Flash Card

Question 1

What does the “market segmentation theory” suggest?

Answer 1

This theory claims that the big players in the industry are the ones who really affected interest rate fluctuations.

Question 2

XYZ bond has a duration of 7. If interest rates fall by 2% points, what would you expect to happen to the market value of this bond?

Answer 2

The market value of XYZ bond would rise by 14%

Question 3

What interest rate theory suggests that people’s perceptions of what will happen to interest rates in the future dictate the shape of the yield curve?

Answer 3

The expectations theory

Question 4

How is the nominal rate of return calculated?

Answer 4

Nominal rate return= Real rate of return+ Inflation rate

Question 5

How is the current yield of a Treasury bill Calculated?

Answer 5

Face Value- Market price/ Market price

Time 365/ term

Question 6

What type of bond has the name of the owner recorded in the bond certificate itself?

Answer 6

Registered bond

Question 7

What is the formula for yield to maturity?

Answer 7

Annual income+/- Annual price change
——————————————————-
Average of market price and maturity price

Question 8

What is duration?

Answer 8

Simply a multiplayer; it tells you how much a bond’s price will change given a 1% change in market interest rates

Question 9

How is the real rate of return calculated?

Answer 9

Real return = Nominal return - Inflation rate

Question 10

What is “market segmentation theory”?

Answer 10

Claims that the big players in the industry are the one who really affect interest rate fluctuations. Their demand for short-term or long-term money is the determining factor in dictating interest rate levels. These big players are made up of banks and insurance companies

Question 11

In what three ways can a bond index be used?

Answer 11

1. To server as an indication of the performance of the overall bond market
2. To compare and assess the performance of bond portfolio managers
3. To create bond index funds

Question 12

With reference to bonds, what does “reinvestment risk” refer to?

Answer 12

Refers to the risk that a bond investor might not be able to reinvest the interest payments received at the same rate as on the bond itself.

Question 13

What type of bond is not registered to a specific person or entity?

Answer 13

A bearer bond

Question 14

Between the buyer and seller if a bond, who pays whom the accrued interest?

Answer 14

The purchaser pays the accrued interest to the seller of the bond

Question 15

What is the formula for current yield?

Answer 15

Current yield= Annual interest payment
————————————-
Current market price

Question 16

What is difference between a “sell side” of a firm and a “buy side” of a firm?

Answer 16

Sell side- Investment dealer ( Investment banker, Trader)

Buy side- Investment management (institutional clients)

Question 17

What impact would a decrease in interest rates have on a bond’s yield?

Answer 17

The bond yield would fall.

Question 18

What is the shape of a normal yield curve?

Answer 18

Upward- sloping line

Question 19

What are the three ways bond indexes can be used?

Answer 19

1. To serve as an indication of the performance of the overall bond market 2. To compare and assess the performance of bond portfolio managers
2. To create bond index funds

Question 20

In what direction do bond price generally move after an increase in interest rates?

Answer 20

They generally decline.

Question 21

What is “accrued interest “ on a bond?

Answer 21

Is the interest that had accumulated since the last interest payment date, and it is paid to the current holder if the bond when it is sold to another investor.

Question 22

If bond A has a higher duration than bond B, what does that tell us?

Answer 22

Bond A is more volatile in price than bond B

Question 23

What is “expectation theory”?

Answer 23

States people’s expectations of what will happen to interest rate in the future dictate the shape of the yield curve.

Question 24

What is the accrued interest period on a bond that trades in the secondary market?

A. The last interest payment date up to but not including the settlement date
B. The day after the last interest payment date up to and including the settlement date.

Answer 24

The accrued interest period goes from the day after last interest payment date up to and including the settlement date.

Question 25

What does the “liquidity preference theory “ suggest?

Answer 25

People will usually lock up their money only if they are compensated by a higher rate of return.