Bonds Questions for RBI Grade B with Answer Key & Explanation

Practicing bonds questions of RBI Grade B exam level is crucial for assessing your understanding of bond concepts for the exam. Below, we have listed practice questions of bonds you can attempt in an exam like setting.

Here’s how you can practice these questions:

• Set a timer of 20 minutes.
• Start your test and attempt questions within 20 minutes.
• Once you’re done or the time is up, refer to the answer key.
• Evaluate your performance to identify areas where you may need further study or practice.

RBI Grade B Bond Practice Questions

Here are 20 practice questions that you can attempt to assess your understanding of bond concepts:

Question 1:

What is the term used for bonds issued by the Indian government in Japanese Yen, with the intention of raising funds from Chinese investors?

 [A] Government Bonds

 [B] Corporate Bonds

 [C] Sovereign Bonds

 [D] Foreign Bonds

 [E] Domestic Bonds 

Click here for the explanation.

Question 2:

A bond with a face value of Rs. 1,000 is currently trading in the secondary market at a price of Rs. 950. This means that the bond is trading at a:

 [A] Premium

 [B] Discount

 [C] Par value

 [D] Zero-coupon bond

 [E] None of the above

Click here for the explanation.

Question 3:

Which of the following is NOT a characteristic of a mortgage bond?

 [A] It is a type of asset-backed security

 [B] It is secured by a pool of mortgages.

 [C] It is a promise by the bond issuing authority to pledge real property as additional security.

 [D] It is a zero-coupon bond.

 [E] None of the above

Click here for the explanation.

Question 4:

What is the main difference between serial and term bonds?

 [A] Serial bonds have different maturity dates, while term bonds have a single maturity date.

 [B] Serial bonds are issued by corporations, while term bonds are issued by governments.

 [C] Serial bonds are secured by assets, while term bonds are unsecured.

 [D] Serial bonds pay a higher interest rate than term bonds.

 [E] None of the above

Click here for the explanation.

Question 5:

Which one of the following statements is true?

1. Two bonds with same coupon rate and same duration would have similar bond price irrespective of frequency of coupon payments

2. Among Two bonds with same coupon rate and same duration, the bond with semi-annual payment would have higher price as compared to bonds with annual payments

3. Among Two bonds with same coupon rate and same duration, the bond with semi-annual payment would have lesser price as compared to bonds with annual payments

4. Bond Price is not dependent on frequency of coupon payments, coupon rate, and duration.

 [A] 1 only

 [B] 3 only

 [C] 2 only

 [D] 4 only

 [E] All of the above.

Click here for the explanation.

Question 6: 

A bond is issued at a _____X_________, If a bond’s price is higher than its original value (what it will be worth when it matures), these bonds are sold at a ____Y________.

 Identify X and Y from the options.

 [A] Premium price, premium

 [B] Discount, premium

 [C] Par, premium

 [D] Premium, par

 [E] None of the above 

Click here for the explanation.

Question 7:

If the interest rate on Bond becomes more than the available rate in the market then which of the following is true?

 [A]  Bond Price Would Decrease

 [B]  Bond Price would increase

 [C] Yield would increase

 [D] Both 1 and 3

 [E] None of the above

Click here for the explanation.

Question 8:

Who decides whether the risk associated with a company is high or low?

 [A] The issuer of the bond

 [B] Both the issuer and the bondholders

 [C] Credit rating agencies

 [D] The government

 [E] The bondholders

Click here for the explanation.

Question 9:

Which of the following is NOT a prominent credit rating agency headquartered in India?

 [A] CRISIL

 [B] Moody’s Investors Service

 [C] ICRA

 [D] CARE Ratings

 [E] India Ratings (Fitch India)

Click here for the explanation.

Question 10:

A bond with a face value of INR 1,000 has a current market price of INR 900 and has a coupon rate of 10% per annum. The bond matures in 5 years. What is the yield of the bond?

 [A] 9.91%

 [B] 10.42%

 [C] 10.94%

 [D] 11.11%

 [E] None of the above

Click here for the explanation.

Question 11:

Consider the following statements in the context of the difference between interest and yield on bonds:

 1. The Interest Rate that which borrower is paying to the investor remains fixed.

 2. The yield of the bond is determined by the Bond’s Current Market Prices.

 3. Interest rate is a measure of the total return an investor can expect from a bond.

 Which among the above statement/s is/are incorrect?

