Fixed Income and Bonds Flashcards

What happens to a bond's price when interest rates rise?

Answer: The price falls

Bond prices and interest rates have an inverse relationship — when rates rise, existing bonds with lower coupon rates become less attractive, so their prices fall.

What is the 'par value' of a bond?

Answer: The face value repaid at maturity

Par value (also called face value) is the principal amount the issuer promises to repay the bondholder when the bond matures.

A bond's coupon rate is 5% and its current market price is below par. What is true about its current yield?

Answer: Current yield is greater than 5%

When a bond trades below par, the fixed coupon payment represents a higher percentage of the lower purchase price, making the current yield greater than the coupon rate.

Which type of bond is backed by the full faith and credit of the U.S. federal government?

Answer: Treasury bonds

U.S. Treasury bonds are direct obligations of the federal government, backed by its full taxing authority, making them among the safest investments.

What is 'yield to maturity' (YTM)?

Answer: The total return earned if a bond is held until it matures

YTM is the total annualized return an investor would earn if the bond is purchased at the current price and held until maturity, accounting for coupon payments and any gain or loss on principal.

What does a bond's 'duration' measure?

Answer: The sensitivity of a bond's price to changes in interest rates

Duration measures how much a bond's price will change in response to a 1% change in interest rates — a higher duration means greater price sensitivity.

Which bond rating is considered 'investment grade' according to Standard & Poor's?

Answer: BBB and above

S&P classifies bonds rated BBB- or higher as investment grade, indicating relatively low default risk and suitable for most institutional investors.