Trading Jobs Fixed Income Trading 2 — Questions and Answers
Question 1: What is a 'callable bond'?
- A bond that can be converted to equity
- A bond the issuer can redeem before maturity (Correct answer)
- A bond with a floating interest rate
- A bond backed by specific assets
Correct answer: A bond the issuer can redeem before maturity
A callable bond allows the issuer to repay the principal before the scheduled maturity date, usually when interest rates fall and they can refinance at lower rates.
Question 2: Which rating from Moody's indicates the lowest investment-grade bond quality?
- Aaa
- Baa3 (Correct answer)
- Ba1
- B1
Correct answer: Baa3
Baa3 is Moody's lowest investment-grade rating; anything below Baa3 (such as Ba1) is considered speculative-grade or 'junk.'
Question 3: What is the primary market for US Treasury bonds?
- NYSE
- Treasury Direct website only
- Treasury auctions (Correct answer)
- Federal Reserve open market operations
Correct answer: Treasury auctions
US Treasury securities are initially sold through Treasury auctions where primary dealers and the public submit competitive and non-competitive bids.
Question 4: What is 'convexity' in bond analysis?
- The shape of the yield curve
- A measure of the curvature in the price-yield relationship (Correct answer)
- The difference between coupon and yield
- The correlation between bond prices and equity prices
Correct answer: A measure of the curvature in the price-yield relationship
Convexity measures the curvature or non-linearity in the relationship between bond prices and yields, improving duration's accuracy as a risk measure for large rate moves.
Question 5: What is the 'benchmark' most commonly used for pricing corporate bonds in the US?
- LIBOR
- Fed Funds Rate
- US Treasury yields (Correct answer)
- Prime Rate
Correct answer: US Treasury yields
Corporate bonds are typically priced as a spread over comparable-maturity US Treasury yields, which serve as the risk-free benchmark.
Question 6: In fixed income markets, what does 'DV01' represent?
- The duration divided by one year
- The dollar value change for a 1 basis point move in yield (Correct answer)
- The default value of a bond at par
- The daily volume of bond trades
Correct answer: The dollar value change for a 1 basis point move in yield
DV01 (Dollar Value of 01) measures how much a bond's price changes in dollar terms for a 1 basis point (0.01%) change in yield.
Trading Jobs Fixed Income Trading 2
What is a 'callable bond'?