R02 Fixed-interest securities, yields and bond markets: free practice questions

1. Question 1 of 5

   How is the coupon on a conventional bond calculated?

   Option A: As compound interest on the price paidOption B: As a share of the issuer's annual profitOption C: As simple interest on the £100 nominal valueOption D: As a percentage of the bond's current market price

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   The answer is C: As simple interest on the £100 nominal value

   The coupon is the fixed rate of interest set at issue. It's expressed gross and calculated as simple interest on the nominal (par) value, usually paid twice a year.

   Why the other options are wrong

   A

   Coupons are simple interest on the nominal value.

   B

   Coupons are fixed at issue, not linked to profits.

   D

   That describes the interest yield, not the coupon.

2. Question 2 of 5

   During a corporate bond issue managed by an investment bank, how long do investors have to make firm bids once final terms are issued?

   Option A: 24 hoursOption B: Seven working daysOption C: One calendar monthOption D: Five working days

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   The answer is A: 24 hours

   The bank markets the issue and prospective coupon, collects indicative bids, then issues final terms; prospective investors then have 24 hours to make firm bids.

   Why the other options are wrong

   B

   Seven working days relates to the ex dividend period.

   C

   Investors have 24 hours.

   D

   Investors have 24 hours.

3. Question 3 of 5

   Which of these bonds is likely to be most volatile when interest rates change?

   Option A: A 25-year bond with an 8% couponOption B: A 2-year bond with a 1% couponOption C: A 2-year bond with an 8% couponOption D: A 25-year bond with a 1% coupon

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   The answer is D: A 25-year bond with a 1% coupon

   The lower the coupon and the longer the time to redemption, the more volatile a bond is. A long-dated, low-coupon bond is the most volatile.

   Why the other options are wrong

   A

   A higher coupon returns cash sooner, reducing volatility.

   B

   Short-dated bonds are less sensitive to rate changes.

   C

   Short-dated, high-coupon bonds are the least volatile.

4. Question 4 of 5

   Under a positive yield curve, what does an investor seeking income find?

   Option A: Only index-linked gilts pay an incomeOption B: The same capital buys the same income at any maturityOption C: It costs more capital to buy the same income from shorts than longsOption D: Short-dated gilts give the most income per pound invested in them

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   The answer is C: It costs more capital to buy the same income from shorts than longs

   With a positive yield curve, longer-dated bonds yield more, so achieving a given income needs more capital in short-dated bonds than in longer-dated ones.

   Why the other options are wrong

   A

   Conventional gilts pay income at every maturity.

   B

   That would be the case with a flat curve.

   D

   Under a positive curve, longer-dated bonds yield more.

5. Question 5 of 5

   Which of the following are generally true of corporate bonds compared with gilts? 1. Higher yields 2. Wider spreads between buying and selling prices 3. Lower credit risk 4. More volatile prices

   Option A: 2, 3 and 4 onlyOption B: 1, 2 and 4 onlyOption C: 1, 2, 3 and 4Option D: 1 and 2 only

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   The answer is B: 1, 2 and 4 only

   Corporate bonds carry more credit risk and are less liquid than gilts, so yields are higher, spreads wider and prices typically more volatile. Their prices can move even when rates and inflation are stable, as creditworthiness changes.

   Why the other options are wrong

   A

   Corporate bonds carry more credit risk than gilts, not less.

   C

   Statement 3 is wrong: credit risk is higher.

   D

   Corporate bond prices are typically more volatile too.

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