Fixed Income Securities Flashcards

What is the relationship between bond prices and interest rates?

Answer: They move in opposite directions

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

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:

Answer: 5.26%

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

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

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

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

A 'zero coupon bond' is best described as:

Answer: A bond issued at a discount that pays no periodic interest

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.

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

Answer: Index-linked gilts

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

What does 'yield to maturity' (YTM) represent for a bond?

Answer: The total annualised return if the bond is held until maturity and coupons are reinvested at the same rate

YTM is the internal rate of return on a bond, assuming it is held to maturity and all coupon payments are reinvested at the same rate.

Which credit rating is considered the lowest investment-grade rating by Standard & Poor's?

Answer: BBB-

BBB- is the lowest investment-grade rating from S&P; bonds rated BB+ and below are classified as speculative or 'high yield'.