Fixed Income Securities
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Course Introduction
Fixed Income Securities explores the valuation, analysis, and management of bonds and other debt instruments within domestic and international markets. The course covers key concepts such as term structure of interest rates, yield curves, credit risk, duration, and convexity. Students examine various fixed income securities, including government and corporate bonds, mortgage-backed and asset-backed securities, and derivatives. Emphasis is placed on interest rate risk, portfolio immunization strategies, and the impact of macroeconomic factors on fixed income markets, preparing students for careers in investment management and financial analysis.
Recommended Textbook Investments Analysis and Management 12th Edition by Charles P. Jones
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Page 2
Chapter 1: Understanding Investments
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Q1) Which of the following is the best definition of wealth?
A)the sum of all current and future income
B)the total of all assets and all income
C)the total of assets and income less any liabilities.
D)the sum of current income and the present value of future income.
Answer: D
Q2) Investors unwilling to assume risk should be satisfied with the rate of inflation as their investment return.
A)True
B)False
Answer: False
Q3) All of the following are benefits of geographic diversification in investment portfolios EXCEPT:
A)Gaining exposure to currencies other than the U.S.dollar.
B)Some global markets have growth rates higher than the U.S.,offering potentially higher returns.
C)Global markets behave completely independently of U.S.markets.
D)Many global markets are not highly correlated with U.S.markets.
Answer: C
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Page 3
Chapter 2: Investment Alternatives
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Q1) Explain how writing option contracts (both puts and calls)can generate income for owners of the underlying stock.
Answer: The writer keeps the option premium regardless of whether or not the option is exercised.
Q2) If an investor states that Intel is overvalued at 65 times,he is referring to:
A)earnings per share
B)dividend yield
C)book value
D)P/E ratio
Answer: D
Q3) LEAPS have maturities dates up to 10 years.
A)True
B)False
Answer: False
Q4) An example of indirect investing would be buying shares in a mutual fund.
A)True
B)False
Answer: True
Q5) How is the earnings retention rate related to the dividend payout rate?
Answer: Earnings retention rate = 1 - dividend payout rate
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Chapter 3: Indirect Investing
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Q1) Which of the following statements regarding fund expenses and performance is true?
A)The higher-performing funds generally have the highest expenses.
B)The stock funds generally have higher expenses than bond funds.
C)The index funds generally have higher expenses than non-index funds.
D)The lower performing funds generally have the highest expenses.
Answer: D
Q2) No-loads charge no sales fee because:
A)they are legally prohibited from doing so.
B)they charge a redemption fee instead.
C)they have no sales force.
D)they charge a 12b-1 fee instead.
Answer: C
Q3) The most popular type of investment company is a:
A)unit investment trust.
B)mutual fund.
C)closed-end investment company
D)real estate investment trust.
Answer: B
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Chapter 4: Securities Markets and Market Indexes
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Sample Questions
Q1) NASDAQ stocks:
A)are generally foreign stocks.
B)trade via the Blue Sheets.
C)are not generally listed on organized exchanges.
D)represent less than 1,000 companies.
Q2) The S&P 500 comprises approximately ________________ percent of the market capitalization of all U.S.publicly traded companies.
Q3) A major appeal for U.S.firms selling bonds in private placements is potential:
A)lower interest expense
B)greater regulatory protection
C)savings from not registering with the SEC or incurring an underwriting spread
D)fewer restrictions on subsequent borrowing activities
Q4) By 2005,program trading accounted for over 70 percent of total NYSE volume.
A)True
B)False
Q5) The price that some seller is trying to sell a stock for is known at the:
A)the bid quote
B)the ask quote
C)the closing price
D)the specialist price
Page 6
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Chapter 5: How Securities Are Traded
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Sample Questions
Q1) The SIPC limit for insurance coverage on cash is _____________________.
Q2) Below what price will a margin call occur? \[\begin{array} { l l }
\text { a. } & \$ 13.50 \\
\text { b. } & \$ 54.00 \\
\text { c. } & \$ 42.00 \\
\text { d. } & \$ 18.00
\end{array} \quad \text { Solution } = \frac { 1350 } { 100 ( 1 - .25 ) } = \$ 18\]
Q3) Which of the following statements regarding discount brokers is true?
A)All discount brokers offer on-line trading.
B)Discount brokers only execute orders on stock transactions.
C)Discount brokers may offer little investment advice.
D)Discount brokers do not offer SIPC protection.
Q4) What is the chief advantage of a market order?
Q5) Direct stock purchase programs (DSPs)are an outgrowth of :
A)electronic trading
B)dividend reinvestment plans
C)increased NASDAQ trading
D)decreased regulation
Q6) What are two methods of investing in stocks without a broker?
