CFS CFS Fixed Income & Bonds 1 — Questions and Answers
Question 1: Which bond characteristic measures the sensitivity of a bond's price to changes in interest rates?
- Duration (Correct answer)
- Convexity
- Yield to maturity
- Current yield
Correct answer: Duration
Duration measures how much a bond's price will change for a given change in interest rates, expressed in years.
Question 2: A bond is said to be trading at a 'discount' when its market price is:
- Below its par value (Correct answer)
- Above its par value
- Equal to its par value
- Equal to its coupon rate
Correct answer: Below its par value
A bond trades at a discount when its market price is below its face (par) value, typically because prevailing interest rates are higher than the bond's coupon rate.
Question 3: What is the primary risk associated with callable bonds from an investor's perspective?
- Reinvestment risk (Correct answer)
- Credit risk
- Liquidity risk
- Currency risk
Correct answer: Reinvestment risk
Callable bonds expose investors to reinvestment risk because the issuer can redeem the bond early, forcing investors to reinvest at potentially lower prevailing rates.
Question 4: Which rating from Moody's indicates the highest investment-grade bond quality?
- Aaa (Correct answer)
- AAA
- Aa1
- A1
Correct answer: Aaa
Moody's highest rating is Aaa, indicating the issuer has an exceptional capacity to meet financial commitments.
Question 5: The yield curve is considered 'inverted' when:
- Short-term yields are higher than long-term yields (Correct answer)
- Long-term yields are higher than short-term yields
- All maturities have the same yield
- Only Treasury yields are declining
Correct answer: Short-term yields are higher than long-term yields
An inverted yield curve occurs when short-term interest rates exceed long-term rates, often considered a recession predictor.
Question 6: Which type of bond has its principal and interest payments adjusted based on inflation?
- TIPS (Treasury Inflation-Protected Securities) (Correct answer)
- Municipal bonds
- Zero-coupon bonds
- Convertible bonds
Correct answer: TIPS (Treasury Inflation-Protected Securities)
TIPS adjust their principal value with the Consumer Price Index (CPI), protecting investors from inflation erosion.
CFS CFS Fixed Income & Bonds 1
Which bond characteristic measures the sensitivity of a bond's price to changes in interest rates?