CME-1 Financial Instruments 2 — Questions and Answers
Question 1: What is the 'par value' (face value) of a bond?
- The market price of the bond
- The principal amount the issuer agrees to repay at maturity (Correct answer)
- The first coupon payment
- The issue price
Correct answer: The principal amount the issuer agrees to repay at maturity
Par value (face value) is the nominal value of the bond that the issuer will repay to holders at maturity, typically SAR 1,000 or SAR 10,000 per bond.
Question 2: What is a 'rights issue' in the Saudi equity market?
- An offering of new shares to the public at large
- An offering of new shares to existing shareholders proportional to their current holdings at a discount (Correct answer)
- A bonus share distribution
- A share buyback programme
Correct answer: An offering of new shares to existing shareholders proportional to their current holdings at a discount
In a rights issue, a listed company offers new shares to existing shareholders in proportion to their current holdings, usually at a discount to the market price, to raise capital.
Question 3: What distinguishes 'preferred shares' from ordinary shares in Saudi Arabia?
- No meaningful distinction
- Preferred shares typically have priority on dividends and/or assets in liquidation but may have restricted or no voting rights (Correct answer)
- Preferred shares are only for foreign investors
- Preferred shares are CMA-issued instruments
Correct answer: Preferred shares typically have priority on dividends and/or assets in liquidation but may have restricted or no voting rights
Preferred shares confer dividend priority and/or liquidation preference over ordinary shareholders, but often come with limited or no voting rights.
Question 4: What is a 'repurchase agreement' (repo) in the Saudi money market?
- A share buyback from the market
- A short-term borrowing arrangement where securities are sold with an agreement to repurchase them at a higher price on a later date (Correct answer)
- A type of sukuk
- An interbank deposit
Correct answer: A short-term borrowing arrangement where securities are sold with an agreement to repurchase them at a higher price on a later date
A repo involves selling securities to a counterparty with a contractual obligation to repurchase them at a set price on a future date, effectively functioning as a secured short-term loan.
Question 5: What is the primary risk for investors in fixed-rate bonds when interest rates rise?
- Inflation risk only
- Interest rate risk: the bond's market value falls as rising rates make its fixed coupon less competitive (Correct answer)
- Credit risk increases
- Liquidity disappears entirely
Correct answer: Interest rate risk: the bond's market value falls as rising rates make its fixed coupon less competitive
Fixed-rate bondholders face interest rate risk: as market rates rise, the present value of the bond's fixed cash flows decreases, reducing its market price.
Question 6: What is the yield to maturity (YTM) of a bond?
- The coupon rate only
- The total return anticipated if the bond is held until maturity, accounting for price, coupon payments, and reinvestment (Correct answer)
- The current dividend yield
- The interest rate set by SAMA
Correct answer: The total return anticipated if the bond is held until maturity, accounting for price, coupon payments, and reinvestment
YTM is the internal rate of return that equates the present value of all future cash flows (coupons + principal) to the current market price of the bond.
CME-1 Financial Instruments 2
What is the 'par value' (face value) of a bond?