Fixed Income Analysis Flashcards

A bond with a 5% annual coupon, $1,000 face value, and 10 years to maturity is priced at $950. The yield to maturity (YTM) is:

Answer: Greater than 5%

When a bond trades at a discount (price below par), the YTM is higher than the coupon rate to compensate investors for the capital appreciation to par at maturity.

Duration measures a bond's price sensitivity to changes in interest rates. If a bond has a modified duration of 7, a 1% increase in yield will cause the bond price to:

Answer: Decrease by approximately 7%

Modified duration of 7 means a 1% rise in yield causes approximately a 7% decline in bond price; duration provides an approximation, not an exact figure.

Which of the following bonds has the greatest price sensitivity to a change in interest rates?

Answer: A 10-year bond with a 5% coupon

Longer maturity and lower coupon rate both increase duration and therefore price sensitivity; the 10-year, 5% coupon bond has the highest duration.

Convexity in bond analysis refers to:

Answer: The curvature in the price-yield relationship that duration alone underestimates

Convexity captures the curvature in the price-yield relationship, providing a more accurate estimate of price changes than duration alone for large yield moves.

The nominal spread of a corporate bond is defined as:

Answer: The difference between the bond's YTM and the YTM of a benchmark government bond of similar maturity

The nominal (or G-spread) is the simple difference between a corporate bond's YTM and a comparable maturity government benchmark YTM.

A callable bond will have a price that is:

Answer: Lower than an otherwise identical option-free bond because the call option benefits the issuer

A callable bond is priced lower than an equivalent option-free bond because the embedded call option benefits the issuer at the expense of the investor.