Fixed Income Test Questions

Here are some questions, could someone confirm if the answers are correct ?

1. Which of the following bond categories has typically lower yield to maturity than short-term treasury bonds? (a) Long-term treasury bonds . I would say b) (b) Short-term municipal bonds. © Short-term corporate bonds. (d) Callable corporate bonds. (e) None of the above.

2. If a bond is callable, then: (a) Investor has the right, but not the obligation, to return the bond to the issuer at a pre-specied price. (b) The timing of cash-flows is known in advance. © The coupon rate is typically greater than for the corresponding bond with no embedded option. (d) Issuer always faces higher risk. (e) None of the above.

The answer is c) The coupons are higher, as investors are facing risk if interest rates go down, the rest of the answers make no sense

3. Which of the following always increases the interest rate risk of a bond? (a) Higher time to maturity. (b) Market expectations of a higher inflation rate. © Higher coupon rate. (d) Lower yield to maturity. (e) None of the above.

5. Which of the following is false? Any idea ? (a) The most common type of a forward rate agreement involves exchanging a xed for a variable leg. (b) In a plain vanilla forward rate agreement the notional principal is never exchanged. © In a plain vanilla forward rate agreement all risk is assumed by the receiver of the fixed leg. (d) In order to hedge a 2-year loan with semiannual payments pegged to Euribor, it is suffcient to enter in three different Euribor forward rate agreements. (e) An interest rate swap is equivalent to a series of forward rate agreements.

_ 6. _ Swap spread is: (a) Internal rate of return (IRR) for a series of payments generated by the fixed leg. (b) Difference between the swap rate and the reference rate (e.g. Libor). © Difference between bid and ask swap rates. (d) A hedging strategy involving swaptions. (e) None of the above.

Swap spread is the difference between the fixed component of a given swap and the yield on a sovereign debt security with a similar maturity. I cannot see the similarity in the following above options, therefore e is might me the correct answer.

7. When investing in a floating rate instrument, for example a note whose coupon payments are pegged to 6-m Euribor, the type of risk you should least be concerned with is: (a) Credit risk of the issuer. I would say a, others are in my opinion pretty much related regarding floating instruments. (b) Interest rate risk. © Inflation risk. (d) Liquidity risk. (e) Price risk.

8. Two government bonds have the same coupon rates and no embedded options. The first one matures in 3 and the second one in 5 years. If the interest rates change, the bond whose price will change more (in relative terms) will be: (a) The first one. (b) The second one. © Both will change for equal relative amounts. (d) It depends whether the interest rate change is positive or negative. (e) It cannot be determined from the information given.

9. The convexity correction to duration-based estimate of the price change is: (a) Always positive. (b) Always negative. © Positive for negative changes in yield and negative for positive changes in yield. (d) Positive for positive changes in yield and negative for negative changes in yield. (e) Positive or negative, depending on the initial value of yield.

10. A 5-year bond with a coupon of 6:0% issued by Lucent Technologies is currently selling at par value. If the term structure of zero-coupon Treasury yields is at at 5:8%, then a 1-year Treasury Note with a coupon of 6:0% is approximately selling at: (a) 94.5 (b) 99.8 © 100.0 (d) 100.2 (e) 102.0