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

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.

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

Duration quantifies how much a bond's price will change for a 1% shift in interest rates, with higher duration indicating greater price sensitivity.

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

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.

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

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.

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

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.

(CPT) Certified Pro Trader Practice Test

(CPT) Certified Pro Trader Practice Test

CPT CPT Fixed Income & Bond Trading