Fixed-Income Securities Analysis Flashcards

Which of the following best describes a callable bond?

Answer: A bond that can be redeemed by the issuer before maturity at a set price

A callable bond gives the issuer the right to redeem the bond before its stated maturity date, typically at a premium to par.

What happens to a bond's price when prevailing interest rates fall?

Answer: The bond's price rises

Bond prices and interest rates move inversely; when rates fall, existing bonds with higher coupons become more valuable, so prices rise.

Real Return Bonds (RRBs) issued by the Government of Canada protect investors against which specific risk?

Answer: Inflation risk

RRBs adjust both principal and coupon payments based on the Consumer Price Index (CPI), protecting investors from purchasing power erosion due to inflation.

A bond with a face value of $1,000 pays a 6% annual coupon. If the bond's current price is $1,060, what is its current yield?

Answer: 5.66%

Current yield = annual coupon / current price = $60 / $1,060 = 5.66%.

Which rating category marks the dividing line between investment-grade and non-investment-grade bonds under standard rating agency scales?

Answer: BBB-/Baa3

BBB- (S&P/Fitch) or Baa3 (Moody's) is the lowest investment-grade rating; anything below is considered non-investment grade (high-yield or junk).

What is the primary purpose of a bond sinking fund?

Answer: To gradually retire a portion of the bond issue before final maturity

A sinking fund requires the issuer to set aside money periodically to retire portions of the bond issue, reducing default risk at final maturity.

Which measure accounts for the possibility that a callable bond will be redeemed early by the issuer?

Answer: Yield to call

Yield to call calculates the bond's yield assuming it is called on the earliest possible call date, rather than held until final maturity.