CFS Fixed Income & Bonds Flashcards
6 cards from real CFS practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 CFS Fixed Income & Bonds flashcards as text
Which risk describes the possibility that a bond issuer will be unable to make scheduled interest or principal payments?
Answer: Default risk
Default risk (credit risk) is the chance that the bond issuer will fail to meet its contractual debt obligations.
A 'putable' bond grants which right to the bondholder?
Answer: The right to sell the bond back to the issuer at a specified price before maturity
A putable bond gives the investor the right to sell (put) the bond back to the issuer at par on specified dates, providing downside protection.
Mortgage-backed securities (MBS) are primarily exposed to which unique risk?
Answer: Prepayment risk
MBS carry prepayment risk because homeowners can refinance or pay off mortgages early, disrupting the expected cash flow stream.
What is the 'current yield' of a bond?
Answer: Annual coupon payment divided by the bond's current market price
Current yield is calculated by dividing the bond's annual coupon payment by its current market price, ignoring capital gains or losses.
Which bond feature provides investors protection by requiring the issuer to retire a portion of the debt annually?
Answer: Sinking fund provision
A sinking fund provision requires the issuer to periodically retire a portion of the outstanding bond issue, reducing default risk over time.
When comparing taxable and tax-exempt bonds, what calculation determines the equivalent taxable yield for a municipal bond?
Answer: Tax-exempt yield divided by (1 minus the investor's marginal tax rate)
The taxable equivalent yield formula (tax-exempt yield ÷ (1 - marginal tax rate)) shows what taxable bond yield would be needed to match a muni's after-tax return.