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Module 4: Fixed Income 1 > Concepts > Flashcards

Concepts Flashcards

1
Q

A noncallable, AA-rated, 5-year zero-coupon with a yield of 6 percent has all of the following EXCEPT:

a. Inflation risk
b. Interest risk
c. Default risk
d. Reinvestment risk

A

d. Reinvestment risk

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2
Q

The debt securities that are most often registered according to the requirements of SEC Rule 415 (shelf registration rule) which gives a borrower the maximum flexibility for issuing securities on a continuous basis are called:

A

Medium-Term Notes

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2
Q

Benchmark bonds serve as the reference interest rate for all other interest rates of similar maturity. Which of the following is not a popular benchmark bond maturity?

a. Ten-year Incorrect
b. Two-year Incorrect
c. Three-year

A

c. Three-year

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2
Q

Which of the following fixed income market players typically hedge the price risk of its book of inventories of debt securities?

a. Asset Management firms
b. Dealers/Market makers
c. Brokers
d. Commercial Banks

A

b. Dealers/Market makers

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3
Q

Compared to negotiable CD’s bankers acceptances:

a. less liquid & shorter maturity
b. Are less likely to default Incorrect
c. Are more likely to pay periodic interest

A

a. less liquid & shorter maturity

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4
Q

Which of the following two sources of bond risk have offsetting effects?

a. Reinvestment risk and default risk
b. Exchange rate risk and volatility risk
c. Interest rate risk and reinvestment risk

A

c. Interest rate risk and reinvestment risk

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5
Q

Which of the following 5-year bonds has the highest interest rate risk?

a. A floating-rate bond. Incorrect
b. An option-free 5% fixed-coupon bond.
c. zero coupon bonds

A

c. zero coupon bonds

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6
Q

A 2-year, zero-coupon U.S. Treasury note does NOT have

a. Volatility risk
b. Currency risk
c. Interest rate risk
d. Inflation risk

A

a. Volatility risk

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7
Q

Which of the following is NOT an example of a US government-sponsored enterprise?

a. Student Loan Marketing Association (Sallie Mae)
b. Ginnie Mae
c. Freddie Mac
d. Fannie Mae

A

b. Ginnie Mae

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7
Q

A mortgage is typically NOT:

a. Subject to early retirement
b. collateralized something
c. amortizing security
d. Characterized by highly predictable cash flows

A

d. Characterized by highly predictable cash flows

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8
Q

Which of the following municipal bonds typically has the greater risk and is issued with higher yields?

a. Limited tax general obligation bonds
b. Revenue bond

A

b. Revenue bond

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8
Q

The volatility of a floating-rate security may be reduced by:

a. Eliminating any put features
b. Resetting a longer time coupon rate
c. Resetting coupon rates more frequently
d. Prolonged coupon rate

A

d. Prolonged coupon rate

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8
Q

Which of the following bonds has the greatest interest rate risk?

a. A 5% 10-year callable bond yielding 4%
b. A 5% 10-year option free bond yielding 4%
c. A 5% 10-year callable bond yielding 6%
d. A 5% 10-year option free yielding 6%

A

(to look for the greatest risk: lower coupon rate, higher maturity, trades at lower yield)
b. A 5% 10-year option free bond yielding 4%

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8
Q

Which of the following best describes the maximum price for a currently callable bond?

a. Its par value plus accrued interest
b. Its par value
c. Call price
d. Its present par value

A

c. Call price

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9
Q

An investor is concerned about interest rate risk. Which of the following four bonds (similar except for yield and maturity) has the LEAST interest rate risk? The bond with:

a. 6% yield and 10-year maturity
b. 5% yield and 10-year maturity

A

a. 6% yield and 10-year maturity

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10
Q

In a repurchase agreement, the seller:

a. Agrees to buy back the collateral security at a lower price at a later date
b. higher price instead of lower

A

b. higher price instead of lower (something along the line)

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11
Q

Which bond will fluctuate more in price when interest rates change assuming similar yield levels and without any embedded option?

a. 6% 10-year bond
b. 5% 30-year bond
c. 6% 30-year bond
d. 5% 10 year bond

A

b. 5% 30-year bond

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11
Q

The most common embedded options that are granted to BONDHOLDERS are the following EXCEPT:

a. Floor on a floater
b. cap on a floater
c. conversion privilege
d. right to put

A

b. cap on a floater

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12
Q

A Yankee bond and a Samurai bond are bonds that are issued and traded in the United States and Japan by issuers that are domiciled in a country other than the U.S. or Japan, respectively. These bonds are referred as:

A

Foreign bonds

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12
Q

Form of a collateralized borrowing arrangement?

