CFM CFM Fixed Income & Credit Analysis 1

Question 1

What is the fundamental relationship between bond prices and interest rates?

Accepted Answer

Bond prices move inversely to interest rates

Answer

When interest rates rise, existing bond prices fall because new bonds offer higher yields, making older bonds less attractive.

Question 2

Which measure quantifies the weighted average time to receive a bond's cash flows?

Accepted Answer

Duration

Answer

Duration measures the weighted average time to receive all cash flows and is used as a proxy for interest rate sensitivity.

Question 3

What is a credit default swap (CDS) primarily used for?

Accepted Answer

Hedging credit risk on a reference entity

Answer

A CDS is a derivative contract where the protection buyer pays periodic premiums in exchange for compensation if a credit event occurs on the reference entity.

Question 4

What does positive convexity indicate about a bond's price-yield relationship?

Accepted Answer

Price increases more than duration predicts when rates fall, and decreases less when rates rise

Answer

Positive convexity means the price-yield curve is curved such that price gains exceed duration-estimated gains in falling rate environments.

Question 5

What is the credit spread in fixed income markets?

Accepted Answer

The yield difference between a corporate bond and a comparable Treasury bond

Answer

The credit spread compensates investors for taking on credit risk above the risk-free rate represented by Treasury bonds.

(CFM) Certified Fund Manager Practice Test

(CFM) Certified Fund Manager Practice Test

CFM CFM Fixed Income & Credit Analysis 1