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FIXED INCOME Volume 6 CFA Institute - Solutions

13. Which of the following provides call protection for CMBS investors at the structural level?A. Defeasance B. Prepayment lockout C. Sequential-pay tranches
12. Which of the following would most likely increase balloon risk for a commercial mortgage loan that is maturing?A. High DSCR B. Low LTV ratio C. Lack of property buyers in market
11. The weighted average proceeds from the mortgages is closest to:A. 3.47%.B. 3.50%.C. 3.61%.
10. The weighted average coupon payment is closest to:A. 3.47%.B. 3.50%.C. 3.61%.
9. The associated loan to value ratio is closest to:A. 0.75.B. 0.77.C. 0.80.
8. Which of the following adverse consequences is most likely associated with extension risk?A. Investors must reinvest the proceeds at lower interest rates.B. Higher interest rates reduce the value
7. Shown below are five mortgages that comprise the entire pool in a mortgage-backed security.Mortgage Interest Rate(i)Beginning Balance(BB)Current Balance(CB)Original Term(months)Number of Months to
6. Which of the following approaches redistributes prepayment risk?A. Tranching B. Excess spread C. Overcollateralization
5. For a CMO that includes Planned Amortization Class (PAC) tranches, if the prepayment rate is within the anticipated range, which of the following tranches most likely protects investors from
4. The debt-to-income (DTI) ratio is closest to:A. 1.30%.B. 16.10%.C. 250.00%.
3. The loan-to-value (LTV) ratio is closest to:A. 54%.B. 66%.C. 70%.
2. Select which of the following statements related to the collateralized bonds issued directly by the SPE is most accurate.A. This senior/subordinated structure is an example of time tranching.B.
1. Compare the credit rating of the Class A bonds issued by the SPE and the uncollateralized bonds issued directly by AR&C. The Class A bonds are most likely rated:A. lower than AR&C bonds.B. the
describe characteristics and risks of commercial mortgage-backed securities
describe types and characteristics of residential mortgage-backed securities, including mortgage pass-through securities and collateralized mortgage obligations, and explain the cash flows and risks
describe fundamental features of residential mortgage loans that are securitized
define prepayment risk and describe time tranching structures in securitizations and their purpose
12. Which of the following statements about CDOs is correct?A. The collateral pools for CDOs are static.B. The proceeds to pay the CDO bond classes can only come from interest payments from
11. The feature of a covered bond transaction most likely shared with both CDOs and non-mortgage ABS is its:A. specified LTV cutoff.B. multiple tranches for the cover pool.C. distinct maturity and
10. When a CLO transaction experiences a collateral pool default:A. senior tranche holders are guaranteed full repayment.B. call features embedded in bonds likely affect junior tranches.C. losses are
9. The inclusion of assets into a CLO collateral pool is completed:A. during a subsequent ramp-up period.B. prior to the close of the CLO transaction.C. between ramp-up and loan maturity on meeting
8. Which investor tranche plays a key role in determining CLO viability?A. Senior B. Equity C. Mezzanine
7. A characteristic of solar loans that makes them attractive to potential solar ABS investors is their:A. universal availability to any homeowners.B. ability to combine multiple liens to mitigate
6. An action affecting the cash flow received by a credit card ABS holder during its revolving period is the:A. early repayment of principal by cardholders.B. card’s floating-rate cap exceeding the
5. For an issuer, which of the following outcomes is most likely afteroffering a credit card ABS?A. Increased cost of funding B. Increased income from fees C. Increased cost of default risk
4. Select the internal credit enhancement that seeks to improve the overall credit quality of a risky pool of securitized loans.A. Letters of credit B. Overcollateralization C. Cash collateral
3. Consider the following potential reasons to explain why covered bonds usually carry lower credit risks and offer lower yields than otherwise similar ABS:1. Eligibility criteria 2. Dynamic cover
2. Upon a bankruptcy affecting a covered bond, the first available safeguards to protect against potential losses are the:A. ringfenced loans.B. unencumbered assets of the issuer.C. assets added by
1. Which of the following statements regarding securitized products is correct?A. Credit tranching offers credit protection for the equity tranche in a securitization.B. Pass-through securities are
describe collateralized debt obligations, including their cash flows and risks
describe types and characteristics of non-mortgage asset-backed securities, including the cash flows and risks of each type
describe typical credit enhancement structures used in securitizations
describe characteristics and risks of covered bonds and how they differ from other asset-backed securities
8. In a securitization, the party that purchases the loans or receivables and uses them as collateral to issue ABS is the:A. SPE.B. seller.C. servicer.
7. In the event of a bankruptcy of the originator in a loan securitization, the investors would most likely experience:A. gains.B. losses.C. no impact.
