NISM V-D Interest Rates and the Fixed Income Market — Practice Questions
Module 3 opens here: what drives interest rates, the instruments of the fixed income market, bond pricing and yield, the price-yield relationship, and duration as the measure of interest rate risk.
24 questions on Interest Rates & Fixed Income in the ScoreSetu bank — each with a detailed explanation and, where useful, a memory hook.
What this topic covers
- Drivers of interest rates
- Fixed income instruments
- Bond pricing and yield
- Duration and interest rate risk
Free sample questions
1. With respect to investments, what does 'Diversification' mean?
- A. Diversification is for insuring against market risks
- B. Diversification is for minimizing market risks ✅
- C. Diversification is for taking market risks
- D. Diversification is for eliminating market risks
Answer: B — Diversification is for minimizing market risks
Why: Diversification is the strategy of investing in a variety of assets (like stocks, bonds, sectors, geographies, gold etc.) to reduce the overall risk of a portfolio. It helps in minimizing unsystematic risk (specific to a company or sector), and can somewhat reduce exposure to market risk, but cannot eliminate it completely.
💡 Diversification MINIMIZES market risk (cuts unsystematic risk) -> cannot ELIMINATE it.
2. A Treasury Bill (face value Rs 100) with 73 days left to maturity is trading at Rs 98.00. Using the Bond Equivalent Yield (BEY) formula for T-bills given in the workbook, its yield is approximately:
- A. 10.20% ✅
- B. 9.86%
- C. 10.00%
- D. 8.00%
Answer: A — 10.20%
Why: BEY = [(Face value - Price)/Price] x (365/Days to maturity) x 100 = (2/98) x (365/73) x 100 = 0.020408 x 5 x 100 = 10.20%, using the Actual/365 convention of the Indian money market. The 9.86% figure is the discount yield, which uses a 360-day year and divides by face value instead of price.
💡 Formula: T-bill BEY = (FV - P)/P x 365/days -> divide by PRICE, use 365 (Actual/365).
3. A 10-year, 9% annual coupon bond is purchased at Rs 114.05 when the required yield is 7%. If the yield stays at 7% throughout, what happens to the bond's price as it approaches maturity?
- A. It rises further above Rs 114.05
- B. It declines gradually towards Rs 100 (face value) ✅
- C. It remains at Rs 114.05 until it is redeemed
- D. It drops immediately to Rs 100
Answer: B — It declines gradually towards Rs 100 (face value)
Why: This is the 'pull to par' effect: a premium bond's price moves steadily down towards face value as maturity approaches (114.05 with 10 years left, 113.03 with 9 years, and so on to 100 at maturity), while a discount bond's price rises towards par. Because of pull to par, there is no price risk if the bond is held until maturity.
💡 PULL TO PAR: premium bond price FALLS to 100, discount bond RISES to 100 as maturity nears.
Practise all 24 Interest Rates & Fixed Income questions
Plus the full 853-question NISM V-D bank and real-feel mock exams.
Other NISM V-D topics
Investment LandscapeConcept & Role of Mutual FundsLegal StructureLegal & RegulatoryScheme Related InformationDistribution & ChannelsNAV, TER & PricingTaxationInvestor ServicesRisk, Return & PerformanceScheme PerformanceScheme SelectionBasics of DerivativesUnderstanding the IndexForwards & FuturesOptionsEquity Derivative StrategiesInterest Rate DerivativesInterest Rate FuturesInterest Rate OptionsInterest Rate Strategies