QCM Flashcards
(37 cards)
True or false. A municipal bond can be issued by a government
True
What is the current yield of the bond?
The annual interest divided by the face value
What is a forward rate ?
The rate of an investment in bonds for future periods
How is convexity related to the price- yield curve ?
The more convexe the curve , the more sensitivity to interest rates is the bond’s price
True or false. A negative convexity means less sensitivity of the price to interest rates changes
True
What is the primary consequence of an expansionary monetary policy?
Lower unemployment rate
What is the most likely to cause a steepening curve ?
An increase in LT rates
According to the market segmentation theory, why do investors focus on specific maturity
Because each investor has a maturity preference
In the liquidity preference theory, why LT have higher yields
Because investors have to look down their funds for a longer period
What would most likely lead to a flattening of the yield curve?
A decrease in LT rates
What is the expectation theory?
The yield curve reflects the average of future ST rates expected by the market
What is commonly expected with a flat curve
A slow down in economic growth
What environment is associated with downward sloping?
A deflationary and falling interest rates
What is a spot rate
The YTM of a zero coupon bond. It is the market expectations for each time horizon
What does flattening means
Gab between LT and ST narrowing
What is the liquidity premium?
The excess return required for holding the money due to possible change in the interest rate
What would happen if the CB aggressively cut interest rates
Inverted
What is the primary risk of a ladder strategy ?
The interest rates will fall and lead to reinvestment at lower rates
What is the main advantage of the bullet strategy?
Insurance that the money will be at the exact time and amount of the liability
What is the main advantage of zero coupon bonds in a immunization strategy?
They provided the exact CF needed to match the liability date so they are perfect for CF matching
What is the main purpose of a ladder strategy
Minimizing the volatility of the portfolio
What is the primary risk of the duration matching strategy?
That the CF will move in the opposite direction of the liability
What is a big limitation of the duration matching immunization?
It protects from the sensitivity of interest rates but I doesn’t match the timing of CF and liability
When you expect interest rates to rise and want to protect from the losses, in which bond can you invest
Floating rate bonds