6. Which of the following statements about securitization is incorrect?A. The ABS that are created by securitization have characteristics similar to those of equity investments.B. Buying securitized
5. Which of the following statements about securitization’s impact on economies and financial markets is correct?A. Securitization decreases overall liquidity in the financial system.B.
4. Which of the following best describes the entity shown in shape 9?The entity in shape 9 is the:A. seller of the collateral.B. servicer of the leases.C. SPE that purchases the leases and uses them
3. Which shape best represents the cash payments for the Leases?A. Shape 2 B. Shape 3 C. Shape 5 AR&C 2 Investors Customers
2. Determine which of the following is the best next step for AR&C.A. AR&C issues and sells securities backed by the pool of leases.B. AR&C sets up a separate legal entity to which it sells the
1. Which of the following benefits of securitization is most likely to be important for investors?A. Increased efficiency B. Reduced liquidity risk C. The ability to tailor interest rate and credit
describe securitization, including the parties and the roles they play
explain benefits of securitization for issuers, investors, economies, and financial markets
9. Mojofon’s S&P issuer credit rating is B+. Its S&P subordinated bond issue rating is most likely:A. BB –.B. B+.C. B –.
8. Half of Mojofon’s senior unsecured bonds are issued by its major operating subsidiary, which contributes over 90% of the group’s cash flow and assets, and the remainder of the group’s senior
7. Mojofon’s capital structure consists of the following:Type Amount Senior secured bonds(pledged by collateral valued at 60)50 Senior unsecured bonds 35 Subordinated bonds 15 Common equity 100
6. Based on the financial information, Mojofon’s credit risk is:A. below that of its peers.B. similar to that of its peers.C. above that of its peers.
5. The outstanding bonds of Mojofon contain a covenant that requires its EBITDA/Interest coverage ratio to be above 3.0. Based on coverage ratio analysis, Mojofon most likely:A. has improved its
4. The credit analyst studies the key financial information of Mojofon and that of its peers below:Key Credit Metrics Mojofon Peer Average Current Year Prior Year Current Year EBITDA 27 20 55 Revenue
3. Which of the following will most likely reduce Mojofon’s near-term default risk?A. A new policy to increase dividends on a steady basis B. A three-year strategy to pursue acquisitions funded by
2. Based on the overall industry assessment, the credit analyst concludes that the credit conditions for Mojofon will most likely:A. tighten because the sector is maturing, and industry concentration
1. Based on her smartphone industry assessment, the credit analyst concludes that Mojofon’s debt service capacity is low because:A. the threat of substitutes is low.B. the threat of new entrants
describe the seniority rankings of debt, secured versus unsecured debt and the priority of claims in bankruptcy, and their impact on credit ratings
calculate and interpret financial ratios used in credit analysis
describe the qualitative and quantitative factors used to evaluate a corporate borrower’s creditworthiness
6. Agora is an emerging market economy with restricted capital convertibility(domestic to foreign exchange is not freely convertible). It is significantly dependent on income from the tourism sector
5. Which of the following statements best characterizes external strength for a non-reserve currency sovereign country?A. The ability to impose and enforce strict capital controls B. The
4. Gulf Investment Corporation (GIC) is an investment company incorporated in Kuwait as a Gulf Shareholding Company. GIC is equally owned by the governments of the six member states of the Gulf
3. Based upon the following data, which country is expected to be assigned the lowest sovereign credit rating?Country Economic Statistics Costa Rica Dominican Republic El Salvador Long-term external
2. Match the indicators below to the impact (positive or negative) on the creditworthiness of a general obligation bond issued by a state government:■ Positive■ Negative A. Low unemployment B.
1. Which of the following statements best characterizes higher creditworthiness for a non-reserve currency emerging market sovereign government?A. A country with a government budget surplus, current
explain special considerations when evaluating the credit of sovereign and non-sovereign government debt issuers and issues
6. An investment-grade bond with modified duration of 7 and reported convexity of 0.51 increases in price by 9.93% after a yield spread change. The value of the spread change would be closest to:A.
