CPT CPT Fixed Income & Bond Trading

Question 1

What is the fundamental inverse relationship between bond prices and interest rates?

Accepted Answer

When interest rates rise, existing bond prices fall; when rates fall, bond prices rise

Answer

Bond prices and interest rates move in the same direction; rising rates cause prices to rise

Answer

Bond prices are unaffected by interest rate changes after the initial issuance date

Answer

Bond prices only react to short-term rate changes, not long-term Federal Reserve policy shifts

Question 2

What does 'duration' measure in bond portfolio management?

Accepted Answer

A bond's price sensitivity to changes in interest rates, expressed in years

Answer

The total years remaining until a bond matures from the current date

Answer

The average time since a bond was originally issued across all holdings

Answer

The coupon payment frequency, expressed as the number of payments per year

Question 3

What is the 'yield curve,' and what does an inverted yield curve historically signal?

Accepted Answer

A graph of yields across different maturities; inversion (short-term rates above long-term) has historically preceded recessions

Answer

A graph of bond yields vs. credit ratings; inversion signals a credit crisis is imminent

Answer

A chart showing the yield spread between corporate and Treasury bonds; inversion signals tightening credit conditions

Answer

A plot of a bond's yield over time since issuance; inversion indicates the bond was mispriced at launch

Question 4

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

Accepted Answer

The total annualized return an investor earns if the bond is held to maturity and all payments are reinvested at the same rate

Answer

The annual coupon rate stated on the bond's face at issuance

Answer

The difference between the bond's purchase price and its par value at redemption

Answer

The minimum yield required by credit rating agencies for investment-grade classification

Question 5

What is a 'Treasury bond futures contract,' and why do professional traders use it?

Accepted 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

Answer

A forward contract issued by the U.S. Treasury to lock in government borrowing costs

Answer

A structured product that pays the holder the difference between current and historical Treasury yields

Answer

An exchange-traded fund tracking an index of investment-grade corporate bonds with Treasury collateral

Question 6

What is a 'credit spread' in fixed income markets?

Accepted Answer

The yield difference between a corporate bond and a comparable maturity Treasury bond, reflecting credit risk

Answer

The difference in price between a new bond issuance and a previously issued bond from the same company

Answer

The gap between a bond's bid price and ask price on the secondary market

Answer

The premium paid on a bond callable above par compared to a non-callable equivalent