Fixed Income Analysis Workbook. Barbara S. Petitt

the form of bilateral loans, syndicated loans, commercial paper, notes, and bonds.

      ● Commercial paper is a short-term unsecured security that is used by companies as a source of short-term and bridge financing. Investors in commercial paper are exposed to credit risk, although defaults are rare. Many issuers roll over their commercial paper on a regular basis.

      ● Corporate bonds and notes take different forms depending on the maturities, coupon payment, and principal repayment structures. Important considerations also include collateral backing and contingency provisions.

      ● Medium-term notes are securities that are offered continuously to investors by an agent of the issuer. They can have short-term or long-term maturities.

      ● Financial institutions have access to additional sources of funds, such as retail deposits, central bank funds, interbank funds, large-denomination negotiable certificates of deposit, and repurchase agreements.

      ● A repurchase agreement is similar to a collateralized loan. It involves the sale of a security (the collateral) with a simultaneous agreement by the seller (the borrower) to buy the same security back from the purchaser (the lender) at an agreed-on price in the future. Repurchase agreements are a common source of funding for dealer firms and are also used to borrow securities to implement short positions.

      PROBLEMS

      This question set was developed by Michael Whitehurst, CFA (San Diego, CA, USA). Copyright © 2013 by CFA Institute.

      1. In most countries, the bond market sector with the smallest amount of bonds outstanding is most likely the:

      A. government sector.

      B. financial corporate sector.

      C. non-financial corporate sector.

      2. The distinction between investment grade debt and non-investment grade debt is best described by differences in:

      A. tax status.

      B. credit quality.

      C. maturity dates.

      3. A bond issued internationally, outside the jurisdiction of the country in whose currency the bond is denominated, is best described as a:

      A. Eurobond.

      B. foreign bond.

      C. municipal bond.

      4. Compared with developed markets bonds, emerging markets bonds most likely:

      A. offer lower yields.

      B. exhibit higher risk.

      C. benefit from lower growth prospects.

      5. With respect to floating-rate bonds, a reference rate such as the London interbank offered rate (Libor) is most likely used to determine the bond's:

      A. spread.

      B. coupon rate.

      C. frequency of coupon payments.

      6. Which of the following statements is most accurate? An interbank offered rate:

      A. is a single reference rate.

      B. applies to borrowing periods of up to 10 years.

      C. is used as a reference rate for interest rate swaps.

      7. An investment bank that underwrites a bond issue most likely:

      A. buys and resells the newly issued bonds to investors or dealers.

      B. acts as a broker and receives a commission for selling the bonds to investors.

      C. incurs less risk associated with selling the bonds than in a best efforts offering.

      8. In major developed bond markets, newly issued sovereign bonds are most often sold to the public via a(n):

      A. auction.

      B. private placement.

      C. best efforts offering.

      9. A mechanism by which an issuer may be able to offer additional bonds to the general public without preparing a new and separate offering circular best describes:

      A. the grey market.

      B. a shelf registration.

      C. a private placement.

      10. Which of the following statements related to secondary bond markets is most accurate?

      A. Newly issued corporate bonds are issued in secondary bond markets.

      B. Secondary bond markets are where bonds are traded between investors.

      C. The major participants in secondary bond markets globally are retail investors.

      11. A bond market in which a communications network matches buy and sell orders initiated from various locations is best described as an:

      A. organized exchange.

      B. open market operation.

      C. over-the-counter market.

      12. A liquid secondary bond market allows an investor to sell a bond at:

      A. the desired price.

      B. a price at least equal to the purchase price.

      C. a price close to the bond's fair market value.

      13. Sovereign bonds are best described as:

      A. bonds issued by local governments.

      B. secured obligations of a national government.

      C. bonds backed by the taxing authority of a national government.

      14. Agency bonds are issued by:

      A. local governments.

      B. national governments.

      C. quasi-government entities.

      15. The type of bond issued by a multilateral agency such as the International Monetary Fund (IMF) is best described as a:

      A. sovereign bond.

      B. supranational bond.

      C. quasi-government bond.

      16. Which of the following statements relating to commercial paper is most accurate?

      A. There is no secondary market for trading commercial paper.

      B. Only the strongest, highly rated companies issue commercial paper.

      C. Commercial paper is a source of interim financing for long-term projects.

      17. Eurocommerical paper is most likely:

      A. negotiable.

      B. denominated in euro.

      C. issued on a discount basis.

      18. When issuing debt, a company may use a sinking fund arrangement as a means of reducing:

      A. credit risk.

      B. inflation risk.

      C. interest rate risk.

      19. Which of the following is a source of wholesale funds for banks?

      A. Demand deposits

      B. Money market accounts

      C. Negotiable certificates of deposit

      20. A characteristic of negotiable certificates of deposit is:

      A. they are mostly available in small denominations.

      B. they can be sold in the open market prior to maturity.

      C. a penalty is imposed if the depositor withdraws funds prior to maturity.

      21. A repurchase agreement is most comparable to a(n):

      A. interbank deposit.

      B. collateralized loan.

      C.