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IFMP Fixed Income Securities Certification (FISC), Pakistan study materials
IFMP Fixed Income Securities Certification (FISC), Pakistan study resources

IFMP Fixed Income Securities Certification (FISC), Pakistan practice questions

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Question 1Fixed income securities (domain content not enumerated in source)

In the Pakistan fixed income market, what does the term 'clean price' of a bond refer to?

  1. The price after adjusting for inflation over the bond's life
  2. The price excluding accrued interest since the last coupon date Correct answer.
  3. The price net of brokerage commission and taxes
  4. The price including all coupon payments made to date

Explanation

The clean price is the quoted price of a bond that excludes accrued interest earned since the last coupon payment. The dirty price equals the clean price plus accrued interest, and settlement in Pakistan typically occurs on a dirty price basis.

Question 2Fixed income securities (domain content not enumerated in source)

A Pakistan Investment Bond (PIB) carries a coupon of 10% paid semi-annually. What is the coupon amount paid per Rs 100 face value at each payment date?

  1. Rs 5.00 Correct answer.
  2. Rs 10.00
  3. Rs 1.00
  4. Rs 2.50

Explanation

An annual coupon of 10% on Rs 100 face value equals Rs 10 per year. Since the coupon is paid semi-annually, each payment is half of that annual amount, which is Rs 5.00.

Question 3Fixed income securities (domain content not enumerated in source)

Which institution acts as the primary regulator of the debt securities market and the central depository for government securities in Pakistan?

  1. Securities and Exchange Commission of Pakistan Correct answer.
  2. National Clearing Company of Pakistan
  3. Pakistan Stock Exchange
  4. State Bank of Pakistan

Explanation

The Securities and Exchange Commission of Pakistan (SECP) regulates the capital markets, including debt securities, and oversees market infrastructure such as the Central Depository Company. The State Bank of Pakistan handles monetary policy and government debt issuance, while the exchange and clearing company perform narrower operational roles.

Question 4Fixed income securities (domain content not enumerated in source)

A bond has a Macaulay duration of 6.5 years and a yield to maturity of 8%. Using the modified duration approximation, what is the approximate percentage price change for a 50 basis point increase in yield?

  1. A decrease of about 3.25%
  2. A decrease of about 0.33%
  3. A decrease of about 3.01% Correct answer.
  4. An increase of about 3.01%

Explanation

Modified duration equals Macaulay duration divided by (1 + yield), giving 6.5 / 1.08 = 6.0185. Multiplying by the 0.50% yield change gives approximately 3.01%, and because yields rise, the price falls by that amount.

Question 5Fixed income securities (domain content not enumerated in source)

Which of the following best describes the relationship between bond price and yield for a plain vanilla fixed coupon bond?

  1. Inverse and linear
  2. Inverse and convex Correct answer.
  3. Direct and convex
  4. Directly proportional and linear

Explanation

Bond prices move inversely to yields, and the relationship is convex because price changes are not symmetric for equal yield increases and decreases. Convexity means price gains from a yield fall exceed price losses from an equal yield rise.

Question 6Fixed income securities (domain content not enumerated in source)

An investor buys a 5-year zero coupon bond at a yield of 9% and holds it to maturity. Which risk is essentially eliminated by this strategy?

  1. Credit risk
  2. Reinvestment risk Correct answer.
  3. Liquidity risk
  4. Inflation risk

Explanation

A zero coupon bond pays no interim coupons, so there are no cash flows to reinvest before maturity. This eliminates reinvestment risk, although credit, inflation, and liquidity risks remain.

Question 7Fixed income securities (domain content not enumerated in source)

In Pakistan, which instrument is typically issued by the State Bank of Pakistan to manage short-term liquidity in the interbank market?

  1. Pakistan Investment Bonds
  2. Treasury Bills Correct answer.
  3. Corporate commercial paper
  4. Ijarah Sukuk

Explanation

Treasury bills are short-term government securities, typically with maturities of three, six, or twelve months, used by the central bank to manage liquidity. PIBs are long-term instruments, while sukuk and commercial paper are issued by other entities.

