Questions and Answers of Fixed Income Analysis

An active manager observes a yield spread for an outstanding corporate bond that is above the G-spread for that same bond. Which of the following is the most likely explanation for the difference?A.
A long-only active credit manager faces similar corporate bond portfolio choices to those in an earlier example:Given an expectation that an economic rebound will cause both credit spreads and
A London-based investor owns a five-year ₤100 million FRN that pays three-month MRR + 1.75% on a quarterly basis. The current MRR of 0.50% is assumed to remain constant over time. If the issuer’s
An Australian investor holds a three-year FRN with a coupon of three-month MRR + 1.25%. Given an expected strong economic recovery, she anticipates a rise in Australian MRR over the next three years
As in the prior example, an active fixed-income manager anticipates an economic rebound that is expected to cause high-yield credit curve steepening. The manager chooses a tactical CDX strategy
A London-based investor wants to estimate roll-down return attributable to a fixed-rate, option-free corporate bond versus UK gilts over the next six months assuming a static, upward-sloping
A financial analyst compares a portfolio evenly split between two technology company bonds trading at par to an index with an average OAS of 125 bps.Calculate the portfolio DTS, and estimate how the
A financial analyst is considering the likelihood that an emerging market sovereign issuer of US dollar–denominated bonds is able to meet its interest payments over the next 12 months. Which of the
A corporate bond has an effective spread duration of five years and a credit spread of 2.75% (275 bps).What is the approximate excess return if the bond is held for six months and the credit spread
An active United States–based investor is considering a portfolio allocation to the bonds of a major commodities producer headquartered in an emerging market economy. The issuer is a major
An active credit manager anticipates an economic slowdown led by a decline in residential housing prices. Which of the following portfolio positioning strategies involving structured products is the
An active fixed-income manager is conducting scenario analysis for the MBS component of a portfolio. Which of the following analytical model input changes is most likely to reduce the future value of
Which of the following statements best describes empirical duration?A. A common way to calculate a bond’s empirical duration is to run a regression of its price returns on changes in a benchmark
An active manager is weighing an investment in the bonds of two issuers in the same industry with identical PODs using a structural credit model. Which of the following changes to the model inputs
An investor has formed expectations across four bond rating categories and intends to overweight the category with the highest expected excess return over the next 12 months. Evaluate which rating
Consider the earlier case of an investor holding $50 million face value of a 15-year bond with a coupon of 2.75%, a current YTM of 3.528%, and a price of 91 per 100 of face value. What is the VaR for
An active fixed-income manager is considering increasing an overweight portfolio allocation to BBB rated health care issuers versus a targeted index. Which of the following VaR measures is the most
An investor seeks to purchase credit protection under a five-year CDS contract at a CDS market spread of 0.50% p.a. for an investment-grade issuer with an estimated effective spread duration
A European-based fixed-income manager intends to underweight exposure to a BBB rated French media and telecommunications issuer. She observes that the issuer’s current on-the-run five-year CDS
Consider the investor from the prior example who sought to underweight a French media and telecommunications issuer. Assume instead that the investor seeks to maintain a constant media and
A portfolio manager considers the following annual coupon bonds:An increase in expected inflation causes the government yield curve to steepen, with a 20-point rise in the 10-year government bond YTM
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
An active manager is weighing the purchase of two callable bonds with similar credit risks and the same final maturity. Which of the two bonds is more likely to be called on the next call date?A. The
A London-based investor wants to estimate roll-down return attributable to a fixed-rate, option-free corporate bond versus UK gilts over the next six months assuming a static, upward-sloping
A corporate bond has an effective spread duration of five years and a credit spread of 2.75% (275 bps).What is the instantaneous (holding period of zero) excess return if the spread rises to 3.25%?
