Practice Quiz

FRM Financial Risk Manager Practice Test

Category - Bond

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Suppose two bonds are trading in the secondary market. They have the same maturity date and similar credit quality, but one has a nominal yield of 4% while the other has one of 8%. What does this really tell you about the two bonds?
  1. One is more attractive than the other.
  2. Two bonds must be different in values.
  3. Two bonds must have been issued by different lenders.
  4. Two bonds must have been issued at different times.
Explanation
Two bonds must have been issued at different times. One was issued when interest rates were around 4%, while the other was issued when interest rates were around 8%.

Key Takeaway: The nominal yield to a bond is the sum of total coupons paid each year, divided by the face value of the bond. The higher the nominal yield to a bond is, the higher the coupons are.
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