 [A] 1 and 2

 [B] 1 and 3

 [C] 2 and 3

 [D] 3 only

 [E] 1, 2, and 3

Click here for the explanation.

Question 12:

When interest rates offered by banks or other institutions decrease, what happens to the prices of existing bonds in the market?

 [A] They increase

 [B] They decrease

 [C] They remain the same

 [D] They become more volatile

 [E] They become less attractive

Click here for the explanation.

Question 13:

What will happen to bond yields when market interest rates decrease?

 [A] Bond yields increase.

 [B] Bond yields remain unchanged.

 [C] The relationship between interest rates and bond yields is negative.

 [D] Bond yields decrease.

 [E] None of the above

Click here for the explanation.

Question 14:

Calculate the price of a bond with a par value of $1000 to be paid in  2 years, a coupon rate of 20%, and a required yield of 6%. Coupon Payments are made annually. 

[A] $1920.63 

[B] $1750.88 

[C] $1500.00 

[D] $1256.67 

[E] $1756.98

Click here for the explanation.

Question 15:

An investor buys a 5-year government bond with a face value of $10,000, a yield of 4%, and a coupon rate of 10%. Calculate the semi-annual interest payment.

 [A] $199.50

 [B] $500

 [C] $500.50

 [D] $501.50

 [E] None of the above

Click here for the explanation.

Question 16:

If a perpetual bond pays $25,000 per year in perpetuity and the discount rate is assumed to be 25%, the present value would be:

 [A] $90,000

 [B] $95,000

 [C] $100,000.00

 [D] $74,000

 [E] None of the above

Click here for the explanation.

Question 17:

Which statement best describes Malkiel’s Property 1?

 [A] There is a direct relationship between market interest rates and bond values.

 [B] There is no relationship between market interest rates and bond values.

 [C] There is an inverse relationship between market interest rates and bond values.

 [D] Market interest rates have no impact on bond prices.

 [E] None of the above

Click here for the explanation.

Question 18:

Consider a callable bond that has a face value of 10,000 and pays an annual coupon of 10%. The bond is currently priced at 11,750 and has the option to be called at 11,000 ten years from now. Find the YTC.

 [A] 8.13%

 [B] 8.23%

 [C] 8.56%

 [D] 9.23%

 [E] None of the above

Click here for the explanation.

Question 19:

What is credit risk?

 [A] The risk that the issuer of a bond will default on its debt obligations.

 [B] The risk that the value of a bond will fluctuate with changing market conditions.

 [C] The risk that a bond’s price will fall with rising interest rates.

 [D] The risk that a bond’s total return will not outpace inflation.

 [E] All of the above.

Click here for the explanation.

Question 20:

Suppose you purchased a bond with a face value of Rs.50,000 and a coupon rate of 10% with 10 years until maturity. After 1 year, the interest rate on fixed deposits increases to 15%. What would be the most likely impact on the bond’s price?

 [A] The bond’s price will increase.

 [B] The bond’s price will remain unchanged.

 [C] The bond’s price will decrease.

 [D] The bond’s price will be unaffected by the change in interest rates.

 [E] None of the above

Click here for the explanation.

Finally, it’s time to evaluate your performance with the answer key below.

RBI Grade B Bond Practice Questions: Answer Key

Here’s the answer key for the above RBI Grade B bond practice questions:

Evaluation: Based on your performance, you may need to review bond concepts further or move on to other topics of finance.

Learn New Concepts

• If you got 10 or more questions correct, it indicates a strong understanding of bond concepts. 
• Now, you can confidently move on to other finance topics like Derivatives, Primary and Secondary Markets, Financial Institutions, etc.

Need for Revision

• If you couldn’t solve atleast 10 questions correctly, you need to revise your bond concepts. 
• Refer to the article, “RBI Grade B Bond Concepts” to enhance your understanding of the bond concepts and improve your score.

Don’t forget to go through the below explanations. These explanations will help you revise the concepts of bonds and also help you with the best way to attempt and solve the above questions.

RBI Grade B Bond Practice Questions: Explanation

Here are the detailed explanations for the above questions:

Question 1: Explanation: Click here for the question.

Sovereign Bonds are issued by the Indian Government in foreign currency. So, bonds issued by the Indian Government in US Dollars or Japanese Yen would be an example of Sovereign bonds.

