Worksheet - Building Concepts for RBI

For
Bonds
 Purpose of Worksheet

The purpose of the worksheet is to help you build and apply concepts. It is very important to
apply what you have learned because RBI is putting up tweaked questions rather than direct
questions. Work sheet consists of
1. Fill in the blanks
2. True /False
3. MCQs
4. Match the column

Many of these you would be able to solve with the help of the document you have read
before this worksheet. But many of them will give new dimensions to your learning and will
test how much you can apply. But rest assured after doing this worksheet you will feel more
confident and that is all what matters

The answers along with explanation (wherever required) are given at the end of the
worksheet
1. Bond holders are also known as :
a) Creditors to the company. c) Equity holders of the company
b) Debtors to the company d) Partners of the company

Answer : a) Bonds are debt instruments so bond holders are known as creditors

2) Interest rate of the debt instrument are generally :

a) variable and depend on performance of firm
b) is fixed and pre decided irrespective of performance of firm
c) fixed but depends on performance of company
d) none of these

Answer : b) Interest rate on bonds(debt instrument) are generally fixed and pre decided by the creditor.

3) What is coupon in terms of debt instruments :

a. amount of interest paid to bondholders on a periodic basic
b. maturity payment to the bondholders
c. amount of interest paid to equity holders on a periodic basis
d. it is the par value of debt instruments

Answer : a) The coupon amount is the amount of interest paid to bondholders on a periodic basis vis a vis
annually, semiannually, quarterly etc.

4) Sovereign Debt instruments are generally not free from :

a. Default risk
b. Counter party risk
c. Systemic Risk
d. None of these

Answer : c) Even government bonds faces market risk (Systemic) risk, but as government can’t default so it
is free from default/counter party risk

5) What are convertible bonds ?

a. These are the bonds that can be converted to zero coupon bonds.
b. These are the bonds that do not have exchange risk.
c. These are the bonds that have highest yield to maturity.
d. These are the bonds that can be converted to equities.

Answer : d) Convertible bonds are the bonds that can be converted to equities

6) Price of the bonds and yield to maturity are :

a. Directly related
b. Inversely related
c. Have no dependance
d. None of these
Answer : b) As price of bond rises, its yield to maturity falls citing an inverse dependance.

7) Choose the correct statements about Zero Coupon Bonds :

a. Bonds that pay interest not dependant on company’s profit
b. Bonds that do not pay interest
c. Bonds which sell at discounted price
d. Yield to maturity on these bonds are nil as no interest is paid

i. a only
 ii. b, c & d only
iii. b, d only
iv) b, c only

Answer : iv) Zero coupon bonds are sold at discounted price but pays no coupon.A nil YTM is useless for
bond holders.

8) Current yield on bond generally understates the return on :

a. Premium bonds
b. Discounted bonds
c. Both a & b
d. it never understates the return on any bond

Answer : b) Current yield is not a reliable information as it understates the return on discounted bonds while
it overstates the return on premium bonds. So YTM is used as it correctly states the return.

9) What happens to price of bonds if market rate falls :

a. it rises as bond is also market instrument
b. it rises as demand for bonds will rise
c. it remains unchanged
d. none of these

Answer : b) bond prices rise with fall in market rate as demand increases and subsequently yield also falls.

10) Bonds are generally redeemed on maturity at :

a. par value
b. Premium
c. Market price of bond
d. can be redeemed at par or premium

Answer : a) At maturity bond is redeemed at its face/par value

11) What are callable bonds :

a. The bond holder reserves the right to sell the bonds
b. The issuer reserves the right to call back the bonds
c. These are bonds that can be called as equity when both parties decide so
d. Callable bonds are bonds with floating interest rate only

Answer : b) Callable bonds are of less interest to investors as they can be called back by issuer at any
point of time by paying the premium over par value

12) Bonds issued by German and UK government are respectively known as :

a. OATs and Gilts
b. Bunds & OATs
c. OATs & Bunds
d. Bunds & Gilts

Answer : d) Bonds issued by various govt are known the following :