A junior analyst considers a 10-year high-yield bond issued by EKN Corporation (EKN) position in a high-yield portfolio. The bond has a price of 91.82, a modified duration of 8.47, and a spread
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 ×
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
An investor seeks to purchase credit protection under a five-year CDS contract at a CDS market spread of 0.50% p.a. for an investment-grade issuer with an estimated effective spread duration
A corporate bond has an effective spread duration of five years and a credit spread of 2.75% (275 bps).Assume the bond has a 1% annualized expected POD and expected loss severity of 60% in the event
Which of the following outcomes is most likely if the junior analyst revises the bond’s original recovery rate higher?A. An increase in the bond’s PODB. A decrease in the bond’s PODC. A
Which of the following observations on the risks of spread-based fixed-income portfolios is the most accurate?A. Because credit spreads equal the product of the LGD and the POD, distinguishing
An active portfolio manager observes the following market information related to an outstanding corporate bond and two on-the-run government bonds that pay annual coupons:The portfolio manager also
An active portfolio manager observes the following market information related to an outstanding corporate bond and two on-the-run government bonds that pay annual coupons:The portfolio manager also
An active portfolio manager observes the following market information related to an outstanding corporate bond and two on-the-run government bonds that pay annual coupons:The portfolio manager also
An active portfolio manager observes the following market information related to an outstanding corporate bond and two on-the-run government bonds that pay annual coupons:The portfolio manager also
Which of the following statements about credit spread measures is most accurate?A. The DM is the yield spread over the MRR established upon issuance to compensate investors for assuming an issuer’s
An active fixed-income manager is considering two corporate bond positions for an active portfolio. The first bond has a BBB rating with a credit spread of 2.75% and an effective spread duration of
An active fixed-income manager is considering two corporate bond positions for an active portfolio. The first bond has a BBB rating with a credit spread of 2.75% and an effective spread duration of
An active fixed-income manager is considering two corporate bond positions for an active portfolio. The first bond has a BBB rating with a credit spread of 2.75% and an effective spread duration of
An active manager is considering the senior bonds of one of several corporate issuers. Holding other factors constant, which of the following key financial ratio changes would lead the manager to
Which of the following statements about statistical credit analysis models is most accurate?A. Structural credit models solve for the POD using observable company-specific variables such as financial
An investor is faced with an active portfolio decision across three bond rating categories based on the following current market information:Which bond rating category offers the highest expected
An investor is faced with an active portfolio decision across three bond rating categories based on the following current market information:Which active bond portfolio maximizes expected excess
An investor is faced with an active portfolio decision across three bond rating categories based on the following current market information:Which bond rating category offers the highest expected
Which of the following strategies best addresses the liquidity risk of a less frequently traded bond position in an active manager’s portfolio?A. Enter into a receive fixed, pay floating asset
Which of the following statements best describes methods for assessing portfolio tail risk?A. Parametric methods use expected value and standard deviation of risk factors under a normal distribution
Which of the following statements best describes how a single-name CDS contract is priced at inception?A. If the reference entity’s credit spread trades below the standard coupon rate, the CDS
Which of the following credit portfolio positioning strategies is the most appropriate to underweight the financial sector versus an index?A. Purchase protection on the CDX and sell protection on the
Which of the following phases of the credit cycle typically involves a decline in the number of issuer defaults?A. Late expansion phaseB. Early expansion phaseC. Peak phase
Which of the following regarding the shape of the credit spread curve for high yield issuers is most accurate?A. High-yield credit spread curves change shape more over the cycle than investment-grade