Question 8Fixed income securities (domain content not enumerated in source)

What distinguishes a sukuk from a conventional bond in Islamic finance?

  1. Sukuk represent ownership in an underlying asset or project rather than a debt obligation Correct answer.
  2. Sukuk cannot be traded on a secondary market
  3. Sukuk always pay a fixed coupon linked to a benchmark rate
  4. Sukuk are guaranteed by the government of Pakistan

Explanation

Sukuk are Shariah-compliant certificates representing ownership in tangible assets, usufruct, or a project, rather than a pure debt obligation. Returns are generated from the underlying asset's cash flows, not from interest on a loan.

Question 9Fixed income securities (domain content not enumerated in source)

A bond's yield to maturity is 11% and its current yield is 10%. What can be inferred about the bond?

  1. The bond is trading at a premium to par
  2. The bond is trading at a discount to par Correct answer.
  3. The bond is trading exactly at par
  4. The bond has a floating coupon rate

Explanation

When the yield to maturity exceeds the current yield, the bond is trading below par, which is a discount. This occurs because the current yield ignores the capital gain that accrues as the price converges to par at maturity.

Question 10Fixed income securities (domain content not enumerated in source)

Which of the following best defines the 'accrued interest' on a bond?

  1. Interest earned by the holder since the last coupon payment date Correct answer.
  2. The total interest paid over the bond's life
  3. The difference between the coupon rate and the market yield
  4. Interest that will be paid at the next coupon date

Explanation

Accrued interest is the portion of the next coupon that has been earned by the seller since the last coupon date. The buyer compensates the seller for this amount at settlement, and it is added to the clean price to give the dirty price.

Question 11Fixed income securities (domain content not enumerated in source)

An investor expects interest rates to fall sharply over the next year. Which bond strategy is most consistent with this view?

  1. Extending duration to maximize price appreciation Correct answer.
  2. Holding cash until rates stabilize
  3. Buying short-duration bonds to reduce price sensitivity
  4. Investing in floating rate notes tied to the policy rate

Explanation

When rates fall, bond prices rise, and longer duration bonds experience larger price gains. Extending duration therefore maximizes capital appreciation in a falling rate environment.

Question 12Fixed income securities (domain content not enumerated in source)

Which credit rating agency is widely recognized internationally for rating corporate debt securities issued in Pakistan?

  1. Karachi Stock Exchange
  2. Pakistan Credit Rating Agency (PACRA) Correct answer.
  3. State Bank of Pakistan
  4. Auditor General of Pakistan

Explanation

PACRA, along with other agencies such as VIS, provides credit ratings for corporate debt securities in Pakistan. Rating agencies assess the creditworthiness of issuers and the default risk of their instruments.

Question 13Fixed income securities (domain content not enumerated in source)

A bond has a face value of Rs 1,000, a coupon rate of 8% paid annually, and 3 years to maturity. If the market yield is 10%, what is the approximate price of the bond?

  1. Rs 1,000.00
  2. Rs 950.26 Correct answer.
  3. Rs 900.00
  4. Rs 1,050.00

Explanation

Discounting the three coupon payments of Rs 80 and the Rs 1,000 principal at 10% gives approximately Rs 950.26. Because the coupon rate is below the market yield, the bond trades at a discount to par.

Question 14Fixed income securities (domain content not enumerated in source)

What is the primary purpose of a bond indenture?

  1. To calculate the yield to maturity at issuance
  2. To specify the legal terms, covenants, and obligations of the issuer Correct answer.
  3. To set the secondary market trading price of the bond
  4. To guarantee the bond against default

Explanation

The indenture is the legal contract between the issuer and bondholders that sets out the coupon, maturity, covenants, and other obligations. It protects bondholders by defining what the issuer may and may not do.

Question 15Fixed income securities (domain content not enumerated in source)

Which of the following is the most accurate measure of a bond's total return if the investor holds it to maturity and reinvests coupons at the yield to maturity?

  1. Coupon rate
  2. Current yield
  3. Yield to maturity Correct answer.
  4. Yield to call

Explanation

Yield to maturity reflects the internal rate of return on the bond's cash flows assuming coupons are reinvested at that same yield until maturity. It captures coupon income plus any capital gain or loss from the purchase price to par.

