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business
debt markets and investments

Questions and Answers of Debt Markets And Investments

Explain the application of the binomial interest rate model to value callable and/ or puttable bonds.
Discuss why the Z- spread for a callable bond is higher than its OAS.
Discuss the difference between the Z- spread and the OAS.
Describe an approach for valuing convertible bonds.
Discuss the primary differences between traditional (option- free) bonds and MBSs.
Discuss some of the strengths and weaknesses of the zero- volatility spread in valuing an MBS.
Identify the four core elements to an MBS valuation model.
Explain the concept of negative convexity and why an MBS exhibits this phenomenon.
Discuss how fixed income derivatives valuation has changed as a result of the interest rate market dynamics during and after the financial crisis of 2007– 2008.
Identify the differences between the valuation of forward rate agreements and short term interest rate futures contracts.
Identify the differences between the valuation of European OTC bond options and options on Treasury bond futures.
Discuss the need for alternatives to the Black model as applied to different types of fixed income options.
Explain why capacity analysis is important when a lender is evaluating a potential credit relationship.
Discuss four risks associated with a company’s cash conversion cycle and offer some examples.
Explain how the cash flow statement is organized and its importance to credit analysts.
Explain the role of credit rating agencies in debt markets.
List the auctioneers’ main objectives in treasury auctions.
Differentiate between a discriminatory auction and a uniform- price auction.
Discuss the roles of primary dealers and the reason for underpricing in U.S. Treasury auctions.
Discuss the role of private information in treasury auctions.
Discuss how governments prevent a short squeeze in the treasury markets.
Define prepayments and discuss how they are estimated and how an entity should account for them when calculating premium/ discount amortization on a bond or loan transactions.
Explain the difference between a discount and premium amortization and the impact on net income.
Explain the difference between the effective interest and straight- line methods of amortization and indicate which is permissible under U.S. GAAP.
Discuss how a negative interest rate may alter the cash flow payable or receivable by a bond issuer and explain why bond investors still invest in such bonds.
Discuss the characteristics of bond that is a HYB.
Describe the evolution of the HYB market including one positive and one negative aspect of this asset class from the issuer’s perspective.
List the key parties involved in a HYB issue, define the term “lead left,” and discuss some reasons for issuing HYBs.
Define the term covenants and describe the difference between “incurrence- based” and “maintenance- based” covenants.
Define “staple” financing and discuss why this type of financing is controversial.
Define distressed debt.
Define an underwater loan and describe the key factors driving the risk to investors in these loans.
Define a principal write- down and discuss the costs and benefits of this method of debt restructuring.
Describe other terms or focal points in restructuring debt besides reducing the principal balance.
Explain the risk of over- and under- investment that arises in distressed situations.
Explain why a foreign government would buy U.S. debt.
Discuss why short interest is a signal for bond prices.
Describe the relation between a municipal bond’s spread and risk premium.
Discuss the potential benefits and risks of automation in the fixed income market.
Explain why adding short- term bonds to a portfolio can reduce the portfolio’s vulnerability to inflation.
Describe any differences in terms of risk, return, and liquidity between(a) Owning two bonds with the same maturity(b) Owning one bond with a longer maturity and one bond with a shorter maturity, in
Describe a situation in which a strategy developed for an institutional investor cannot be implemented by an individual.
Explain how a portfolio manager can use an active bond strategy using country, currency, and credit risk based on the manager’s views on interest rates.
Describe which types of institutional investors are best suited to use LDI strategies and the main benefits of doing so.
Explain the key principle behind an immunization strategy and how it compares to using beta in an equity investment.
Explain the dedication strategy and the risks associated with this strategy.
Consider a five- year bond with a coupon rate of 12 percent and a face value of $1,000. Given the following hypothetical interest rates and assuming the pure expectations theory is correct, calculate
Consider a four- year bond with a coupon rate of 7 percent and face value of $1,000. Further assume the yield curve is flat, with a 9 percent yield to maturity. Assuming the yield curve remains flat,
List the primary borrowers in global debt markets.
Describe the various types of consumer/ household debt.
Explain the concept of the “great rotation” and provide one reason the “great rotation” is unlikely to occur.
Explain which category of household debt is increasing fastest and provide two reasons this situation concerns financial market participants.

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