FIA Fixed Income & Bond Markets 2 — Questions and Answers
Question 1: Which risk measures the sensitivity of a bond's price to a 1 basis point change in yield?
- Dollar Value of a Basis Point (DV01) (Correct answer)
- Convexity
- Macaulay Duration
- Yield Spread
Correct answer: Dollar Value of a Basis Point (DV01)
DV01 (also called PVBP) measures the dollar price change of a bond for a one basis point (0.01%) move in yield.
Question 2: A bond trading at a price below its par value is said to be trading at a:
- Premium
- Discount (Correct answer)
- Flat price
- Spread
Correct answer: Discount
A bond trading below par (face value) is at a discount, meaning its yield is above its coupon rate.
Question 3: What is the primary difference between investment-grade and high-yield bonds?
- Investment-grade bonds have shorter maturities
- High-yield bonds are issued only by governments
- Investment-grade bonds carry lower credit risk and higher ratings (Correct answer)
- High-yield bonds pay semi-annual coupons while investment-grade pay annual
Correct answer: Investment-grade bonds carry lower credit risk and higher ratings
Investment-grade bonds are rated BBB-/Baa3 or above, indicating lower default risk, while high-yield (junk) bonds carry ratings below that threshold.
Question 4: Which type of bond structure pays no periodic interest and instead is issued at a deep discount to face value?
- Floating-rate note
- Zero-coupon bond (Correct answer)
- Callable bond
- Convertible bond
Correct answer: Zero-coupon bond
Zero-coupon bonds make no periodic coupon payments; the investor's return comes entirely from the difference between the purchase price and face value at maturity.
Question 5: The Option-Adjusted Spread (OAS) is used to compare bonds by:
- Adjusting yield for inflation expectations
- Removing the value of embedded options to isolate credit/liquidity spread (Correct answer)
- Measuring the bond's sensitivity to interest rate changes
- Converting foreign currency coupons to USD equivalents
Correct answer: Removing the value of embedded options to isolate credit/liquidity spread
OAS strips out the value of embedded options (like call features) so the remaining spread reflects credit and liquidity risk only.
Question 6: What happens to a floating-rate note's coupon when its reference rate (e.g., SOFR) increases?
- The coupon decreases
- The coupon remains fixed until maturity
- The coupon increases (Correct answer)
- The bond is called
Correct answer: The coupon increases
Floating-rate notes reset their coupons periodically based on a reference rate, so rising SOFR directly increases the coupon payment.
Question 7: A bond with positive convexity will experience price changes that are:
- Symmetric for yield increases and decreases
- Larger for yield decreases than yield increases of the same magnitude (Correct answer)
- Larger for yield increases than decreases
- Unrelated to yield changes
Correct answer: Larger for yield decreases than yield increases of the same magnitude
Positive convexity means the price gain from a yield drop exceeds the price loss from an equal yield rise, benefiting the bondholder.
FIA Fixed Income & Bond Markets 2
Which risk measures the sensitivity of a bond's price to a 1 basis point change in yield?