SS 15. Fixed Income Basic Concepts

Question 1

Calculation of a bond price using spot rates to discount the bond cash flows is best described as:

Answer 1

Arbitration free valuation

Question 2

Name the coupon structure:

‘The coupon rate increases by a certain amount if
the credit rating of the issuer falls, and decreases if the credit rating of the issuer improves.’

Answer 2

Credit-linked coupon bond

Question 3

If the issuer of a bond is in default, the bond will be trading:

Answer 3

flat

Question 4

Current Yield =

Answer 4

Annual cash coupon payment
/
Current bond price

Question 5

Given an increase in interest rate volatility, what will be the most likely effect on the price of a putable bond?

Answer 5

Increase

Question 6

Notes have a maturity of:

Answer 6

Between 1 and 10 years

Question 7

Bills have a maturity of:

Answer 7

Under 1 year

Question 8

Name the coupon structure:

‘Regular coupon payments do not begin
until a period of time after issuance.’

Answer 8

Deferred coupon (split coupon) bonds

Question 9

Name the coupon structure:

‘The issuer may make coupon payments by increasing
the principal amount, essentially paying bond interest with more bonds.’

Answer 9

Payment-in-kind bond

Question 10

Sovereign bonds whose coupon payments and/or principal payments are adjusted by a consumer price index (CPI) are known as:

Answer 10

Inflation-linked bonds or

Linkers

Question 11

On-the-run issue =

Answer 11

The most recently auctioned issue of that maturity

Question 12

When computing the yield to maturity, it is assumed that the interest payments are reinvested at what rate?

Answer 12

yield to maturity at the time of the investment

Question 13

‘An insurance company agrees to make a

payment if a third party fails to perform under the terms of a contract’ defines a:

Answer 13

Surety bond

Question 14

Assuming all other factors remain unchanged, during the lockout period on a credit card asset-backed security:

Answer 14

The investor receives coupon interest but no principal.

Question 15

A ______ ____ _______ provides for the periodic retirement of a portion of the
bonds issued over the life of the issue. In general, bonds with a sinking fund
provision have less credit risk but greater reinvestment risk.

Answer 15

sinking fund provision

Question 16

A South African company issues bonds denominated in pound sterling that are sold to investors in the United Kingdom. These bonds are:

Answer 16

Foreign bonds

Bonds sold in a country and denominated in that country’s currency by an entity from another country are referred to as foreign bonds.

Question 17

Pure-discount bonds and other bonds sold at significant discounts to par when
issued are termed:

Answer 17

original issue discount (OID) bonds

Question 18

A repurchase agreement is most comparable to a:

Answer 18

collateralized loan

Question 19

The legal contract that describes the form of the bond, the obligations of the issuer, and the rights of the bondholders is called the:

Answer 19

indenture

Question 20

A ______ bond pays for losses resulting from employee theft or misconduct.

Answer 20

fidelity

Question 21

‘A debt obligation backed by a segregated pool of assets’ is called a:

Answer 21

Cover bond

Question 22

Name the coupon structure:

‘The coupon rate increases over time according to a
predetermined schedule. These bonds are typically callable’

Answer 22

Step-up coupon bond

Question 23

Bonds that are denominated in a currency other than that of the country in which they are issued are called:

Answer 23

Eurobonds

Question 24

Describe a convertible bond’s conversion premium:

Answer 24

Bond price minus conversion value

Question 25

‘A method estimating bond YTMs using the YTMs of traded bonds that have credit quality very close to that of the non-traded or infrequently traded
bonds of similar maturity and coupon’ describes:

Answer 25

Matrix pricing

Question 26

The Public Securities Administration (PSA) prepayment benchmark is expressed as:

Answer 26

A monthly series of conditional prepayment rates (CPRs)

Question 27

If interest rates are expected to increase, the coupon payment structure that will benefit the issuer is a:

Answer 27

Capped Floating Rate Note (Capped FRN)

Question 28

A capital market security has a maturity of:

Answer 28

longer than one year

Question 29

The full price is otherwise known as:

Answer 29

The dirty price

The invoice price

Question 30

Bonds with a bid ask spread of _____ are considered liquid

Answer 30

10 to 12 bps

Question 31

Bonds have a maturity of:

Answer 31

Between 10 and 30 years

Question 32

Settlement period for a government bond:

Answer 32

T + 1

Question 33

Which type of bond earns interest on an implied basis?

Answer 33

Pure discount bond

Question 34

Spreads between bonds with different maturities describe:

Answer 34

Intra-market spreads

Question 35

________ are often issued as bearer bonds (rather than registered bonds)

Answer 35

Eurobonds

Question 36

Wholesale funds available for banks include (3):

Answer 36

central bank funds

interbank funds

negotiable certificates of deposit

Question 37

The collateral for credit card receivable-backed securities is:

Answer 37

A pool of non-amortizing loans

Question 38

‘The risk that when interest rates rise, mortgage holders will make fewer prepayments, thereby increasing the maturity of the bond’ describes:

Answer 38

Extension risk

Question 39

For a callable bond, a yield-to-call can be calculated for each possible call date and price. The lowest of yield-to-maturity and the various yields-to-call is termed the:

Answer 39

Yield-to-worst

Question 40

Relative to negative bond covenants, positive covenants are:

Answer 40

cheaper for the issuer

Question 41

Bond dealers usually quote the:

Answer 41

flat price

Question 42

The collateral for an auto loan ABS is:

Answer 42

A pool of amortizing loans

Question 43

When an investor’s investment horizon is less than the Macaulay duration of the bond owned, the duration gap is:

Answer 43

Positive

Question 44

Accrued interest formula:

Answer 44

(Days since last coupon / days between the coupon) * coupon payment

Question 45

‘A monthly measure of prepayment for the mortgage pool’ describes the:

Answer 45

Single Monthly Mortality rate (SMM)

Question 46

Corporate bonds vs. Treasury bonds spreads describe:

Answer 46

inter-market spreads

Question 47

The flat price is otherwise known as:

Answer 47

The clean price

The quoted price

Question 48

A U.S. dollar-denominated bond sold to investors outside the United States is called a:

Answer 48

Eurodollar bond