Questions and Answers of Fixed Income Analysis

Anna Lebedeva is a fixed-income portfolio manager. Paulina Kowalski, a junior analyst, and Lebedeva meet to review several positions in Lebedeva’s portfolio.Lebedeva begins the meeting by
Anna Lebedeva is a fixed-income portfolio manager. Paulina Kowalski, a junior analyst, and Lebedeva meet to review several positions in Lebedeva’s portfolio.Lebedeva begins the meeting by
Anna Lebedeva is a fixed-income portfolio manager. Paulina Kowalski, a junior analyst, and Lebedeva meet to review several positions in Lebedeva’s portfolio.Lebedeva begins the meeting by
Anna Lebedeva is a fixed-income portfolio manager. Paulina Kowalski, a junior analyst, and Lebedeva meet to review several positions in Lebedeva’s portfolio.Lebedeva begins the meeting by
Anna Lebedeva is a fixed-income portfolio manager. Paulina Kowalski, a junior analyst, and Lebedeva meet to review several positions in Lebedeva’s portfolio.Lebedeva begins the meeting by
The expected exposure to default loss for Bond I is:A. Less than the expected exposure for Bond II.B. The same as the expected exposure for Bond II.C. Greater than the expected exposure for Bond
Based on Exhibit 1, the loss given default for Bond II is:A. Less than that for Bond I.B. The same as that for Bond I.C. Greater than that for Bond I.Lena Liecken is a senior bond analyst at Taurus
Based on Exhibit 1, the expected future value of Bond I at maturity is closest to:A. 98.80.B. 103.74.C. 105.00.Lena Liecken is a senior bond analyst at Taurus Investment Management. Kristel Kreming,
Based on Exhibit 1, the risk-neutral default probability for Bond I is closest to:A. 2.000%.B. 3.175%.C. 4.762%.Lena Liecken is a senior bond analyst at Taurus Investment Management. Kristel Kreming,
Based on Exhibit 2, the credit valuation adjustment for Bond III is closest to:A. 3.3367.B. 3.5395.C. 5.8808.Lena Liecken is a senior bond analyst at Taurus Investment Management. Kristel Kreming, a
Based on Exhibit 3, if Bond IV’s credit rating changes during the next year to an A rating, its expected price change would be closest to:A. −8.00%.B. −7.35%.C. −3.15%.Lena Liecken is a
Kreming’s suggested model for Bond IV is a:A. Structural model.B. Reduced-form model.C. Term structure model.Lena Liecken is a senior bond analyst at Taurus Investment Management. Kristel Kreming,
According to Watt’s statement, the shape of UNAB’s credit curve is most likely: A. Flat.B. Upward-sloping.C. Downward-sloping.On 1 January 20X2, Deem Advisors purchased a $10 million six-year
Should Watt conclude that UNAB experienced a credit event?A. YesB. No, because UNAB did not file for bankruptcyC. No, because the failure to pay occurred on a subordinated unsecured bondOn 1 January
Based on Exhibit 1, the upfront premium as a percent of the notional for the CDS protection on Kand Corporation would be closest to:A. 2.0%.B. 9.8%.C. 14.0%.On 1 January 20X2, Deem Advisors purchased
On 1 January 20X2, Deem Advisors purchased a $10 million six-year senior unsecured bond issued by UNAB Corporation. Six months later (1 July 20X2), concerned about the portfolio’s credit exposure
To satisfy the compliance requirements referenced by Chan, the Fund is most likely required to:A. Set a notional amount.B. Post an upfront payment.C. Sign an ISDA master agreement.John Smith, a
Which type of CDS should Chan recommend to Smith?A. CDS indexB. Tranche CDSC. Single-name CDSJohn Smith, a fixed-income portfolio manager at a €10 billion sovereign wealth fund (the Fund), meets
Based on Exhibit 1, the probability of Orion defaulting on the bond during the first three years is closest to:A. 1.07%.B. 2.50%.C. 3.85%.John Smith, a fixed-income portfolio manager at a €10
To close the position on the hypothetical Orion trade, the Fund:A. Sells protection at a higher premium than it paid at the start of the trade.B. Buys protection at a lower premium than it received
The hypothetical Orion trade generated an approximate:A. Loss of £117,000.B. Gain of £117,000.C. Gain of £234,000.John Smith, a fixed-income portfolio manager at a €10 billion sovereign wealth
Based on the three economic outlook statements, a profitable long/short trade would be to:A. sell protection using a Canadian CDX IG and buy protection using a US CDX IG.B. buy protection using an
Given the description of the asset pool of the ABS, Kowalski should recommend a:A. Loan-by-loan approach.B. Portfolio-based approach.C. Statistics-based approach.Anna Lebedeva is a fixed-income
The curve trade that would best capitalize on Chan’s view of the US credit curve is to:A. Buy protection using a 20-year CDX and buy protection using a 2-year CDX.B. Buy protection using a 20-year
A profitable equity-versus-credit trade involving Delta and Zega is to:A. Short Zega shares and buy protection on Delta using the 10-year CDS.B. Go long Zega shares and buy protection on Delta using
Mary is anxious about the level of risk in her portfolio because of a recent period of increased equity market volatility. Most of her wealth is invested in a diversified global equity portfolio.She
A consultant for a large corporate pension plan is looking at three funds (Funds X, Y, and Z) as part of the pension plan’s global fixed-income allocation. All three funds use the Bloomberg
Which of the following best describes a measure of sensitivity to changes in yields to maturity for a portfolio of bonds with cash flows contingent on interest rate changes?A. Portfolio dispersionB.
