QFC QFC Fixed Income & Credit Analysis 2

Question 1

What is the 'yield to maturity' (YTM) of a bond?

Accepted Answer

The discount rate that equates the present value of all cash flows to the bond's current market price

Answer

YTM is the internal rate of return of a bond assuming all coupons are reinvested at the same rate and held to maturity.

Question 2

What is a 'callable bond' and what risk does it create for investors?

Accepted Answer

A bond the issuer can redeem early; creates reinvestment risk for investors

Answer

A callable bond allows the issuer to redeem it before maturity, typically when rates fall, forcing investors to reinvest at lower yields.

Question 3

In the context of credit ratings, what does an 'investment-grade' rating signify?

Accepted Answer

A bond rated BBB-/Baa3 or higher, indicating relatively low default risk

Answer

Investment-grade bonds (BBB-/Baa3 and above from S&P/Moody's) carry lower default risk and attract institutional investors with credit quality mandates.

Question 4

What does the term structure of interest rates (yield curve) plot?

Accepted Answer

Yields of same-issuer bonds of varying maturities

Answer

The yield curve shows the yields on otherwise comparable bonds (same issuer, credit quality) across different maturities at a single point in time.

Question 5

What is a credit default swap (CDS) primarily used for?

Accepted Answer

Transferring credit risk of a reference entity from the protection buyer to the protection seller

Answer

A CDS is a derivative contract where the protection buyer pays periodic premiums and receives a payment if the reference entity defaults.

(QFC) Quantitative Finance Certification Practice Test

(QFC) Quantitative Finance Certification Practice Test

QFC QFC Fixed Income & Credit Analysis 2