Fixed income securities: NISM Series XXI-B notes and practice questions

Q1. Which statement best describes “Credit risk”?

1. Credit risk is the risk that the issuer fails to pay interest or principal, which credit ratings help assess.
2. A portfolio manager must be registered with SEBI and must meet the eligibility, capital and fit and proper requirements.
3. Operational risk is the risk of loss from failed processes, people, systems or external events, including errors and fraud.
4. An option gives the buyer the right but not the obligation to buy or sell at a strike price, for a premium paid to the seller.

Q2. Which statement best describes “Reinvestment risk”?

1. Reinvestment risk is the chance that coupons are reinvested at lower rates than the original yield.
2. An active strategy departs from the benchmark to earn higher returns, at higher cost and risk of underperformance.
3. P/B compares market price to book value per share and is often used for banks and asset-heavy firms.
4. A portfolio manager must be registered with SEBI and must meet the eligibility, capital and fit and proper requirements.

Q3. Which statement best describes “Current yield”?

1. Tactical allocation makes short-term deviations from strategic weights to exploit market views.
2. A clearing corporation guarantees settlement of trades and manages counterparty risk, with delivery of securities and funds through depositories and banks.
3. Front running is trading ahead of a client's large order for the manager's own benefit and is a prohibited practice.
4. Current yield is annual coupon divided by the current market price.

Q4. Which statement best describes “Yield to maturity”?

1. YTM is the single discount rate that equates the bond's price to the present value of its cash flows if held to maturity.
2. Counterparty risk is the risk that the other party to a contract fails to meet its obligation.
3. Managers must send periodic reports to clients with portfolio composition, transactions, fees and other details, at least once a quarter.
4. Managers must follow know-your-client and anti-money laundering norms, verify identity and report suspicious transactions.

Q5. Which term is described here? Bond prices and yields move in opposite directions, so a rise in market yields lowers the price.

1. Secondary market
2. Price and yield
3. Time-weighted return
4. Fiduciary duty and conflicts

Q6. Which term is described here? The yield curve plots yields against maturity, and an upward-sloping curve means longer maturities have higher yields.

1. Yield curve
2. Risk management process
3. Information ratio
4. Investing versus speculation