Page 7
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Chapter 6: The Risks and Returns From Investing
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Q1) It is generally easier to predict interest rate risk than market risk.
A)True
B)False
Q2) A major difference between real and nominal returns is that:
A)real returns adjust for inflation and nominal returns do not
B)real returns use actual cashflows and nominal returns use expected cashflows
C)real returns adjust for commissions and nominal returns do not
D)real returns show the highest possible return and nominal returns show the lowest possible return
Q3) Liquidity risk:
A)is the risk that investment bankers normally face
B)is lower for small OTC stocks than for large NYSE stocks
C)is a risk associated with secondary market transactions
D)increases whenever interest rates increase
Q4) A number of prominent observers expect the equity risk premium in the future to be:
A)Considerably lower than that of the past
B)Considerably higher than that of the past
C)Very similar to the historical average
D)No change is expected from recent years
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Chapter 7: Portfolio Theory
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Sample Questions
Q1) With a continuous probability distribution,:
A)a probability is assigned to each possible outcome.
B)possible outcomes are constantly changing.
C)an infinite number of possible outcomes exist.
D)there is no variance.
Q2) Calculate the expected return and risk (standard deviation)for General Fudge for 200X,given the following information:
\(\begin{array} { l l l l l } \text { Probabilities } & 0.20 & 0.15 & 0.50 & 0.15 \end{array}\)
\(\begin{array} { l l l l l } \text { Possible Outcomes } & 20 \% & 15 \% & 11 \% & - 5 \% \end{array}\)
Q3) Owning two securities instead of one will not reduce the risk taken by an investor if the two securities are
A)perfectly positively correlated with each other
B)perfectly independent of each other
C)perfectly negatively correlated with each other
D)of the same category, E)g.blue chips
Q4) An efficiently diversified portfolio still has _____________________ risk.
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Page 9
Chapter 8: Portfolio Selection
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Sample Questions
Q1) Systematic risk is also called:
A)diversifiable risk
B)market risk
C)random risk
D)company-specific risk
Q2) An indifference curve shows:
A)the one most desirable portfolio for a particular investor
B)all combinations of portfolios that are equally desirable to a particular investor
C)all combinations of portfolios that are equally desirable to all investors
D)the one most desirable portfolio for all investors
Q3) Portfolios lying on the upper right portion of the efficient frontier are likely to be chosen by
A)aggressive investors
B)conservative investors
C)risk-averse investors
D)defensive investors
Q4) Suppose you interview two different portfolio managers about their efficient sets of portfolios.Is it possible,or even probable,that they would have two different efficient sets? Why?
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Chapter 9: Asset Pricing Models
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Sample Questions
Q1) Select the correct statement regarding the market portfolio.It:
A)is readily and precisely observable.
B)is a risky portfolio.
C)is the lowest point of tangency between the risk-free rate and the efficient frontier.
D)should be composed of stocks or bonds.
Q2) The expected return on the market for next period is 11 percent.The risk free rate of return is 4 percent,and Alpha Company has a beta of 1.1.The market risk premium is
A)7.7 percent.
B)7 percent.
C)11 percent.
D)12.1 percent.
Q3) The arbitrage pricing theory (APT)and the CAPM both assume all except the following?
A)Investors have homogeneous beliefs.
B)Investors are risk-averse utility maximizers.
C)Borrowing and lending can be done at the rate RF.
D)Markets are perfect.
Q4) What is the formula for the slope of the CML? What does it represent?
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Chapter 10: Common Stock Valuation
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Sample Questions
Q1) Why did investors favor large cap stocks in the mid to late 1990s?
Q2) Under the zero-growth dividend model,expected dividends are the same as current dividends.
A)True
B)False
Q3) Brotech Unlimited sells at $40 per share,and its latest 12 month earnings were $8 per share,of which $3.20 per share were paid as dividends.
(a)What is Brotech's current P/E ratio?(b)If Brotech's earnings are expected to grow by 9 percent per year,what is the projected price for next year assuming that the P/E ratio remains constant?(c)If you had a required rate of return of 15 percent,expected the dividend payout ratio to remain constant,and dividends to grow at a rate of 9 percent,would you buy this stock?
Q4) Analysts often use a ________% rule in security valuation in recognition of the fact that estimating a security's value is an inexact process.
A)5
B)10
C)15
D)20
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Chapter 11: Common Stocks: Analysis
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Q1) The most important decision to make when building a diversified stock portfolio is:
A)individual security analysis.
B)asset allocation.
C)minimization of market risk.
D)maximization of expected return.
Q2) The central focus of a security analyst's job is to:
A)ascertain the accuracy of financial statements of selected companies.
B)find growth stocks.
C)forecast a specific company's return.
