IP - Chapter 8 - Fixed Income Securities Analysis*

Question 1

These bonds are typically called at a premium to par.

Answer 1

Callable Bonds

Question 2

Bonds that sell at a significant discount from par and does not pay periodic coupon payments.

Answer 2

Zero Coupon Bonds

Question 3

What is the best way to calculate YTM?

Answer 3

Use a financial calculator

Question 4

Explain Bond See-Saw Vertically and Horizontally?

Answer 4

Vertically (Top to Bottom) : Premium, Par, Discount

Horizontally: (Left to Right) : Coupon, CY, YTM

Question 5

The yield used in the valuation of a fixed income security is stated in the form of an ___________ .

Answer 5

Annual Rate of Return

Question 6

This type of risk is directly related to the bid-ask spread. The larger the spread, the greater the risk.

Answer 6

Liquidity

Question 7

Represent current market interest rates for various maturities.

Answer 7

Yield Curves

Question 8

What are the 3 most common yield curves?

Answer 8

Upward, Downward, and Flat

Question 9

Most actively traded bond market, extremely liquid

Answer 9

Treasury Market

Question 10

Theory based on the concept that longer term rates (or forward rates) are based on expected future short term rates.

Answer 10

Pure Expectations Theory

Question 11

Under this theory, investors require premiums for the increased exposure to interest rate risk inherent in long term bonds.

Answer 11

Liquidity Preference Theory

Question 12

In this theory interest rates are determined by supply and demand

Answer 12

market segmentation theory

Question 13

The interest in these type of bonds are state tax exempt but subject to federal taxes.

Answer 13

Treasury Bonds

Question 14

States that financial institutions have certain term preferences as to the maturity of their assets for matching liabilities.

Answer 14

Preferred Habitat Theory

Question 15

The price of a bond is attributable to 3 factors:

Answer 15

1) YTM
2) Coupon
3) Term of the bond

Question 16

A weighted measure of payback

Answer 16

Duration

Question 17

Used to determine the percentage change in the price of a bond or bond portfolio for a specific change in prevailing interest rates.

Answer 17

Modified Duration

Question 18

A linear measure of the curvilinear bond price yield relationship also assumes parallel shifts in the yield curve

Answer 18

Duration

Question 19

A bond or bond portfolio can be initially immunized if the Macaulay duration of the bond or bond portfolio matches when ?

Answer 19

The investor needs the funds

Question 20

The degree to which the bond price-yield relationship is _______________ .

Answer 20

Curvilinear

Question 21

What are the three important uses for duration?

Answer 21

1) Measuring Volatility
2) Estimating price changes based on Interest Rates
3) Immunizing a bond/bond portfolio against interest rate risk

Question 22

Duration is not a static number and will change as ___________ and _____________ change.

Answer 22

Time, Interest Rates

Question 23

3 main factors that impact a bonds duration are:

Answer 23

Coupon Rate, Maturity, YTM

Question 24

What kind of relationship do coupon rate and duration have?

Answer 24

Inverse

Question 25

Generally duration is ____________ term to maturity unless it is a zero coupon bond.

Answer 25

Less than

Question 26

What happens to duration when maturity increases?

Answer 26

Duration increases at a decreasing rate

Question 27

How is YTM related to duration?

Answer 27

Inversely

Question 28

Concept of minimizing the impact of changes of interest rates on the value of investments.

Answer 28

Immunization

Question 29

A measure of the curvature of the price of a bond based on the changes in interest rates.

Answer 29

Convexity

Question 30

What is the relationship between Coupon, YTM, and Maturity with Duration and Convexity?

Answer 30

Coupon - Inverse with Duration, Inverse with Convexity
YTM - Inverse with Duration, Inverse with Convexity
Maturity - Direct with Duration, Direct with Convexity

Question 31

Exchanging bonds in a strategy with identical characteristics as an arbitrage opportunity

Answer 31

Substitution Swap

Question 32

Exchanging similar bonds from two different market sectors in a strategy (ie. Treasuries for Corporates)

Answer 32

Intermarket Spread Swap

Question 33

This rule does not count with fixed income securities if purchased from a different issuer.

Answer 33

Wash Sale Rule

Question 34

What are the 3 yield curve strategies?

Answer 34

Ladder, Barbell, Bullet

Question 35

Used to take advantage of expected changes in interest rates

Answer 35

Rate Anticipation Swap

Question 36

Strategy designed to take advantage of normal yield curve structure. This is a ‘buy and hold’ strategy that works when LT rates are higher than ST rates. In this strategy the investor purchases long term bonds and holds them for a period of time but less than maturity.

Answer 36

Riding the Yield Curve

Question 37

Weighted measure of payback used to estimate volatility of a bond or bond portfolio?

Answer 37

Duration