IFSE MAIN EXAMINATION 2026 SET QUESTIONS AND
SOLUTIONS SCORED A+
✔✔Commercial Paper (CP) - ✔✔- issued by corporations seeking short-term loans to
fund short-term cash shortages
- purchased at a discount
- at maturity face value is paid
- higher interest and higher risk as not backed by government or bank
- corporation borrows money under its own name and credit rating
- interest rate depends on stability of corporation and its likelihood of loan repayment
- safety of principal and income
✔✔Bonds - ✔✔- fixed income securities with maturity greater than 1 year
- regular income and stability of principal
- riskier ones backed by corporations with poor credit rating entice investors with higher
coupon rates
- when price is $100 means it is at par
- secured by specific assets of the issuer (property, inventories, equipment, etc.)
✔✔Coupon Bonds - ✔✔- forces the issuer to pay the coupon payments
- if issuer defaults on coupon payments or principal, bondholder can force issuer into
bankruptcy to sell their assets and use proceeds to repay bondholders
✔✔Debentures - ✔✔- similar to bonds but not secured by real assets or collateral
- backed by the reputation and credit worthiness of the issuer
- higher level of income than regular secured bonds
- medium risk because not secured by real assets and lower priority than bondholders if
company goes bankrupt
✔✔Convertible Bonds - ✔✔- type of coupon bond that offer investors the option to
convert the bonds into common shares, which confer ownership interest in the company
issuing the bonds
- pre-set price within specified time frame
- due to conversion option, usually smaller coupon rate
✔✔Callable Bonds - ✔✔- issuer reserves right to buy back bond from the bondholder
within a specified time period at a specified price, usually at premium to face value
- higher interest rate as investors may have to sell bond back at an inconvenient time
✔✔Extendible Bonds - ✔✔- allows investor to extend term of the bond within specified
limits
- convenient when bond is close to maturity and paying out a relatively high interest
- lower rate of interest to obtain this feature
, ✔✔Retractable Bonds - ✔✔Bonds that allow the bondholder to sell them back to the
issuer at predetermined prices at specified times earlier than the maturity date
✔✔Zero Coupon Bonds - ✔✔- no coupon payments
- sold at a discount
- paid out at maturity at face value
- face value and maturity are pre-determined so investors know exactly how much
interest they will receive
- usually held in RRSPs
- higher risk as payout isn't throughout as with coupon payments but only at maturity
(interest rates may rise in the meantime)
✔✔Mortgage Bonds - ✔✔- invest in a pool of mortgages
- regular interest income and safety of principal
- low risk as backed by real assets
- Ex: CMBs
✔✔Relationship Between Bond Prices and Interest Rates - ✔✔Inversely proportional
✔✔Relationship Between Bond Prices and Yield - ✔✔Directly proportional
✔✔Normal Yield Curve - ✔✔X-axis: Yield Y-axis: Maturity
- upward-sloping yield curve indicates that long-term interest rates are generally higher
than short-term interest rates. The higher yield reflects investor's expectation that rates
will rise in the future
✔✔Inverted Yield Curve - ✔✔X-axis: Yield Y-axis: Maturity
- downward-sloping yield curve indicates that short-term interest rates are generally
higher than long-term interest rates. Investors expect rates to decline. A recession may
be forthcoming
✔✔Flat Yield Curve - ✔✔X-axis: Yield Y-axis: Maturity
- short and long term rates are the same. Usually indicates that the market is in
transition trying to determine the direction of interest rates. Possible sign of economic
slowdown
✔✔6 Main Risks of Investing with Bonds - ✔✔1. Inflation Risk
2. Interest Risk
3. Reinvestment Risk
4. Liquidity Risk
5. Sovereign Risk
6. Default Risk
✔✔Inflation Risk of a Bond - ✔✔AKA purchasing power risk. When the return of a bond
does not keep up with the inflation rate.
SOLUTIONS SCORED A+
✔✔Commercial Paper (CP) - ✔✔- issued by corporations seeking short-term loans to
fund short-term cash shortages
- purchased at a discount
- at maturity face value is paid
- higher interest and higher risk as not backed by government or bank
- corporation borrows money under its own name and credit rating
- interest rate depends on stability of corporation and its likelihood of loan repayment
- safety of principal and income
✔✔Bonds - ✔✔- fixed income securities with maturity greater than 1 year
- regular income and stability of principal
- riskier ones backed by corporations with poor credit rating entice investors with higher
coupon rates
- when price is $100 means it is at par
- secured by specific assets of the issuer (property, inventories, equipment, etc.)
✔✔Coupon Bonds - ✔✔- forces the issuer to pay the coupon payments
- if issuer defaults on coupon payments or principal, bondholder can force issuer into
bankruptcy to sell their assets and use proceeds to repay bondholders
✔✔Debentures - ✔✔- similar to bonds but not secured by real assets or collateral
- backed by the reputation and credit worthiness of the issuer
- higher level of income than regular secured bonds
- medium risk because not secured by real assets and lower priority than bondholders if
company goes bankrupt
✔✔Convertible Bonds - ✔✔- type of coupon bond that offer investors the option to
convert the bonds into common shares, which confer ownership interest in the company
issuing the bonds
- pre-set price within specified time frame
- due to conversion option, usually smaller coupon rate
✔✔Callable Bonds - ✔✔- issuer reserves right to buy back bond from the bondholder
within a specified time period at a specified price, usually at premium to face value
- higher interest rate as investors may have to sell bond back at an inconvenient time
✔✔Extendible Bonds - ✔✔- allows investor to extend term of the bond within specified
limits
- convenient when bond is close to maturity and paying out a relatively high interest
- lower rate of interest to obtain this feature
, ✔✔Retractable Bonds - ✔✔Bonds that allow the bondholder to sell them back to the
issuer at predetermined prices at specified times earlier than the maturity date
✔✔Zero Coupon Bonds - ✔✔- no coupon payments
- sold at a discount
- paid out at maturity at face value
- face value and maturity are pre-determined so investors know exactly how much
interest they will receive
- usually held in RRSPs
- higher risk as payout isn't throughout as with coupon payments but only at maturity
(interest rates may rise in the meantime)
✔✔Mortgage Bonds - ✔✔- invest in a pool of mortgages
- regular interest income and safety of principal
- low risk as backed by real assets
- Ex: CMBs
✔✔Relationship Between Bond Prices and Interest Rates - ✔✔Inversely proportional
✔✔Relationship Between Bond Prices and Yield - ✔✔Directly proportional
✔✔Normal Yield Curve - ✔✔X-axis: Yield Y-axis: Maturity
- upward-sloping yield curve indicates that long-term interest rates are generally higher
than short-term interest rates. The higher yield reflects investor's expectation that rates
will rise in the future
✔✔Inverted Yield Curve - ✔✔X-axis: Yield Y-axis: Maturity
- downward-sloping yield curve indicates that short-term interest rates are generally
higher than long-term interest rates. Investors expect rates to decline. A recession may
be forthcoming
✔✔Flat Yield Curve - ✔✔X-axis: Yield Y-axis: Maturity
- short and long term rates are the same. Usually indicates that the market is in
transition trying to determine the direction of interest rates. Possible sign of economic
slowdown
✔✔6 Main Risks of Investing with Bonds - ✔✔1. Inflation Risk
2. Interest Risk
3. Reinvestment Risk
4. Liquidity Risk
5. Sovereign Risk
6. Default Risk
✔✔Inflation Risk of a Bond - ✔✔AKA purchasing power risk. When the return of a bond
does not keep up with the inflation rate.
