Know where U stand:questions 6-10

investing, corporate, principal

6. A portfolio manager is considering investing a portion of her fixed income portfolio in a security whose cash flows are dependent on an underlying pool of mortgages. The portfolio consists of treasury bonds, corporate bonds and Ginnie Mae passthroughs. The security being considered is Tranche B of a CMO.The underlying collateral is a Ginnie Mae passthrough security. The rules of the CMO state that Tranche A is the first to receive monthly principal. By investing in Tranche B of the CMO, the portfolio manager will most likely reduce portfolio:
a. credit risk
b. inflation risk
c. sovereign risk
d. prepayment risk.

7. Fred Perry, CFA purchased $100,000 of a newly issued TIPS baded on the following information:

issuance date: 01-jan-08
issuance price: $1,000
maturity- 10 years
auction set real rate- 2%
interest payable- annually
CPI-U (applicable inflation index)- 5% (annual rate)

The coupon payment at the end of the year is closest to:
a. $2,000
b. $2,100
c. $5,000
d. $7,000

8. All else equal, an increase in expected yield volatility is most likely to result in an increase in the price of a(n):
a. putable bond
b. callable bond
c. option-free bond selling at a discount
d. option-free bond selling at a premium

9. A US-based investor who purchases an option-free bond with a 7% coupon rate, maturing in 20 years, and issued by a US-based company is most likely exposed to:
a. sovereign risk and credit risk
b. event risk and interest rate risk
c. volatility risk and yield curve risk
d. interest risk and exchange-rate risk.

10. A futures trader goes long one futures contract at $450. The settlement price 1 day before expiration is $500. On expiration day, the future is trading at $505. The least likely way the futures trader will lock in her profits on expiration is:

a. take delivery of the underlying asset and pay a $500 to the short
b. close out the futures position by selling the futures contract at $505.
c. take delivery of the underlying asset and pay the expiration settlement price to the short.
d. cash settle the futures and receive the difference between $500 and the expiration settlement price.