QFC QFC Fixed Income & Credit Analysis

Question 1

What is the relationship between bond prices and interest rates?

Accepted Answer

Inverse — prices fall when rates rise

Answer

Bond prices move inversely to interest rates because the present value of fixed future cash flows falls when discount rates increase.

Question 2

What does 'duration' measure in fixed income analysis?

Accepted Answer

Weighted-average time to receive a bond's cash flows, as a measure of interest rate sensitivity

Answer

Duration quantifies a bond's price sensitivity to interest rate changes; a higher duration means greater sensitivity.

Question 3

What is the yield spread between a corporate bond and a comparable maturity Treasury bond primarily reflecting?

Accepted Answer

Credit (default) risk and liquidity risk premium demanded by investors

Answer

The credit spread compensates investors for the additional risk of default and lower liquidity relative to risk-free Treasuries.

Question 4

Which term describes a bond that is issued at a discount and pays no periodic coupon payments?

Accepted Answer

Zero-coupon bond

Answer

A zero-coupon bond is sold at a deep discount to par value and returns par at maturity with no intermediate interest payments.

Question 5

In credit analysis, what does the interest coverage ratio measure?

Accepted Answer

A firm's ability to pay interest expense from operating earnings

Answer

The interest coverage ratio (EBIT / Interest Expense) shows how many times operating income covers periodic interest obligations.

(QFC) Quantitative Finance Certification Practice Test