Questions and Answers of Fixed Income Analysis

Bond dealers most often quote the:A. Flat price.B. Full price.C. Full price plus accrued interest.
The following information relates Bond G, described in the exhibit below, is sold for settlement on 16 June 2020.The accrued interest per 100 of par value for Bond G on the settlement date of 16 June
The following information relates Bond G, described in the exhibit below, is sold for settlement on 16 June 2020.The flat price for Bond G on the settlement date of 16 June 2020 is closest to:A.
Matrix pricing allows investors to estimate market discount rates and prices for bonds:A. With different coupon rates.B. That are not actively traded.C. With different credit quality.
When underwriting new corporate bonds, matrix pricing is used to get an estimate of the:A. Required yield spread over the benchmark rate.B. Market discount rate of other comparable corporate bonds.C.
A bond with 20 years remaining until maturity is currently trading for 111 per 100 of par value. The bond offers a 5% coupon rate with interest paid semiannually. The bond’s annual
The annual yield-to-maturity, stated for with a periodicity of 12, for a four-year, zerocoupon bond priced at 75 per 100 of par value is closest to:A. 6.25%.B. 7.21%.C. 7.46%.
A bond with five years remaining until maturity is currently trading for 101 per 100 of par value. The bond offers a 6% coupon rate with interest paid semiannually. The bond is first callable in
A five-year, 5% semiannual coupon payment corporate bond is priced at 104.967 per 100 of par value. The bond’s yield-to-maturity, quoted on a semiannual bond basis, is 3.897%. An analyst has been
A bond with five years remaining until maturity is currently trading for 101 per 100 of par value. The bond offers a 6% coupon rate with interest paid semiannually. The bond is first callable in
The following information relatesA bond with five years remaining until maturity is currently trading for 101 per 100 of par value. The bond offers a 6% coupon rate with interest paid semiannually.
A bond with five years remaining until maturity is currently trading for 101 per 100 of par value. The bond offers a 6% coupon rate with interest paid semiannually. The bond is first callable in
An analyst evaluates the following information relating to floating-rate notes (FRNs) issued at par value that have three-month MRR as a reference rate:Based only on the information provided, the FRN
A two-year floating-rate note pays six-month Libor plus 80 bps. The floater is priced at 97 per 100 of par value. The current six-month MRR is 1.00%. Assume a 30/360 day-count convention and evenly
A 365-day year bank certificate of deposit has an initial principal amount of USD96.5 million and a redemption amount due at maturity of USD100 million. The number of days between settlement and
The bond equivalent yield of a 180-day banker’s acceptance quoted at a discount rate of 4.25% for a 360-day year is closest to:A. 4.31%.B. 4.34%.C. 4.40%.
Which of the following statements describing a par curve is incorrect?A. A par curve is obtained from a spot curve.B. All bonds on a par curve are assumed to have different credit risk.C. A par curve
The following information relatesAll rates are annual rates stated for a periodicity of one (effective annual rates).The value per 100 of par value of a two-year, 3.5% coupon bond with interest
The following information relatesAll rates are annual rates stated for a periodicity of one (effective annual rates).The three-year implied spot rate is closest to:A. 1.18%.B. 1.94%.C. 2.28%. Time
A yield curve constructed from a sequence of yields-to-maturity on zero-coupon bonds is the:A. Par curve.B. Spot curve.C. Forward curve.
The rate interpreted to be the incremental return for extending the time-to-maturity of an investment for an additional time period is the:A. Add-on rate.B. Forward rate.C. Yield-to-maturity.
The following information relatesBoth bonds pay interest annually. The current three-year EUR interest rate swap benchmark is 2.12%.The G-spread in basis points on the UK corporate bond is closest
The spread component of a specific bond’s yield-to-maturity is least likely impacted by changes in:A. Its tax status.B. Its quality rating.C. Inflation in its currency of denomination.
The yield spread of a specific bond over the standard swap rate in that currency of the same tenor is best described as the:A. I-spread.B. Z-spread.C. G-spread.
