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 relationship between bond prices and interest rates?
Answer: They move in opposite directions
Bond prices and interest rates have an inverse relationship: when interest rates rise, existing bond prices fall, and when rates fall, bond prices rise.
What does the 'yield to maturity' (YTM) of a bond represent?
Answer: The total annualized return if the bond is held to maturity and all payments are reinvested
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.
Which US government agency issues Treasury Inflation-Protected Securities (TIPS)?
Answer: US Department of the Treasury
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.
What is 'duration' as used in bond analysis?
Answer: A measure of a bond's price sensitivity to changes in interest rates
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.
A bond with a coupon rate below its current yield is trading at:
Answer: A discount
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.
What is a 'callable bond' and what risk does it present to investors?
Answer: A bond the issuer can redeem before maturity; presents reinvestment risk
A callable bond gives the issuer the right to redeem it before maturity, typically when interest rates fall, exposing investors to reinvestment risk at lower rates.