Investment Fixed Income and Bonds 3

Question 1

What does it mean when a bond is trading at a 'discount'?

Accepted Answer

The bond's market price is below its par value

Answer

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.

Question 2

Which U.S. Treasury security has a maturity of less than one year?

Accepted Answer

Treasury bill (T-bill)

Answer

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.

Question 3

What is a 'TIPS' (Treasury Inflation-Protected Security)?

Accepted Answer

A Treasury bond whose principal adjusts with the Consumer Price Index

Answer

TIPS are U.S. Treasury bonds whose principal value is adjusted periodically based on changes in the CPI, protecting investors against inflation erosion.

Question 4

What is the 'yield curve,' and what does an inverted yield curve typically signal?

Accepted Answer

A graph of bond yields vs. maturities; inversion often signals a coming recession

Answer

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.

Question 5

A bond with a higher coupon rate, all else equal, will have:

Accepted Answer

Lower duration and less interest rate sensitivity

Answer

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.

Investment Practice Test

Investment Practice Test

Investment Fixed Income and Bonds 3