Questions and Answers of Fixed Income Analysis

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
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
The investment process followed by DFC’s previous fixed-income manager is best described as:A. Asset-driven liabilities.B. Liability-driven investing.C. Asset−liability management.SD&R
Relative to Approach 1 of gaining passive exposure, an advantage of Approach 2 is that it:A. Minimizes tracking error.B. Requires less risk analysis.C. Is more appropriate for socially responsible
The two-bond hypothetical portfolio’s immunization goal is to lock in a rate of return equal to:A. 9.55%.B. 9.85%.C. 10.25%.SD&R Capital (SD&R), a global asset management company,
Which of Molly’s statements about liability-driven investing is (are) correct?A. Statement 1 only.B. Statement 2 only.C. Both Statement 1 and Statement 2.SD&R Capital (SD&R), a global asset
Based on Exhibit 1, which of the portfolios will best immunize SD&R’s single liability?A. Portfolio 1B. Portfolio 2C. Portfolio 3SD&R Capital (SD&R), a global asset management company,
Which of the portfolios in Exhibit 1 best minimizes the structural risk to a single-liability immunization strategy?A. Portfolio 1B. Portfolio 3C. Portfolio 4SD&R Capital (SD&R), a global
Which of the custom benchmark’s characteristics violates the requirements for an appropriate benchmark portfolio?A. Characteristic 1B. Characteristic 2C. Characteristic 3SD&R Capital
Based on DFC’s bond holdings and Exhibit 2, Molly should recommend:A. Benchmark 1.B. Benchmark 2.C. Benchmark 3.SD&R Capital (SD&R), a global asset management company, specializes in
A disadvantage of Strategy 1 is that:A. Price risk still exists.B. Interest rate volatility introduces risk to effective matching.C. There may not be enough bonds available to match all
A Radford School Board member has stated that she prefers a bond portfolio structure that provides diversification over time, as well as liquidity. In addressing the board member’s inquiry, Hui
A Radford School Board member has stated that she prefers a bond portfolio structure that provides diversification over time, as well as liquidity. In addressing the board member’s inquiry, Hui
Which of Trey’s reasons for choosing bond mutual funds as an investment vehicle is correct?A. Reason 1B. Reason 2C. Reason 3Serena is a risk management specialist with Liability Protection
The effects of a non-parallel shift in the yield curve on Strategy 2 can be reduced by:A. Minimizing the convexity of the bond portfolio.B. Maximizing the cash flow yield of the bond portfolio.C.
Hui’s response to Doug’s question about the most efficient portfolio management strategy should be:A. Full replication.B. Active management.C. An enhanced indexing strategy.Doug, the newly hired
Which portfolio structure should Hui recommend that would satisfy the school board member’s preference?A. Bullet portfolioB. Barbell portfolioC. Laddered portfolioDoug, the newly hired chief
Chaopraya is an investment advisor for high-net-worth individuals. One of her clients, Schuylkill, plans to fund her grandson’s college education and considers two options:• Option 1: Contribute
Consider two $50 million portfolios: Portfolio A is fully invested in the 5-year Treasury bond, and Portfolio B is an investment split between the 2-year (58.94%) and the 10-year (41.06%) bonds. The
Say a UK-based manager seeks to extend duration beyond an index by adding 10-year exposure. The manager considers either buying and holding a 10-year, 2.25% semi-annual coupon UK government bond
A fixed-income manager is presented with the following key rate duration summary of his actively managed bond portfolio versus an equally weighted index portfolio across 5-, 10-, and 30-year
A fixed-income manager is considering a foreign currency fixed-income investment in a relatively high-yielding market, where she expects bear flattening to occur in the near future and her
A US-based portfolio manager plans to invest in Australian zero-coupon bonds denominated in Australian dollars (AUD). He projects that over the next 12 months, the Australian zero-coupon yield curve
Assume a 1-year investment horizon for a portfolio manager considering US Treasury market strategies. The manager is considering two strategies to capitalize on an expected rise in US Treasury
The portfolio alternative with the highest modified duration is the:A. Bullet portfolio.B. Barbell portfolio.C. Equally weighted portfolio.A Sydney-based fixed-income portfolio manager is considering
The manager estimates that accelerated economic growth in Australia will increase the level of government yields-to-maturity by 50 bps. Under this scenario, which of the three portfolios experiences
Assume the manager is able to extend her mandate by adding derivatives strategies to the three portfolio alternatives. The best way to position her portfolio to benefit from a bear flattening
In her market research, the manager learns that ASX 3-year and 10-year Treasury bond futures are the most liquid products for investors trading and hedging medium- to long-term Australian dollar
An economic slowdown is expected to result in a 25 bp decline in Australian yield levels. Which portfolio alternative will experience the largest gain under this scenario?A. Bullet portfolioB.
