CBE CBE Financial Markets and Instruments 1 — Questions and Answers
Question 1: Which financial market instrument represents a short-term debt obligation issued by the U.S. Treasury with a maturity of one year or less?
- Treasury bond
- Treasury bill (Correct answer)
- Treasury note
- TIPS
Correct answer: Treasury bill
Treasury bills (T-bills) are short-term U.S. government debt instruments with maturities of 4, 8, 13, 26, or 52 weeks.
Question 2: The yield curve is considered 'inverted' when:
- Short-term rates are higher than long-term rates (Correct answer)
- Long-term rates are higher than short-term rates
- All maturities have the same yield
- The 10-year yield equals the Fed funds rate
Correct answer: Short-term rates are higher than long-term rates
An inverted yield curve occurs when short-term interest rates exceed long-term rates, which has historically preceded U.S. recessions.
Question 3: A bond trading at a price below its par value is said to be trading at a:
- Premium
- Discount (Correct answer)
- Parity
- Spread
Correct answer: Discount
A bond trades at a discount when its coupon rate is lower than prevailing market interest rates, causing its price to fall below par.
Question 4: Which of the following best describes a derivative financial instrument?
- A stock issued by a publicly traded company
- A contract whose value is derived from an underlying asset (Correct answer)
- A government bond with fixed interest payments
- A savings account with a guaranteed return
Correct answer: A contract whose value is derived from an underlying asset
Derivatives are financial contracts whose value depends on the price of an underlying asset such as stocks, bonds, commodities, or currencies.
Question 5: The primary market in finance refers to:
- Where previously issued securities are traded between investors
- Where new securities are issued for the first time to raise capital (Correct answer)
- The largest stock exchange by market capitalization
- Markets for commodity futures contracts
Correct answer: Where new securities are issued for the first time to raise capital
The primary market is where companies and governments issue new securities directly to investors, such as through an IPO or bond issuance.
Question 6: Which measure represents the sensitivity of a bond's price to changes in interest rates?
- Convexity
- Duration (Correct answer)
- Yield spread
- Credit rating
Correct answer: Duration
Duration measures the weighted average time to receive a bond's cash flows and approximates the percentage price change for a 1% change in interest rates.
CBE CBE Financial Markets and Instruments 1
Which financial market instrument represents a short-term debt obligation issued by the U.S.
Treasury with a maturity of one year or less?