CISI IAD Fixed Income Securities 3

Question 1

What is the primary purpose of the 'yield curve'?

Accepted Answer

To illustrate the relationship between yield and time to maturity for bonds of similar credit quality

Answer

To show the relationship between bond prices and inflation expectations

Answer

To display daily price movements of government bonds

Answer

To compare corporate bond yields with equity dividend yields

Question 2

An 'inverted yield curve' typically signals:

Accepted Answer

Expectations of falling interest rates or an impending economic slowdown

Answer

Strong economic growth expectations

Answer

Rising inflation in the short term only

Answer

Higher credit risk in long-dated bonds

Question 3

Which of the following best describes a 'convertible bond'?

Accepted Answer

A bond that gives the holder the right to convert into a specified number of equity shares

Answer

A bond that can be converted into a different currency at maturity

Answer

A bond whose coupon converts from fixed to floating after a set period

Answer

A bond that can be redeemed early by the issuer

Question 4

The 'clean price' of a bond differs from the 'dirty price' in that:

Accepted Answer

The clean price excludes accrued interest, while the dirty price includes it

Answer

The clean price includes accrued interest, while the dirty price does not

Answer

The clean price is quoted after tax, while the dirty price is before tax

Answer

There is no difference — they are alternative names for the same figure

Question 5

Which of the following is a characteristic of 'high yield' (sub-investment grade) bonds compared to investment-grade bonds?

Accepted Answer

Higher yields and greater credit risk, but potentially higher returns

Answer

Lower coupon rates to reflect better liquidity

Answer

Guaranteed by a government or supranational body

Answer

Lower price volatility due to shorter maturities

Question 6

In the context of bond markets, what is 'duration matching' (immunisation) used for?

Accepted Answer

Aligning the duration of assets and liabilities to protect against interest rate movements

Answer

Matching bond maturities to reduce portfolio size

Answer

Selecting bonds with identical coupon structures

Answer

Matching government bonds with corporate bonds of the same yield

Question 7

What does 'basis risk' refer to in fixed income markets?

Accepted Answer

The risk that the yield spread between two related instruments changes unexpectedly

Answer

The risk that a bond will be called before maturity

Answer

The risk arising from holding bonds denominated in a foreign currency

Answer

The risk that the bond issuer's credit rating is downgraded