CPT Fixed Income & Bond Trading Flashcards
6 cards from real CPT practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 CPT Fixed Income & Bond Trading flashcards as text
What is the difference between the 'primary market' and the 'secondary market' for bonds?
Answer: The primary market is where new bonds are issued and sold for the first time; the secondary market is where previously issued bonds are traded between investors
In the primary market, the issuer sells bonds directly (via underwriters) to raise capital; in the secondary market, investors trade those bonds among themselves.
What is a 'mortgage-backed security' (MBS), and what is prepayment risk?
Answer: A security representing a pool of mortgage loans where investors receive principal and interest; prepayment risk is the danger that borrowers repay early when rates fall, forcing reinvestment at lower yields
MBS pool residential mortgages and pass through payments to investors; prepayment risk mirrors callable bond risk — homeowners refinance when rates fall, returning principal at the worst time.
What does 'basis risk' mean when using Treasury futures to hedge a corporate bond portfolio?
Answer: The residual risk remaining because the price movements of Treasury futures and corporate bonds do not perfectly correlate due to credit spread changes
Even though Treasury futures hedge interest rate risk, corporate bonds also move based on credit spreads, so the hedge is imperfect — the difference is basis risk.
What is the 'DV01' (Dollar Value of a Basis Point) used for in professional bond trading?
Answer: The dollar change in a bond's price for a one basis point (0.01%) change in yield, used to size hedges and quantify rate risk
DV01 tells traders exactly how many dollars they gain or lose per basis point move in rates, making it essential for precisely sizing positions and hedges.
What is a 'repo' (repurchase agreement), and how do professional fixed income traders use it?
Answer: A short-term borrowing mechanism where a trader sells bonds for cash and agrees to repurchase them at a slightly higher price, effectively using bonds as collateral for financing
Repos are the primary funding mechanism for leveraged fixed income positions, allowing traders to finance bond inventories overnight or for short terms at near-risk-free rates.
What is the purpose of the 'on-the-run' vs. 'off-the-run' distinction in Treasury markets?
Answer: On-the-run Treasuries are currently being auctioned; off-the-run are all previously issued Treasuries of the same maturity that trade at a slight yield premium due to lower liquidity
The most recently auctioned Treasury (on-the-run) is the most liquid and serves as the market benchmark, while older issues (off-the-run) carry a small liquidity premium in yield.