A corporate bond offers a 5% coupon rate and has exactly three years remaining to maturity. Interest is paid annually. The following rates are from the benchmark spot curve: Time-to-Maturity 1 year 2
Agnelli Industries (Agnelli), a manufacturer of industrial machine tools based in Bergamo, Italy, has €500 million of corporate bonds outstanding. These bonds have a credit rating below investment
Assume that a pool includes three mortgages with the following characteristics: Outstanding Mortgage Mortgage Balance (US$) 1 2 3 1,000 3,000 6,000 Coupon Rate (%) 5.1 5.7 5.3 Number of Months to
Used Luxury Auto (ULA) is a hypothetical company that has established a nationwide business in buying used luxury autos and then refurbishing them with the latest in electronic equipment (for
Return to the ULA securitization described in Example 1. Based on the information provided, the form of credit enhancement that the transaction most likely includes is:A. Time tranching.B. Credit
In an interest-only mortgage, the borrower:A. Does not have to repay the principal as long as she pays the interest.B. Does not have to make principal repayments for a certain number of years, after
The following information is taken from a filing with the US Securities and Exchange Commission about a CMBS issued by a special purpose entity established by a major US commercial bank. The
A non-conforming mortgage:A. Cannot be used as collateral in a mortgage-backed security.B. Does not satisfy the underwriting standards for inclusion as collateral for an agency residential
A collateralized mortgage obligation:A. Eliminates prepayment risk.B. Is created from a pool of conforming loans.C. Redistributes various forms of prepayment risk among different bond classes.
Credit card receivable asset-backed securities differ from auto loan ABS in the following way:A. Credit card loans are recourse loans, whereas auto loans are non-recourse loans.B. The collateral for
An additional risk of an investment in an arbitrage collateralized debt obligation relative to an investment in an asset-backed security is:A. The default risk on the collateral assets.B. The risk
Which of the following statements about covered bonds and asset-backed securities is most accurate?A. Both covered bonds and ABS pass prepayment and extension risk of the underlying asset pool
Securitization is beneficial for banks because it:A. Repackages bank loans into simpler structures.B. Increases the funds available for banks to lend.C. Allows banks to maintain ownership of their
Agnelli Industries (Agnelli), a manufacturer of industrial machine tools based in Bergamo, Italy, has €500 million of corporate bonds outstanding. These bonds have a credit rating below investment
Used Luxury Auto (ULA) is a hypothetical company that has established a nationwide business in buying used luxury autos and then refurbishing them with the latest in electronic equipment (for
A bank advertises a mortgage with the following interest rate: 2.99% (12-month Euribor + 2.50%), resetting once a year. The mortgage is most likely:A. A hybrid mortgage.B. An adjustable-rate
The following information is taken from a filing with the US Securities and Exchange Commission about a CMBS issued by a special purpose entity established by a major US commercial bank. The
The monthly cash flows of a mortgage pass-through security most likely:A. Are constant.B. Change when interest rates decline.C. Are equal to the cash flows of the underlying pool of mortgages.
The variability in the average life of the PAC tranche of a CMO relative to the average life of the mortgage pass-through securities from which the CMO is created is:A. Lower.B. The same.C. Higher.
Suppose that an investor observes the following prices and yields-to-maturity on zerocoupon government bonds:The prices are per 100 of par value. The yields-to-maturity are stated on a semiannual
A 6% annual coupon corporate bond with two years remaining to maturity is trading at a price of 100.125. The two-year, 4% annual payment government benchmark bond is trading at a price of 100.750.