Ann Smith works for a US investment firm in its London office. She manages the firm’s British pound–denominated corporate bond portfolio. Her department head in New York City has asked Smith to
Kevin Tucker manages a global bond portfolio. At a recent investment committee meeting, Tucker discussed his portfolio’s domestic (very high-credit-quality) government bond allocation with another
Arturo manages a mutual fund that is benchmarked to the Global Aggregate Bond Index. He currently has a bullish view of the global economy and believes corporate bond spreads are attractive. He is
A bond portfolio manager needs to raise €10,000,000 in cash to cover outflows in the portfolio she manages. To satisfy her cash demands, she considers one of two corporate bond positions for
Based on Exhibit 1, which fund provides the highest level of protection against inflation for coupon payments?A. AschelB. PermotC. RosaisoCécile is a junior analyst for an international wealth
Based on Exhibit 1, the rolling yield of Aschel over a one-year investment horizon is closest to:A. −2.56%.B. 0.54%.C. 5.66%.Cécile is a junior analyst for an international wealth management firm.
Which of the following is a true statement about portfolio dispersion?A. It can be described as the variance of time to the receipt of cash flows.B. The higher the dispersion, the lower the convexity
The leveraged portfolio return for Aschel is closest to:A. 7.25%.B. 7.71%.C. 8.96%.Cécile is a junior analyst for an international wealth management firm. Her supervisor, Margit, asks Cécile to
Based on Note 2, Rosaiso is the only fund for which the expected change in price based on the investor’s views of yields to maturity and yield spreads should be calculated using:A. convexity.B.
Is Cécile correct with respect to key features of liability-based mandates?A. YesB. No, only Feature 1 is correct.C. No, only Feature 2 is correct.Cécile is a junior analyst for an international
Based on Exhibit 2, the optimal strategy to meet Villash Foundation’s cash needs is the sale of:A. 100% of Bond 1.B. 100% of Bond 2.C. 50% of Bond 1 and 50% of Bond 2.Cécile is a junior analyst
Which approach to its total return mandate is the fund’s domestic bond portfolio most likely to use?A. Pure indexingB. Enhanced indexingC. Active managementCelia is chief investment officer for the
Strategy 2 is most likely preferred to Strategy 1 for meeting the objective of:A. Protecting against inflation.B. Funding future liabilities.C. Minimizing the correlation of the fund’s domestic
Are Dan’s statements to Celia that support Dan’s choice of bonds to sell correct?A. Only Statement 1 is correct.B. Only Statement 2 is correct.C. Neither Statement 1 nor Statement 2 is
Based on Exhibit 1, which bond most likely has the highest liquidity premium?A. Bond 1B. Bond 2C. Bond 3Celia is chief investment officer for the Topanga Investors Fund, which invests in equities and
Based on Exhibit 2, the total expected return of the fund’s global bond portfolio is closest to:A. 0.90%.B. 1.66%.C. 3.76%.Celia is chief investment officer for the Topanga Investors Fund, which
Celia is chief investment officer for the Topanga Investors Fund, which invests in equities and fixed income. The clients in the fund are all taxable investors. The fixed-income allocation includes a
An institutional client asks a fixed-income investment adviser to recommend a portfolio to immunize a single 10-year liability. It is understood that the chosen portfolio will need to be rebalanced
Modern Mortgage, a savings bank, decides to establish an ALCO (asset−liability committee) to improve risk management and coordination of its loan and deposit ratesetting processes. Modern’s
Mr. Zheng is a Shanghai-based wealth adviser. A major client of his, the Wang family, holds most of its assets in residential property and equity investments and relies on regular cash flows from
A Japanese corporation recently sold one of its lines of business and would like to use the cash to retire the debt liabilities that financed those assets. Summary statistics for the multiple debt
A Frankfurt-based asset manager uses the Long Bund contract traded at the Intercontinental Exchange (ICE) futures exchange to manage the gaps that arise from “duration drift” in a portfolio of
An asset manager is asked to build and manage a portfolio of fixed-income bonds to retire multiple corporate debt liabilities. The debt liabilities have a market value of GBP 50,652,108, a modified
A corporation is concerned about the defined benefit pension plan that it sponsors for its unionized employees. Because of recent declines in corporate bond yields and weak performance in its equity
