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Bond Interview Questions With Answers

Bonds and fixed income interview sample questions

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962 views2 pages

Bond Interview Questions With Answers

Bonds and fixed income interview sample questions

Uploaded by

jagadeesh jackson
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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 What is a bond?

 Answer: A bond is a fixed income instrument that represents a loan made by an investor to a
borrower, typically a corporation or government entity. The bond issuer promises to pay the
bondholder a fixed interest rate for a specified period and then return the principal amount
at maturity.

 How do you calculate the present value of a bond?


 Answer: The present value of a bond can be calculated using the formula PV = C/(1+r)^1 +
C/(1+r)^2 + ... + C/(1+r)^n + FV/(1+r)^n, where PV is the present value, C is the periodic
coupon payment, r is the required rate of return, n is the number of periods, and FV is the
face value or principal amount.

 What is the difference between the coupon rate and the yield to maturity?
 Answer: The coupon rate is the fixed annual interest rate that the bond issuer promises to
pay to the bondholder. The yield to maturity, on the other hand, is the total return
anticipated on a bond if held until it matures, taking into account the coupon payments and
the capital gain or loss from the purchase price to the face value at maturity.

 What factors can affect the bond's market price?


 Answer: Several factors can affect the bond's market price, including changes in interest
rates, credit ratings, inflation expectations, market liquidity, and supply and demand
dynamics.

 How do you calculate the yield to maturity of a bond?


 Answer: The yield to maturity can be calculated using trial and error, or by using a financial
calculator or spreadsheet program. The formula is too complex to solve manually, but it
involves finding the discount rate that equates the present value of the bond's future cash
flows to its current market price.

 How does the bond's credit rating affect its valuation?


 Answer: A bond's credit rating reflects the creditworthiness of the issuer and the likelihood
of default. A higher credit rating typically means lower risk and a lower required rate of
return, which translates into a higher bond price. Conversely, a lower credit rating implies
higher risk and a higher required rate of return, which leads to a lower bond price.

 What is the difference between a premium bond and a discount bond?


 Answer: A premium bond is a bond that trades above its face value or par value, while a
discount bond is a bond that trades below its face value. The premium or discount reflects
the difference between the bond's coupon rate and the prevailing market interest rate.

 These are just a few examples of the types of bond valuation questions you might encounter
in an interview. It's important to be familiar with the key concepts and formulas involved in
bond valuation and to be able to apply them to real-world scenarios.
 What is the difference between a zero-coupon bond and a regular bond?
 Answer: A zero-coupon bond is a bond that does not pay periodic coupon payments.
Instead, the investor buys the bond at a discount to its face value and receives the full face
value at maturity. A regular bond, on the other hand, pays periodic coupon payments in
addition to the face value at maturity.

 How do you calculate the duration of a bond?


 Answer: The duration of a bond measures its sensitivity to changes in interest rates. It can be
calculated as the weighted average of the bond's cash flows, where the weights are the
present value of each cash flow divided by the total present value. A simpler approximation
is to use the formula Duration = (Macaulay Duration)/(1+r), where Macaulay Duration is the
weighted average time to receive the bond's cash flows and r is the required rate of return.

 What is the difference between a callable bond and a puttable bond?


 Answer: A callable bond is a bond that can be redeemed by the issuer before its maturity
date. This gives the issuer the option to refinance the bond at a lower interest rate if market
conditions are favorable. A puttable bond, on the other hand, gives the bondholder the
option to sell the bond back to the issuer at a predetermined price before maturity. This
gives the bondholder some protection against rising interest rates.

 How do you account for accrued interest when buying or selling a bond?
 Answer: When buying or selling a bond, the buyer pays the seller the market price plus the
accrued interest, which represents the interest earned by the bond since the last coupon
payment. The seller receives the market price minus the accrued interest. The amount of
accrued interest depends on the number of days since the last coupon payment and the
coupon rate.

 How do you compare the yields of two different bonds?


 Answer: The most common way to compare the yields of two different bonds is to calculate
their yield spreads, which is the difference between their yields to maturity or other
benchmark rates. A positive yield spread means the bond has a higher yield than the
benchmark, while a negative yield spread means the bond has a lower yield. Yield spreads
can also be adjusted for differences in credit ratings, duration, and other factors

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