Fixed Income and Bonds Flashcards
7 cards from real Investment practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Fixed Income and Bonds flashcards as text
What is a 'callable bond'?
Answer: A bond the issuer can redeem before its maturity date
A callable bond gives the issuer the right to repay the principal before the stated maturity date, usually when interest rates fall and the issuer can refinance at lower cost.
What is the primary risk that causes high-yield ('junk') bonds to offer higher interest rates than investment-grade bonds?
Answer: Credit (default) risk
High-yield bonds are issued by companies with lower credit ratings, meaning there is a greater probability the issuer may default on interest or principal payments.
A zero-coupon bond is sold at $600 and matures at $1,000 in 5 years. How does the investor earn a return?
Answer: Through the difference between purchase price and maturity value
Zero-coupon bonds pay no periodic interest; instead, investors earn the return from the discount at purchase, receiving the full par value at maturity.
What is the 'spread' in the context of bond investing?
Answer: The difference in yield between a bond and a benchmark (e.g., Treasuries)
In bond markets, spread most commonly refers to the yield difference between a bond (such as a corporate bond) and a comparable-maturity Treasury, reflecting additional risk.
Which of the following best describes a 'municipal bond'?
Answer: A bond issued by a state or local government, often tax-exempt
Municipal bonds are issued by state and local governments to fund public projects; interest income is typically exempt from federal income tax and sometimes state and local taxes.
What is 'reinvestment risk' for a bond investor?
Answer: The risk that coupon payments will be reinvested at lower rates
Reinvestment risk is the uncertainty that future coupon payments can only be reinvested at rates lower than the original yield, reducing the total realized return.
An investor buys a 10-year bond with a 4% coupon. If inflation rises to 6%, what has the investor experienced?
Answer: Negative real return, as inflation exceeds the coupon rate
When inflation exceeds the coupon rate, the real purchasing power of the fixed interest payments declines, resulting in a negative real return for the investor.