The portfolio alternative with the least exposure to convexity is the:A. bullet portfolio.B. barbell portfolio.C. equally weighted portfolio.A Sydney-based fixed-income portfolio manager is
The current butterfly spread for the Australian government yield curve based upon the manager’s portfolio choices is:A. 83 bps.B. 28 bps.C. −28 bps.A Sydney-based fixed-income portfolio manager
Which of the following statements best describes the forward rate bias?A. Investors tend to favor fixed-income investments in currencies that trade at a premium on a forward basis.B. Investors tend
Which of the following derivatives strategies would best offset the yield curve exposure difference between the active and index portfolios?A. Add a pay-fixed 10-year swap and long 2-year, 5-year,
The rolldown returns over the 1-year investment horizon for the Buy-and-Hold and Yield Curve Rolldown portfolios are closest to:A. 1.00% for the Buy-and-Hold portfolio and 3.01% for the Yield Curve
The total expected return over the 1-year investment horizon for the Buy-and-Hold and Yield Curve Rolldown portfolios are closest to:A. 2.515% for the Buy-and-Hold portfolio and 4.555% for the Yield
Which of the following statements best describes how the expected total return results would change if THB yields were to rise significantly over the investment horizon?A. Both the Buy-and-Hold and
Which of the following statements is true if yield levels increase by 50 bps?A. The active portfolio will outperform the index portfolio by approximately 61 bps.B. The index portfolio will outperform
Which of the following statements best characterizes how the active portfolio is positioned for yield curve changes relative to the index portfolio?A. The active portfolio is positioned to benefit
Which of the following would be expected to provide the most accurate modeling with respect to the observed term structure?A. CIR modelB. Ho–Lee modelC. Vasicek model
Which of the following investment alternatives includes an arbitrage opportunity?Bond A: The yield for a 3% annual coupon 10-year bond is 2.5% in New York City. The same bond sells for $104.376 per
The yield-to-maturity (“par rate”) for a benchmark one-year annual coupon bond is 2%, for a benchmark two-year annual coupon bond is 3%, and for a benchmark three-year annual coupon bond is 4%. A
Which of the following statements about the Vasicek model is most accurate? It has:A. A single factor, the long rate.B. A single factor, the short rate.C. Two factors, the short rate and the long
The CIR model:A. Assumes interest rates are not mean reverting.B. Has a drift term that differs from that of the Vasicek model.C. Assumes interest rate volatility increases with increases in the
Which term structure model can be calibrated to closely fit an observed yield curve?A. The Ho–Lee modelB. The Vasicek modelC. The Cox–Ingersoll–Ross model
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
Which of the following statements comparing the Ho–Lee and Kalotay–Williams– Fabozzi (KWF) equilibrium term structure models is correct?A. The Ho–Lee model assumes constant volatility, while
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
A three-year floating rate bond pays annual coupons of one-year reference rate (set in arrears) and is capped at 5.600%. The reference rate swap curve is as given in Exhibit 1 (i.e., the one-year,
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
Investors in putable bonds most likely seek to take advantage of:A. Higher interest rates.B. Improvements in the issuer’s credit rating.C. Movements in the price of the issuer’s common stock.
George Cahill, a portfolio manager, has identified three five-year annual coupon bonds issued by a sovereign government. The three bonds have identical characteristics. The exceptions are that Bond A
Return to the valuation of the Bermudan-style three-year 4.25% annual coupon bond putable at par one year and two years from now, as depicted in Exhibit 13. The one-year, two-year, and three-year par
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
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
A three-year floating-rate bond pays annual coupons of one-year reference rate (set in arrears) and is floored at 3.000%. The reference swap curve is as given in Exhibit 1 (i.e., the one-year,
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
The conversion option in a convertible bond is a right held by:A. The issuer.B. The bondholders.C. The issuer and the bondholders jointly.