A derivatives consultant, a former head of interest rate swaps trading at a major London bank, is asked by a Spanish corporation to devise an overlay strategy to “effectively defease” a large
Cindy Cheng, a Hong Kong-based portfolio manager, has established the All Asia Dragon Fund, a fixed-income fund designed to outperform the Markit iBoxx Asian Local Bond Index (ALBI). The ALBI tracks
Adelaide Super, a superannuation fund, offers a range of fixed interest (or fixed-income) investment choices to its members. Superannuation funds are Australian government-supported arrangements for
Given the significant rise in regional bond issuance following the 2008 global financial crisis, Next Europe Asset Management Limited aims to grow its assets under management by attracting a variety
Based on Exhibit 1, Kiest’s liabilities would be classified as:A. Type I.B. Type II.C. Type III.Serena is a risk management specialist with Liability Protection Advisors. Trey, CFO of Kiest
A Japanese corporation recently sold one of its lines of business and would like to use the cash to retire the debt liabilities that financed those assets. Summary statistics for the multiple debt
Modern Mortgage, a savings bank, decides to establish an ALCO (asset−liability committee) to improve risk management and coordination of its loan and deposit ratesetting processes. Modern’s
A Frankfurt-based asset manager uses the Long Bund contract traded at the Intercontinental Exchange (ICE) futures exchange to manage the gaps that arise from “duration drift” in a portfolio of
A corporation is concerned about the defined benefit pension plan that it sponsors for its unionized employees. Because of recent declines in corporate bond yields and weak performance in its equity
A derivatives consultant, a former head of interest rate swaps trading at a major London bank, is asked by a Spanish corporation to devise an overlay strategy to “effectively defease” a large
Cindy Cheng, a Hong Kong-based portfolio manager, has established the All Asia Dragon Fund, a fixed-income fund designed to outperform the Markit iBoxx Asian Local Bond Index (ALBI). The ALBI tracks
Given the significant rise in regional bond issuance following the 2008 global financial crisis, Next Europe Asset Management Limited aims to grow its assets under management by attracting a variety
Based on Exhibit 2, the portfolio with the greatest structural risk is:A. Portfolio A.B. Portfolio B.C. Portfolio C.Serena is a risk management specialist with Liability Protection Advisors. Trey,
Modern Mortgage, a savings bank, decides to establish an ALCO (asset−liability committee) to improve risk management and coordination of its loan and deposit ratesetting processes. Modern’s
Modern Mortgage, a savings bank, decides to establish an ALCO (asset−liability committee) to improve risk management and coordination of its loan and deposit ratesetting processes. Modern’s
Given the significant rise in regional bond issuance following the 2008 global financial crisis, Next Europe Asset Management Limited aims to grow its assets under management by attracting a variety
Which portfolio in Exhibit 2 fails to meet the requirements to achieve immunization for multiple liabilities?A. Portfolio AB. Portfolio BC. Portfolio CSerena is a risk management specialist with
Based on Exhibit 2, relative to Portfolio C, Portfolio B:A. Has higher cash flow reinvestment risk.B. Is a more desirable portfolio for liquidity management.C. Provides less protection from yield
Serena’s three assumptions regarding the duration-matching strategy indicate the presence of:A. Model risk.B. Spread risk.C. Counterparty credit risk.Serena is a risk management specialist with
The global bond benchmark in Exhibit 3 that is least appropriate for Kiest to use is the:A. Global Aggregate Index.B. Global High Yield Index.C. Global Aggregate GDP Weighted Index.Serena is a risk
To meet both of Trey’s guidelines for the pension’s bond fund investment, Serena should recommend:A. Pure indexing.B. Enhanced indexing.C. Active management.Serena is a risk management specialist
Chaopraya is an investment advisor for high-net-worth individuals. One of her clients, Schuylkill, plans to fund her grandson’s college education and considers two options:• Option 1: Contribute
A Sydney-based fixed-income portfolio manager is considering the following Commonwealth of Australia government bonds traded on the ASX (Australian Stock Exchange):The manager is considering
Returning to our earlier example of the German media and telecommunications issuer, the investor decides instead to position her portfolio for a steepening of the issuer’s credit curve using the
