CIM CIM Fixed Income & Debt Securities 2

Question 1

Credit spread represents the difference between:

Accepted Answer

The yield on a corporate bond and the yield on a comparable maturity Treasury bond

Answer

Credit spread is the additional yield an investor earns above the risk-free Treasury rate to compensate for the credit risk of a non-government issuer.

Question 2

Which of the following best describes a mortgage-backed security (MBS)?

Accepted Answer

A bond backed by a pool of mortgage loans that passes interest and principal payments to investors

Answer

An MBS is a securitized product where the cash flows from a pool of mortgage loans are passed through to investors as interest and principal payments.

Question 3

Prepayment risk is a concern for MBS investors primarily because:

Accepted Answer

When rates fall, homeowners refinance early, returning principal at an inopportune time for investors

Answer

Prepayment risk means investors receive principal back sooner than expected — often when rates are low — forcing reinvestment at lower yields.

Question 4

The yield to maturity (YTM) of a bond assumes which of the following?

Accepted Answer

All coupon payments are reinvested at the YTM rate until maturity

Answer

YTM is calculated under the assumption that all coupon payments are reinvested at the same YTM rate, which may not hold in practice.

Question 5

Treasury Inflation-Protected Securities (TIPS) protect investors from inflation by:

Accepted Answer

Adjusting the bond's principal value in line with the Consumer Price Index (CPI)

Answer

TIPS adjust their principal upward with CPI increases, so both the principal at maturity and the coupon payments grow with inflation.

CIM - Chartered Investment Manager Practice Test

CIM - Chartered Investment Manager Practice Test

CIM CIM Fixed Income & Debt Securities 2