NISM Series V-D · Unit 10 of 12 · about 5% of the paper
Interest rates, fixed income markets and interest rate derivatives: NISM Series V-D notes and practice questions
Interest rate basics, bond price and yield, and why interest rate derivatives exist.
What to know in Unit 10
- Bond price and yield.
- Duration.
- Why IRDs.
Key terms, examples and exam traps
Bond price and yield
Bond prices and yields move in opposite directions, so a rise in yields lowers bond prices.
Example. A bond falls in price when yields rise.
Exam trap. This statement is false: Bond prices rise when yields rise.
Coupon
A coupon is the periodic interest payment a bond pays based on its face value and coupon rate.
Example. A 7% bond of ₹100 pays ₹7 a year.
Exam trap. This statement is false: A coupon is the bond's market price.
Yield to maturity
Yield to maturity is the return from holding a bond to maturity, with all coupons reinvested at the same rate.
Example. An investor compares bonds by their yields.
Exam trap. This statement is false: Yield to maturity ignores the bond's price.
Government securities
G-Secs are issued by the government and have no credit risk, but they carry interest rate risk.
Example. A 10-year G-Sec falls in value if yields rise.
Exam trap. This statement is false: G-Secs have no interest rate risk.
Duration
Duration measures a bond's sensitivity to interest rate changes, and a longer duration means greater price change for a change in yield.
Example. A bond with a duration of 7 moves more than one with 2.
Exam trap. This statement is false: Duration measures a bond's credit risk.
Interest rate risk
Interest rate risk is the risk that the value of a bond or fund changes because rates change.
Example. A debt fund falls when yields rise.
Exam trap. This statement is false: Interest rate risk is the same as default risk.
Interest rate derivative
An interest rate derivative is a contract whose value depends on an interest rate or a bond price, and it is used to hedge or take a view on rates.
Example. A debt fund hedges a rate rise with a futures contract.
Exam trap. This statement is false: Interest rate derivatives depend on equity prices.
Money market
The money market deals in short-term instruments such as T-bills, commercial paper and call money.
Example. A liquid fund holds T-bills.
Exam trap. This statement is false: The money market deals only in long-term bonds.
6 practice questions
Read each question and choose your answer before opening the free mock, which shows the correct answer and the reason.
Q1. Which term is described here? The money market deals in short-term instruments such as T-bills, commercial paper and call money.
- Money market
- Redemption and structure
- Stamp duty on units
- Advantages of mutual funds
Q2. Which term is described here? Bond prices and yields move in opposite directions, so a rise in yields lowers bond prices.
- Bond price and yield
- One scheme per category
- Hedging with index futures
- Notional underlying
Q3. Which term is described here? Interest rate risk is the risk that the value of a bond or fund changes because rates change.
- Beta
- Interest rate risk
- Mark-to-market in IRF
- Who uses IRDs
Q4. Which term is described here? A coupon is the periodic interest payment a bond pays based on its face value and coupon rate.
- Key Information Memorandum
- Hedging with index futures
- Coupon
- Riskometer
Q5. Which term is described here? Yield to maturity is the return from holding a bond to maturity, with all coupons reinvested at the same rate.
- Yield to maturity
- Risk profiling
- Cost of carry
- Mark-to-market
Q6. Which term is described here? An interest rate derivative is a contract whose value depends on an interest rate or a bond price, and it is used to hedge or take a view on rates.
- Three-tier structure
- Interest rate derivative
- Call option
- Yield to maturity
Frequently asked questions
How much of NISM Series V-D comes from Unit 10?
Unit 10 (Interest rates, fixed income markets and interest rate derivatives) usually carries about 5% of the questions. The whole exam has 150 questions and the pass mark is 60%.
What should I study in NISM Series V-D Unit 10?
Bond price and yield. Duration. Why IRDs.
Are these NISM Series V-D practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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