Debt securities and fixed income
Fixed income questions test whether you can translate a bond's terms into risk and return for a client: what is promised, by whom, for how long, and what happens to the price when rates or credit quality move.
Bond basics
A bond promises a coupon (fixed, floating or zero) and repayment of face value at maturity. On the NZX Debt Market you'll see New Zealand Government bonds, Local Government Funding Authority paper, corporate bonds and Kauri bonds issued in New Zealand dollars by offshore borrowers. Listed bonds are offered under a Product Disclosure Statement, usually with a minimum subscription.
The two big risks
Interest rate risk: prices and yields move inversely, and the sensitivity is captured by duration. Modified duration approximates the percentage price change for a 1% yield change, so a bond with modified duration of 4.4 loses roughly 4.4% if yields rise one percentage point. Credit risk: the issuer may not pay. It is priced as a credit spread over the government curve and assessed through ratings from agencies such as S&P and Moody's; assess seniority too, since subordinated or unsecured notes rank behind secured debt.
Features to check
Call dates (issuer can redeem early, capping upside), step-up coupons, subordination, and liquidity - many NZX-listed bonds trade thinly, so the quoted price may not be achievable in size.
Worked example
A client holds $250,000 of a bond with modified duration 4.4. You expect yields to rise 0.50%. Estimated price impact = −4.4 × 0.50% = −2.2%, or about $5,500 of capital loss - roughly seven months of a 5% coupon. That estimate ignores convexity but is adequate for deciding whether to shorten duration.
Traps
Reading a 5% coupon as a 5% return; yield to maturity is the relevant measure. Assuming a high rating removes price risk. Ignoring call features on high-coupon notes. Treating thin secondary-market quotes as firm.