CISI IAD Fixed Income Securities 2

Question 1

What is 'convexity' in bond analysis?

Accepted Answer

The curvature of the price-yield relationship that improves on the linear duration estimate

Answer

The spread between a bond's yield and the risk-free rate

Answer

The average maturity of the bond's cash flows

Answer

The inverse of the bond's modified duration

Question 2

A 'callable bond' gives which party the right to redeem the bond before maturity?

Accepted Answer

The issuer

Answer

The bondholder

Answer

The bond trustee

Answer

The regulator

Question 3

The 'credit spread' on a corporate bond is best defined as:

Accepted Answer

The yield premium over a comparable maturity government bond

Answer

The difference between its bid and offer price

Answer

The annual coupon rate minus the risk-free rate

Answer

The difference between the redemption yield and the flat yield

Question 4

Which of the following statements about 'gilts' is correct?

Accepted Answer

They are UK government bonds issued by HM Treasury

Answer

They are issued by UK local authorities

Answer

They carry a significant risk of default

Answer

They always pay a floating rate coupon

Question 5

Modified duration measures a bond's approximate price change for a:

Accepted Answer

1% (100 basis point) change in yield

Answer

1% change in the bond's coupon rate

Answer

One-year passage of time

Answer

1% change in the issuer's credit rating

Question 6

What is a 'floating rate note' (FRN)?

Accepted Answer

A bond whose coupon payments reset periodically based on a reference rate such as SONIA

Answer

A bond whose maturity date can be extended by the issuer

Answer

A bond that can be converted into equity at the holder's option

Answer

A bond that is traded on a floating exchange-rate basis

Question 7

A bond priced at a 'premium' means:

Accepted Answer

Its market price is above its face (par) value

Answer

Its yield to maturity is higher than its coupon rate

Answer

It has a higher credit rating than comparable bonds

Answer

Its coupon is above the current risk-free rate only