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 fundamental inverse relationship between bond prices and interest rates?
Answer: When interest rates rise, existing bond prices fall; when rates fall, bond prices rise
Because a bond's coupon is fixed, rising market rates make it less attractive relative to new bonds, so its price must fall to offer a competitive yield.
What does 'duration' measure in bond portfolio management?
Answer: A bond's price sensitivity to changes in interest rates, expressed in years
Duration quantifies how much a bond's price will change for a 1% shift in interest rates, with higher duration indicating greater price sensitivity.
What is the 'yield curve,' and what does an inverted yield curve historically signal?
Answer: A graph of yields across different maturities; inversion (short-term rates above long-term) has historically preceded recessions
The yield curve plots yields for bonds of increasing maturity; an inversion where short-term rates exceed long-term rates has preceded most U.S. recessions historically.
What does 'yield to maturity' (YTM) represent for a bond investor?
Answer: The total annualized return an investor earns if the bond is held to maturity and all payments are reinvested at the same rate
YTM is the comprehensive annualized return that equates the bond's current price to the present value of all future cash flows, assuming reinvestment at the same rate.
What is a 'Treasury bond futures contract,' and why do professional traders use it?
Answer: A standardized agreement to buy or sell U.S. Treasury bonds at a set price on a future date, used for hedging interest rate exposure or speculating on rate moves
T-bond futures allow traders to gain leveraged exposure to or hedge against interest rate changes without owning the underlying bonds, trading on the CME Group.
What is a 'credit spread' in fixed income markets?
Answer: The yield difference between a corporate bond and a comparable maturity Treasury bond, reflecting credit risk
Credit spreads widen when investors demand more compensation for default risk and tighten when confidence in the issuer improves, making them a key risk indicator.