FIN390
Fixed Income Securities Analysis
Comprehensive Test Review (Qns & Ans)
2025
1. Which of the following best describes a callable bond?
- A) A bond that can be converted into shares of the issuing
company's stock
- B) A bond that pays interest only at maturity
- C) A bond that can be redeemed by the issuer before its
maturity date
- D) A bond that has a floating interest rate
- ANS: C) A bond that can be redeemed by the issuer before its
maturity date
©/2025
, - Rationale: A callable bond allows the issuer to redeem the
bond before its maturity date, often at a premium price, giving the
issuer flexibility to refinance the debt if interest rates decline.
2. What is the primary risk associated with investing in
mortgage-backed securities (MBS)?
- A) Interest rate risk
- B) Credit risk
- C) Prepayment risk
- D) Inflation risk
- ANS: C) Prepayment risk
- Rationale: Prepayment risk is the primary risk associated
with mortgage-backed securities because homeowners may pay
off their mortgages early, leading to unpredictable cash flows and
reinvestment risk for the investors.
3. Which of the following measures the sensitivity of a bond's
price to changes in interest rates?
- A) Yield to maturity (YTM)
- B) Modified duration
- C) Convexity
- D) Credit spread
- ANS: B) Modified duration
©/2025
, - Rationale: Modified duration measures the sensitivity of a
bond's price to changes in interest rates, indicating how much the
price will change for a given change in interest rates.
Fill-in-the-Blank Questions
4. The __________ is the annual return an investor can expect to
earn if the bond is held to maturity, considering all coupon
payments and any capital gains or losses.
- ANS: Yield to maturity (YTM)
- Rationale: The yield to maturity (YTM) is the annual return
an investor can expect to earn if the bond is held to maturity,
considering all coupon payments and any capital gains or losses.
5. In fixed income securities analysis, __________ refers to the
additional yield that investors demand for taking on credit risk
compared to risk-free securities.
- ANS: Credit spread
- Rationale: The credit spread refers to the additional yield
that investors demand for taking on credit risk compared to risk-
free securities, reflecting the perceived risk of default.
6. __________ is a measure of the curvature of the relationship
between bond prices and interest rates, accounting for changes in
duration as interest rates change.
- ANS: Convexity
©/2025
, - Rationale: Convexity is a measure of the curvature of the
relationship between bond prices and interest rates, accounting for
changes in duration as interest rates change, providing a more
accurate estimate of price sensitivity.
True/False Questions
7. True or False: A bond with a higher coupon rate generally has
a higher interest rate risk compared to a bond with a lower coupon
rate.
- ANS: False
- Rationale: A bond with a higher coupon rate generally has a
lower interest rate risk compared to a bond with a lower coupon
rate because the higher coupon payments provide more income,
reducing the impact of interest rate changes on the bond's price.
8. True or False: Zero-coupon bonds do not pay periodic interest
and are issued at a discount to their face value.
- ANS: True
- Rationale: Zero-coupon bonds do not pay periodic interest
and are issued at a discount to their face value. Investors receive
the full face value at maturity.
9. True or False: The duration of a bond portfolio is a weighted
average of the durations of the individual bonds in the portfolio.
- ANS: True
©/2025
Fixed Income Securities Analysis
Comprehensive Test Review (Qns & Ans)
2025
1. Which of the following best describes a callable bond?
- A) A bond that can be converted into shares of the issuing
company's stock
- B) A bond that pays interest only at maturity
- C) A bond that can be redeemed by the issuer before its
maturity date
- D) A bond that has a floating interest rate
- ANS: C) A bond that can be redeemed by the issuer before its
maturity date
©/2025
, - Rationale: A callable bond allows the issuer to redeem the
bond before its maturity date, often at a premium price, giving the
issuer flexibility to refinance the debt if interest rates decline.
2. What is the primary risk associated with investing in
mortgage-backed securities (MBS)?
- A) Interest rate risk
- B) Credit risk
- C) Prepayment risk
- D) Inflation risk
- ANS: C) Prepayment risk
- Rationale: Prepayment risk is the primary risk associated
with mortgage-backed securities because homeowners may pay
off their mortgages early, leading to unpredictable cash flows and
reinvestment risk for the investors.
3. Which of the following measures the sensitivity of a bond's
price to changes in interest rates?
- A) Yield to maturity (YTM)
- B) Modified duration
- C) Convexity
- D) Credit spread
- ANS: B) Modified duration
©/2025
, - Rationale: Modified duration measures the sensitivity of a
bond's price to changes in interest rates, indicating how much the
price will change for a given change in interest rates.
Fill-in-the-Blank Questions
4. The __________ is the annual return an investor can expect to
earn if the bond is held to maturity, considering all coupon
payments and any capital gains or losses.
- ANS: Yield to maturity (YTM)
- Rationale: The yield to maturity (YTM) is the annual return
an investor can expect to earn if the bond is held to maturity,
considering all coupon payments and any capital gains or losses.
5. In fixed income securities analysis, __________ refers to the
additional yield that investors demand for taking on credit risk
compared to risk-free securities.
- ANS: Credit spread
- Rationale: The credit spread refers to the additional yield
that investors demand for taking on credit risk compared to risk-
free securities, reflecting the perceived risk of default.
6. __________ is a measure of the curvature of the relationship
between bond prices and interest rates, accounting for changes in
duration as interest rates change.
- ANS: Convexity
©/2025
, - Rationale: Convexity is a measure of the curvature of the
relationship between bond prices and interest rates, accounting for
changes in duration as interest rates change, providing a more
accurate estimate of price sensitivity.
True/False Questions
7. True or False: A bond with a higher coupon rate generally has
a higher interest rate risk compared to a bond with a lower coupon
rate.
- ANS: False
- Rationale: A bond with a higher coupon rate generally has a
lower interest rate risk compared to a bond with a lower coupon
rate because the higher coupon payments provide more income,
reducing the impact of interest rate changes on the bond's price.
8. True or False: Zero-coupon bonds do not pay periodic interest
and are issued at a discount to their face value.
- ANS: True
- Rationale: Zero-coupon bonds do not pay periodic interest
and are issued at a discount to their face value. Investors receive
the full face value at maturity.
9. True or False: The duration of a bond portfolio is a weighted
average of the durations of the individual bonds in the portfolio.
- ANS: True
©/2025
