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IIA CIA Exam
Certified Internal Auditor Exam (Page 16 )

Updated On: 12-Jan-2026
Page 16 of 342
PDF with 1702 Questions

Bondholders are assured of protection against inflation if they hold

  1. Income bonds.
  2. Convertible bonds.
  3. Mortgage bonds.
  4. Indexed bonds.

Answer(s): D

Explanation:

The interest payments on indexed or purchasing power bonds are based on an inflation index, such as the consumer price index. Thus, interest paid to bondholders rises automatically when the inflation rate rises.



Zero-coupon bonds:

  1. Sell for a small fraction of their face value because their yield is much lower than the market rate.
  2. Increase in value each year as they approach maturity, providing the owner with the total payoff at maturity.
  3. Are redeemable in measures of a commodity such as barrels of oil, tons of coal, or ounces of rare metal (e.g., silver).
  4. Are high-interest-rate, high-risk, unsecured bonds that have been used extensively to finance leveraged buyouts.

Answer(s): B

Explanation:

Zero-coupon bonds sell at a deep discount and increase in value each year until maturity.
These bonds do not pay interest.



Convertible bonds and bonds issued with warrants differ in that

  1. Convertible bonds have lower coupon rates than straight bonds, while bonds issued with warrants have higher coupon rates than straight bonds.
  2. Convertible bonds have higher coupon rates than straight bonds, while bonds issued with warrants have lower coupon rates than straight bonds.
  3. Convertible bonds remain outstanding after the bondholder exercises the right to become an ordinary shareholder, while bonds that are issued with warrants do not.
  4. Bonds that are issued with warrants remain outstanding after the bondholder exercises the right to become an ordinary shareholder, while convertible bonds do not.

Answer(s): D

Explanation:

Warrants are usually detachable. They are options to purchase equity securities and should be separately accounted for. A capital gain results if the share price rises above the option price. The bonds remain outstanding if the warrants are exercised. Convertible bonds must be surrendered when the conversion privilege is exercised. Under IFRSs, the equity and debt features of convertible bonds are separately accounted for.



If an entity has outstanding bonds with a sinking fund provision and if interest rates have <List A> since the bonds were issued, the entity would realize a savings in meeting its sinking fund obligations by <List B>.

  1. Option A
  2. Option B
  3. Option C
  4. Option D

Answer(s): A

Explanation:

If interest rates have increased, the prices of outstanding bonds must decrease so that their yields will reach the market rate. Hence, the bonds will be selling at a discount below face value) in the open market. Retiring a portion of the outstanding bonds by buying them in the open market at the discounted price will be cheaper than calling a portion of the bonds at face value.



Which of the following is usually not a feature of cumulative preference shares?

  1. Has priority over ordinary shares with regard to earnings.
  2. Has priority over ordinary shares with regard to assets.
  3. Has voting rights.
  4. Has the right to receive dividends in arrears before ordinary share dividends can be paid.

Answer(s): C

Explanation:

Preference shares do not usually have voting rights. Preference shareholders are usually given the right to vote for directors only if the entity has not paid the preference dividend for a specified period of time, such as 10 quarters. Such a provision is an incentive for management to pay preference dividends.



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