Series 7 – General Securities Representative Exam Fixed Income Securities 2 — Questions and Answers
Question 1: How is a bond's current yield calculated?
- Annual coupon / Par value
- Annual coupon payment / Current market price (Correct answer)
- Yield to maturity / Coupon rate
- Par value / Current market price
Correct answer: Annual coupon payment / Current market price
Current yield equals the annual coupon payment divided by the bond's current market price, reflecting the income return based on what was actually paid.
Question 2: Yield to maturity (YTM) assumes which of the following?
- The bond is held to maturity and all coupons are reinvested at the YTM rate (Correct answer)
- The bond is sold at par value after one year
- The coupon rate equals the current yield throughout
- Interest payments are received only at maturity
Correct answer: The bond is held to maturity and all coupons are reinvested at the YTM rate
YTM assumes the bond is held to maturity and that all coupon payments are reinvested at a rate equal to the YTM itself.
Question 3: Which measure quantifies a bond's price sensitivity to changes in interest rates?
- Convexity
- Duration (Correct answer)
- Coupon rate
- Credit spread
Correct answer: Duration
Duration measures how much a bond's price will change for a given change in interest rates; a higher duration means greater price sensitivity.
Question 4: A callable bond gives the issuer the right to:
- Increase the coupon rate during the bond's life
- Extend the bond's maturity date at their discretion
- Redeem the bond before maturity at a specified call price (Correct answer)
- Convert the bond into shares of common stock
Correct answer: Redeem the bond before maturity at a specified call price
A call provision allows the issuer to retire the bond before its scheduled maturity, typically when interest rates fall, at a predetermined call price.
Question 5: When a bond is trading at a discount, its yield to maturity is:
- Equal to the coupon rate
- Less than the coupon rate
- Greater than the coupon rate (Correct answer)
- Equal to zero
Correct answer: Greater than the coupon rate
A discount bond trades below par, meaning the investor gains not only the coupon but also capital appreciation to par at maturity, so YTM exceeds the coupon rate.
Question 6: The difference between a corporate bond's yield and a Treasury bond yield of the same maturity is called the:
- Duration spread
- Credit spread (Correct answer)
- Yield curve spread
- Convexity premium
Correct answer: Credit spread
The credit spread reflects the additional yield investors demand for taking on the default risk of a corporate issuer relative to the risk-free Treasury.
Question 7: Which of the following best describes an inverted yield curve?
- Short-term rates are higher than long-term rates (Correct answer)
- Long-term rates are higher than short-term rates
- All maturities offer the same yield
- Short-term and long-term rates are converging
Correct answer: Short-term rates are higher than long-term rates
An inverted yield curve occurs when short-term interest rates exceed long-term rates, often considered a recession indicator.
Series 7 – General Securities Representative Exam Fixed Income Securities 2
How is a bond's current yield calculated?