Fixed Income Securities Test Flashcards
6 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 6 Fixed Income Securities Test flashcards as text
What is the 'credit spread' on a corporate bond?
Answer: The yield premium over a comparable Treasury security
The credit spread is the additional yield a corporate bond offers over a comparable maturity Treasury bond, compensating investors for default and liquidity risk.
Which credit rating is the lowest investment-grade rating assigned by Moody's?
Answer: Baa3
Baa3 is the lowest investment-grade rating from Moody's; ratings below Baa3 (Ba1 and below) are considered speculative grade or 'junk'.
What is a 'zero-coupon bond'?
Answer: A bond issued at a discount that pays no periodic interest but repays full par at maturity
A zero-coupon bond pays no periodic interest; it is issued at a deep discount and matures at par value, with the investor's return coming entirely from price appreciation.
The yield curve typically slopes upward (normal yield curve) because:
Answer: Investors demand higher yields for longer maturities due to greater uncertainty and liquidity risk
A normal upward-sloping yield curve reflects the liquidity preference theory: investors require higher compensation for tying up money for longer periods due to greater uncertainty.
What are mortgage-backed securities (MBS)?
Answer: Securities collateralized by a pool of mortgage loans
MBS are financial instruments that represent ownership in a pool of mortgage loans; investors receive principal and interest payments as borrowers make mortgage payments.
What is 'negative convexity' and which type of bond commonly exhibits this feature?
Answer: The price-yield relationship caps upside; callable bonds
Negative convexity means price appreciation is limited when rates fall because the issuer is likely to call the bond; callable bonds and many mortgage-backed securities exhibit this feature.