A

Repurchase Agreement

13
Q

A mortgage is typically NOT:

A
13
Q

Consider a five-year bond with a 10 percent coupon that has a present yield-to-maturity of 8 percent. If interest rates remain constant, one year from now the price of this bond will be:

a. The same
b. Decrease
c. Higher

A

b. Decrease

13
Q

Which of the following methods is NOT used by central governments to distribute bonds?

a. Special Auction/ Multi-Price Method
b. Tap method Incorrect
c. Regular auction/single-price method

A

a. Special Auction/ Multi-Price Method

14
Q

Reinvestment risk tends to be highest for:

A

Amortizing security

15
Q

Intermediaries assist buyers and sellers by making markets, underwriting, and providing risk management services. Which of the following is NOT an objective of an intermediary as a player in the fixed income market?

a. To provide proprietary trading activities.
b. To have an orderly liquid and secondary market for repurchase and financing
c. To provide fee-based services
on risk management, issuance,
etc.
d. To provide market-making
services and earn bid-offer
spreads in secondary markets

A

b. To have an orderly liquid and secondary market for repurchase and financing

16
Q

In determining the premium that an issuer must pay to call an issue, the purpose of _______ is to protect the yield of those investors who purchased the security at issuance.

A

Yield maintenance premium

16
Q

Which of the following is not a fixed income security?

a. Preferred stock
b. Common stock

A

b. Common stock

16
Q

“Character” analysis involves the analysis of the quality of management. Which of the following is considered by Moody’s Investors Service in assessing management quality?

A

All of the above

16
Q

Affirmative Covenants in a bond’s indenture set forth the activities that the borrower promises to do. Which of the following is NOT a common affirmative covenant?

a. to pay interest and principal on a timely basis
b. to pay all taxes and other claims when due
c. dividend payments
d. to maintain all properties used and useful in the borrower’s business in good condition and working order

A

c. dividend payments

17
Q

Which of the following is NOT TRUE regarding margin buying?

a. The funds borrowed to buy the securities are provided by the broker.
b. The interest rate banks charged brokers for this transaction is called the call money rate.
c. Institutional bond investors is common.
d. Investor will pay call money rate plus service charge Incorrect

A

c. Institutional bond investors is common

17
Q

A portfolio manager is considering the purchase of a callable bond. The bond’s issuer will likely call the bond if:

a. Interest rates fall which will be disadvantageous to the portfolio manager.
b. Interest rates fall which will be advantageous to the portfolio manager.

A

a. Interest rates fall which will be DISadvantageous to the portfolio manager.

18
Q

A non-refundable bond can be called:

a. Only if interest rates fall
b. Only if lower cost debt is NOT used to make the call
c. Only if lower cost debt is used to make the call Incorrect

A

b. Only if lower cost debt is NOT used to make the call

19
Q

Which of the following prevents redemption from certain sources, namely the proceeds of other debt issues sold at a lower cost of money?

a. Refunding protection
b. Sinking fund provision

A

a. Refunding protection

20
Q

Which of the following is NOT a provision for the early retirement of debt by the issuer?

a. A call option
b. conversion option
c. prepayment
d. accelerated sinking fund

A

b. conversion option

20
Q

Some issuers do not own fixed assets. To satisfy the desire of bondholders for security, the issuer grants investors a lien (legal right to sell) on financial assets they own. Bonds secured by such assets are called Collateral Trust Bonds which may be secured by the following EXCEPT:

a. Securities of other companies
b. Stocks
c. Bonds
d. real property

A

c. Bonds

21
Q

Which of the following is a type of credit risk in bonds:

a. Reinvestment risk
b. Default Risk

A

b. Default Risk**

21
Q

A $1,000 face value 10-year, 6% coupon bond pays no interest for 5 years and then pays $300, followed by a regular $30 coupon payment every 6 months through maturity. The bond is a:

A

Deferred interest bond

22
Q

A variable (floating)—rate note is best described as having uncertai:

a. Date of final maturity Incorrect
b. Coupon payment dates Incorrect
c. Coupon cash flows
d. Principal

A

c. Coupon cash flows

22
Q

A municipal bond that is supported by cash flows from a portfolio of Treasury securities held in an escrow fund is called:

A

Pre-refunded bonds

23
Q

Duration measures the sensitivity of a bond’s price to changes in:

A

Change in yield

24
Q

Which of the following is NOT an objective of the issuer as a player in the fixed-income market?

a. To design and issue debt securities in order to minimize funding costs
b. To sell securities at the best
possible market price
c. To have an orderly and liquid
secondary market for
repurchase and refinancing
d. To diversify portfolio at low cost

A

d. To diversify portfolio at low cost

25
Q

To reconstitute a bond, a dealer would:

A

“putting them back together” then selling it as a whole again

25
Q

The most common embedded options that are granted to ISSUERS or BORROWERS include the following EXCEPT:

a. Floor on Float Rate
b. The accelerated sinking fund provision
c. The right to the underlying borrowers in a pool of loans to prepay principal above the scheduled principal payment

A

a. Floor on Float Rate

25
Q

The interest rate risk of a noncallable bond is most likely to be positively related to the:

A

bond’s duration**

25
Q

Which of the following players in the fixed income market care a good deal more about the risk premium that is priced into debt securities

A

investors

25
Q

Activities in the primary market for debt securities would NOT include:

a. Auction process
b. Best efforts
c. Market Making
d. a firm commitment

A

c. Market Making

25
Q

From the perspective of the BONDHOLDER, which of the following pairs of options would both add value to a straight (option-free) bond?

A

put and conversion

26
Q

Which of the following is a required element for determining the value of a fixed-income security?

A

time till maturity

Module 4: Fixed Income 1 (1 decks)

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