George Cahill, a portfolio manager, has identified three five-year annual coupon bonds issued by a sovereign government. The three bonds have identical characteristics. The exceptions are that Bond A
George Cahill, a portfolio manager, has identified three five-year annual coupon bonds issued by a sovereign government. The three bonds have identical characteristics. The exceptions are that Bond A
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
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
Return to the valuation of the Bermudan-style three-year 4.25% annual coupon bond putable at par one year and two years from now, as depicted in Exhibit 13. The one-year, two-year, and three-year par
Return to the valuation of the Bermudan-style three-year 4.25% annual coupon bond callable at par one year and two years from now as depicted in Exhibit 12. The one-year, two-year, and three-year par
An investor buys $10 million of five-year protection, and the CDS contract has a duration of four years. The company’s credit spread was originally 500 bps and widens to 800 bps.Does the investor
An analyst is evaluating two US apparel companies: Atelier and Trapp. Atelier is a large company that focuses on high-end apparel brands. It is profitable despite a high cost structure. Trapp is
An investor owns some intermediate-term bonds issued by a company and has become concerned about the risk of a near-term default, although he is not very concerned about a default in the long term.
An investor wants to be long the credit risk of a given company. The company’s bond currently yields 6% and matures in five years. A comparable five-year CDS contract has a credit spread of 3.25%.
An investor believes that a company will undergo a leveraged buyout (LBO) transaction, whereby it will issue large amounts of debt and use the proceeds to repurchase all of the publicly traded
On 1 January 20X2, Deem Advisors purchased a $10 million six-year senior unsecured bond issued by UNAB Corporation. Six months later (1 July 20X2), concerned about the portfolio’s credit exposure
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 10-year spread is unchanged, but the 5-year spread widens by
Imagine an investor sold five-year protection on an investment-grade company and had to pay a 2% upfront premium to the buyer of protection. Assume the duration of the CDS to be four years. What are
An investor buys $10 million of five-year protection, and the CDS contract has a duration of four years. The company’s credit spread was originally 500 bps and widens to 800 bps.Estimate the CDS
An investor owns some intermediate-term bonds issued by a company and has become concerned about the risk of a near-term default, although he is not very concerned about a default in the long term.
An investor believes that a company will undergo a leveraged buyout (LBO) transaction, whereby it will issue large amounts of debt and use the proceeds to repurchase all of the publicly traded
An investor wants to be long the credit risk of a given company. The company’s bond currently yields 6% and matures in five years. A comparable five-year CDS contract has a credit spread of 3.25%.
Chaopraya is an investment advisor for high-net-worth individuals. One of her clients, Schuylkill, plans to fund her grandson’s college education and considers two options:• Option 1: Contribute
Portfolio convexity is a second-order effect that causes the value of a portfolio to respond to a change in yields-to-maturity in a non-linear manner. Which of the following best describes the effect
An investment manager who pursues the cash-based yield curve strategies described in Exhibit 5 faces an inverted yield curve (with a decline in long-term yields-to-maturity and a sharp increase in
Consider a $50 million Treasury portfolio equally weighted between 2-, 5-, and 10-year Treasuries using parameters from the prior example as the index, and an active portfolio with 20% each in 2- and
Consider a Treasury portfolio consisting of a $124.6 million long 2-year zero-coupon Treasury with an annualized 2% yield-to-maturity and a short $25.41 million 10-year zero-coupon bond with a 4%
An investment manager is considering an incremental position in a callable, putable, or option-free bond with otherwise comparable characteristics. If she expects a downward parallel shift in the
A parallel upward shift in the yield curve is expected. Which of the following would be the best option strategy?a. Long a receiver swaptionb. Short a payer swaptionc. Long a put option on a bond
Given a parallel shift upwards in the yield curve, what is the most likely ordering in terms of expected decline in value—from least to most—for otherwise comparable bonds? Assume that the
Consider the case of a portfolio manager examining a cross-currency carry trade between US dollar (USD) and Mexican peso (MXN) money market rates. The manager is contemplating borrowing in USD for
An analyst manages an active fixed-income fund that is benchmarked to the Bloomberg Barclays US Treasury Index. This index of US government bonds currently has a modified portfolio duration of 7.25
A Dutch investor considering a 5-year EUR government bond purchase expects yields-to-maturity to decline by 25 bps in the next six months. Which of the following statements about the rolldown return

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