To meet their expenditure, governments have 2 options- 

a) Raise taxes or 

b) Issue bonds. 

The Yield of the sovereign bond is the interest rate that the government pays on issuing bonds. Countries with volatile economies and high inflation rates have to issue higher interest returns on their bonds compared to more stable ones. The Creditworthiness, external and internal factors (Country Risk), and Exchange Rates affect the yield of the bonds. 

Hence, the correct answer is option C.

Question 2: Explanation: Click here for the question.

A bond is said to be trading at a discount when its current market price is lower than its face value. In the question, the bond is trading at a price of Rs. 950, which is lower than its face value of Rs. 1,000.

Hence option B is the correct answer.

Let’s check the other options

1. Premium: A bond is said to be trading at a premium when its current market price is higher than its face value.
2. Par value: A bond is said to be trading at par value when its current market price is equal to its face value.
3. Zero-coupon bond: A zero-coupon bond is a type of bond that does not pay any periodic interest payments. Instead, the investor receives the full face value of the bond at maturity.

Question 3: Explanation: Click here for the question.

The answer is d. It is a zero-coupon bond.

Here’s why:

a, b, and c are all characteristics of mortgage bonds.

• Mortgage bonds are indeed a type of asset-backed security, specifically one where the underlying asset is a pool of mortgages.
• They are also secured by this pool of mortgages, meaning that if the issuer defaults, bondholders can potentially recoup their investment by seizing the underlying properties.
• Additionally, some mortgage bonds may have real property pledged as additional security, further reducing the risk for investors.

 d, zero-coupon bonds, are not a characteristic of mortgage bonds.

• Mortgage bonds typically make periodic coupon payments to investors, consisting of both interest and principal.
• Zero-coupon bonds, on the other hand, do not make any coupon payments and instead are sold at a discount to their face value, with the difference representing the investor’s return.

Therefore, while all the other options describe common features of mortgage bonds, being a zero-coupon bond is not one of them.

Hence option D is the correct answer

Question 4: Explanation: Click here for the question.

Serial and term bonds are two common structures used for issuing debt securities, and they differ in how their principal repayments are scheduled over the bond’s life. 

• Serial bonds are issued by an organization with different maturity dates. 
• This is done to enable the company to retire the bonds in installments rather than all together. 
• It is less likely to disturb the cash position of the rm than if all the bonds were retired together. 
• Term bonds are the opposite of Serial Bonds as in this the bonds mature at once rather than in installments. 

Hence option A is the correct answer. 

Question 5: Explanation: Click here for the question.

A higher frequency of coupon payments means higher interest earned on further investment of those payments. So the bond price would be higher because the bond price is the present value of all the interest payments made in the future.

The following statement is true:

2. Among Two bonds with the same coupon rate and same duration, the bond with semi-annual payment would have a higher price as compared to bonds with annual payments.

Detailed Explanation:

A bond’s price is determined by a number of factors, including its coupon rate, duration, and the prevailing market interest rate. The frequency of coupon payments also has an impact on bond prices but to a lesser extent.

In general, a bond with more frequent coupon payments will have a higher price than a bond with less frequent coupon payments. This is because investors prefer to receive their interest payments more frequently.

For example, suppose you have two bonds with the same coupon rate and duration, but one bond pays semi-annual coupons while the other bond pays annual coupons. The bond with semi-annual coupons will have a higher price than the bond with annual coupons. This is because you will receive more interest payments more frequently with the semi-annual coupon bond.

The other three statements are false:

• 1. Two bonds with the same coupon rate and same duration would have similar bond prices irrespective of the frequency of coupon payments (This is false. A bond with more frequent coupon payments will generally have a higher price than a bond with less frequent coupon payments.)
• 3. Among Two bonds with the same coupon rate and same duration, the bond with semi-annual payment would have a lower price as compared to bonds with annual payments (This is also false. A bond with semi-annual coupon payments will generally have a higher price than a bond with annual payments.)
• 4. Bond Price is not dependent on the frequency of coupon payments, coupon rate, and duration. (This is false. Bond price is dependent on all three of these factors.

Therefore, option C is the correct answer.

Question 6: Explanation: Click here for the question.

A bond is issued at a premium price If a bond’s price is higher than its original value (what it will be worth when it matures), these bonds are sold at a premium.

Hence option A is the correct answer.

