bond runner Interview Questions and Answers

1. What is a bond?

   • Answer: A bond is a fixed-income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). The borrower agrees to pay back the principal (the original loan amount) at a specified date (maturity date) and interest payments at fixed intervals (coupon payments).

2. Explain the concept of yield to maturity (YTM).

   • Answer: YTM is the total return an investor can expect if a bond is held until maturity. It takes into account the bond's current market price, par value, coupon interest rate, and time to maturity. It's expressed as an annual percentage rate.

3. What is duration and why is it important?

   • Answer: Duration is a measure of a bond's price sensitivity to changes in interest rates. A higher duration means the bond's price will fluctuate more with interest rate changes. It's crucial for managing risk in a bond portfolio.

4. Describe the difference between a coupon bond and a zero-coupon bond.

   • Answer: A coupon bond pays periodic interest payments (coupons) to the bondholder until maturity, while a zero-coupon bond doesn't pay any interest. Instead, it's sold at a discount and matures at its face value.

5. What is bond convexity?

   • Answer: Convexity measures the curvature of the relationship between a bond's price and its yield. It provides a more accurate estimate of price changes than duration, especially for large interest rate movements.

6. Explain the concept of bond rating and its significance.

   • Answer: Bond ratings, issued by agencies like Moody's, S&P, and Fitch, assess the creditworthiness of a bond issuer. Higher ratings indicate lower risk of default, and thus typically result in lower yields.

7. What are call provisions and put provisions in bonds?

   • Answer: A call provision allows the issuer to redeem the bond before its maturity date. A put provision allows the bondholder to sell the bond back to the issuer before maturity, usually at a predetermined price.

8. What is reinvestment risk?

   • Answer: Reinvestment risk is the risk that future coupon payments from a bond will have to be reinvested at a lower interest rate than the bond's original coupon rate.

9. What is interest rate risk?

   • Answer: Interest rate risk is the risk that the value of a bond will decline in response to rising interest rates. Higher interest rates make existing bonds less attractive.

10. What is inflation risk?

    • Answer: Inflation risk is the risk that the real return on a bond will be reduced by inflation. If inflation rises faster than the bond's yield, the investor's purchasing power erodes.

11. What is credit risk?

    • Answer: Credit risk (or default risk) is the risk that the bond issuer will fail to make timely interest payments or repay the principal at maturity.

12. What is liquidity risk?

    • Answer: Liquidity risk is the risk that a bond cannot be easily sold without a significant price concession. This is more likely with less actively traded bonds.

13. Explain the concept of a bond's yield curve.

    • Answer: A yield curve plots the yields of bonds with different maturities but similar credit quality. It shows the relationship between a bond's yield and its time to maturity.

14. What are the different shapes of yield curves?

    • Answer: Common shapes include normal (upward sloping), inverted (downward sloping), and flat yield curves. The shape can provide insights into economic expectations.

15. What is a bond spread?

    • Answer: A bond spread is the difference in yield between two bonds, typically representing the extra yield demanded for holding a bond with higher risk (e.g., a corporate bond vs. a government bond).

16. What is a sinking fund provision?

    • Answer: A sinking fund is a provision in a bond indenture that requires the issuer to set aside funds regularly to repay the bond at maturity or before.

17. Explain the concept of bond immunization.

    • Answer: Bond immunization is a strategy to protect a bond portfolio's value from interest rate fluctuations by matching the portfolio's duration to the investor's investment horizon.

18. What is a bond laddering strategy?

    • Answer: Bond laddering is a strategy where bonds with different maturities are purchased to reduce interest rate risk and ensure a steady stream of income.

19. What is a bullet strategy for bond investing?

    • Answer: A bullet strategy involves investing in bonds with a similar maturity date to receive a lump sum payment at the end of the investment period.

20. What are some common types of bonds?

    • Answer: Examples include Treasury bonds, corporate bonds, municipal bonds, agency bonds, and mortgage-backed securities.

21. What are the differences between Treasury bonds, notes, and bills?

    • Answer: They differ primarily in their maturity dates: Bills are short-term (less than a year), notes are medium-term (2-10 years), and bonds are long-term (over 10 years).

22. What are municipal bonds?

    • Answer: Municipal bonds are issued by state and local governments to finance public projects. Interest income is often tax-exempt at the federal level.

23. What are corporate bonds?

    • Answer: Corporate bonds are issued by corporations to raise capital. They offer higher yields than government bonds but carry greater credit risk.

24. What are mortgage-backed securities (MBS)?

    • Answer: MBS are securities backed by a pool of mortgages. Investors receive payments from the underlying mortgages.

25. What is a bond indenture?

    • Answer: A bond indenture is a legal contract between the bond issuer and the bondholders that outlines the terms and conditions of the bond.

26. What is a trustee in the context of bonds?

    • Answer: A trustee is an independent party appointed to oversee the bond indenture and ensure that the issuer complies with its terms.

27. How do rising interest rates affect bond prices?

    • Answer: Rising interest rates generally lead to falling bond prices, as existing bonds with lower coupon rates become less attractive compared to newly issued bonds with higher rates.

28. How do falling interest rates affect bond prices?

    • Answer: Falling interest rates generally lead to rising bond prices, as existing bonds with higher coupon rates become more attractive.

