FINANCIAL MARKETS AND INSTITUTIONS
EXAMINATION TEST 2026 FULL QUESTIONS
AND CORRECT SOLUTIONS
◉ What is a simple loan? Answer: A simple loan is a debt instrument
where the borrower repays the principal plus interest on a specific
date.
◉ What is a discount bond? Answer: A discount bond is a debt
instrument where the borrower repays the loan in a single payment
at maturity but receives less than the face value initially.
◉ What is a coupon bond? Answer: A coupon bond is a debt
instrument that requires multiple interest payments and a payment
of the face value at maturity.
◉ What is the face value of a bond? Answer: The face value (or par
value) is the amount to be repaid by the bond issuer at maturity.
◉ What is the coupon rate of a bond? Answer: The coupon rate is the
value of the coupon expressed as a percentage of the par value of the
bond.
,◉ What is the current yield of a bond? Answer: The current yield is
the value of the coupon expressed as a percentage of the current
price of the bond.
◉ What does maturity refer to in the context of bonds? Answer:
Maturity is the length of time before the bond expires and the issuer
makes the face value payment to the buyer.
◉ What is a fixed-payment loan? Answer: A debt instrument
requiring regular payments of principal and interest.
◉ What does yield to maturity represent? Answer: The interest rate
that equates the present value of cash flows from a debt instrument
with its current value.
◉ How are bond prices and yield to maturity related? Answer: They
are negatively related; as bond prices fall, yield to maturity rises.
◉ What happens to bond prices when interest rates rise? Answer:
Bond prices fall below their face value.
◉ Define capital gain in the context of bonds. Answer: A capital gain
occurs when the market price of a bond increases.
,◉ Define capital loss in the context of bonds. Answer: A capital loss
occurs when the market price of a bond declines.
◉ What is the law of one price? Answer: Identical products should
sell for the same price everywhere.
◉ What is the formula for the rate of return (R) on a bond? Answer:
R equals the coupon payment plus the change in the price of a bond
divided by the initial price.
◉ What is the current yield? Answer: The current yield is calculated
using the bond's initial price.
◉ What is the relationship between holding period and yield to
maturity? Answer: Return equals yield to maturity only if the
holding period matches the time to maturity.
◉ How does interest rate risk affect long-term bonds? Answer:
Prices and returns for long-term bonds are more volatile than for
shorter-term bonds.
◉ What are nominal interest rates? Answer: Nominal interest rates
are the stated interest rates without adjustment for inflation.
, ◉ What are real interest rates? Answer: Real interest rates are
nominal rates adjusted for inflation.
◉ What is the difference between ex ante and ex post real interest
rates? Answer: Ex ante is calculated before inflation occurs, while ex
post is calculated after.
◉ What happens to the ex post real interest rate if actual inflation is
higher than expected? Answer: The ex post real interest rate will be
lower than the ex ante rate.
◉ What is an inflation-indexed bond? Answer: A bond that promises
a fixed real interest rate, with the nominal rate adjusted for inflation.
◉ What are Treasury Inflation Protected Securities (TIPS)? Answer:
Bonds issued by the U.S. Treasury that are indexed to inflation.
◉ What is the impact of rising interest rates on existing bonds?
Answer: Existing bonds with lower rates become less desirable,
leading to a fall in their prices.
◉ What is the significance of bond maturity on price volatility?
Answer: The longer the maturity, the greater the price volatility
associated with interest rate changes.
EXAMINATION TEST 2026 FULL QUESTIONS
AND CORRECT SOLUTIONS
◉ What is a simple loan? Answer: A simple loan is a debt instrument
where the borrower repays the principal plus interest on a specific
date.
◉ What is a discount bond? Answer: A discount bond is a debt
instrument where the borrower repays the loan in a single payment
at maturity but receives less than the face value initially.
◉ What is a coupon bond? Answer: A coupon bond is a debt
instrument that requires multiple interest payments and a payment
of the face value at maturity.
◉ What is the face value of a bond? Answer: The face value (or par
value) is the amount to be repaid by the bond issuer at maturity.
◉ What is the coupon rate of a bond? Answer: The coupon rate is the
value of the coupon expressed as a percentage of the par value of the
bond.
,◉ What is the current yield of a bond? Answer: The current yield is
the value of the coupon expressed as a percentage of the current
price of the bond.
◉ What does maturity refer to in the context of bonds? Answer:
Maturity is the length of time before the bond expires and the issuer
makes the face value payment to the buyer.
◉ What is a fixed-payment loan? Answer: A debt instrument
requiring regular payments of principal and interest.
◉ What does yield to maturity represent? Answer: The interest rate
that equates the present value of cash flows from a debt instrument
with its current value.
◉ How are bond prices and yield to maturity related? Answer: They
are negatively related; as bond prices fall, yield to maturity rises.
◉ What happens to bond prices when interest rates rise? Answer:
Bond prices fall below their face value.
◉ Define capital gain in the context of bonds. Answer: A capital gain
occurs when the market price of a bond increases.
,◉ Define capital loss in the context of bonds. Answer: A capital loss
occurs when the market price of a bond declines.
◉ What is the law of one price? Answer: Identical products should
sell for the same price everywhere.
◉ What is the formula for the rate of return (R) on a bond? Answer:
R equals the coupon payment plus the change in the price of a bond
divided by the initial price.
◉ What is the current yield? Answer: The current yield is calculated
using the bond's initial price.
◉ What is the relationship between holding period and yield to
maturity? Answer: Return equals yield to maturity only if the
holding period matches the time to maturity.
◉ How does interest rate risk affect long-term bonds? Answer:
Prices and returns for long-term bonds are more volatile than for
shorter-term bonds.
◉ What are nominal interest rates? Answer: Nominal interest rates
are the stated interest rates without adjustment for inflation.
, ◉ What are real interest rates? Answer: Real interest rates are
nominal rates adjusted for inflation.
◉ What is the difference between ex ante and ex post real interest
rates? Answer: Ex ante is calculated before inflation occurs, while ex
post is calculated after.
◉ What happens to the ex post real interest rate if actual inflation is
higher than expected? Answer: The ex post real interest rate will be
lower than the ex ante rate.
◉ What is an inflation-indexed bond? Answer: A bond that promises
a fixed real interest rate, with the nominal rate adjusted for inflation.
◉ What are Treasury Inflation Protected Securities (TIPS)? Answer:
Bonds issued by the U.S. Treasury that are indexed to inflation.
◉ What is the impact of rising interest rates on existing bonds?
Answer: Existing bonds with lower rates become less desirable,
leading to a fall in their prices.
◉ What is the significance of bond maturity on price volatility?
Answer: The longer the maturity, the greater the price volatility
associated with interest rate changes.
