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CSSC EOM Exams > Module 10 - Fixed Income and the Bond Market > Flashcards

Module 10 - Fixed Income and the Bond Market Flashcards

1
Q

Statement 1: Fixed income sub-asset classes can never perform better than equities. Statement 2: Cash has never been the best performing asset class in the past decade.

a. Statement 1 is true. Statement 2 is false.
b. Both statements are true.
c. Both statements are false.

A

c. Both statements are false.

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2
Q

Which of these relate to fixed income investments:

a. Return on equity
b. Return of capital
c. Ownership stake in the company

A

b. Return of capital

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3
Q

Three important elements when investing in a bond

A

Features; contingency provisions; considerations

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4
Q

Date of the bond’s final payment

A

Maturity date

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5
Q

Amount to be received on the bond’s final payment

A

Coupon and Face Value

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6
Q

Bond’s annual interest payment as percent of par

A

Coupon rate

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7
Q

Eurobonds are not issued in any domestic market

A

True

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8
Q

Claimable, Puttable, Convertible Bonds are samples of contingency provisions

A

False

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9
Q

Gives the bondholder the right to convert the bond into common shares of the issuing company

A

Convertible

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10
Q

Interest computation for corporate loans

A

ACT/360

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11
Q

Secured loans are not covered by collateral, merely backed by reputation and credit record

A

False

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12
Q

Which is not a systematic risk or undiversifiable risk for the fixed income market

A

Credit risk

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13
Q

Risk on the income received in a decreasing rate environment

A

Reinvestment risk

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14
Q

Capital markets refer to financial markets where funds are generated and traded, products include long-term bonds, corporate bonds, treasury bills and stocks

A

False

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15
Q

Sales of securities after initial offers or auctions

A

Secondary market

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16
Q

Strongest capability for timely payment for short-term fixed income

A

PRS1

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17
Q

Which of these credit ratings are not investment grade

A

Ba1

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18
Q

While not best practice, a bond issuer sometimes _______ to get the best credit ratings

A

Forum shopping

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19
Q

A derivative contract between two parties, in which the buyer makes a series of cash payments to receive a promise of compensation for credit losses

A

Credit Default Swaps

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20
Q

ABSs resemble options (as a put writer) except:

A

If something goes bad, returns can go higher

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21
Q

Analysts look into these for creditworthiness of borrowers; which of these do not belong in 4 Cs:

A

Lower coupon rates and shorter maturity dates than industry

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22
Q

The decline in issuer’s creditworthiness, which leads investors to believe the risk of default is higher and thus causing the yield spreads to widen and the bond price to fall

A

Downgrade risk

23
Q

Which has the correct order of highest rank to lowest rank (left to right)

A

First lien, senior subordinated, subordinated

24
Q

If a bond’s coupon rate is higher than the yield of maturity, then:

A

This is a premium bond

25
Q

Calculate worst case Expected Loss of a BB-rated senior unsecured corporate bond based on the following available information, assuming the investor will hold out until end of bankruptcy.

BB-rated default rates (mean 0.69%, max 2.69%, min 0%)

Emergency year recovery rate = 54.1%

Default year recovery rate = 47.4%

A

1.23%

26
Q

Value of bond can be described in terms of:

A

Price, Yield

27
Q

Discounting future cash flows with the required rate of return per year would give us the future value of cash flows.

A

False

28
Q

What is the present value of a $10k 3yr bond with 5% annual coupon at 4% interest rate

A

10,278

29
Q

An investor with a required rate of return of 4% were given options, which of these would be the most suitable fixed income:

A

4yr Government FXTN 4.0% YTM

30
Q

Information an investor needs to value perpetual bonds or preferred shares

A

Coupon/Dividends, interest rate

31
Q

When deriving the present value of a cash flow for bonds, the par value is placed at:

A

Maturity

32
Q

Which of the following is not true when valuing a semiannual coupon bond

A

N /2

33
Q

Which of the following is true when valuing a quarterly coupon bond

A

N*4

34
Q

Which of the following does not describe a zero-coupon bond

a. N = 3
b. Interest = 3
c. Coupon = 3

A

c. Coupon = 3

35
Q

Values of bonds with lower coupons are less sensitive to changes in YTM

A

False

36
Q

Values of bonds with longer maturities are more sensitive to changes in YTM

A

True

37
Q

As yields fall, bond price increases at a decreasing rate

A

False

38
Q

As yields increase, price declines at declining rate

A

True

39
Q

Nominal yield takes into account current price of bond

A

False

40
Q

0.20% is 200 basis points; 1% is equal to _______

A

Statement is false; 100bps

41
Q

Yield to maturity measures compounded rate of return of a bond held to maturity but does not factor in reinvestment rate.

A

False

42
Q

When calculating for accrued interest, which method is correct

a. July maxes at 30 days; calendar days max of 365
b. July maxes at 31 days; calendar days max of 360
c. July maxes at 31 days; calendar days max of 365

A

July maxes at 31 days; calendar days max of 365

43
Q

Investor buys a 10,000 quarterly bond with a 6% coupon paid on October 15. Trade settles on December 2.

A

Accrued interest ACT/ACT = 78.94

44
Q

Investor pays full price when accrued interest is included and settled through settlement

A

True

45
Q

Factors affecting the yield curve

A

Monetary Policy, Supply and Demand, Inflation

46
Q

When calculating YTM, coupon payments are assumed to be reinvested at YTM

A

True

47
Q

Which of these statements are not descriptive of constant-yield price trajectory

a. A point on the trajectory represents the carrying value of the bond at that time
b. Plots the carrying value through all periods until maturity
c. Premium and discount bonds do not converge into par

A

c. Premium and discount bonds do not converge into par

48
Q

Which of these carrying value formulae is incorrect

a. Premium bonds = purchase price – amortized amount of premium
b. Premium bonds = purchase price + amortized amount of premium
c. Discount bonds = purchase price + amortized amount of discount

A

b. Premium bonds = purchase price + amortized amount of premium

49
Q

Capital loss occurs when price is sold below its constant-yield price trajectory

A

True

50
Q

Duration can exceed Tenor

A

False

51
Q

Macaulay Duration can be calculated by dividing Modified Duration by 1+r

A

False

52
Q

Which of these statements are not true about duration

a. Longer maturity -> lower duration
b. Higher coupon rate -> lower duration
c. Higher YTM -> lower duration

A

a. Longer maturity -> lower duration

53
Q

When deriving the present value of a cash flow for bonds, the loaned out face value (cash outflow of investor) is placed at:

A

T0

54
Q

Values of bonds with higher coupons are less sensitive to changes in YTM

A

True

CSSC EOM Exams (14 decks)

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