Questions and Answers of Debt Markets And Investments

Identify two methods of bond issuance.
Compare and contrast the risk and return characteristics of bonds relative to equity securities.
List three reasons investors hold bonds in their portfolios.
Identify the credit rating range for investment- grade bonds under the Moody’s ratings system.
List and discuss two challenges in constructing bond indices.
Explain how modified duration and convexity are used to approximate the change in the price of a bond for a given change in interest rates.
Identify the major financial instruments used in interest rate risk management.
Describe the characteristics associated with portfolio immunization, asset- liability management, and gap analysis.
Explain how the seniority rank of debt affects the recovery rate for bond investors in the event of default on a fixed income security.
Explain the effect of an upgrade from A to AA on the credit spread for a bond.
Discuss the importance of inflation to fixed income investors.
Explain how including ESG analysis might have helped identify increased risk at BP before the Deepwater Horizon accident.
Identify the different types of U.S. Treasury securities.
Describe two types of auctions used for U.S. Treasury securities.
Explain several uses and benefits of U.S. Treasury securities.
List some consequences of governments increasing the debt level.
Discuss the circumstances under which an issuer needs to repay municipal bonds.
Discuss two ways that municipal debt can be structured.
Explain the benefits of investing in municipal bonds.
Discuss the pros and cons of public- private partnerships.
Discuss several common types of corporate bonds and their features.
Identify the key relation between a bond’s price and the market interest rate.
Discuss several ways to estimate the change in a bond’s price.
Describe how to protect a debt obligation’s value from interest rate movements.
Discuss the importance of credit ratings to firms and investors.
Discuss the three main characteristics of securitized debt instruments.
Explain the main differences between securitized debt and secured lending.
Describe the importance of a true sale in the context of securitized debt.
Discuss the importance of liquidity facilities in securitized debt transactions such as asset- backed commercial paper.
Explain how cash flow and synthetic CDOs differ from market value CDOs.
Discuss the size of the interest rate derivatives market in both absolute and relative terms using different measures.
Identify the key dates for a forward rate agreement and discuss their role in its trading mechanism.
Discuss the characteristics of the Eurodollar futures contract.
Discuss the main features of a credit default swap.
Discuss three key differences between traditional bank financing and accounts receivable financing.
Explain why letters of credit are primarily used within international trade.
Explain how collateral risk and counterparty risk can change over the life of a repurchase agreement.
Explain why a lender should size a borrower’s revolving credit facility properly.
Discuss why a company might borrow from the syndicated loan market rather than from a bank.
Explain why companies are motivated to issue private versus public debt.
Discuss whether a private debt investor is better off buying and holding a primary issuance or a secondary issuance.
Discuss why institutional investors such as pension funds, foundations, and endowments allocate capital to private debt investments such as syndicated loans and direct lending.
Explain the meaning of the term arbitrage- free yield curve.
Explain the difference between equilibrium and market curves.
Discuss why duration is an inappropriate measure of interest rate risk for interest rate swaps.
Discuss what the calibration of a short- term model involves.
Define the market price of risk.
Discuss the conditions under which an interest rate model is arbitrage- free.
Identify the available numeraires in the LIBOR market model.
Discuss the impact of trade volatility on fixed income in an open economy.
Discuss the level of integration between sovereign debt markets and comment on the differences between developed and emerging economies.
Explain how governance quality affects debt relief.
Explain the impact of sovereign risk on the private sector.
Explain the difference between a capped and a floored FRN.
Identify the main components that affect an FRN’s performance.
Identify when the spread for life and effective margin methods are appropriate.
Identify the most accurate method of determining an FRN’s relative value and explain why.
Identify a main drawback of using relative valuation methods for FRNs.
Compare and contrast callable and puttable bonds.
Discuss the advantages and disadvantages of convertible bonds to investors.
Describe negative convexity and its impact on callable bonds.
Discuss why convertible bonds are considered hybrids of debt and equity.
Discuss two examples of more complex embedded options than traditional callable, puttable, and convertible bonds.
Explain the difference between an open- end fund and a closed- end fund.
Explain the differences between a mutual fund and an ETF.
Identify the factors responsible for the growth of funds and net assets of ETFs between 1998 and 2016.
Compare the empirical evidence between studies involving international and U.S. bond mutual funds.
Explain how a SIB is structured and why it may be issued in lieu of conventional financing.
Explain the advantages and risks of investing in death bonds.
Explain the unique characteristic of catastrophe bonds and SIBs.
Discuss some projects that can be financed by green bonds and explain why investing in green bonds can be mutually beneficial to society and investors.
Explain the difference between the inflation protection that investors receive from nominal bonds compared to inflation- linked bonds.
Describe the effect of deflation on inflation- linked bonds and the type of protection offered by a deflation floor. Identify the economic environment that deters issuers from offering deflation
James Jameson inherited a $1 million stock portfolio. He is concerned with the current valuations in the stock market and his primary goal is to maintain the portfolio’s purchasing power while
Jameson decides to ask his neighbor Michael Clay for advice. Clay tells Jameson that since Treasuries and TIPS are both risk- free securities, he should invest in Treasuries because of their greater
Discuss the main benefits of securitization for lenders / issuers and borrowers.
Identify potential drawbacks to the securitization of assets.
Describe the general structure of a securitization in terms of risk, reward, and ratings.
Identify the important executing parties in a securitization and their general duties.
Explain the MBS securitization process.
Discuss how WAC differs from an MBS pass- through rate.
Discuss the sources of prepayment risk of MBSs.
Discuss the difference between agency and private label MBSs.
Explain the benefits of a CMO structure relative to a traditional pass- through structure.
Define an SPV and explain its economic benefits involving an ABS.
Discuss how SPVs differ from master trusts used in the case of credit card ABSs.
Define tranching and explain how it can be used as a mechanism of internal credit enhancement.
Explain how and why prepayment of the underlying obligations may represent a risk to many types of ABS investors.
Discuss which ABS category faces the highest prepayment risk.
Explain how the naturally revolving nature of credit card debt is reflected by the typical securitization structures applied when originating credit card ABSs.
Describe how CDOs, CBOs, and CLOs differ.
Describe the primary parties to a CDO.
Discuss the process and importance of tranching.
Explain the attraction of the CDO structure to investors.
Explain why banks use SPVs.
List the main factors that could influence bond valuation.
Discuss why the corporate bond market is illiquid.
Discuss why accounting disclosure can influence bond value.
Discuss how the advent of CDSs could reduce borrowing costs.
Discuss how the binomial interest rate tree incorporates interest rate uncertainty.

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