Kaplan Unit 4 Missed Questions
Which of the following is an example of sovereign debt? A) Sony Corporation debentures B) U.S. Treasury bonds C) Bank of England notes D) Royal Bank of Canada CDs
B) U.S. Treasury bonds Sovereign debt represents loans to governments. On the exam, it is likely that the examples will be foreign governments, not U.S. Treasury securities. The Royal Bank of Canada is a privately owned corporation and its debts are not those of the Canadian government. Bank of England notes are the paper currency issued (e.g., the ₤10 and ₤20 notes).
If interest rates increase, the interest payable on outstanding corporate bonds will A) decrease. B) increase. C) remain unchanged. D) change according to the inverse payout theory.
C) remain unchanged. The interest payable is the nominal yield, which is stated on the face of the bond. It is the percentage of face value the bond will pay each year regardless of the prevailing interest rates in the market. It is the market price of bonds, not the interest payable, that responds inversely to changes in interest rates.
An investor is concerned about safety. When consulting the ratings, which of the following securities would appear to be least likely to default on its obligation to make timely payment of interest and principal? A) AAA rated common stock B) BB rated sovereign debt C) A rated mortgage bond D) AA rated debenture
D) AA rated debenture When it comes to reducing default risk, "the As have it." That is, the more As in the rating, the lower the default risk. True, the common stock is rated triple A, but stock has no obligation to pay interest and repay principal. Why isn't the mortgage bond a safer bet than the debenture? Aren't secured bonds the safest? These are good questions, but the rating services take that into consideration when giving a rating. In their eyes, the debenture, an unsecured debt, merits a double A rating while the mortgage bond, even with the pledged collateral, can only be awarded a single A rating. Sovereign debt, the debt of a country's government, is usually quite safe, but history has shown us that governments can, and do, default. The BB rating here indicates a certain question as to the safety.
It would be most unusual to see which of the following issued at a discount? A) Treasury bill B) Commercial paper C) Banker's acceptance D) Jumbo CD
D) Jumbo CD Jumbo (negotiable) CDs are one of the few money market instruments issued at face value. Unlike those issued at a discount, they are interest bearing.
