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 does it mean when a bond is trading at a 'discount'?
Answer: The bond's market price is below its par value
A bond trades at a discount when its market price is below its face (par) value, typically because its coupon rate is lower than prevailing interest rates.
Which U.S. Treasury security has a maturity of less than one year?
Answer: Treasury bill (T-bill)
Treasury bills have maturities of 4, 8, 13, 17, 26, or 52 weeks, making them short-term debt instruments sold at a discount and redeemed at par.
What is a 'TIPS' (Treasury Inflation-Protected Security)?
Answer: A Treasury bond whose principal adjusts with the Consumer Price Index
TIPS are U.S. Treasury bonds whose principal value is adjusted periodically based on changes in the CPI, protecting investors against inflation erosion.
What is the 'yield curve,' and what does an inverted yield curve typically signal?
Answer: A graph of bond yields vs. maturities; inversion often signals a coming recession
The yield curve plots yields across maturities; when short-term yields exceed long-term yields (inverted), it has historically been a reliable predictor of economic recession.
A bond with a higher coupon rate, all else equal, will have:
Answer: Lower duration and less interest rate sensitivity
Higher coupon bonds return more cash flow earlier (via coupon payments), reducing their weighted average time to cash flows (duration) and making them less sensitive to rate changes.
What is a 'convertible bond'?
Answer: A corporate bond that can be converted into a set number of the issuer's shares
A convertible bond is a corporate debt instrument that gives the holder the option to convert the bond into a predetermined number of the issuer's common stock shares.
Which measure best captures the total cost of a bond's financing to an issuer, accounting for the time value of money and all cash flows?
Answer: Yield to maturity (YTM)
Yield to maturity accounts for all future coupon payments, the par value repaid at maturity, and the current price paid, giving the most comprehensive measure of a bond's total cost or return.