USA govt : US Treasuries
German : Bunds
French : OATs
UK : Gilts

13) If a bond has a coupon rate of 5.6% per annum compounded half yearly, then what is its
semiannual rate ?
 a. 11.2%
b. 5.6%
c. 2.8%
d. 1.4%

Answer : c) 5.6/2 = 2.8%

14) A bond selling at price above its par value is known to be selling at :
a. Discount
b. Premium
c. Hyper priced bond
d. Hypo priced bond

Answer : b) Bonds selling at price above its par value is known as premium

15) A bond selling at price below its par value is known to be selling at :
a. Discount
b. Premium
c. Hyper priced
d. Hypo priced

Answer : a) Bonds selling at price below its par value is known as discount

16) If the market interest rate exceeds the coupon rate, bonds sell for :
a. less than its face value
b. more than its face value
c. Its par value
d. its face value

Answer : a) if market rate > coupon rate, bond becomes unattractive for investors & hence demand for it
falls and it sells below its face value

17) If the coupon rate exceeds the market interest rate, bonds sell for :
a. less than its face value
b. more than its face value
c. Its par value
d. its face value

Answer : b) if market rate < coupon rate, bond becomes attractive for investors & hence demand for it rises
and it sells above its face value at premium

18) A 5 year bond with par value of Rs 1000 has current yield of 7.5 % and coupon rate of 8%. What
is the bond’s price ?
a. 1023.37
b. 1066.67
c. 933.33
d. 1000

Answer : b)
Current yield = coupon/ bond’s price
0.075 =80/BP
BP =80/.075=1066.67
19) A bond with face value of Rs 1000 is price at Rs 1125. If its coupon rate is 9%. Determine its
current yield ?
a. 5%
b. 7%
c. 8%
d. 9%

Answer : c)

Current yield = coupon/ bond’s price

CY =90/1125
CY = .08 i.e. 8%

20) A 6 year bond of par value Rs 1000 pays interest of Rs 80 annually and sells at 950. Calculate its
YTM ?
a. 9.12
b. 8.42
c. 10.01
d. 8.00

Answer : a) Approx YTM = [C+ (F-P)/n] / (F+P)/2

YTM =9.05 (approx)

Actual calculation of YTM :

Bond price = C(1- 1/(1+r)^n) )/ r + FV/(1+r)^n
950 = 80/r(1- 1/ (1+r)^n) +1000/(1+r)^n
r =9.12 is the actual YTM

21) A 6 year bond of par value Rs 1000 pays interest of Rs 80 annually and sells at 950. Calculate
its Current Yield?
a. 9.12
b. 8.42
c. 10.01
d. 8.00

Answer : b) Current yield = coupon/ bond price

CY = 80/950 =0.0842 ie 8.42%

22) A 6 year bond of par value Rs 1000 pays interest of Rs 80 annually and sells at 950. Calculate its
Coupon rate?
a. 9.12
b. 8.42
c. 10.01
d. 8.00

Answer : b) Coupon rate = coupon/ par value of bond

CR = 80/1000 =0.08 ie 8.00%
Read the paragraph and answer the following questions : (Questions: 23-25)

A firm issued bonds with par value of Rs 10000 with coupon of 10% pa and maturity of 3 years.The
bond sells at YTM of 9 % . Par value of a bond is actually the price shown on the face of bond and
coupon is the interest rate it holds.Coupon is paid periodically while bond is redeemed at par at
maturity.

23) Calculate the coupon payment received by bond holder every year?
a. 500
b. 1000
c. 900
d. 800

Answer : b) Coupon rate =Coupon payment / Par value

0.1 = coupon payment/ 10000
Coupon payment =1000

24) Calculate the selling price of the bond ?

a. 10000.00
b. 10253.13
c. 9746.87
d. 11354.36

Answer : b) Bond price = C(1- 1/(1+r)^n) )/ r + FV/(1+r)^n

BP = 1000(1-1/1.09^3)/0.09 + 10000/1.09^3

25) Will the bond price rise or fall if YTM changes to 11% ?
a. A change in YTM does not affect bond price
b. It will rise
c. It will fall
d. Can't say it may rise or fall depending on situations

Answer : c) YTM and bond price are inversely related, a rise in one results in fall of other.