Question 16Fixed income securities (domain content not enumerated in source)

A bond is callable at par in two years. If market yields fall significantly, what risk does the bondholder face?

  1. Reinvestment risk, because the bond may be called and proceeds reinvested at lower rates Correct answer.
  2. Inflation risk, because coupons are fixed
  3. Extension risk, because the bond's maturity lengthens
  4. Default risk, because the issuer is likely to become insolvent

Explanation

When yields fall, issuers tend to call bonds and refinance at lower rates, forcing investors to reinvest the proceeds at the lower prevailing yields. This is reinvestment risk, which is the main risk for holders of callable bonds in a falling rate environment.

Question 17Fixed income securities (domain content not enumerated in source)

In Pakistan, what is the typical quotation convention for Treasury bills in the secondary market?

  1. Discount rate on a 365-day basis Correct answer.
  2. Price per Rs 100 face value
  3. Price as a percentage of the coupon rate
  4. Annual yield to maturity on a simple basis

Explanation

Treasury bills are short-term discount instruments quoted on a discount rate basis, reflecting the difference between face value and purchase price annualized over the tenor. This differs from coupon bonds, which are quoted on a price or yield basis.

Question 18Fixed income securities (domain content not enumerated in source)

Which of the following best describes 'convexity' in bond analysis?

  1. The difference between clean and dirty price
  2. The spread between bid and ask prices
  3. The ratio of coupon rate to market yield
  4. The rate at which duration changes as yield changes Correct answer.

Explanation

Convexity measures the curvature of the price-yield relationship, effectively the rate at which duration changes as yields change. It improves the accuracy of price change estimates beyond what duration alone provides.

Question 19Fixed income securities (domain content not enumerated in source)

An investor holds a 10-year bond with a 7% coupon and a yield to maturity of 7%. If the bond is held to maturity and coupons are reinvested at 5%, how does the realized return compare with the yield to maturity?

  1. Realized return will exceed the yield to maturity
  2. Realized return will equal the yield to maturity
  3. Realized return cannot be determined without the credit rating
  4. Realized return will be below the yield to maturity Correct answer.

Explanation

Yield to maturity assumes coupons are reinvested at the yield to maturity itself. If coupons are reinvested at a lower rate of 5%, the realized compound return will fall short of 7%.

Question 20Fixed income securities (domain content not enumerated in source)

What is the primary function of a primary dealer in the Pakistan government securities market?

  1. To rate the creditworthiness of government bonds
  2. To insure bondholders against default
  3. To underwrite and participate in auctions of government securities Correct answer.
  4. To set the policy rate for the central bank

Explanation

Primary dealers are financial institutions authorized to bid directly in government securities auctions and to support secondary market liquidity. They act as intermediaries between the government and the broader market.

Question 21Fixed income securities (domain content not enumerated in source)

A corporate bond in Pakistan is issued with a put option. From the investor's perspective, what does this feature provide?

  1. The obligation to buy additional bonds at par
  2. The right to convert the bond into equity shares
  3. The right to sell the bond back to the issuer at a specified price Correct answer.
  4. The right to receive higher coupons if rates rise

Explanation

A put option gives the bondholder the right, but not the obligation, to sell the bond back to the issuer at a predetermined price on specified dates. This protects investors if yields rise or the issuer's credit deteriorates.

Question 22Fixed income securities (domain content not enumerated in source)

Which of the following is the most appropriate measure of interest rate risk for a bond portfolio when yield changes are large?

  1. Duration combined with convexity Correct answer.
  2. Macaulay duration alone
  3. Modified duration alone
  4. Current yield

Explanation

For large yield changes, duration alone becomes an increasingly inaccurate approximation because the price-yield relationship is curved. Adding convexity adjusts the estimate for this curvature and improves accuracy.

Question 23Fixed income securities (domain content not enumerated in source)

What does a bond's 'basis point' represent in fixed income markets?

  1. One tenth of a percentage point (0.10%)
  2. One hundredth of a percentage point (0.01%) Correct answer.
  3. Ten percentage points (10.00%)
  4. One percentage point (1.00%)

Explanation

A basis point is one hundredth of one percent, so 100 basis points equal 1%. Market participants use basis points to express small yield changes precisely.