An analyst observes these reported statistics for two bonds.The analyst believes that Bond B has a little more risk than Bond A. How much additional compensation, in terms of a higher
An investor is considering the following six annual coupon payment government bonds:Based on the relationships between the bond prices and bond characteristics, which bond will go down in price the
Suppose that an investor observes the following prices and yields-to-maturity on zerocoupon government bonds:The prices are per 100 of par value. The yields-to-maturity are stated on a semiannual
A portfolio manager is considering the purchase of a bond with a 5.5% coupon rate that pays interest annually and matures in three years. If the required rate of return on the bond is 5%, the price
Securitization benefits financial markets by:A. Increasing the role of intermediaries.B. Establishing a barrier between investors and originating borrowers.C. Allowing investors to tailor credit risk
Agnelli Industries (Agnelli), a manufacturer of industrial machine tools based in Bergamo, Italy, has €500 million of corporate bonds outstanding. These bonds have a credit rating below investment
Used Luxury Auto (ULA) is a hypothetical company that has established a nationwide business in buying used luxury autos and then refurbishing them with the latest in electronic equipment (for
Referring to Exhibit 7, the tranche of CMO-03 that is most suitable for an investor concerned about contraction risk is:A. P-A (PAC).B. P-D (PAC).C. S (support). EXHIBIT 7 CMO-03: CMO Structure with
If the borrower fails to make the contractual mortgage payments on a non-recourse mortgage, the lender:A. Cannot foreclose the property.B. Can recover the outstanding mortgage balance only through
A prepayment rate of 80 PSA means that investors can expect:A. 80% of the par value of the mortgage pass-through security to be repaid prior to the security’s maturity.B. 80% of the borrowers whose
The following information is taken from a filing with the US Securities and Exchange Commission about a CMBS issued by a special purpose entity established by a major US commercial bank. The
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
A benefit of securitization is the:A. Reduction in disintermediation.B. Simplification of debt obligations.C. Creation of tradable securities with greater liquidity than the original loans.
All else being equal, when interest rates decline:A. Investors in mortgage pass-through securities face extension risk.B. The weighted average maturity of a mortgage pass-through security
The tranche of a collateralized mortgage obligation that is most suitable for an investor who expects a fall in interest rates is:A. A fixed-rate tranche.B. An inverse floating-rate tranche.C. A PAC
The following information is taken from a filing with the US Securities and Exchange Commission about a CMBS issued by a special purpose entity established by a major US commercial bank. The
Which of the following characteristics of a residential mortgage loan would best protect the lender from a strategic default by the borrower? A. RecourseB. A prepayment optionC. Interest-only
If a mortgage borrower makes prepayments without penalty to take advantage of falling interest rates, the lender will most likely experience:A. Extension risk.B. Contraction risk.C. Yield maintenance.
The last payment in a partially amortizing residential mortgage loan is best referred to as a:A. Waterfall.B. Principal repayment.C. Balloon payment.
A goal of securitization is to:A. Separate the seller’s collateral from its credit ratings.B. Uphold the absolute priority rule in bankruptcy reorganizations.C. Account for collateral’s primary
Which of the following statements related to securitization is correct?A. Time tranching addresses the uncertainty of a decline in interest rates.B. Securitizations are rarely structured to include
The creation of bond classes with a waterfall structure for sharing losses is referred to as:A. Time tranching.B. Credit tranching.C. Overcollateralization.
In a securitization, time tranching provides investors with the ability to choose between:A. Extension and contraction risks.B. Senior and subordinated bond classes.C. Fully amortizing and partially
A special purpose entity issues asset-backed securities in the following structure.At which of the following amounts of default in par value would Bond Class A experience a loss?A. €20 millionB.
In a securitization, the collateral is initially sold by the:A. Issuer.B. Depositor.C. Underwriter.
The following information is taken from a filing with the US Securities and Exchange Commission about a CMBS issued by a special purpose entity established by a major US commercial bank. The
In a securitization, the special purpose entity (SPE) is responsible for the:A. Issuance of the asset-backed securities.B. Collection of payments from the borrowers.C. Recovery of underlying assets
The investment that is most suitable for an investor who is willing and able to accept significant prepayment risk is:A. A mortgage pass-through security.B. The support tranche of a collateralized
Securitization benefits investors by:A. Providing more direct access to a wider range of assets.B. Reducing the inherent credit risk of pools of loans and receivables.C. Eliminating cash flow timing
William Marolf obtains a EUR5 million mortgage loan from Bank Nederlandse. A year later, the principal on the loan is EUR4 million and Marolf defaults on the loan. Bank Nederlandse forecloses, sells
Fran Martin obtains a non-recourse mortgage loan for $500,000. One year later, when the outstanding balance of the mortgage is $490,000, Martin cannot make his mortgage payments and defaults on the
A balloon payment equal to a mortgage’s original loan amount is a characteristic of a:A. Bullet mortgage.B. Fully amortizing mortgage.C. Partially amortizing mortgage.
