FIA Fixed Income & Bond Markets 3 — Questions and Answers
Question 1: Which U.S. Treasury security has an original maturity of exactly one year or less?
- Treasury Note
- Treasury Bond
- Treasury Bill (Correct answer)
- TIPS
Correct answer: Treasury Bill
Treasury Bills (T-bills) are short-term government securities with maturities of 4, 8, 13, 17, 26, or 52 weeks.
Question 2: In bond markets, what does 'clean price' refer to?
- A bond's price after subtracting accrued interest (Correct answer)
- A bond's price after adjusting for credit risk
- A bond's price inclusive of accrued interest
- A bond's price on its issue date
Correct answer: A bond's price after subtracting accrued interest
Clean price (quoted price) excludes accrued interest; the dirty price (settlement price) adds accrued interest back.
Question 3: What type of risk arises when a bond issuer may be unable to make timely interest or principal payments?
- Liquidity risk
- Interest rate risk
- Credit (default) risk (Correct answer)
- Reinvestment risk
Correct answer: Credit (default) risk
Credit risk (default risk) is the risk that the bond issuer will fail to meet its contractual obligations of interest and/or principal.
Question 4: Which yield measure assumes that all coupon payments are reinvested at the same rate as the bond's current yield to maturity?
- Current yield
- Yield to call
- Yield to maturity (YTM) (Correct answer)
- Spot rate
Correct answer: Yield to maturity (YTM)
YTM assumes reinvestment of all coupons at the YTM rate itself, which is a key limitation when market rates change.
Question 5: A mortgage-backed security (MBS) exposes investors to prepayment risk primarily because:
- Interest rates on MBS are adjustable
- Homeowners may repay their mortgages early when rates fall (Correct answer)
- MBS are not backed by government guarantees
- MBS coupons decrease when housing prices fall
Correct answer: Homeowners may repay their mortgages early when rates fall
When interest rates fall, homeowners refinance at lower rates, returning principal to MBS investors sooner than expected—often at the worst time for reinvestment.
Question 6: The yield curve is considered 'inverted' when:
- Short-term yields are higher than long-term yields (Correct answer)
- Long-term yields are higher than short-term yields
- All maturities have the same yield
- Corporate yields exceed government yields
Correct answer: Short-term yields are higher than long-term yields
An inverted yield curve occurs when short-term rates exceed long-term rates, historically associated with economic recession expectations.
Question 7: Which agency rating category is the lowest that is still considered investment-grade by Moody's?
- Aa3
- Baa3 (Correct answer)
- Ba1
- Caa1
Correct answer: Baa3
Baa3 is Moody's lowest investment-grade rating; Ba1 and below are considered speculative (high-yield or junk).
FIA Fixed Income & Bond Markets 3
Which U.S.
Treasury security has an original maturity of exactly one year or less?