5. Pitfalls of relying solely on credit ratings when making bond investment decisions may be best described as the following:A. Rating agencies may change their rating in response to changing market
4. A bond investor is considering the credit risk components and observed yield spreads for two IG bonds of similar maturity and liquidity:POD LGD Yield Spread Bond 1 1.25% 75% 100 bps Bond 2 1.1%
3. Determine the correct answers to fill in the blanks: While the likelihood of default for IG borrowers is typically __________ that of an HY issuer, an investor’s loss in the event of a default
2. An uncollateralized USD200,000 note has the following characteristics:Recovery rate 95%Exposure at default USD150,000 If the note’s expected loss in the event of default is USD2,500, its
1. Determine the correct answers to fill in the blanks:____________ is the risk that a bond issuer’s creditworthiness deteriorates, leading investors to believe the risk of default is __________
describe macroeconomic, market, and issuer-specific factors that influence the level and volatility of yield spreads
describe the uses of ratings from credit rating agencies and their limitations
describe credit risk and its components, probability of default and loss given default
8. What impact would a “flight to safety” (i.e., government bond yields falling and credit spreads widening) have on the analytical duration estimate of Bond A?A. Decreased duration B. Increased
7. For the two bonds under consideration, would analytical duration estimates or empirical duration estimates be most appropriate in conducting your analysis?A. Analytical duration estimates B.
6. The investor’s portfolio is diversified, and the fixed-income component of the portfolio has bonds of various maturities, with a duration of 7.48621. What would happen to the effective duration
5. A colleague asks whether you also considered looking at the key rate durations when comparing the interest rate risks of Bond A and Bond B. Would research into key rate durations for Bond A and
4. For the percentage price change for Bond A, given a 200 bp increase in benchmark yield, what part of the price change is of the most concern?A. Duration B. Convexity C. Not able to determine with
3. The following information on Bonds A and B was obtained:Bond Effective Duration Effective Convexity A 7.48621 29.35972 B 7.23852 –321.75618 Compare the interest rate risk of Bond A and Bond B.A.
2. For Bond B, as the benchmark yield curve declines, the slope of the line tangent to the bond flattens as the benchmark yield declines and reaches an inflection point, after which the effective
1. For the two bonds offered by Large-Cap Company, which duration calculation would be the most appropriate to use to measure interest rate risk?A. Modified duration B. Macaulay duration C. Effective
describe the difference between empirical duration and analytical duration
define key rate duration and describe its use to measure price sensitivity of fixed-income instruments to benchmark yield curve changes
calculate the percentage price change of a bond for a specified change in benchmark yield, given the bond’s effective duration and convexity
explain why effective duration and effective convexity are the most appropriate measures of interest rate risk for bonds with embedded options
9. The method of using weighted-average portfolio duration and convexity measures to assess price risk of a bond portfolio is best characterized as:A. being theoretically correct.B. being commonly
8. The bond portfolio’s benchmark is a fixed-income index with a duration of 9.5325 and convexity of 103.0677. Based on the weighted-average portfolio duration and convexity, the portfolio should
7. For a 100 bps increase in yield-to-maturity and using the weighted average duration and convexity, the expected percentage price change for the bond portfolio is closest to:A. –7.981%.B.
6. For a 100 bps increase in yield-to-maturity and using money duration and money convexity, the estimated change in Bond Y’s full price is closest to:A. –GBP472,937.B. –GBP450,180.C.
5. Given a 75 bps change in the yields-to-maturity for Bonds Y and Z, the convexity adjustment for Bond Z would be greater than the convexity adjustment of Bond Y:A. if the YTM change is positive.B.
4. If the yield-to-maturity of Bond X increases by 50 bps, the expected percentage price change of Bond X is closest to:A. –1.792%.B. –1.812%.C. –1.832%.
3. For changes in yield-to-maturity, the convexity adjustment is most needed to account for the:A. first-order effect on bond prices.B. bond price risk due to small changes in yield-to-maturity.C.
2. A bond pays a semiannual fixed coupon of 4.75%. It trades at par on its coupon date of 16 December 2025 and matures on 16 December 2033. The bond’s annualized convexity statistic is closest
1. A 5.5% semiannual-pay fixed-coupon bond is issued at par on 1 May 2025 and matures on 1 May 2029. For a 5 bps increase and decrease in yield-to-maturity, PV+ and PV– are 98.245077 and
calculate portfolio duration and convexity and explain the limitations of these measures
calculate the percentage price change of a bond for a specified change in yield, given the bond’s duration and convexity
calculate and interpret convexity and describe the convexity adjustment
7. The portfolio manager is interested in comparing the interest rate risk of Bond Three to that of Bond Four, a floating-rate note that resets every six months. On 1 June 2026, both bonds were
6. Which bond has the highest price value of a basis point?A. Bond One B. Bond Two C. Bond Three
5. If the yields-to-maturity for all three bonds were to increase by 100 bps, which bond has the greatest anticipated decrease in price?A. Bond One B. Bond Two C. Bond Three
4. Relative to a five-year zero-coupon bond priced to yield 5%, Bond Three has a modified duration that is best described as:A. lower than the zero-coupon bond’s modified duration.B. the same as
3. The modified duration for Bond Two is closest to:A. 3.59.B. 3.65.C. 3.78

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