Module 10 - Fixed Income and the Bond Market Flashcards
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.
c. Both statements are false.
Which of these relate to fixed income investments:
a. Return on equity
b. Return of capital
c. Ownership stake in the company
b. Return of capital
Three important elements when investing in a bond
Features; contingency provisions; considerations
Date of the bond’s final payment
Maturity date
Amount to be received on the bond’s final payment
Coupon and Face Value
Bond’s annual interest payment as percent of par
Coupon rate
Eurobonds are not issued in any domestic market
True
Claimable, Puttable, Convertible Bonds are samples of contingency provisions
False
Gives the bondholder the right to convert the bond into common shares of the issuing company
Convertible
Interest computation for corporate loans
ACT/360
Secured loans are not covered by collateral, merely backed by reputation and credit record
False
Which is not a systematic risk or undiversifiable risk for the fixed income market
Credit risk
Risk on the income received in a decreasing rate environment
Reinvestment risk
Capital markets refer to financial markets where funds are generated and traded, products include long-term bonds, corporate bonds, treasury bills and stocks
False
Sales of securities after initial offers or auctions
Secondary market
Strongest capability for timely payment for short-term fixed income
PRS1
Which of these credit ratings are not investment grade
Ba1
While not best practice, a bond issuer sometimes _______ to get the best credit ratings
Forum shopping
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
Credit Default Swaps
ABSs resemble options (as a put writer) except:
If something goes bad, returns can go higher
Analysts look into these for creditworthiness of borrowers; which of these do not belong in 4 Cs:
Lower coupon rates and shorter maturity dates than industry
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
Downgrade risk
Which has the correct order of highest rank to lowest rank (left to right)
First lien, senior subordinated, subordinated
If a bond’s coupon rate is higher than the yield of maturity, then:
This is a premium bond
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%
1.23%
Value of bond can be described in terms of:
Price, Yield
Discounting future cash flows with the required rate of return per year would give us the future value of cash flows.
False
What is the present value of a $10k 3yr bond with 5% annual coupon at 4% interest rate
10,278
An investor with a required rate of return of 4% were given options, which of these would be the most suitable fixed income:
4yr Government FXTN 4.0% YTM
Information an investor needs to value perpetual bonds or preferred shares
Coupon/Dividends, interest rate
When deriving the present value of a cash flow for bonds, the par value is placed at:
Maturity
Which of the following is not true when valuing a semiannual coupon bond
N /2
Which of the following is true when valuing a quarterly coupon bond
N*4
Which of the following does not describe a zero-coupon bond
a. N = 3
b. Interest = 3
c. Coupon = 3
c. Coupon = 3
Values of bonds with lower coupons are less sensitive to changes in YTM
False
Values of bonds with longer maturities are more sensitive to changes in YTM
True
As yields fall, bond price increases at a decreasing rate
False
As yields increase, price declines at declining rate
True
Nominal yield takes into account current price of bond
False
0.20% is 200 basis points; 1% is equal to _______
Statement is false; 100bps
Yield to maturity measures compounded rate of return of a bond held to maturity but does not factor in reinvestment rate.
False
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
July maxes at 31 days; calendar days max of 365
Investor buys a 10,000 quarterly bond with a 6% coupon paid on October 15. Trade settles on December 2.
Accrued interest ACT/ACT = 78.94
Investor pays full price when accrued interest is included and settled through settlement
True
Factors affecting the yield curve
Monetary Policy, Supply and Demand, Inflation
When calculating YTM, coupon payments are assumed to be reinvested at YTM
True
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
c. Premium and discount bonds do not converge into par
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
b. Premium bonds = purchase price + amortized amount of premium
Capital loss occurs when price is sold below its constant-yield price trajectory
True
Duration can exceed Tenor
False
Macaulay Duration can be calculated by dividing Modified Duration by 1+r
False
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. Longer maturity -> lower duration
When deriving the present value of a cash flow for bonds, the loaned out face value (cash outflow of investor) is placed at:
T0
Values of bonds with higher coupons are less sensitive to changes in YTM
True
