Investment Fixed Income and Bonds 2

Question 1

What is a 'callable bond'?

Accepted Answer

A bond the issuer can redeem before its maturity date

Answer

A bond that can be traded on any exchange

Answer

A bond that pays variable coupon rates

Answer

A bond backed by collateral

Question 2

What is the primary risk that causes high-yield ('junk') bonds to offer higher interest rates than investment-grade bonds?

Accepted Answer

Credit (default) risk

Answer

Liquidity risk

Answer

Inflation risk

Answer

Reinvestment risk

Question 3

A zero-coupon bond is sold at $600 and matures at $1,000 in 5 years. How does the investor earn a return?

Accepted Answer

Through the difference between purchase price and maturity value

Answer

Through semi-annual interest payments

Answer

Through dividends paid annually

Answer

Through capital gains from selling the bond above par

Question 4

What is the 'spread' in the context of bond investing?

Accepted Answer

The difference in yield between a bond and a benchmark (e.g., Treasuries)

Answer

The difference between a bond's bid and ask price

Answer

The bond's duration minus its maturity

Answer

The range of coupon payment dates

Question 5

Which of the following best describes a 'municipal bond'?

Accepted Answer

A bond issued by a state or local government, often tax-exempt

Answer

A bond issued by a corporation to fund operations

Answer

A bond issued by the Federal Reserve

Answer

A bond denominated in foreign currency

Question 6

What is 'reinvestment risk' for a bond investor?

Accepted Answer

The risk that coupon payments will be reinvested at lower rates

Answer

The risk that the bond's price will decline

Answer

The risk that inflation erodes purchasing power

Answer

The risk that the issuer will call the bond early

Question 7

An investor buys a 10-year bond with a 4% coupon. If inflation rises to 6%, what has the investor experienced?

Accepted Answer

Negative real return, as inflation exceeds the coupon rate

Answer

A capital gain, since bond prices rise with inflation

Answer

No impact, since bonds are inflation-protected

Answer

An increase in yield to maturity