"Fixed Income":Defining Elements

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Questions 1:

Which of the following is most likely an indicator of liquidity in the secondary market for bonds?

A 、Bid-to-cover ratio

B 、Bid–offer spread

C、 Settlement period

Questions 2:

ANZ Corporation has issued a three-year bond that makes semiannual interest payments in March and September at the coupon rate of six-month Libor + 250 bps. This bond is most likely referred to as a:

A、 floating-rate note.

B 、plain vanilla bond.

C 、pure discount bond.

View answer resolution

【Answer to question 1】B

【analysis】

B is correct. The bid–offer spread reflects the prices at which secondary market dealers will buy from a customer (bid) and sell to a customer (offer). It is an indicator of liquidity because a tighter bid–offer spread represents a more liquid market than a market with a wider bid–offer spread.

A is incorrect because the bid-to-cover ratio represents the activity in a primary bond market auction.

C is incorrect because the settlement period represents the market’s conventions for settlement for different types of bonds (e.g., government bonds or corporate bonds.)

【Answer to question 2】A

【analysis】

A is correct. A floating-rate note pays a floating interest rate equal to a reference rate plus a spread.

B is incorrect because a plain vanilla bond pays a fixed rate of interest (i.e, the coupon payment does not change during the bond’s life).

C is incorrect because a pure discount bond does not pay any coupon interest during the life of the bond.

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