Trading Jobs Fixed Income Trading 1 — Questions and Answers
Question 1: What is the relationship between bond prices and interest rates?
- They move in the same direction
- They move in opposite directions (Correct answer)
- They are unrelated
- They move together only for long-term bonds
Correct answer: They move in opposite directions
Bond prices and interest rates have an inverse relationship — when rates rise, existing bond prices fall, and vice versa.
Question 2: What is 'yield to maturity' (YTM)?
- The coupon rate stated on the bond
- The total return anticipated if held until maturity (Correct answer)
- The current yield based on market price
- The yield on a comparable Treasury bond
Correct answer: The total return anticipated if held until maturity
Yield to maturity is the total annualized return an investor would earn if they bought the bond today and held it until maturity, accounting for all coupon payments and price appreciation or depreciation.
Question 3: What is 'duration' as used in fixed income trading?
- The maturity date of a bond
- A measure of a bond's price sensitivity to interest rate changes (Correct answer)
- The time between coupon payments
- The length of the bond's call period
Correct answer: A measure of a bond's price sensitivity to interest rate changes
Duration measures how sensitive a bond's price is to changes in interest rates — a bond with higher duration will experience larger price swings when rates move.
Question 4: Which type of US Treasury security has the shortest maturity?
- Treasury bonds
- Treasury notes
- Treasury bills (Correct answer)
- Treasury STRIPS
Correct answer: Treasury bills
Treasury bills (T-bills) have maturities of one year or less (4, 8, 13, 26, or 52 weeks), making them the shortest-term Treasury instruments.
Question 5: What does it mean when a bond is trading 'at a discount'?
- Its coupon rate is below the current market rate
- Its price is below its face (par) value (Correct answer)
- It has been downgraded by a rating agency
- Its yield is below the risk-free rate
Correct answer: Its price is below its face (par) value
A bond trading at a discount means its current market price is below its face value of $1,000, typically because market interest rates have risen since issuance.
Question 6: What is a 'spread' in the context of fixed income trading?
- The difference between bid and ask prices
- The yield difference between a bond and a benchmark Treasury (Correct answer)
- The gap between coupon payment dates
- The margin charged by a broker on bond trades
Correct answer: The yield difference between a bond and a benchmark Treasury
In fixed income, 'spread' typically refers to the yield difference between a corporate or municipal bond and a comparable-maturity Treasury security.
Trading Jobs Fixed Income Trading 1
What is the relationship between bond prices and interest rates?