26) MATCH THE COLUMN :

A. OFCD i) are French govt bonds

B. Callable Bonds ii) is the rate of return if bond is held till maturity
C. OATs iii) can be converted to equity if agreed by both parties
D. YTM iv) can be called back by issuer at any time

a. A-i, B-ii, C-iii, D-iv

b. A-i, B-iv, C-iii, D-ii
c. A-iii, B-iv, C-i, D-ii
d. A-iv, B-iii, C-ii, D-i

Answer : c) OFCD is optionally fully convertible debenture.while OAT is French sovereign bonds.YTM is
yield to maturity.
27) MATCH THE COLUMN :

A. Face Value i) The price above par value on which bond sells
B. Discount ii) The price below face value on which bond sells
C. Coupon iii) is the sum received at maturity
D. Premium iv) is the interest rate mentioned on bonds

a. A-i, B-ii, C-iii, D-iv

b. A-i, B-iv, C-iii, D-ii
c. A-iii, B-ii, C-i, D-iv
d. A-iii, B-ii, C-iv, D-i

Answer : d) These are the terminologies of a bond.Must remember these

28) The bonds that give the bondholders right but not the obligation to sell their bonds back to the
issuer at a predetermined price and date before maturity is known as _______________.

Answer : Putt-able Bonds

29) The bonds that give the issuer right but not the obligation to buy their bonds back from the
bondholders by paying the premium and at a date before maturity is known as _______________.

Answer : Call-able Bonds

30) The bonds in which principal is paid throughout the life of bond are known as _______________.

Answer : Amortising Bonds

31) The bond that has no maturity and pays a fixed coupon is known as _______________.

Answer : Console Bond

Read the following paragraph and answer the following questions : ( Questions : 32 to 34)

David buys a bond of par value Rs1000, 10 year maturity and 8% coupon rate for Rs 950. A year
later the bond price changes to Rs 1050.

32) Calculate the rate of return over the year ?

a. 10.52 %
b. 11.05 %
c. 18.95 %
d. 9.52 %

Answer : c) Rate of return over the year = (Coupon Income + Price Change)/ Investment

RoR = 180/950 = 18.947 %

33) Calculate the new Yield to Maturity?

a. 7.96 %
b. 6.98 %
c. 8.05 %
d. 7.23 %

Answer: d
So, YTM = ( 80+ (1000-1050)/9 ) / (2050/2) = 7.26 %
Therefore, Actual YTM will be close to this

34) Approx, By how much percentage does the YTM changes over the year ?
a. 1.49 %
b. 0.76 %
c. 0.67 %
d. 1.23 %

Answer : a ) earlier YTM = 8.72 % (approx) use the above formula

Now the YTM is 7.23 % so the change is approximately 1.49 %

35) Determine the price of zero coupon bond maturing in 8 years with required yield of 8% pa and
par value of Rs 8000 compounded annually :
a) Rs 5423.23
b) Rs 4322.15
c) Rs 14807.44
d) Rs 12046.75

Answer : b) Bond Price = 8000/(1.08)^8

For zero coupon bonds, Coupon =0 , So Bond Price = Maturity Value/ (1+ i)^n

36) Determine the face value of zero coupon bonds maturing in 8 years with required yield of 5% pa
and bond price of 3555 compounded semiannually.
a) Rs 2394.74
b) Rs 4322.15
c) Rs 5277.42
d) Rs 4331.42

Answer : c) Bond Price = Face Value / (1+i)^n

Face Value = BP*(1+i)^n
Here BP =3555
i = 2.5 % ie 0.025 per half yearly
n = 16 semi annual payments
So, FV = 3555(1.025)^16