Which of the following statements best describes a credit curve roll-down strategy?A. Returns from a credit curve roll-down strategy can be estimated by combining the incremental coupon from a longer
An investor observes the following current CDS market information:Which of the following is the most appropriate credit portfolio positioning strategy to capitalize on an expected economic
Which of the following is the most accurate statement related to international credit markets?A. Fixed exchange-rate regimes among emerging markets usually reduce the likelihood of financial distress
Which of the following statements about the role of structured products in an active credit portfolio is most accurate?A. Covered bonds perform relatively well in a downturn versus other fixed-income
An active fixed-income manager is evaluating the relative performance of an investment-grade corporate versus a high-yield corporate debt allocation in a fixed-income portfolio. Which of the
The (flat) price on a fixed-rate corporate bond falls one day from 92.25 to 91.25 per 100 of par value because of poor earnings and an unexpected ratings downgrade of the issuer. The (annual)
AFC Investment Ltd. is a fixed-income investment firm that actively manages a government bond fund and a corporate bond fund. Holdings of the government bond fund are mainly medium-term US Treasury
A “buy-and-hold” investor purchases a fixed-rate bond at a discount and holds the security until it matures. Which of the following sources of return is least likely to contribute to the
An investor plans to retire in 10 years. As part of the retirement portfolio, the investor buys a newly issued, 12-year, 8% annual coupon payment bond. The bond is purchased at par value, so its
The following information is from the prospectus supplement for US$877,670,000 of auto loan ABS issued by XYZ Credit Automobile Receivables Trust 2019:The collateral for this securitization is a pool
Which statement about covered bonds is least accurate?A. Covered bonds provide investors with dual recourse, to the cover pool and also to the issuer.B. Covered bonds usually carry higher credit
A fixed-income analyst is asked to rank three bonds in terms of interest rate risk. Interest rate risk here means the potential price decrease on a percentage basis given a sudden change in financial
Keisha Jones is a junior analyst at Sparling Capital. Julie Anderson, a senior partner and Jones’s manager, meets with Jones to discuss interest rate models used for the firm’s fixed-income
Samuel & Sons is a fixed-income specialty firm that offers advisory services to investment management companies. On 1 October 20X0, Steele Ferguson, a senior analyst at Samuel, is reviewing three
Sidley Brown, a fixed-income associate at KMR Capital, is analyzing the effect of interest rate volatility on the values of callable and putable bonds issued by Weather Analytics (WA). WA is owned by
Robert Jourdan, a portfolio manager, has just valued a 7% annual coupon bond that was issued by a French company and has three years remaining until maturity. The bond is callable at par one year and
Sidley Brown, a fixed-income associate at KMR Capital, is analyzing the effect of interest rate volatility on the values of callable and putable bonds issued by Weather Analytics (WA). WA is owned by
Nick Andrews, a fixed-income investment analyst, has been asked by his supervisor to prepare an analysis of the convertible bond issued by Heavy Element Inc., a chemical industry company, for
An issuer in the eurozone wants to sell a three-year floating-rate note at par \ with an annual coupon based on the 12-month Euribor + 300 bps. Because the 12 month Euribor is currently at a historic
Erna Smith, a portfolio manager, has two fixed-rate bonds in her portfolio: a callable bond (Bond X) and a putable bond (Bond Y). She wants to examine the interest rate sensitivity of these two bonds
Samuel & Sons is a fixed-income specialty firm that offers advisory services to investment management companies. On 1 October 20X0, Steele Ferguson, a senior analyst at Samuel, is reviewing three
Nick Andrews, a fixed-income investment analyst, has been asked by his supervisor to prepare an analysis of the convertible bond issued by Heavy Element Inc., a chemical industry company, for
Brown is now analyzing the effect of interest rate volatility on the price of WA’s bonds.Relative to its price at 15% interest rate volatility, the price of Bond X at a lower interest rate
Erna Smith, a portfolio manager, has two fixed-rate bonds in her portfolio: a callable bond (Bond X) and a putable bond (Bond Y). She wants to examine the interest rate sensitivity of these two bonds
Nick Andrews, a fixed-income investment analyst, has been asked by his supervisor to prepare an analysis of the convertible bond issued by Heavy Element Inc., a chemical industry company, for