D)determine the market demand for a specific company's stock.
Q3) Index funds are considered relatively tax efficient since they rarely have short-term gains.
A)True
B)False
Q4) In an upward trending market,what sectors might investors consider to increase absolute returns?
Q5) With respect to proper diversification in asset allocation,what are the general guidelines for a U.S.investor's portfolio regarding foreign securities?
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Chapter 12: Market Efficiency
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Sample Questions
Q1) The January effect concerns:
A)large cap stocks.
B)mid-cap stocks.
C)small cap stocks.
D)foreign stocks.
Q2) According to the semi-strong form of the EMH,investors who invest in a stock after a highly positive announcement concerning the stock can expect to earn
A)normal return because the stock will be fairly priced when purchased.
B)extraordinary return because the new information will not affect the price until later.
C)extraordinary loss because insiders possess non-public information.
D)zero return because the next price is expected to be the same as the last price.
Q3) Based on the research related to market anomalies,investors should prefer
A)low standardized unexpected earnings (SUE)and high P/E ratios.
B)low SUE,low P/E stocks.
C)high SUE,low P/E stocks.
D)high SUE,high P/E stocks.
Q4) What is a market anomaly? Give examples of several market anomalies.
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Chapter 13: Economy Market Analysis
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Q1) Use the constant-growth dividend discount model to explain why stock prices have an inverse relationship to interest rates.
Q2) The typical business cycle in the United States seems to lead the stock market's turning point by a few months.
A)True
B)False
Q3) Most analysts today agree that using money as an indicator of future economic activity is accurate.
A)True
B)False
Q4) Stock prices often peak when?
A)Two years before the start of a recession.
B)One year before the start of a recession.
C)At the start of a recession.
D)One year after the start of a recession.
Q5) The financial news reports that the market is overvalued at a near record high based on the earnings multiplier.What does that mean to you?
Q6) Explain how dividend yield on the S&P 500 Index can be used to make market forecasts.
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Chapter 14: Industry Analysis
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Sample Questions
Q1) The food industry would be considered:
A)growth industry.
B)defensive industry.
C)cyclical industry.
D)countercyclical industry.
Q2) In the expansion stage,products become more standardized.
A)True
B)False
Q3) The food industry is a good example of a countercyclical industry.
A)True
B)False
Q4) Mature industries typically have much higher P/E ratios than growth industries,which are riskier.
A)True
B)False
Q5) Industry analysis is important because:
A)companies can only do as well as their industry.
B)industries often have an inverse relationship to the market.
C)industries perform very differently over time.
D)companies in declining industries lose money.
Page 16
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Chapter 15: Company Analysis
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Q1) How could unexpected inflation affect the P/E ratio?
Q2) Which of the following is true regarding earnings forecasts made by analysts versus forecasts made by statistical models?
A)The evidence tends to support analysts' forecasts in terms of accuracy over statistical models.
B)The evidence tends to support statistical models' forecasts in terms of accuracy over statistical models.
C)The evidence tends to support both types of forecasts equally.
D)The evidence does not support either type of forecast in terms of accuracy.
Q3) The auditor's report:
A)guarantees accuracy.
B)guarantees the quality of the earnings.
C)attests that the statements are a fair presentation of financial position.
D)all of the above are true
Q4) Upon analyzing the financial statements of Jain Industries,you discover that it is currently retaining 60 percent of its earnings (which were $6 this past year),and is experiencing a ROE of almost 20 percent.Assuming a risk-free rate of 4 percent and a risk-premium of 8 percent,how much would you be willing to pay for Jain Industries stock on the basis of the P/E ratio approach?
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Chapter 16: Technical Analysis
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Q1) Conclusions about technical analysis suggest that:
A)it is Difficult to justify technical analysis.
B)it has been found to be completely deficient.
C)stock price movements repeat themselves constantly.
D)there is complete agreement about the interpretation of technical signals.
Q2) The oldest approach to common stock selection is:
A)technical analysis
B)fundamental analysis
C)stochastic analysis
D)value analysis
Q3) A support level is a price range:
A)at which a significant increase in demand for a stock is expected.
B)at which a significant increase in supply of a stock is expected.
C)below which a stock price cannot go.
D)above which a stock price cannot go.
Q4) Institutional investors are often considered to have the "smart money," while small,individual investors are not so well informed about the market.Which two sentiment indicators treat both institutions and individuals alike?
Q5) What is the advance-decline line? What does it tell the technician?
Q6) What four factors should be considered in testing technical trading rules?
Page 18
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Chapter 17: Bond Yields
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Q1) What happens to the price of bonds,if interest rates go up?
A)The price of bonds goes up.
B)The price of bonds stays the same.
C)The price of bonds goes down.
