FIA Fixed Income & Bond Markets 5

Question 1

Which risk describes the possibility that coupon payments cannot be reinvested at a rate equal to the bond's YTM?

Accepted Answer

Reinvestment risk

Answer

Reinvestment risk occurs when interim coupon cash flows must be reinvested at lower prevailing rates, reducing total realized return below the stated YTM.

Question 2

What is the spread between a corporate bond's yield and an on-the-run Treasury of the same maturity called?

Accepted Answer

Credit spread (or yield spread)

Answer

The credit spread (yield spread) reflects compensation for credit risk, liquidity risk, and other factors above the risk-free Treasury rate.

Question 3

Extension risk in mortgage-backed securities (MBS) occurs when:

Accepted Answer

Rising rates slow prepayments, extending the MBS duration beyond expectations

Answer

When rates rise, refinancing activity slows, fewer mortgages are prepaid, and MBS investors receive principal more slowly than expected—extending effective duration.

Question 4

Which term describes bonds issued in a currency different from that of the country where they are issued?

Accepted Answer

Eurobonds

Answer

Eurobonds are issued in a currency other than that of the country where they are sold (e.g., a USD-denominated bond sold in Europe).

Question 5

What does the term 'on-the-run' refer to in the Treasury market?

Accepted Answer

The most recently issued Treasury security of a given maturity

Answer

On-the-run Treasuries are the most recently auctioned securities for each maturity, making them the most liquid and actively traded benchmark issues.

(FIA) Financial Information Associate Certification Practice Test

(FIA) Financial Information Associate Certification Practice Test

FIA Fixed Income & Bond Markets 5