Question 24Fixed income securities (domain content not enumerated in source)

A bank holds a bond portfolio with a duration of 4 years and a market value of Rs 500 million. If yields rise by 100 basis points, what is the approximate change in portfolio value using duration?

  1. A loss of approximately Rs 20 million Correct answer.
  2. A loss of approximately Rs 5 million
  3. A gain of approximately Rs 5 million
  4. A gain of approximately Rs 20 million

Explanation

The approximate value change equals duration multiplied by the yield change and the market value: 4 × 0.01 × Rs 500 million = Rs 20 million. Because yields rise, the portfolio loses value.

Question 25Fixed income securities (domain content not enumerated in source)

Which of the following statements about the relationship between coupon rate and duration is correct, all else equal?

  1. Lower coupon bonds have longer duration Correct answer.
  2. Duration equals the coupon rate for par bonds
  3. Higher coupon bonds have longer duration
  4. Coupon rate has no effect on duration

Explanation

Lower coupon bonds pay more of their total cash flow at maturity, so their weighted average time to cash flows is longer. Therefore, all else equal, lower coupon bonds have higher duration.

Question 26Fixed income securities (domain content not enumerated in source)

A Pakistani corporate bond pays a 10% annual coupon and is currently priced at Rs 1,050 per Rs 1,000 face value. What is its current yield?

  1. 10.00%
  2. 9.52% Correct answer.
  3. 8.50%
  4. 10.50%

Explanation

Current yield equals the annual coupon payment divided by the market price, not the face value. Here the annual coupon is Rs 100 and the price is Rs 1,050, so the current yield is 100/1,050 = 9.52%. Using face value would incorrectly give the coupon rate, and multiplying the coupon rate by the price premium is not a valid yield formula.

Question 27Fixed income securities (domain content not enumerated in source)

Which market convention describes a repo transaction in the Pakistani money market?

  1. A permanent transfer of ownership with no maturity date
  2. A loan of securities in which the borrower pays no compensation
  3. A sale of securities with an agreement to repurchase them at a set price on a future date Correct answer.
  4. An outright purchase of Treasury bills with no resale commitment

Explanation

A repo is a collateralised borrowing arrangement structured as a sale of securities combined with a forward agreement to buy them back at a pre-agreed price. The difference between the sale and repurchase price reflects the implied repo rate. Outright purchases and permanent transfers lack the repurchase leg that defines a repo.

Question 28Fixed income securities (domain content not enumerated in source)

A bond's clean price is quoted at Rs 980 while accrued interest since the last coupon is Rs 35. What is the dirty (settlement) price the buyer pays?

  1. Rs 1,015 Correct answer.
  2. Rs 980
  3. Rs 945
  4. Rs 1,035

Explanation

The dirty price equals the clean price plus accrued interest, because the buyer compensates the seller for interest earned but not yet paid. Adding Rs 35 to Rs 980 gives Rs 1,015. Subtracting accrued interest would understate the payment, and quoting only the clean price ignores the seller's accrued entitlement.

Question 29Fixed income securities (domain content not enumerated in source)

In bond terminology, what does a 'coupon' represent?

  1. The periodic interest payment the issuer promises to pay the holder Correct answer.
  2. The amount of principal repaid at maturity
  3. The fee charged by the underwriter at issuance
  4. The price at which the bond was first sold to investors

Explanation

The coupon is the stated periodic interest the issuer pays to bondholders, usually expressed as an annual percentage of face value. It is distinct from the issue price, the underwriting fee, and the principal repayment at maturity. Confusing these components misstates the bondholder's cash flow stream.

Question 30Fixed income securities (domain content not enumerated in source)

A bond trades at a price above its face value. What does this indicate about the relationship between its coupon rate and its yield to maturity?

  1. The coupon rate is higher than the yield to maturity Correct answer.
  2. The coupon rate is zero
  3. The coupon rate is lower than the yield to maturity
  4. The coupon rate equals the yield to maturity

Explanation

When a bond trades at a premium, its coupon payments exceed what the market yield requires, so investors pay more than par. Thus the coupon rate must be above the yield to maturity. A discount price would indicate the opposite, and equality of coupon and yield prices the bond at par.