Additional Information

1. Discount Price: If a bond’s price is lower than its original value, it’s sold at a discount. This occurs when the bond’s interest rate is lower than the current market interest rates
2. Par Price: When a bond’s price is the same as its original value, it’s sold at par. This means the bond’s interest rate is about the same as the current market interest rates

Question 7: Explanation: Click here for the question.

The correct answer is B- Bond Price would Increase.

Here’s why:

If the interest rate on a specific bond becomes higher than the prevailing market rates, that bond becomes more attractive to investors compared to other bonds offering similar or lower returns. 

Therefore, demand for the bond increases and so the bond price increases.

Hence option B is the correct answer.

Question 8: Explanation: Click here for the question.

Risk is the possibility of losing money on an investment or business venture. Whereas Return in finance is the profit or loss an investor makes on an investment over a period.

Let’s check the options:

• (A) The issuer of the bond: The option is incorrect as The issuer of the bond has a vested interest in making their bonds appear as low-risk as possible, so they are not a reliable source of information on the riskiness of their own bonds. Hence, option A is incorrect.
• (B) Both the issuer and the bondholders: The option is incorrect as Both the issuer and the bondholders have biases that could affect their assessment of the riskiness of a bond. Hence, option B is incorrect.
• (C) Credit rating agencies: The option is correct as Credit rating agencies are specialized organizations that assess the creditworthiness of companies and other borrowers. They assign credit ratings to borrowers based on their financial strength, debt levels, and other factors. Investors use credit ratings to help them assess the risk of investing in a company’s bonds. Hence, option C is correct.
• (D) The government: The option is incorrect as The government does not play a role in assessing the riskiness of individual bonds. Hence, option D is incorrect.
• (E) The bondholders: The option is incorrect as Bondholders may have different opinions on the riskiness of a particular bond, so they are not a reliable source of information on the riskiness of a bond. Hence, option E is incorrect.

Therefore, option C is the correct answer

Question 9: Explanation: Click here for the question.

A credit rating agency (CRA) is a company that rates debtors on the basis of their ability to pay back their interest and loan amount on time and the probability of them defaulting. 

CRAs were set up to provide independent evidence and research-based opinion on the ability and willingness of the issuer to meet debt service obligations, quintessentially attaching a probability of default to a specific instrument.

Moody’s Investors Service is a prominent credit rating agency headquartered in the United States. It is not one of the credit rating agencies established in India.

Hence, option B is the correct answer.

Question 10: Explanation: Click here for the question.

A bond’s yield is the return an investor expects to receive each year over its term to maturity. For the investor who has purchased the bond, the bond yield is a summary of the overall return that accounts for the remaining interest payments and principal they will receive, relative to the price of the bond.

Let’s calculate the bond yield 

The formula to calculate yield is: Yield = Coupon amount/Current Market Price of the bond*100

• Coupon amount = 10*1000/100= Rs.100
• Current Market Price of the bond= 900
• Putting the values in the formula
• Yield = (100/900) *100 
• Yield = 11.11%

Hence, option D is the correct answer.

Question 11: Explanation: Click here for the question.

Let’s check the statements

• Statement 1: The statement is correct as the interest rate that a borrower pays to an investor is fixed when the bond is issued. This is called the coupon rate. Hence, statement 1 is correct
• Statement 2: The statement is correct as The yield of a bond is determined by its current market price. This is because the yield is the total return that an investor can expect to receive from the bond, including both the interest payments and any capital gains or losses. Hence, statement 2 is correct
• Statement 3: The statement is incorrect as, The yield is a measure of the total return that an investor can expect to receive from the bond, including both the interest payments and any capital gains or losses. Hence, statement 3 is incorrect

 Therefore, option D is the correct answer.

Question 12: Explanation: Click here for the question.

The price of a bond and its yield-to-maturity are negatively correlated to each other so When interest rates decrease, the prices of existing bonds typically increase. This is because older bonds with higher coupon rates become more attractive to investors in a lower interest rate environment. 

As a result, the demand for existing bonds increases, driving up their prices.

The correct answer is option A.

Question 13: Explanation: Click here for the question.

Bond yield refers to the rate of return an investor can expect to earn from a bond investment.

• The relationship between interest rates and bond yields is positively correlated. 
• When market interest rates increase, the yields on newly issued bonds also rise. 
• Conversely, when market interest rates decrease, the yields on new bonds tend to fall.

