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

Classical immunization matches the duration of bond assets to the investment horizon or liability duration, protecting the portfolio against parallel shifts in the yield curve.

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 dirty price (or full price) is the total price paid for a bond, including the accrued interest that has built up since the last coupon payment date.

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 convertible bond gives holders the option to convert the bond into a specified number of the issuer's common shares, allowing investors to benefit from equity upside while having bond downside protection.

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

Ginnie Mae securities are backed by the full faith and credit of the US government, making them the only agency MBS with an explicit government guarantee.

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

Prepayment risk arises when homeowners refinance or sell their homes, repaying mortgages early and returning principal to MBS investors who must then reinvest at potentially lower yields.

Investment Practice Test

Investment Practice Test

Investment Jobs Fixed Income Securities Test 3