Question 31Fixed income securities (domain content not enumerated in source)

Which risk is most directly reduced for a Pakistani investor who buys a bond denominated in US dollars rather than Pakistani rupees, assuming the same issuer and maturity?

  1. Interest rate risk
  2. Credit risk
  3. Local currency depreciation risk Correct answer.
  4. Reinvestment risk

Explanation

Holding a foreign-currency bond removes exposure to depreciation of the investor's home currency against that foreign currency, since the cash flows are already in dollars. It does not reduce interest rate risk, credit risk, or reinvestment risk, which depend on the issuer's profile and the bond's structure.

Question 32Fixed income securities (domain content not enumerated in source)

What does the settlement date of a bond trade represent?

  1. The date on which the buyer must pay cash and the seller must deliver the securities Correct answer.
  2. The date of the next scheduled coupon payment
  3. The date on which the issuer first announced the bond
  4. The maturity date of the bond

Explanation

Settlement is the point at which the trade becomes final: cash changes hands and securities are transferred. It follows the trade date by a convention such as T+1 or T+2. It is unrelated to announcement dates, coupon dates, or maturity.

Question 33Fixed income securities (domain content not enumerated in source)

A sukuk al-ijarah certificate holder typically receives returns derived from which underlying arrangement?

  1. Rental income from leased assets held by the issuing entity Correct answer.
  2. A share of the issuer's equity profits
  3. A capital gain guaranteed at maturity
  4. A fixed interest payment guaranteed by the issuer

Explanation

In a sukuk al-ijarah, the certificates represent ownership in leased assets, and holders receive a share of the rental income generated by those assets. Returns are therefore asset-linked rather than a guaranteed interest payment. Profit-sharing applies to musharakah or mudarabah structures, and guaranteed capital gains are not a feature of sukuk.

Question 34Fixed income securities (domain content not enumerated in source)

An investor buys a 10-year bond with a modified duration of 6.5 and a yield to maturity of 9%. Using duration only, what is the approximate percentage price change for a 25 basis point increase in yield?

  1. A fall of about 1.63% Correct answer.
  2. A fall of about 0.16%
  3. A rise of about 1.63%
  4. A fall of about 6.50%

Explanation

The duration-based estimate is modified duration multiplied by the yield change: 6.5 × 0.0025 = 0.01625, or about 1.63%. Because yields rise, the price falls, so the change is negative. Using 25 rather than 0.25 as a decimal produces the 6.50% figure, which misapplies the basis point conversion.

Question 35Fixed income securities (domain content not enumerated in source)

A bond portfolio has a modified duration of 5 and a convexity of 60. For a 100 basis point fall in yields, which adjustment does convexity make to the duration-only price estimate?

  1. It adds roughly 0.60% to the estimated price gain
  2. It subtracts roughly 0.30% from the estimated price gain
  3. It adds roughly 0.30% to the estimated price gain Correct answer.
  4. It has no effect for a parallel shift

Explanation

The convexity adjustment is one-half times convexity times the squared yield change: 0.5 × 60 × (0.01)^2 = 0.003, or about 0.30%. Convexity always adds to the price for a given yield change, so it increases the estimated gain when yields fall. It is not subtracted, and its magnitude is half the naive convexity-times-change product.

Question 36Fixed income securities (domain content not enumerated in source)

A 3-year bond pays an 8% annual coupon on a face value of Rs 1,000 and trades at a yield to maturity of 8%. What is its price?

  1. Rs 920
  2. Rs 1,024
  3. Rs 1,000 Correct answer.
  4. Rs 1,080

Explanation

When the coupon rate equals the yield to maturity and payments are annual, the bond prices exactly at par. Each coupon and the redemption are discounted at 8%, which sums to the Rs 1,000 face value. Any premium or discount price would require coupon and yield to differ.

Question 37Fixed income securities (domain content not enumerated in source)

A bond has a Macaulay duration of 7.2 years and a yield to maturity of 10% compounded annually. What is its modified duration?