The correct answer is option D.

Question 14: Explanation: Click here for the question.

To calculate the price of a bond using the formula, we need the following information:

•  C (Coupon Value) = 200
•  N (Number of periods) = 2
•  i (Current yield) = 6%
•  M (Maturity Value) = 1000
•  Bond Price =?

Step 2: Substitute the values into the formula.

• Bond Price = $200 * (1 + (1/ 1+0.06) 2 /6 + 1000/(1+0.06) 2
• Bond Price = $1256.67

Hence, option D is the correct answer

Question 15: Explanation: Click here for the question.

Semi-annual interest payment is a type of interest payment that is made twice a year, every six months. This is in contrast to annual interest payments, which are made once a year, and quarterly interest payments, which are made four times a year.

Let’s check the answer

•  Semi-Annual Interest Payment = (Annual Interest Payment / 2)
•  = ($1000 / 2)
•  = $500

Hence, option B is the correct answer

Question 16: Explanation: Click here for the question.

Perpetual bonds, also known as perps, are bonds with no maturity date. This means that the issuer of the bond does not have to repay the principal amount of the bond, and the bondholder is entitled to receive interest payments forever. Perpetual bonds are often considered to be a type of equity, rather than debt, because of their lack of a maturity date.

Let’s check the answer: Click here for the question.

Present value (or prince) = C / dr

Where:

•  C = periodic coupon payment of the bond
•  dr = discount rate applied to the bond
•  Present value = $25,000 / 0.25
•  Present value = $100,000

Hence, option C is the correct answer.

Question 17: Explanation: Click here for the question.

Burton Gordon Malkiel (born August 28, 1932) is an American economist and writer, most famous for his classic nance book A Random Walk down Wall Street. He has given some important properties or theorems for Bonds. As per that,

Malkiel’s Property 1- It states that there is an inverse relationship between market interest rates and bond values. This means that as market interest rates increase, bond prices fall, and vice versa.

Hence, option C is the correct answer.

Additional Information

• Malkiel’s Property 2: Malkiel’s Property 2 states that the relationship between interest rates and bond prices is inverse but is not a straight line but kind of convex.
• This means that as interest rates go down, bond prices go up, and vice versa. 
• However, the relationship is not linear, meaning that the change in bond prices is not directly proportional to the change in interest rates. 
• Instead, the relationship is convex, meaning that the change in bond prices becomes more pronounced as interest rates continue to change.

Question 18: Explanation: Click here for the question.

•  Coupon Interest Payment = 10% of 10000 = 1000
•  Call price = 11000
•  Market Value = 11750
•  Number of years to Call = 10

•  YTC = (1000 + (11000-11750)/10) / (11000+11750)/2
•  YTC = 8.132%

Hence, the correct answer is option A.

Question 19: Explanation: Click here for the question.

Credit risk: The risk that the issuer of the bond will default on its debt obligations, meaning that it will be unable to make interest payments or repay the principal amount of the loan.

Hence, option A is the correct answer.

Additional Information

Interest rate risk: The risk that the price of a bond will fall if interest rates rise. This is because new bonds will be issued with higher interest rates, making existing bonds less attractive to investors.

Question 20: Explanation: Click here for the question.

When market interest rates rise, existing bonds with fixed coupon rates become less attractive to investors because they offer a lower yield compared to the new, higher market rates.

In this scenario, the bond was initially issued with a 10% coupon rate, but after 1 year, fixed deposit rates have risen to 15%. Since the bond’s coupon rate is lower than the current market rate, its price will likely decrease.

Investors can earn a higher yield with the 15% fixed deposit compared to the bond’s 10% coupon, so they may prefer to sell the bond and invest in the higher-yielding option. This increase in market interest rates reduces the demand for the existing bond, which, in turn, results in a decrease in its price.

Hence, option C is the correct answer.

After practicing these bond-related questions, you should also click on the link, “RBI Grade B Bond PYQs”, to practice the actual bond-related questions asked in the exam.

Click on the link, “RBI Grade B Bond Questions” to download the above-mentioned bond practice questions in a PDF format.

Conclusion

Attempting bond practice papers is probably the best way to determine how well you’re prepared for the bond topic. 

• If you score well, you can move on to a different topic. 
• If not, you can revise your RBI Grade B Bond Concepts and retake the test.