Reading 28: Relative-Value Methodologies for Global Corpora face, management, corporate, following

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For the management of a fixed-income portfolio, which of the following is an important implication of the increasing supply of corporate bonds within the last decade?

A) The average bond duration has increased.

B) The maturity structure of corporate bonds has increased.

C) Portfolio managers have more ways to satisfy their risk and return objectives.

D) The relative performance of corporate bonds has decreased.

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Answer and Explanation

Greater supply means more issues from which managers can choose. The greater the number of issues provides managers with more opportunities to select securities that match their investment objectives, whether that be to fund some liability stream, or attempt to outperform some benchmark return.

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For the management of a fixed-income portfolio, which of the following is an important implication of the change in the dominant product structure in the primary corporate bond market within the last decade?

A) Option-free bonds are scarce and, therefore, demand a premium price.

B) Securities structured with embedded options are scarce and, therefore, demand a premium price.

C) Coupon-paying bonds are scarce and, therefore, demand a premium price.

D) Intermediate maturity bonds are scarce and, therefore, demand a premium price.

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Answer and Explanation

Intermediate structures that are not callable, putable, or sinkable have come to dominate the market.

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Which of the following statements about bond markets is FALSE?

A) Although duration tilts can be accomplished with corporate bonds, many bond managers prefer the use of Treasuries to play the yield curve.

B) Qualitative issues that differentiate the management of an international bond portfolio versus a purely domestic one, include, differences in time zones and differences in market structure and conventions.

C) The primary reasons for investing in international bonds include higher returns and better diversification.

D) Technological advancements, together with increased competition among corporate bond traders, will lead to less liquid global corporate bond markets because the number of issues available will not increase at a fast enough pace to keep up with the increased level of demand.

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 Answer and Explanation

Liquidity will most likely increase in the future because technological advances in trading systems and communication of information, together with greater competition among bond traders, will lead to higher volumes of bond trading, an important element in liquidity.

Liquidity will most likely increase in the future because technological advances in trading systems and communication of information, together with greater competition among bond traders, will lead to higher volumes of bond trading, an important element in liquidity.

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Which of the following statements about cyclical and secular changes in the primary bond market is FALSE?

A) Relative corporate bond returns frequently perform best when the supply of bonds is relatively plentiful.

B) There have been many periods where absolute corporate bond returns have declined when the supply of new issues has unexpectedly declined.

C) Structural changes in the composition of the bond market can occur rapidly.

D) One factor that can cause structural changes in the bond market is the desire of issuers to minimize financing costs under different yield curve and spread scenarios.

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Answer and Explanation

Structural changes occur slowly and have long-term implications for bond portfolio investment decisions. These changes are the result of issuers attempting to minimize their funding costs under different yield curve and spread scenarios.

Structural changes occur slowly and have long-term implications for bond portfolio investment decisions. These changes are the result of issuers attempting to minimize their funding costs under different yield curve and spread scenarios.

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Which of the following statements about bullet maturity bonds is TRUE?

A) Bullet and intermediate structures are currently dominant in all but the high yield segment of the corporate bond market.

B) A call feature is an integral part of a bullet maturity bond.

C) A bullet maturity is characterized by the ability of a trader to exercise a put on the bond, within five years of original issuance.

D) A majority of bullet maturity bonds have sinking funds.

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Answer and Explanation

Bullet and intermediate structures currently dominate all but the high yield segment of the corporate bond market. Bullet maturities cannot be callable, putable, or have sinking funds.

Bullet and intermediate structures currently dominate all but the high yield segment of the corporate bond market. Bullet maturities cannot be callable, putable, or have sinking funds.

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Which of the following statements about bond market characteristics is FALSE?

A) Callable issues are no longer dominant in the high-yield segment of the corporate bond market.

B) Bond mangers adjust their portfolios in response to, or in anticipation of, structural changes in the composition of the bond market.

C) The concept of liquidity requires that a market be able to provide for both the sale of a bond at its fair market value, plus the ability to sell quickly.

D) During the 1990s, new bond issuances had narrower spreads and relatively strong returns.

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Answer and Explanation

In the high-yield market segment, callable issues are still dominant, although this may change in time. Bullet and intermediate structures now dominate the other segments.

In the high-yield market segment, callable issues are still dominant, although this may change in time. Bullet and intermediate structures now dominate the other segments.