High School

Each of the questions below has four alternatives. Choose the most correct alternative for each of the questions/statements. Write down the number of the question in your answer book and the letter corresponding to your choice next to the question number.

4.2 A bond that makes no coupon payments during the life of the bond, but is sold at a considerable discount, is known as:

a) an inflation-linked bond
b) a zero-coupon bond
c) a discount bond
d) a premium bond

4.3 The coupon divided by the nominal value represents the:

a) nominal value
b) par value
c) yield-to-maturity
d) coupon rate

4.4 Which of the following bonds have the lowest return?

a) a bond with a B3 rating
b) a bond with a Baa1 rating
c) a bond with a BB rating
d) a bond with a BBB rating

4.5 If a bond is R1,000 at maturity and the bond currently sells for R990, then:

a) the YTM is more than the coupon rate
b) the coupon rate is more than the YTM
c) the YTM and the coupon rate are the same
d) the bond is selling at above par

4.6 Preference shareholders:

a) have voting rights at annual general meetings.
b) are involved in the day-to-day operations of a company.
c) receive preferential treatment in terms of dividend payments.
d) have a pre-emptive right.

4.7 Ordinary shareholders:

a) enjoy a fixed annual rate of dividend.
b) have voting rights at annual general meetings.
c) receive preferential treatment in the case of liquidation.
d) are involved in the day-to-day operations of a company.

Use the following information to answer questions 4.8 and 4.9:
The Vuvuzela Company issued one million ordinary shares at a value of 1c when the company listed on the stock exchange in 2014. The current price per share is 15c.

4.8 What is the par value of the Vuvuzela Company’s ordinary shares?

a) 1c
b) 15c
c) R10,000
d) R150,000

4.9 What is the market value of the Vuvuzela Company’s ordinary shares?

a) 1c
b) 150c
c) R10,000
d) R150,000

Answer :

4.2. b) A zero-coupon bond.

4.3. d) Coupon rate.

4.4. c) A bond with a BB rating.

4.5. a) The YTM is more than the coupon rate.

4.6. c) Receive preferential treatment in terms of dividend payments.

4.7. b) Have voting rights at annual general meetings.

4.8. a) The par value of the Vuvuzela Company’s ordinary shares is 1c

4.9. d) R150 000.

4.2. b) A zero-coupon bond.

A bond that makes no coupon payments during the life of the bond but is sold at a considerable discount is known as a zero-coupon bond.

4.3. d) Coupon rate.

The coupon divided by the nominal value represents the coupon rate.

4.4. c) A bond with a BB rating.

Bonds with lower credit ratings have higher default rates and hence have a higher yield to compensate for the higher risk.

4.5. a) The YTM is more than the coupon rate.

If a bond is R1 000 at maturity and the bond currently sells for R990, then the yield-to-maturity is more than the coupon rate.

4.6. c) Receive preferential treatment in terms of dividend payments.

Preference shareholders receive preferential treatment in terms of dividend payments.

4.7. b) Have voting rights at annual general meetings.

Ordinary shareholders have voting rights at annual general meetings.

4.8. a) 1c.The par value of the Vuvuzela Company’s ordinary shares is 1c because the company issued one million ordinary shares at a value of 1c.

4.9. d) R150 000.

The market value of the Vuvuzela Company’s ordinary shares is R150 000 because the current price per share is 15c. Therefore, one million ordinary shares are worth R150 000.

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