CSC Fixed-Income Securities Analysis 2

Question 1

A bond's duration measures which of the following?

Accepted Answer

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

Answer

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

Question 2

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?

Accepted Answer

-5%

Answer

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

Question 3

Which type of bond carries the highest credit risk?

Accepted Answer

High-yield (junk) bonds

Answer

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

Question 4

What does a flat yield curve indicate about market expectations?

Accepted Answer

Investors have little expectation of interest rate changes

Answer

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.

Question 5

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

Accepted Answer

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

Answer

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

CSC - Canadian Securities Course Practice Test

CSC - Canadian Securities Course Practice Test

CSC Fixed-Income Securities Analysis 2