Samuel & Sons is a fixed-income specialty firm that offers advisory services to investment management companies. On 1 October 20X0, Steele Ferguson, a senior analyst at Samuel, is reviewing three
Nick Andrews, a fixed-income investment analyst, has been asked by his supervisor to prepare an analysis of the convertible bond issued by Heavy Element Inc., a chemical industry company, for
Samuel & Sons is a fixed-income specialty firm that offers advisory services to investment management companies. On 1 October 20X0, Steele Ferguson, a senior analyst at Samuel, is reviewing three
Erna Smith, a portfolio manager, has two fixed-rate bonds in her portfolio: a callable bond (Bond X) and a putable bond (Bond Y). She wants to examine the interest rate sensitivity of these two bonds
Nick Andrews, a fixed-income investment analyst, has been asked by his supervisor to prepare an analysis of the convertible bond issued by Heavy Element Inc., a chemical industry company, for
Erna Smith, a portfolio manager, has two fixed-rate bonds in her portfolio: a callable bond (Bond X) and a putable bond (Bond Y). She wants to examine the interest rate sensitivity of these two bonds
Brown is now analyzing the effect of interest rate volatility on the price of WA’s bonds.Relative to its price at 15% interest rate volatility, the price of Bond Z at a higher interest rate
A fixed-income analyst is considering the credit risk over the next year for three corporate bonds currently held in her bond portfolio. Her assessment for the exposure, probability of default, and
A fixed-income trader at a hedge fund observes a three-year, 5% annual payment corporate bond trading at 104 per 100 of par value. The research team at the hedge fund determines that the risk-neutral
Edward Kapili is a summer intern working on a fixed-income trading desk at a major money-center bank. His supervisor asks him to value a three-year, 3% annual payment corporate bond using a binomial
Manuel Perello is a wealth manager for several Latin American families who seek to keep a portion of their assets in very high-quality corporate bonds. Mr. Perello explains that the yields to
Tess Waresmith is a young finance professional who plans to eventually buy a two-family house, live in one unit, and rent the other to help cover the mortgage payments. She is a careful money manager
Carol Feely is a junior credit analyst at one of the major international credit rating agencies. She understands that in the standard structural models, equity is interpreted as a call option on the
Lori Boller is a fixed-income money manager specializing in taking long positions on high-yield corporate bonds that she deems to be undervalued. In particular, she looks for bonds for which the
Omar Yassin is an experienced credit analyst at a fixed-income investment firm. His current assignment is to assess potential purchases of distressed high-yield corporate bonds. One intriguing
Which of Kreming’s observations regarding actual and risk-neutral default probabilities is correct?A. Only Observation 1B. Only Observation 2C. Both Observation 1 and Observation 2Lena Liecken is a
Assume that a company with several debt issues trading in the market files for bankruptcy (i.e., a credit event takes place). What is the cheapest-to-deliver obligation for a CDS contract where the
A French company files for bankruptcy, triggering various CDS contracts. It has two series of senior bonds outstanding: Bond A trades at 30% of par, and Bond B trades at 40% of par. Investor X owns
Assume that an investor sells $500 million of protection using the CDX IG index, which has 125 reference entities. Concerned about the creditworthiness of a few of the components, the investor hedges
Assume that a company’s hazard rate is a constant 8% per year, or 2% per quarter. An investor sells five-year CDS protection on the company with the premiums paid quarterly over the next five
A company’s 5-year CDS trades at a credit spread of 300 bps, and its 10-year CDS trades at a credit spread of 500 bps.The company’s 5-year spread is unchanged, but the 10-year spread widens by
Assume a high-yield company’s 10-year credit spread is 600 bps and the duration of the CDS is 8 years. What is the approximate upfront premium required to buy 10-year CDS protection? Assume
A French company files for bankruptcy, triggering various CDS contracts. It has two series of senior bonds outstanding: Bond A trades at 30% of par, and Bond B trades at 40% of par. Investor X owns
Assume that an investor sells $500 million of protection using the CDX IG index, which has 125 reference entities. Concerned about the creditworthiness of a few of the components, the investor hedges

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