Untitled Deck Flashcards
What happens to the price of a bond when the yield to maturity (YTM) increases by 50 basis points?
The bond’s price will most likely decrease by approximately 2%
This is based on the inverse relationship between bond prices and yields.
What is the yield to maturity of a zero-coupon bond priced at 550 with a face value of 1,000 maturing in 10 years?
Closest to 6.15%
Yield to maturity calculations for zero-coupon bonds involve solving for the interest rate in the present value equation.
Which type of bond is most likely to exhibit negative convexity?
A callable bond
Callable bonds can be redeemed by the issuer before maturity, which can lead to negative convexity.
A bond with a Macaulay duration of 7.5 years and a yield to maturity of 4% has a modified duration closest to what value?
7.21 years
Modified duration adjusts Macaulay duration for the bond’s yield.
When is a bond’s price most sensitive to changes in yield?
When the bond has a low coupon rate and a long maturity
Longer maturity and lower coupon rates increase duration, making the bond more sensitive to yield changes.
Which yield measure assumes that coupon payments are reinvested at the yield to maturity?
Yield to maturity
This yield measure reflects the total return anticipated on a bond if held until it matures.
What is the current yield of a bond with a 5% coupon rate priced at 102?
Closest to 4.90%
Current yield is calculated as the annual coupon payment divided by the current price.
What is the yield to worst for a callable bond?
The lower of the yield to maturity or yield to call
Yield to worst provides the most conservative return estimate for callable bonds.
What is a bond’s nominal spread?
The difference between the bond’s yield and the yield of a comparable-maturity Treasury security
Nominal spread indicates the risk premium over risk-free rates.
What is most likely to increase the option-adjusted spread (OAS) of a callable bond?
An increase in interest rate volatility
Higher volatility increases the uncertainty of future interest rates, affecting the OAS.
A bond portfolio with a modified duration of 6.5 will most likely experience a price change of approximately what percentage if interest rates change by 1%?
6.5%
Modified duration provides an estimate of the percentage price change for a 1% change in yield.
What does duration measure in relation to bonds?
The sensitivity of a bond’s price to changes in yield
Duration is a key measure of interest rate risk.
When is a bond’s convexity most likely to be highest?
When the bond has a low coupon rate and a long maturity
Bonds with lower coupons and longer maturities exhibit greater curvature in price-yield relationships.
What price change can be expected for a bond with a modified duration of 8.0 and convexity of 150 if interest rates decrease by 1%?
Approximately 8.15%
The price change incorporates both duration and convexity adjustments.
Which bond is most likely to have the highest interest rate risk?
A 10-year, zero-coupon bond
Zero-coupon bonds have higher duration than coupon bonds, increasing their sensitivity to interest rate changes.
A bond with a credit rating of BBB is classified as what?
Investment grade
BBB ratings indicate a moderate credit risk, suitable for many investors.
What factor is most likely to improve a bond’s credit rating?
An increase in profitability
Higher profitability improves the issuer’s ability to meet debt obligations.
The recovery rate for a defaulted bond is most likely to be highest for which type of bond?
Senior secured bonds
Senior secured bonds have priority in claims on assets, leading to higher recovery rates.
What is most likely to increase the credit spread of a corporate bond?
An increase in liquidity risk
Higher liquidity risk can lead to wider credit spreads as investors demand more compensation.
What is the yield to maturity of a bond with a credit spread of 250 basis points?
Most likely 7.50%
The yield to maturity is calculated as the risk-free rate plus the credit spread.
Which theory suggests that the shape of the yield curve is determined by expectations of future interest rates?
Pure expectations theory
This theory posits that the yield curve reflects market expectations of future interest rates.
What does a steeply upward-sloping yield curve indicate?
Expectations of rising inflation
A steep yield curve often signals that investors expect higher future interest rates.
Which factor is most likely to cause a parallel shift in the yield curve?
A change in inflation expectations
Changes in inflation expectations affect the yield across all maturities uniformly.
What is the 1-year forward rate two years from now if the spot rate for a 2-year zero-coupon bond is 3.5% and for a 3-year zero-coupon bond is 4.0%?
Closest to 4.5%
Forward rates are derived from the difference in spot rates.
What is most likely to cause an inverted yield curve?
Expectations of declining interest rates
An inverted yield curve often signals economic downturns or recessions.
Which entity is most likely to issue bonds in the primary market?
A corporation
Corporations frequently issue bonds to raise capital directly from investors.
What is a characteristic of a bond issued in the Eurobond market?
Be issued in a currency other than the issuer’s domestic currency
Eurobonds provide issuers access to international capital markets.
Which feature is most likely associated with a sovereign bond?
A low level of liquidity risk
Sovereign bonds are often highly liquid due to their demand in the market.
What is the effect of a sinking fund provision on a bond?
Reduce the issuer’s credit risk
Sinking funds ensure that the issuer sets aside funds to repay bonds at maturity.
Which is a characteristic of a municipal bond?
Exemption from federal income tax
Municipal bonds are often issued for public projects and offer tax advantages to investors.
