Investment Jobs Fixed Income Securities Test 1

Question 1

What is the relationship between bond prices and interest rates?

Accepted Answer

They move in opposite directions

Answer

Bond prices and interest rates have an inverse relationship: when interest rates rise, existing bond prices fall, and when rates fall, bond prices rise.

Question 2

What does the 'yield to maturity' (YTM) of a bond represent?

Accepted Answer

The total annualized return if the bond is held to maturity and all payments are reinvested

Answer

YTM is the total return anticipated on a bond if held until it matures, assuming all coupon and principal payments are received and coupons are reinvested at the same rate.

Question 3

Which US government agency issues Treasury Inflation-Protected Securities (TIPS)?

Accepted Answer

US Department of the Treasury

Answer

TIPS are issued by the US Department of the Treasury; their principal value adjusts with the Consumer Price Index (CPI) to protect investors from inflation.

Question 4

What is 'duration' as used in bond analysis?

Accepted Answer

A measure of a bond's price sensitivity to changes in interest rates

Answer

Duration measures how much a bond's price will change in response to a 1% change in interest rates, with higher duration indicating greater interest rate sensitivity.

Question 5

A bond with a coupon rate below its current yield is trading at:

Accepted Answer

A discount

Answer

When a bond's coupon rate is lower than the prevailing market yield, the bond must trade at a discount (below par) to compensate investors for the below-market coupon.

Investment Practice Test

Investment Practice Test

Investment Jobs Fixed Income Securities Test 1