Fixed-Income Securities Analysis Flashcards

A bond's duration measures which of the following?

Answer: The weighted average time to receive the bond's cash flows

Duration is the weighted average time to receive all cash flows (coupons and principal), weighted by their present values.

If a bond has a modified duration of 5 and market yields rise by 1%, what is the approximate change in the bond's price?

Answer: -5%

Modified duration approximates that a 1% rise in yield causes a price decline roughly equal to the modified duration percentage, so approximately -5%.

Which type of bond carries the highest credit risk?

Answer: High-yield (junk) bonds

High-yield bonds, also called junk bonds, are rated below investment grade and carry the highest risk of default among these choices.

What does a flat yield curve indicate about market expectations?

Answer: Investors have little expectation of interest rate changes

A flat yield curve, where short- and long-term rates are similar, suggests the market has little consensus or expectation of significant future rate changes.

An investor buys a strip bond at a deep discount. How is the investment return realized?

Answer: Through the difference between the purchase price and face value at maturity

Strip bonds pay no coupons; the investor's return comes entirely from the appreciation of the purchase price to face value at maturity.

Which term describes the risk that a bond investor cannot reinvest coupon payments at the same rate as the original yield?

Answer: Reinvestment risk

Reinvestment risk is the risk that future coupon payments will be reinvested at lower rates than originally anticipated, reducing total return.

What is the relationship between a bond's coupon rate and its price when it trades at a discount?

Answer: Coupon rate is lower than the yield to maturity

A bond trades at a discount when its coupon rate is lower than the prevailing yield to maturity, making it less attractive at par.