typical characteristic of a bond?

Accepted Answer

Represents ownership in the issuing company

Answer

Pays regular interest payments

Answer

Can be secured or unsecured

Answer

Has a fixed maturity date

Question 33

What is the primary distinction between a debenture and a secured loan?

Accepted Answer

Debentures are unsecured, while secured loans are backed by collateral.

Answer

Debentures are issued by banks, while secured loans are issued by companies.

Answer

Debentures have a higher interest rate than secured loans.

Question 34

What is the primary purpose of a sinking fund associated with a debt instrument?

Accepted Answer

To gradually repay the principal amount of the debt

Answer

To offset the interest payments on the debt

Answer

To provide additional security to investors

Question 35

Which of the following factors would typically have the most significant impact on the interest rate offered on a bond?

Accepted Answer

The creditworthiness of the issuer

Answer

The maturity date of the bond

Answer

The prevailing economic conditions at the time of issuance

Answer

The size of the bond issue

Question 36

What is a key advantage of issuing a convertible bond over a traditional bond?

Accepted Answer

It provides the bondholder with the option to convert their bond into shares of the issuing company

Answer

It has a shorter maturity date than a traditional bond

Answer

It has a lower interest rate than a traditional bond

Question 37

What is the primary difference between a bullet bond and an amortizing bond?

Accepted Answer

Bullet bonds pay interest only at maturity, while amortizing bonds pay interest periodically and gradually repay the principal.

Answer

Bullet bonds have a longer maturity date than amortizing bonds.

Question 38

What is the purpose of a call provision in a debt instrument?

Accepted Answer

It gives the issuer the right to repay the debt before maturity.

Answer

It gives the bondholder the option to sell the bond back to the issuer.

Answer

It protects the issuer from default.

Question 39

What is the primary role of a credit rating agency in the debt market?

Accepted Answer

To assess the creditworthiness of debt issuers

Answer

To regulate the issuance of debt instruments

Answer

To provide investment advice to investors

Answer

To facilitate the trading of debt instruments

Question 40

In what way does the issuance of debt instruments contribute to economic growth?

Accepted Answer

It provides companies with capital to invest in new projects and expand their operations

Answer

It reduces the amount of money in circulation, leading to lower inflation

Answer

It increases the value of the currency, making exports more competitive

Question 41

Identify the defining characteristic of a debt instrument.

Accepted Answer

It represents a loan from an investor to a borrower.

Answer

It provides equity ownership in a business.

Answer

It guarantees a return on investment.

Question 42

Which of the following is not classified as a debt instrument?

Accepted Answer

Shares

Answer

Debentures

Answer

Bonds

Question 43

Explain the primary distinction between bonds and debentures.

Accepted Answer

Bonds are secured by specific assets, while debentures are unsecured.

Answer

Debentures are issued exclusively by governments, whereas bonds can be issued by both corporations and governments.

Answer

Bonds typically offer higher interest rates than debentures.

Question 44

What is the purpose of a coupon payment on a bond?

Accepted Answer

To provide periodic interest payments to bondholders.

Answer

To repay the principal amount of the bond at maturity.

Answer

To cover administrative costs associated with the bond issuance.

Answer

To offer dividends to bondholders.

Question 45

Describe the relationship between yield to maturity and bond price.

Accepted Answer

As yield to maturity increases, bond price tends to decrease.

Answer

As yield to maturity increases, bond price tends to increase.

Answer

There is no correlation between yield to maturity and bond price.

Question 46

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

Accepted Answer

To evaluate the creditworthiness of entities issuing debt instruments.

Answer

To determine interest rates on debt instruments.

Answer

To oversee and manage the issuance of debt instruments.

Answer

To dispense investment recommendations to investors.

Question 47

Explain the difference between a callable bond and a putable bond.

Accepted Answer

A callable bond gives the issuer the right to repurchase the bond before its maturity date, while a putable bond gives the investor the right to sell the bond back to the issuer before its maturity date.

Answer

Callable bonds typically offer higher interest rates than putable bonds.

Question 48

What is the primary purpose of a sinking fund?

Accepted Answer

To accumulate funds for the repayment of the principal amount of a bond issue at maturity.

Answer

To cover interest payments on a bond issue.

Answer

To serve as a guarantee to bondholders in the event of a default.

Question 49

Which of the following is NOT a characteristic of a debenture?

Accepted Answer

It is secured against a specific asset.

Answer

It has a fixed maturity date.

Answer

It is issued by a company.

Answer

It can be subordinated to other debt.

Question 50

What is the main difference between a bond and a debenture?

Accepted Answer

Bonds are typically secured against a specific asset, while debentures are not.

Answer

Debentures have a longer maturity date than bonds.

Answer

Bonds have a higher interest rate than debentures.

Question 51

Which of the following is a type of bond?

Accepted Answer

Government bond

Answer

Share

Answer

Mortgage

Answer

Loan

Question 52

What is the purpose of a sinking fund?

Accepted Answer

To repay the principal of a bond issue gradually over time.

Answer

To provide a cushion against default.

Answer

To pay the interest on a bond issue.

Answer

To invest in new assets.

Question 53

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

Accepted Answer

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

Answer

Coupon bonds have a higher face value than zero-coupon bonds.

Answer

Zero-coupon bonds have a longer maturity date than coupon bonds.

Question 54

What is the role of a credit rating agency?

Accepted Answer

To provide an independent assessment of the creditworthiness of bond issuers.

Answer

To regulate the bond market.

Answer

To issue bonds to investors.

Answer

To provide investment advice to investors.

Question 55

What is the difference between a callable bond and a non-callable bond?

Accepted Answer

A callable bond can be redeemed by the issuer before its maturity date at the issuer's option, while a non-callable bond cannot.

Answer

Callable bonds have a higher interest rate than non-callable bonds.

Question 56

What is a convertible bond?

Accepted Answer

A bond that can be converted into shares of the issuing company at the option of the bondholder.

Answer

A bond that has a low interest rate.

Answer

A bond that is issued by a company that has a high credit rating.