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

The yield curve plots yields against maturities for bonds of similar credit quality, allowing investors to assess the term structure of interest rates.

Question 2

An 'inverted yield curve' typically signals:

Accepted Answer

Expectations of falling interest rates or an impending economic slowdown

Answer

An inverted yield curve, where short-term yields exceed long-term yields, has historically been associated with expectations of economic slowdown or recession.

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 convertible bond gives the bondholder the option to convert the bond into a predetermined number of the issuer's ordinary shares, offering equity upside alongside bond income.

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 dirty (or full) price includes accrued interest since the last coupon; the clean price strips this out to make comparison between bonds easier.

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

High yield bonds carry a higher probability of default than investment-grade bonds and therefore offer higher yields to compensate investors for the additional credit risk.

CISI Investment Advice Practice Test

CISI Investment Advice Practice Test

CISI IAD Fixed Income Securities 3