A Sydney-based investor notes the following available option-free bonds for an A rated Australian issuer:The 5-year, 10-year, and 15-year Australian government bonds have YTMs and coupons of 0.50%,
Returning to our earlier example of the investment-grade German media and telecommunications issuer, the investor decides instead to overweight exposure to this name by taking a long risk position in
A bank analyst observes a first lien bank loan maturing in two years with a spread of 100 bps from an issuer considering a new second lien bank loan. Using average historical volume weighted
Which of the following best describes the expected shape of the credit spread curve in an economic downturn?A. Investment-grade and high-yield issuers usually experience similar credit spread curve
A portfolio manager considers the following annual coupon bonds:Calculate the yield spread and G-spread for the bank bond.
A high-yield bond fund manager is considering adding a US$50 million face value, fiveyear, 6.75% semiannual coupon bond with a YTM of 5.40% to an active portfolio. The manager uses regression
An active credit portfolio manager considers the following corporate bond portfolio choices familiar from an earlier example:The investor anticipates an economic slowdown in the next year that will
Consider the information from the bank and government annual coupon bonds from the prior example:Assuming that 7- and 10-year swap spreads over the respective government benchmark yields to maturity
An active United States–based credit manager is offered similar US corporate bond portfolio choices to those in an earlier example:As in the earlier case, the manager expects an economic rebound
A United Kingdom–based financial analyst considers a Z-score model in evaluating two publicly traded non-manufacturing companies as follows: Z-Score Model = 1.2 × A + 1.4 × B + 3.3 × C + 0.6 ×
An investor is conducting a relative value analysis on global bond issuers in the health care sector. He is trying to decide whether the global health care sector is a sufficiently narrow sector for
A portfolio manager considers two industrial bonds for a one-year investment:The manager observes a historical annual default probability of 0.27% for A2 rated issuers and 3.19% for B2 rated issuers
A United States–based issuer has the following option-free bonds outstanding:Current on-the-run US Treasury YTMs are as follows:An investor considers the purchase of a new 10-year issue from the
Recall the earlier example of a United States–based issuer with the following option-free bonds outstanding:Assume the investor instead holds a US$50 million face value position in the outstanding
An active credit portfolio manager considers the following corporate bond portfolio choices familiar from an earlier example:The investor anticipates an economic slowdown in the next year that will
An investor is considering the portfolio impact of a new 12-year corporate bond position with a $75 million face value, a 3.25% coupon, current YTM of 2.85%, modified duration of 9.887, and a price
An investor is considering the portfolio impact of a new 12-year corporate bond position with a $75 million face value, a 3.25% coupon, current YTM of 2.85%, modified duration of 9.887, and a price
An active portfolio manager seeking to purchase single-name CDS protection observes a 1.75% 10-year market credit spread for a private investment-grade issuer. The effective spread duration is 8.75
An active portfolio manager seeking to purchase single-name CDS protection observes a 1.75% 10-year market credit spread for a private investment-grade issuer. The effective spread duration is 8.75
An investor observes the following current CDS market information:Select the most appropriate credit portfolio positioning strategy to capitalize on an expected steepening of the investment-grade
An active United States–based credit manager faces the following US and European investment-grade and high-yield corporate bond portfolio choices:The EUR IG and EUR HY allocations are denominated
An active United States–based credit manager faces the following US and European investment-grade and high-yield corporate bond portfolio choices:The EUR IG and EUR HY allocations are denominated
A European portfolio manager is presented with the following information on a portfolio of two bonds. Calculate the OAS of the portfolio. Issuer Company A Company B Face Value € 100,000,000 €
As in the prior example, an active fixed-income manager anticipates an economic slowdown in the next year with a greater adverse impact on lower-rated issuers. The manager chooses a tactical CDX

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