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

Convexity measures the curvature in the bond price–yield relationship; because duration is linear, convexity corrects for the error in large rate changes.

Question 2

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

Accepted Answer

The issuer

Answer

A callable bond gives the issuer the right to redeem (call) the bond prior to maturity, typically when interest rates fall and the issuer can refinance more cheaply.

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 credit spread is the additional yield a corporate bond offers over a risk-free government bond of similar maturity, compensating for default risk.

Question 4

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

Accepted Answer

They are UK government bonds issued by HM Treasury

Answer

Gilts are UK government bonds issued by HM Treasury and are considered among the lowest credit-risk instruments available in sterling markets.

Question 5

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

Accepted Answer

1% (100 basis point) change in yield

Answer

Modified duration estimates the percentage change in a bond's price for a 1% (100 basis point) change in its yield.

CISI Investment Advice Practice Test

CISI Investment Advice Practice Test

CISI IAD Fixed Income Securities 2