Which of the following statements is correct concerning mortgage loan defaults?A. A non-recourse jurisdiction poses higher default risks for lenders.B. In a non-recourse jurisdiction, strategic
Which of the following describes a typical feature of a non-agency residential mortgagebacked security (RMBS)?A. Senior/subordinated structureB. A pool of conforming mortgages as collateralC. A
Which commercial mortgage-backed security characteristic causes a CMBS to trade more like a corporate bond than a residential mortgage-backed security?A. Call protectionB. Internal credit
If interest rates increase, an investor who owns a mortgage pass-through security is most likely affected by:A. Credit risk.B. Extension risk.C. Contraction risk.
The longest-term tranche of a sequential-pay CMO is most likely to have the lowest:A. Average life.B. Extension risk.C. Contraction risk.
Which of the following is most likely an advantage of collateralized mortgage obligations (CMOs)? CMOs canA. Eliminate prepayment risk.B. Be created directly from a pool of mortgage loans.C. Meet the
The tranches in a collateralized mortgage obligation that are most likely to provide protection for investors against both extension and contraction risk are:A. Planned amortization class (PAC)
Support tranches are most appropriate for investors who are:A. Concerned about their exposure to extension risk.B. Concerned about their exposure to concentration risk.C. Willing to accept prepayment
In the context of mortgage-backed securities, a conditional prepayment rate (CPR) of 8% means that approximately 8% of the outstanding mortgage pool balance at the beginning of the year is expected
For a mortgage pass-through security, which of the following risks most likely increases as interest rates decline?A. BalloonB. ExtensionC. Contraction
Compared with the weighted average coupon rate of its underlying pool of mortgages, the pass-through rate on a mortgage pass-through security is:A. Lower.B. The same.C. Higher.
The single monthly mortality rate (SMM) most likely:A. Increases as extension risk rises.B. Decreases as contraction risk falls.C. Stays fixed over time when the standard prepayment model remains at
Credit risk is an important consideration for commercial mortgage-backed securities (CMBS) if the CMBS are backed by mortgage loans that:A. Are non-recourse.B. Have call protection.C. Have prepayment
A commercial mortgage-backed security does not meet the debt-to-service coverage at the loan level necessary to achieve a desired credit rating. Which of the following features would most likely
If a default occurs in a non-recourse commercial mortgage-backed security, the lender will most likely:A. Recover prepayment penalty points paid by the borrower to offset losses.B. Use only the
Which of the following investments is least subject to prepayment risk?A. Auto loan receivable–backed securitiesB. Commercial mortgage-backed securitiesC. Non-agency residential mortgage-backed
An excess spread account incorporated into a securitization is designed to limit:A. Credit risk.B. Extension risk.C. Contraction risk.
Which of the following best describes the cash flow that owners of credit card receivable asset-backed securities receive during the lockout period?A. No cash flowB. Only principal payments
Which type of asset-backed security is not affected by prepayment risk?A. Auto loan ABSB. Residential MBSC. Credit card receivable ABS
In auto loan ABS, the form of credit enhancement that most likely serves as the first line of loss protection is the:A. Excess spread account.B. Sequential-pay structure.C. Proceeds from repossession
In credit card receivable ABS, principal cash flows can be altered only when the:A. Lockout period expires.B. Excess spread account is depleted.C. Early amortization provision is triggered.
The CDO tranche with a credit-rating status between senior and subordinated bond classes is called the:A. Equity tranche.B. Residual tranche.C. Mezzanine tranche.
The key to a CDO’s viability is the creation of a structure with a competitive return for the:A. Senior tranche.B. Mezzanine tranche.C. Subordinated tranche.

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