Fixed Income PREPARATION TEST 2026
QUESTIONS AND CORRECT ANSWERS
GRADED A+
● Money market instruments. Answer: short-term loans that typically
mature in less than 12 months
because of their short maturity, high liquidity, and high-quality issuers
they are considered to be very conservative or low-risk securities
● Bonds. Answer: debt securities that mature in over one year's time
promise the investor that he will receive certain specified cash flows at
certain specified times in the future
● Bond indenture. Answer: certificate that states the terms of a fixed-
income security
● Coupon rate. Answer: the interest paid
the price of money or the cost of borrowing money
sometimes referred to as nominal rate
expressed as a percentage of the bond's par value
most corporate bonds pay coupons semi-annually
coupon amount is influenced by the risks that an investor is taking to
purchase the fixed-income securities
,● Par value. Answer: also known as face value
the initial price of the security
the principal amount of the loan that the purchaser of the fixed-income
security is lending the issuer
is to be paid back at some point in the future
● Time to maturity. Answer: longer-term fixed-income securities are
perceived as higher risk and typically pay higher coupon rates than
short-term issues
longer the maturity of a fixed-income security, the greater the amount of
time its coupon payments would be affected by interest rates and
reinvestment rates
as a security approaches maturity, its risk exposure is less and its
sensitivity to interest movements is also less
● Call and put provisions. Answer: issuers may want the right to pay off
their bonds at par before maturity
expensive high-coupon debt that was issued during a time of high
interest rates could be replaced with cheaper lower-coupon debt if rates
declined
call provisions give the corporation the option to call some or all of the
bonds from their holders at states prices during a specified period before
maturity
, put provisions give the holders an option but this time it is to exchange
their bonds for cash equal to the bond's face value
option generally can be exercised over a brief period of time after a
stated number of years have elapsed since the bond's issuance
● Default or credit risk. Answer: the likelihood of the issuer to default
on payment of interest and principal of the loan
US government securities are considered the highest quality and are
considered to have absolutely no default risk
● Speculative-grade bonds. Answer: better known as junk bonds
also called high-yield bonds
issuer must compensate investors for taking on the additional default
risk
● Money market mutual funds. Answer: specialize in short-term
securities and provide investors an alternative to savings accounts and
other time deposits offered by banks
invest in commercial paper, repurchase agreements, bankers
acceptances, negotiable CDs, Treasury bills, and tax anticipation notes
not protected under FDIC insurance
acceptable investment alternative for an emergency fund due to high
degree of liquidity
QUESTIONS AND CORRECT ANSWERS
GRADED A+
● Money market instruments. Answer: short-term loans that typically
mature in less than 12 months
because of their short maturity, high liquidity, and high-quality issuers
they are considered to be very conservative or low-risk securities
● Bonds. Answer: debt securities that mature in over one year's time
promise the investor that he will receive certain specified cash flows at
certain specified times in the future
● Bond indenture. Answer: certificate that states the terms of a fixed-
income security
● Coupon rate. Answer: the interest paid
the price of money or the cost of borrowing money
sometimes referred to as nominal rate
expressed as a percentage of the bond's par value
most corporate bonds pay coupons semi-annually
coupon amount is influenced by the risks that an investor is taking to
purchase the fixed-income securities
,● Par value. Answer: also known as face value
the initial price of the security
the principal amount of the loan that the purchaser of the fixed-income
security is lending the issuer
is to be paid back at some point in the future
● Time to maturity. Answer: longer-term fixed-income securities are
perceived as higher risk and typically pay higher coupon rates than
short-term issues
longer the maturity of a fixed-income security, the greater the amount of
time its coupon payments would be affected by interest rates and
reinvestment rates
as a security approaches maturity, its risk exposure is less and its
sensitivity to interest movements is also less
● Call and put provisions. Answer: issuers may want the right to pay off
their bonds at par before maturity
expensive high-coupon debt that was issued during a time of high
interest rates could be replaced with cheaper lower-coupon debt if rates
declined
call provisions give the corporation the option to call some or all of the
bonds from their holders at states prices during a specified period before
maturity
, put provisions give the holders an option but this time it is to exchange
their bonds for cash equal to the bond's face value
option generally can be exercised over a brief period of time after a
stated number of years have elapsed since the bond's issuance
● Default or credit risk. Answer: the likelihood of the issuer to default
on payment of interest and principal of the loan
US government securities are considered the highest quality and are
considered to have absolutely no default risk
● Speculative-grade bonds. Answer: better known as junk bonds
also called high-yield bonds
issuer must compensate investors for taking on the additional default
risk
● Money market mutual funds. Answer: specialize in short-term
securities and provide investors an alternative to savings accounts and
other time deposits offered by banks
invest in commercial paper, repurchase agreements, bankers
acceptances, negotiable CDs, Treasury bills, and tax anticipation notes
not protected under FDIC insurance
acceptable investment alternative for an emergency fund due to high
degree of liquidity
