Level 1 — RecognitionEquity & Fixed Income

Equity & Fixed Income

⏱ 20 minutes30 marksprintable — key stays hidden on paper

Chapter: 2.1 Equity & Fixed Income Level: 1 — Recognition Time Limit: 20 minutes Total Marks: 30

Section A — Multiple Choice Questions (1 mark each) [10 marks]

Choose the single best answer.

Q1. Which statement best describes equity as an asset class?

(a) It represents a loan made to a company that must be repaid
(b) It represents ownership in a company with a residual claim on assets
(c) It guarantees a fixed periodic payment
(d) It always has a fixed maturity date

Q2. The face value (par value) of a bond is:

(a) The current market price of the bond
(b) The amount paid at maturity, on which coupons are calculated
(c) The total of all coupon payments
(d) The yield of the bond

Q3. A bond's coupon rate is 6% on a face value of $1,000. The annual coupon payment is:

(a) $6
(b) $60
(c) $600
(d) $166.67

Q4. As market interest rates rise, the price of an existing fixed-coupon bond will:

(a) Rise
(b) Fall
(c) Stay the same
(d) Rise then fall

Q5. Which bond generally carries the lowest default risk?

(a) A junk corporate bond
(b) A domestic government bond
(c) A BBB-rated corporate bond
(d) A convertible debenture

Q6. A zero-coupon bond is characterised by:

(a) Paying periodic coupons and returning par at maturity
(b) Paying no coupons and being issued at a discount to face value
(c) Paying a variable coupon linked to inflation
(d) Having no maturity date

Q7. An inverted yield curve occurs when:

(a) Long-term yields exceed short-term yields
(b) Short-term yields exceed long-term yields
(c) All yields are equal across maturities
(d) Yields are negative

Q8. Duration measures a bond's:

(a) Time until the first coupon
(b) Sensitivity of price to changes in interest rates
(c) Credit rating
(d) Coupon frequency

Q9. A convertible bond gives the holder the right to:

(a) Demand early repayment at any time
(b) Convert the bond into a predetermined number of equity shares
(c) Receive a higher coupon than similar bonds
(d) Avoid all default risk

Q10. A credit rating downgrade from AA to BBB signals:

(a) Lower default risk and higher price
(b) Higher default risk, typically pushing yields up
(c) No change in risk
(d) Conversion into equity

Section B — Matching (1 mark each) [8 marks]

Match each term in Column X to its correct description in Column Y.

Column X		Column Y
Q11. YTM		(i) Loan-style security issued by a corporation, often unsecured
Q12. Debenture		(ii) Total return if a bond is held to maturity, accounting for price, coupons and time
Q13. Coupon		(iii) Ownership stake with dividends and voting rights
Q14. Equity		(iv) Periodic interest payment made by a bond
Q15. Maturity		(v) Date on which the face value is repaid
Q16. Flat yield curve		(vi) Yields roughly equal across all maturities
Q17. Credit rating		(vii) Assessment of an issuer's ability to repay debt
Q18. Current yield		(viii) Annual coupon divided by current market price

Section C — True/False with Justification (2 marks each) [12 marks]

State True or False and give a one-line justification. (1 mark answer + 1 mark justification)

Q19. "A bond trading above its face value (at a premium) has a coupon rate lower than its YTM."

Q20. "Government bonds always offer higher yields than corporate bonds of the same maturity."

Q21. "For two bonds with the same yield, the one with longer duration will lose more value when interest rates rise."

Q22. "A zero-coupon bond can be purchased for less than its face value."

Q23. "Equity holders are paid before bondholders if a company is liquidated."

Q24. "The inverse price-yield relationship means that when a bond's price falls, its yield rises."

Answer keyMark scheme & solutions

Section A — MCQ (1 mark each)

Q1. (b) — Equity is an ownership claim; holders have a residual claim (paid after creditors). Not a loan (that's debt). [1]

Q2. (b) — Face/par value is the redemption amount at maturity and the base for computing coupons. [1]

Q3. (b) — Coupon = $6\% \times 1000 = \$ 60$. [1]

Q4. (b) — Existing fixed coupons become less attractive when new rates rise, so prices fall (inverse price-yield relationship). [1]

Q5. (b) — A domestic sovereign bond carries the lowest default risk of the options (government backing). [1]

Q6. (b) — Zero-coupon bonds pay no periodic interest and are issued at a discount; return comes from par − purchase price. [1]

Q7. (b) — Inverted curve = short-term yields above long-term yields, often signalling recession expectations. [1]

Q8. (b) — Duration quantifies price sensitivity to interest-rate changes. [1]

Q9. (b) — Convertible bonds allow conversion into a fixed number of shares. [1]

Q10. (b) — Downgrade means higher perceived default risk → investors demand higher yield (price falls). [1]

Section B — Matching (1 mark each)

Q	Answer
Q11. YTM	(ii) Total return if held to maturity
Q12. Debenture	(i) Loan-style security, often unsecured
Q13. Coupon	(iv) Periodic interest payment
Q14. Equity	(iii) Ownership stake with dividends/voting
Q15. Maturity	(v) Date face value is repaid
Q16. Flat yield curve	(vi) Yields roughly equal across maturities
Q17. Credit rating	(vii) Assessment of ability to repay debt
Q18. Current yield	(viii) Annual coupon ÷ market price

[8 marks total, 1 each]

Section C — True/False with Justification (2 marks each)

Q19. FALSE. [1] A premium bond has coupon rate higher than YTM — investors pay extra for above-market coupons, which pulls the yield below the coupon rate. [1]

Q20. FALSE. [1] Government bonds usually offer lower yields because they carry lower default risk; corporates pay a risk premium. [1]

Q21. TRUE. [1] Longer duration = greater price sensitivity, so the same yield rise causes a larger price fall. [1]

Q22. TRUE. [1] Zero-coupon bonds are issued/traded at a discount below face value; the gain to par replaces coupon income. [1]

Q23. FALSE. [1] Bondholders (creditors) rank ahead of equity holders in liquidation; equity has the residual (last) claim. [1]

Q24. TRUE. [1] Price and yield move inversely; a price fall raises the effective yield. [1]

Illustrative calculation notes (for markers)

Current yield check (Q18 concept): a $1,000 par bond with 6% coupon priced at$ 1,200 → current yield = $60/1200 = 5\%$ , below coupon rate, consistent with a premium bond (Q19).
Zero-coupon check: a bond redeeming at $1,000 in 2 years at 5% yield prices at$ 1000/1.05^2 \approx 907.03$, confirming discount (Q22).

[
  {"claim": "6% coupon on 1000 face = 60 (Q3)", "code": "result = (0.06*1000 == 60)"},
  {"claim": "Premium bond: 60 coupon at price 1200 gives current yield 5% < coupon 6% (Q19)", "code": "cy = 60/1200; result = (cy < 0.06) and (abs(cy-0.05)<1e-9)"},
  {"claim": "Zero-coupon 1000 par, 5% yield, 2yr prices below par (Q22)", "code": "price = 1000/(1.05**2); result = price < 1000 and abs(price-907.029478458)<1e-6"},
  {"claim": "Longer-duration bond falls more for same yield rise: approx dP/P = -D*dy (Q21)", "code": "dy = 0.01; D_long=8; D_short=3; result = abs(-D_long*dy) > abs(-D_short*dy)"}
]