IFE S7 Bond Markets

What is a bond?

• It is a financial asset that gives the holder a claim on future profits of the firm.

• It is a business contract arranged between suppliers and the firms that can be resold on financial markets.

• It is an insurance contract that is transferable to family members.

• It is a certificate that gives the holder a claim to future cash flows.

What is the maturity of a bond?

• It is the time to expiration of a bond.

• It is the last payment that a bond promises.

• It is the percentage return of a bond.

• It is the size of one single regular payment of a bond.

What is the face value of a bond?

• 1. It is the time to expiration of a bond.

• 1. It is the last payment that a bond promises.

• It is the percentage return of a bond.

• It is the size of one single regular payment of a bond.

What is a coupon?

• It is the time to expiration of a bond.

• It is the last payment that a bond promises.

• It is the percentage return of a bond.

• It is the size of one single regular payment of a bond.

Which bond type can be expected to care the least risk of default?

• A high quality bond

• A treasury bill

• A junk bond

• A gilt

Consider a bond that expires after one year and pays £100 on expiration without making any payments in between. What is the yield of this bond if the price is £98.5?

• The yield is approximately 2.5%.

• The yield is approximately 0.025%.

• The yield is approximately 1.52%.

• The yield is approximately 15.2%.

Consider a demand and supply graph of a bond market. Usually, the vertical axis will measure…

• the quantity of the bond.

• the yield of the bond.

• the face value of the bond.

• the price of the bond.

Consider a supply and demand diagram for the bond market. Assuming all else equal, what will happen if suddenly more business opportunities arise?

• The supply curve will shift to the right meaning that bond prices decrease and hence the yield increases.

• The demand curve will shift to the right meaning that bond prices increase and hence the yield decreases.

• The supply curve will shift to the left meaning that bond prices increase and hence the yield decreases.

• The demand curve will shift to the left meaning that bond prices decrease and the yield decreases.

Consider a demand and supply diagram for the bond market. Assuming all else equal, what will happen if investors believe inflation will increase?

• The supply curve will shift to the right meaning that bond prices decrease and hence the yield increases.

• The demand curve will shift to the right meaning that bond prices increase and hence the yield decreases.

• The supply curve will shift to the left meaning that bond prices increase and hence the yield decreases.

• The demand curve will shift to the left meaning that bond prices decrease and the yield increases.

What does the Market Segmentation Theory state?

• It states that an inverted yield curve is a sign that investors are expecting a recession.

• It states that the yield curve is decreasing because investors expect a lower yield in the future.

• It states that a decreasing yield curve is impossible because the bonds with a short maturity are more liquid than the bonds with a long maturity.

• It states that the shape of the yield curve could be due to different type of investors in the market conducting large transaction.