CISI IAD Fixed Income Securities 1

Question 1

What is the relationship between bond prices and interest rates?

Accepted Answer

They move in opposite directions

Answer

Bond prices and interest rates have an inverse relationship: when rates rise, existing bond prices fall because newer bonds offer higher yields.

Question 2

A bond with a face value of £1,000, a coupon rate of 5% and a current market price of £950 has a current yield of approximately:

Accepted Answer

5.26%

Answer

Current yield = Annual coupon / Market price = £50 / £950 = 5.26%.

Question 3

Which of the following best describes 'duration' in the context of fixed income securities?

Accepted Answer

A measure of a bond's sensitivity to interest rate changes

Answer

Duration measures a bond's price sensitivity to changes in interest rates; a higher duration means greater price volatility for a given rate move.

Question 4

A 'zero coupon bond' is best described as:

Accepted Answer

A bond issued at a discount that pays no periodic interest

Answer

Zero coupon bonds are issued at a discount to face value and pay no periodic coupons; the investor's return comes entirely from the accretion to par at maturity.

Question 5

Which type of UK government bond is designed to protect investors against inflation?

Accepted Answer

Index-linked gilts

Answer

Index-linked gilts have both their coupon payments and principal linked to the UK Retail Prices Index (RPI), providing inflation protection.

CISI Investment Advice Practice Test

CISI Investment Advice Practice Test

CISI IAD Fixed Income Securities 1