Investment Jobs Fixed Income Securities Test 3

Question 1

Which bond immunization strategy matches the duration of assets to the duration of liabilities?

Accepted Answer

Duration matching (classical immunization)

Answer

Bullet strategy

Answer

Barbell strategy

Answer

Cash flow matching

Question 2

What is the 'dirty price' of a bond?

Accepted Answer

The full price including accrued interest since the last coupon payment

Answer

The price after adjusting for credit risk

Answer

The market price minus transaction costs

Answer

The price quoted in the secondary market

Question 3

What is a 'convertible bond' and what is its primary advantage to investors?

Accepted Answer

A bond that can be exchanged for the issuer's common stock; advantage is equity upside potential

Answer

A bond that converts currency; advantage is foreign exchange protection

Answer

A bond with variable interest; advantage is protection against rising rates

Answer

A bond that converts from senior to subordinated; advantage is priority claim

Question 4

Which federal agency guarantees principal and interest payments on Ginnie Mae (GNMA) mortgage-backed securities?

Accepted Answer

US Treasury (full faith and credit)

Answer

Federal Reserve

Answer

FDIC

Answer

OCC

Question 5

What is 'prepayment risk' in mortgage-backed securities?

Accepted Answer

The risk that borrowers pay off mortgages early, forcing reinvestment at lower rates

Answer

The risk that borrowers default on their mortgages

Answer

The risk that servicers fail to process payments

Answer

The risk of rising mortgage rates reducing property values

Question 6

What is a 'CDO' (Collateralized Debt Obligation)?

Accepted Answer

A structured security backed by a pool of debt instruments, divided into tranches with different risk levels

Answer

A direct government bond issue backed by tax revenues

Answer

A bond issued by a corporation to fund debt repayment

Answer

A derivative contract tied to bond indices