37) Determine the maturity period of a zero coupon bond with required yield of 10% pa with semi
annual payment. The par value of bond is Rs 1000 and bond price is Rs 613.913.

a) 10 years
b) 15 years
c) 2.5 years
d) 5 years

Answer : d) 5 years ; 613.913 (1.05)^n = 1000

n =10 half years i.e. 5 years
38) XYZ industries has bonds with maturity value of Rs 1000 on the market making annual
payments, with 14 years to maturity, and selling for $1431.01. At this price, the bonds yield 5.5
percent. What is the coupon rate?

a. 8%
b. 9%
c. 10%
d. 12%

Answer : c) 10 %

39) In zero coupon bond, duration is always ___________ its time to maturity. (= ,or, < ,or, >)

Answer : equal to

40) In non-zero coupon bond, duration is always _______ its time to maturity. (= ,or, < ,or, >)

Answer : less than

41) The coupon of a bond is linked to MIBOR as (10-MIBOR) such that as MIBOR increases the
coupon rate decreases. This type of bond is known as :
a. Floater bond
b. Inverse floater bond
c. Constant floater bond
d. Inverse constant floater bond

Answer : b) As, MIBOR rise, coupon of bond goes down. This type of bond is known as inverse floater

42) The coupon of a bond is linked to LIBOR as (5 + LIBOR) such that as LIBOR increases the
coupon rate increases.This type of bond is known as :
a. Floater bond
b. Inverse floater bond
c. Constant floater bond
d. Inverse constant floater bond

Answer : a) As, LIBOR rise, coupon of bond also rises. This type of bond is known as floater.

43) The short term debt instruments of Indian government are known as :

A. T-Bills
B. Debentures
C. Bonds
D. none of these

Answer : A) T-Bills
44) Yield and Interest rate have :
A. Direct dependance
B. Inverse dependance
C) no dependance
D) none of these

Answer : a) Direct dependance

45) Pension funds are a type of :

a. Zero Coupon bonds
b. Console bonds or Perpetual Bonds
c. Callable bonds
d. Putt-able bonds

Answer : b) Console Bonds/Perpetual Bonds have no maturity

46) Calculate the price of bond with 6 year maturity, 9% coupon, par value of Rs 1000 and current
interest rate of 12 %.

a. 876.66
b. 950.12
c. 855.13
d. 912.36

Answer : a) BP = 90/.12 (1 - 1/1.12^6). + 1000/(1.12)^6

= 876.66

47) YTM is of significance if bond holders holds it till maturity.Which one is the best indicator to
suggest accurate return if bond is not held till maturity ?
a. Current yield
b. Holding period return
c. Maturity return
d. none of these

Answer : b) Most appropriate indicator would be Holding Period return.

Read the following paragraph and answer the following questions : ( Questions : 48 to 50)

A person decided to invest in two policies.The details are as provided.First one was held for 3
years, during which it appreciated from $100 to $ 200 and provided $10 as distributions, and
Second one that went from $250 to $350 and generated $20 in distributions over 4
years?

48) Which investment is better: first one or second one ?

a. first one
b. Second one
c. Both provide same return
d. none of these

Answer : a) the first one ;

Holding period return : 1st one : [ (200-100) + 10 ]/ 100 = 110%

2nd one : [ (350-250) + 20 ]/ 250 = 48%

49) Calculate annualized Holding Period return for the 1st one ?
a. 27.75%
b. 30%
c. 23.5%
d. 19%

Answer : a) Annualized HPR = (HPR+1)^ 1/n. - 1

Annualized HPR = (1.1+1) ^0.33 - 1

50) Calculate annualized Holding Period return for the 2nd one?
a. 13%
b. 10.29%
c. 11.45%
d. 12.23%

Answer: b) Annualized HPR = (HPR + 1) ^ 1/n. - 1

Annualized HPR = (.48+1) ^ ¼ - 1