Investment Jobs Fixed Income Securities Test 2

Question 1

What is the 'credit spread' on a corporate bond?

Accepted Answer

The yield premium over a comparable Treasury security

Answer

The credit spread is the additional yield a corporate bond offers over a comparable maturity Treasury bond, compensating investors for default and liquidity risk.

Question 2

Which credit rating is the lowest investment-grade rating assigned by Moody's?

Accepted Answer

Baa3

Answer

Baa3 is the lowest investment-grade rating from Moody's; ratings below Baa3 (Ba1 and below) are considered speculative grade or 'junk'.

Question 3

What is a 'zero-coupon bond'?

Accepted Answer

A bond issued at a discount that pays no periodic interest but repays full par at maturity

Answer

A zero-coupon bond pays no periodic interest; it is issued at a deep discount and matures at par value, with the investor's return coming entirely from price appreciation.

Question 4

The yield curve typically slopes upward (normal yield curve) because:

Accepted Answer

Investors demand higher yields for longer maturities due to greater uncertainty and liquidity risk

Answer

A normal upward-sloping yield curve reflects the liquidity preference theory: investors require higher compensation for tying up money for longer periods due to greater uncertainty.

Question 5

What are mortgage-backed securities (MBS)?

Accepted Answer

Securities collateralized by a pool of mortgage loans

Answer

MBS are financial instruments that represent ownership in a pool of mortgage loans; investors receive principal and interest payments as borrowers make mortgage payments.

Investment Practice Test

Investment Practice Test

Investment Jobs Fixed Income Securities Test 2