  1. 7.92
  2. 0.72
  3. 7.20
  4. 6.55 Correct answer.

Explanation

Modified duration equals Macaulay duration divided by one plus the yield per period: 7.2 / 1.10 = 6.55. Macaulay duration measures weighted time to cash flows, while modified duration converts that into a price sensitivity measure. Multiplying by one plus the yield instead of dividing gives the incorrect 7.92.

Question 38Fixed income securities (domain content not enumerated in source)

Which strategy immunises a fixed income portfolio against interest rate risk for a single known liability date?

  1. Concentrating holdings in short-term Treasury bills
  2. Investing only in floating rate notes
  3. Matching the portfolio's duration to the investor's remaining time horizon Correct answer.
  4. Buying bonds with the highest available coupon

Explanation

Immunisation requires setting the portfolio duration equal to the remaining horizon so that price and reinvestment effects offset each other when rates change. This protects the value at the target date. Short bills, floaters, and high-coupon bonds do not by themselves align duration with the liability date.

Question 39Fixed income securities (domain content not enumerated in source)

A bond with a face value of Rs 5,000 and a 6% semiannual coupon pays how much per coupon date?

  1. Rs 300
  2. Rs 150 Correct answer.
  3. Rs 75
  4. Rs 600

Explanation

The annual coupon is 6% of Rs 5,000, or Rs 300. With semiannual payments, each payment is half of that, or Rs 150. Reporting Rs 300 would treat the payment as annual, and Rs 75 or Rs 600 misapply the coupon rate or the payment frequency.

Question 40Fixed income securities (domain content not enumerated in source)

A Pakistani bank holds a bond portfolio worth Rs 800 million with a modified duration of 3.5. If yields rise by 50 basis points, what is the approximate loss in value using duration?

  1. Rs 28 million
  2. Rs 14 million Correct answer.
  3. Rs 140 million
  4. Rs 1.4 million

Explanation

The loss is market value × modified duration × yield change: 800 million × 3.5 × 0.005 = Rs 14 million. This linear approximation ignores convexity, which slightly reduces the actual loss. Using a 1% change or misplacing the decimal yields the other figures.

Question 41Fixed income securities (domain content not enumerated in source)

What is the effect of a bond's credit spread widening while the benchmark government yield stays unchanged?

  1. The bond's price and yield are unaffected
  2. The bond's price rises and its yield falls
  3. The bond's price and yield both rise
  4. The bond's price falls and its yield rises Correct answer.

Explanation

A bond's yield equals the benchmark yield plus the credit spread. If the spread widens while the benchmark is unchanged, the bond's yield rises, and its price must fall to deliver that higher yield. Price and yield move in opposite directions, so they cannot both rise.

Question 42Fixed income securities (domain content not enumerated in source)

A bond's yield to maturity is 12% and its coupon rate is 9%. Which statement about the bond is correct?

  1. It trades at par
  2. It trades at a premium to face value
  3. It has no maturity value
  4. It trades at a discount to face value Correct answer.

Explanation

When the yield to maturity exceeds the coupon rate, investors require more than the coupon and will only buy below face value. The bond therefore trades at a discount. A premium would require the coupon to exceed the yield, and par would require them to be equal.

Question 43Fixed income securities (domain content not enumerated in source)

What is the primary role of a credit rating assigned to a corporate bond?

  1. To determine the bond's market price on any given day
  2. To set the coupon rate the issuer must legally pay
  3. To guarantee repayment of principal at maturity
  4. To express an opinion on the issuer's relative creditworthiness and likelihood of default Correct answer.

Explanation

A credit rating is an opinion on relative credit risk, summarising the agency's view of the issuer's ability and willingness to meet obligations. It does not set the coupon, fix the price, or guarantee repayment. Investors use ratings alongside spreads, covenants, and their own analysis.

Question 44Fixed income securities (domain content not enumerated in source)

An investor holds a bond with a 6% coupon at a time when prevailing market yields fall to 4%. Which risk is most relevant to this investor?

