Fixed Income Analysis Flashcards

A bond with a 6% coupon is priced at a yield of 5%. If the yield increases by 100 bps, the price will:

Answer: Decrease by approximately the modified duration percentage

When yields rise, bond prices fall by approximately modified duration × yield change.

Which of the following bonds has the greatest reinvestment risk?

Answer: 10% coupon bond maturing in 10 years

Higher coupon bonds have greater reinvestment risk because more cash flows must be reinvested at potentially different rates.

The Z-spread is best described as the constant spread added to:

Answer: Each Treasury spot rate to discount cash flows to the market price

The Z-spread is added to each spot rate on the benchmark Treasury curve so that the PV of cash flows equals the bond's market price.

A callable bond's option-adjusted spread (OAS) versus its Z-spread will typically show:

Answer: OAS < Z-spread because the call option premium reduces the spread

For a callable bond, OAS < Z-spread because the Z-spread includes the value of the embedded call option that benefits the issuer.

A bond with convexity of 120 and modified duration of 8 will experience a price change closest to which value if yields rise by 200 bps?

Answer: -15.76%

Price change ≈ -Duration × Δy + 0.5 × Convexity × (Δy)² = -8(0.02) + 0.5(120)(0.02)² = -16% + 0.24% = -15.76%.

Which of the following best describes the liquidity preference theory of the term structure?

Answer: Investors demand a premium for holding longer-term bonds due to greater price risk

Liquidity preference theory holds that investors require a liquidity premium for bearing the price risk of longer-maturity bonds.

An investor buys a 3-year bond at par with a 5% annual coupon. If the bond is sold after 2 years when the yield is 4%, the holding period return is closest to:

Answer: 5.47%

The investor receives two coupons of 5 and sells for approximately 100.96 (1 year 5% cash flow discounted at 4%), giving an HPR slightly above the coupon rate.