29. What is a bond's clean price and dirty price?

    • Answer: The clean price is the bond's price excluding accrued interest, while the dirty price (or full price) includes accrued interest.

30. What is accrued interest?

    • Answer: Accrued interest is the interest that has accumulated on a bond since the last coupon payment.

31. What is a benchmark bond?

    • Answer: A benchmark bond is a widely traded, highly liquid bond used as a reference point for pricing other bonds with similar characteristics.

32. What is a bond portfolio?

    • Answer: A bond portfolio is a collection of bonds held by an investor or institution, typically diversified across different issuers, maturities, and credit qualities.

33. What are some strategies for managing bond portfolio risk?

    • Answer: Strategies include diversification, duration matching, laddering, and using derivatives to hedge against interest rate risk.

34. What is the difference between active and passive bond management?

    • Answer: Active management involves actively trading bonds to outperform a benchmark, while passive management involves holding a diversified portfolio that mirrors a benchmark index.

35. What is a high-yield bond (junk bond)?

    • Answer: A high-yield bond is a bond with a low credit rating, indicating a higher risk of default but offering a higher yield to compensate for the increased risk.

36. What is a convertible bond?

    • Answer: A convertible bond is a bond that can be converted into a specified number of shares of the issuer's common stock.

37. What is a callable bond?

    • Answer: A callable bond is a bond that can be redeemed by the issuer before its maturity date, typically at a predetermined price.

38. What is a putable bond?

    • Answer: A putable bond gives the bondholder the right to sell the bond back to the issuer before maturity, typically at a predetermined price.

39. What is a TIPS bond?

    • Answer: A TIPS (Treasury Inflation-Protected Securities) bond is a government bond whose principal is adjusted for inflation, protecting investors from purchasing power erosion.

40. What is a floating rate bond?

    • Answer: A floating rate bond's coupon rate adjusts periodically based on a benchmark interest rate, reducing interest rate risk.

41. How do you calculate the current yield of a bond?

    • Answer: Current yield = (Annual coupon payment / Current market price) * 100

42. What factors influence bond prices?

    • Answer: Interest rates, credit rating, inflation, economic growth, and supply and demand all influence bond prices.

43. What is the difference between a bond's par value and its market value?

    • Answer: Par value is the face value of the bond, while market value is the price at which the bond trades in the secondary market.

44. What is a bond's maturity date?

    • Answer: The maturity date is the date on which the issuer repays the principal amount of the bond.

45. What is a coupon rate?

    • Answer: The coupon rate is the annual interest rate stated on the bond certificate.

46. Explain the concept of "buy and hold" strategy for bonds.

    • Answer: Buy and hold involves purchasing bonds and holding them until maturity, regardless of short-term price fluctuations. Suitable for long-term investors with lower risk tolerance.

47. What is a "flight to safety"? How does it affect bond prices?

    • Answer: A "flight to safety" occurs when investors move their money into low-risk assets (like government bonds) during times of economic uncertainty. This increases demand for these bonds and pushes their prices up.

48. Describe the role of a bond underwriter.

    • Answer: A bond underwriter helps corporations and governments issue bonds by guaranteeing the sale of the bonds at a specified price.

49. What is a bond syndicate?

    • Answer: A bond syndicate is a group of investment banks that work together to underwrite a large bond issue.

50. What is a secondary bond market?

    • Answer: The secondary bond market is where previously issued bonds are traded among investors.

51. What are some sources of information on bonds?

    • Answer: Sources include financial news websites, bond rating agencies, government websites, and financial data providers.

52. How can you assess the creditworthiness of a bond issuer?

    • Answer: By reviewing the issuer's financial statements, credit ratings, and news articles to understand its financial health and debt levels.

53. What are some ethical considerations for a bond trader?

    • Answer: Maintaining transparency, avoiding conflicts of interest, adhering to regulations, and acting in the best interests of clients are crucial ethical considerations.

54. How does the Federal Reserve influence bond markets?

    • Answer: The Federal Reserve's monetary policy actions, such as setting interest rates and conducting open market operations, significantly impact bond yields and prices.

55. What is a repo market?

    • Answer: The repo market (repurchase agreement market) is where securities are sold with an agreement to repurchase them at a later date at a slightly higher price.

56. What are some risks associated with investing in high-yield bonds?

    • Answer: Higher risk of default, greater price volatility, and lower liquidity compared to investment-grade bonds.

57. What is a prepayment risk?

    • Answer: Prepayment risk is the risk that the principal of a mortgage-backed security will be repaid earlier than expected, reducing the investor's income stream.

58. How do you evaluate the performance of a bond portfolio?

    • Answer: By tracking total return, yield, duration, and comparing the portfolio's performance against a relevant benchmark.

59. Explain the concept of "Macaulay Duration."

    • Answer: Macaulay duration is a weighted average of the times until each cash flow from a bond is received, weighted by the present value of each cash flow. It measures a bond's interest rate sensitivity.

60. What is Modified Duration?

    • Answer: Modified duration is a measure of the percentage change in a bond's price for a 1% change in yield. It's calculated by dividing Macaulay duration by (1 + yield/number of coupon periods per year).

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