Reading 27: Fixed-Income Portfol....anagementPart I－LOS j liability, including, structure, interest, managing

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CFA Institute Area 8-11, 13: Asset Valuation
Session 8: Management of Passive and Active Fixed Income Portfolios
Reading 27: Fixed-Income Portfolio ManagementPart I
LOS j: Critique the risks associated with managing a portfolio against a liability structure, including interest rate risk, contingent claim risk, and cap risk.

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Which of the following refers to the risk that floating rate assets may have an upper bound on the interest rate whereby a maximum rate of interest on the asset is achieved?

A) Call risk.

B) Interest rate risk.

C) Tracking error risk.

D) Cap risk.

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Answer and Explanation

Cap risk is the risk that the interest rate is capped (has a maximum) and that interest income from the asset is then capped

Cap risk is the risk that the interest rate is capped (has a maximum) and that interest income from the asset is then capped

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Which of the following refers to the differences in interest rate sensitivity of the firms assets relative to its liabilities?

A) Cap risk.

B) Call risk.

C) Interest rate risk.

D) Tracking error risk.

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Answer and Explanation

Interest rate risk refers to differences in the interest rate sensitivity of the firms assets versus its liabilities.

Interest rate risk refers to differences in the interest rate sensitivity of the firms assets versus its liabilities.

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Which of the following risks associated with managing a bond portfolio is FALSE?

A) Call risk is the risk that interest rates could increase, resulting in the cost of the firm's liabilities exceeding the return on its fixed-rate assets.

B) Combination matching for multiple liabilities is the same as horizon matching.

C) Downside risk measures focus on the portion of returns distributed below a certain (target) level.

D) Price risk and reinvestment risk are the two components that comprise interest rate risk.

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Answer and Explanation

Call risk is the risk that a firms liabilities will be canceled when interest rates rise and will need to be replaced at higher interest rates. Cap risk is the risk that interest rates could increase, resulting in the cost of the firms liabilities exceeding the return on its fixed-rate assets.

Call risk is the risk that a firms liabilities will be canceled when interest rates rise and will need to be replaced at higher interest rates. Cap risk is the risk that interest rates could increase, resulting in the cost of the firms liabilities exceeding the return on its fixed-rate assets.

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Which of the following is the best definition of cap risk? Cap risk is the risk:

A) that a floating rate note has an embedded cap.

B) associated with the issuer of a floating rate note with an embedded cap.

C) that the funding rate used to purchase a floating rate note exceeds the notes cap rate.

D) that the borrowing rate associated with a floating rate liability has a minimum value.

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Answer and Explanation

Cap risk is the risk that the cost of the firm's interest rate-sensitive liabilities exceeds the return on its capped assets in an environment of rising interst rates. Cap risk is a particular concern to investors who borrow at a floating rate.

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Which of the following is the best example of call risk for liabilities?

A) A homeowner prepays a mortgage.

B) Investors withdraw funds on time deposits prior to maturity.

C) An issuer of callable debt exercises the embedded call option.

D) An issuer of callable debt fails to meet the debt payments.

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Answer and Explanation

Contrary to call risk which is the risk that an issuer calls a bond before maturity, call risk for liabilities is the risk that funds are withdrawn prematurely by investors.

ibmtracy

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1212jo

感谢楼主！

deqiang

thanks.