  1. Default risk of the issuer
  2. Liquidity risk in the secondary market
  3. Reinvestment risk on the coupon payments Correct answer.
  4. Inflation risk on the principal

Explanation

When yields fall, coupons received must be reinvested at lower rates, which is reinvestment risk. The bond's price rises in this environment, so price risk is not the concern. Default, inflation, and liquidity risks exist but are not the ones directly triggered by the fall in market yields.

Question 45Fixed income securities (domain content not enumerated in source)

Which feature of a bond indenture protects holders by restricting the issuer's ability to take on additional debt?

  1. A negative pledge covenant Correct answer.
  2. A call provision
  3. A sinking fund requirement
  4. A conversion feature

Explanation

A negative pledge covenant restricts the issuer from pledging assets to new lenders ahead of existing bondholders, limiting dilution of their claim. Call provisions, sinking funds, and conversion features address redemption or equity conversion rather than restricting new secured borrowing.

Question 46Fixed income securities (domain content not enumerated in source)

A bond has a modified duration of 8 and a convexity of 90. For a 200 basis point rise in yields, what is the duration-plus-convexity estimate of the percentage price change?

  1. About -14.2% Correct answer.
  2. About -18.0%
  3. About -16.0%
  4. About -12.4%

Explanation

The duration effect is -8 × 0.02 = -16.0%, and the convexity adjustment is 0.5 × 90 × (0.02)^2 = +1.8%. Combining them gives about -14.2%. Convexity partially offsets the duration loss for large moves, so ignoring it overstates the decline.

Question 47Fixed income securities (domain content not enumerated in source)

Two bonds have the same maturity and yield, but bond A has a 4% coupon and bond B has a 9% coupon. Which statement about their interest rate risk is correct?

  1. Both bonds have identical duration because their maturities match
  2. Bond B has higher duration and greater price sensitivity to yield changes
  3. Bond B has higher duration because its cash flows arrive later
  4. Bond A has higher duration and greater price sensitivity to yield changes Correct answer.

Explanation

A lower coupon concentrates more of the bond's value in the final principal payment, pushing the weighted average time to cash flows further out. Bond A therefore has higher duration and greater price sensitivity. Equal maturity does not imply equal duration, and a higher coupon actually shortens duration.

Question 48Fixed income securities (domain content not enumerated in source)

A bond is priced at 98.50 with a yield to maturity of 7.20%. If the yield falls to 7.10%, the price rises to 99.20. What is the bond's approximate modified duration?

  1. About 0.7
  2. About 14.2
  3. About 3.5
  4. About 7.1 Correct answer.

Explanation

Modified duration approximates the percentage price change divided by the yield change in decimal form: (99.20 - 98.50)/98.50 = 0.00711, divided by 0.0010 gives about 7.1. This is the standard finite-difference estimate of duration. Dividing by the wrong decimal or halving the result produces the other figures.

Question 49Fixed income securities (domain content not enumerated in source)

An investor expects a parallel downward shift in the yield curve and wants to maximise price gains within a fixed credit quality. Which portfolio characteristic should the investor favour?

  1. Short duration and low convexity
  2. Short duration and high convexity
  3. Long duration and negative convexity
  4. Long duration and high convexity Correct answer.

Explanation

Long duration produces the largest price increase when yields fall, and higher convexity adds further gains while cushioning losses. Short duration would capture less of the rally, and negative convexity would work against the investor in a large downward move. The combination of long duration and high convexity is therefore most favourable.

Question 50Fixed income securities (domain content not enumerated in source)

A bond with a face value of Rs 1,000 pays a 10% annual coupon and is callable at Rs 1,020 in one year. If market yields fall to 6%, what is the bondholder's most likely outcome?

  1. The issuer pays a penalty coupon above 10% to retain the bond
  2. The bond is held to maturity and the investor earns 10% to maturity
  3. The bond's price falls below par because of the call feature
  4. The bond is called and the investor must reinvest at lower prevailing yields Correct answer.

Explanation

When yields fall well below the coupon, the issuer can refinance cheaply by calling the bond at the stated call price. The investor then faces reinvestment at the lower 6% market rate. This call risk is precisely why callable bonds offer higher yields than otherwise comparable non-callable bonds.