Fixed Income Investments: Master Bonds and Credit Risk

Question 1

What is the main purpose of including fixed income investments in a diversified portfolio?

Accepted Answer

To provide stability and reduce overall risk

Answer

To generate high returns

Answer

To hedge against inflation

Answer

To meet short-term cash flow needs

Question 2

Define callable bonds.

Accepted Answer

Bonds that can be redeemed by the issuer prior to maturity

Answer

Bonds that have a fixed interest rate

Answer

Bonds that are secured by real estate

Answer

Bonds that are issued by a government agency

Question 3

Compared to equities, which of the following is an advantage of investing in fixed income securities?

Accepted Answer

Lower volatility

Answer

Potential for higher returns

Answer

Favorable tax treatment

Answer

Guaranteed return of principal

Question 4

Which of the following is not considered a fixed income security?

Accepted Answer

Equity stock

Answer

Treasury bond

Answer

Corporate bond

Answer

Municipal bond

Question 5

Which of the following is a key factor in assessing the risk associated with a bond?

Accepted Answer

Credit rating

Answer

Maturity date

Answer

Coupon rate

Answer

Face value

Question 6

What is a key distinction between a bullet bond and a callable bond?

Accepted Answer

Callable bonds can be redeemed by the issuer before maturity

Answer

Bullet bonds have a shorter maturity than callable bonds

Answer

Bullet bonds make regular interest payments while callable bonds do not

Answer

There is no difference between bullet bonds and callable bonds

Question 7

What is the primary role of a bond indenture?

Accepted Answer

To outline the terms and conditions of a bond issue

Answer

To assign credit ratings to bonds

Answer

To determine the coupon rate

Answer

To guarantee investors a return on their investment

Question 8

Which of the following is NOT a consideration when valuing a bond?

Accepted Answer

Issuer's profitability

Answer

Present value of future cash flows

Answer

Credit risk

Answer

Market liquidity

Question 9

How do changes in interest rates generally affect bond prices?

Accepted Answer

Bond prices and interest rates move in opposite directions

Answer

Bond prices and interest rates move in the same direction

Answer

Bond prices remain unaffected by interest rate changes

Answer

Bond prices are inversely proportional to interest rates

Question 10

How do bond ratings influence investment decisions in fixed income investing? Explain their role in assessing credit risk and how investors use them to make informed choices.

Accepted Answer

Bond ratings enable investors to compare the creditworthiness of different bonds and make informed decisions based on risk-return considerations.

Answer

Bond ratings are the only factor that determines investment decisions, making further analysis unnecessary.

Answer

Investors with a high risk tolerance can disregard bond ratings in pursuit of higher returns.

Answer

Bond ratings are only relevant for short-term investments and have no impact on long-term investment strategies.

Question 11

Which of the following is NOT a type of fixed income security?

Accepted Answer

Equity

Answer

Corporate bond

Answer

Government bond

Answer

Municipal bond

Question 12

Which of the following factors does NOT affect the credit risk of a bond?

Accepted Answer

Bondholder's age

Answer

Issuer's financial health

Answer

Industry outlook

Answer

Government support

Question 13

What is the purpose of a bond rating?

Accepted Answer

To evaluate the issuer's ability to repay its debt

Answer

To determine the interest rate on the bond

Answer

To assess the marketability of the bond

Answer

To predict the future performance of the bond

Question 14

Which of the following fixed income securities represents ownership in a company?

Accepted Answer

Corporate bond

Answer

Treasury bond

Answer

Money market instrument

Answer

Municipal bond

Question 15

Which of the following is a key indicator of a bond's credit risk?

Accepted Answer

Credit rating

Answer

Coupon rate

Answer

Maturity date

Question 16

What is the primary purpose of a bond rating?

Accepted Answer

To assess the creditworthiness of the bond issuer

Answer

To determine the maturity date of the bond

Answer

To set the coupon rate of the bond

Answer

To calculate the yield to maturity of the bond

Question 17

Which of the following is a type of fixed income index?

Accepted Answer

Bloomberg Barclays Global Aggregate Index

Answer

Russell 2000 Index

Answer

Nasdaq 100 Index

Answer

S&P 500 Index

Question 18

What is the purpose of a sinking fund?

Accepted Answer

To gradually reduce the outstanding debt

Answer

To increase the interest payments on the debt

Answer

To convert the debt into equity

Answer

To protect investors from credit risk