D)The relationship between interest rates and bond prices cannot be determined.
Q2) Which of the following is the best definition of "realized compound yield"?
A)The yield an investor realizes on the bond coupons.
B)The total amount of the coupon and principal payments.
C)The ending wealth divided by the starting wealth.
D)The total amount of the coupon and principal payments,and the reinvestment of these flows.
Q3) The vast majority of corporate bonds pay floating rate interest on a quarterly basis. A)True B)False
Q4) Yield spreads vary inversely with the: ______________________________.
Q5) Bond traders use the term "basis point" to mean one percentage point in interest rate.
A)True B)False
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Chapter 18: Bonds: Analysis and Strategy
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Q1) Immunization is intended to protect a portfolio against interest rate risk.What should be done? How does it work?
Q2) Interest rate risk is composed of:
A)market risk and default risk.
B)price risk and credit risk.
C)price risk and reinvestment risk.
D)default risk and money risk.
Q3) An example of simultaneous buying of one bond (for example,with fixed rate coupon payments)and selling of another (for example,with variable rate interest payments)occurs when one participates in a:
A)bond ladder strategy.
B)bond swap.
C)interest rate futures transaction.
D)bond portfolio immunization strategy.
Q4) A noncallable bond would be expected to have a higher yield to maturity than a comparable callable bond.
A)True
B)False
Q5) What are two passive management strategies? Two active strategies?
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Chapter 19: Options
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Q1) What type of equity derivatives are created by corporations?
Q2) Options can be purchased on margin.
A)True
B)False
Q3) If the price of the underlying stock equals the strike price of the call option at maturity,the call buyer has a breakeven transaction.
A)True
B)False
Q4) Spreads are used to:
A)increase the return potential
B)circumvent option commissions
C)reduce risk in an option position.
D)all of the above are true.
Q5) What are the variables in the Black-Scholes option pricing model? How is each related to the price of the call option?
Q6) Writing a naked call is potentially riskier than writing a naked put.
A)True
B)False
Q7) What is a hedge ratio?
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Chapter 20: Futures
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Q1) Which of the following exchanges claims that its 3,600 members trade 50 different futures and options products by open auction and electronically?:
A)Chicago Board Options Exchange.
B)Chicago Board of Trade.
C)Chicago Mercantile Exchange.
D)Globex.
Q2) Explain the difference between a forward contract and a futures contract.
Q3) A forward contract differs from a futures contract in that:
A)a forward contract is for a shorter period of time.
B)a forward contract does not specify the selling price.
C)a forward contract does specify the selling price.
D)a forward contract is non-binding.
Q4) What is the difference between hedgers and speculators in the futures markets?
Q5) In the case of a futures contract,buyers can settle a contract
A)only by taking delivery.
B)only by arranging an offsetting contract.
C)either by delivery or offset.
D)by a combination of delivery and offset.
Q6) What is meant by the term "marked to the market"?
Q7) What is the focus of speculators who spread stock-index futures?
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Chapter 21: Portfolio Management
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Q1) Rebalancing is Difficult for many investors because it represents a contrarian strategy.
A)True
B)False
Q2) How does the prudent man rule affect asset allocation?
Q3) One aspect of the tax considerations in asset allocation is that
A)capital gains are often taxed at a higher rate than income.
B)current income is seldom a significant consideration for an investor in the spending phase of the life cycle.
C)investors are exempt from taxes on capital gains once they reach age 65.
D)taxes on capital gains are deferred until the gain is realized.
Q4) In today's world,investor's time horizons have lengthened.
A)True
B)False
Q5) What is difference between strategic asset allocation and tactical asset allocation?
Q6) Explain the life-cycle theory of portfolio policies.
Q7) What is the portfolio management process outlined by Maginn and Tuttle.
Q8) What are some of the differences between individual investors and institutional investors?
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Chapter 22: Evaluation of Investment
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Q1) What are the appropriate uses of the Sharpe and the Treynor performance measures?
Q2) How is regression analysis used to measure portfolio diversification?
Q3) Sharpe's measure is a ratio of excess return to total risk.
A)True
B)False
Q4) Discuss how constraints on portfolio managers affect the portfolio results.
Q5) Which of the following indices would be most appropriate as a benchmark portfolio for a large-cap mutual fund?
A)Wilshire 5000.
B)S&P 500.
C)Dow Jones Industrial Average.
D)Russell 2000.
Q6) The reward-to-variability ratio measures:
A)return above the risk-free rate.
B)excess return per unit of total risk.
C)total risk per unit of excess return.
D)return above the risk-free rate relative to the risk-free rate.
Q7) What is performance attribution?
Q8) What is the major difference between the Sharpe and Treynor models?
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