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LOS e: Discuss and evaluate corporate bond portfolio strategies that are based on relative value, including total return analysis, primary market analysis, liquidity and trading analysis, secondary trading rationales and trading constraints, spread analysis, structure analysis, credit curve analysis, credit analysis, and asset allocation/sector analysis. ffice ffice" />
Q1. Which of the following strategies would normally result in the best bond performance?
A) Buy callable bonds rather than bullets, if a strong bullish bond market is expected.
B) If a bear bond market is expected, buy callable bonds instead of bullets.
C) Buy callable bonds when interest rates decline.
Correct answer is B)
Callable bonds generally outperform bullets in a bear bond market because the probability of a call is reduced. As interest rates increase, the value of the embedded option decreases, with a resultant decrease in the differential yield between callable and noncallable bonds. In a bull bond market the call option acts as a resistance point limiting the price appreciation of callable bonds.
Q2. In terms of a long-term investor, which of the following is a potential criticism of not investing in securities with low liquidity? These securities:
A) offer arbitrage opportunities more frequently.
B) are less risky.
C) have to provide higher returns as a compensation for low liquidity.
Correct answer is C)
Less liquid securities must provide a liquidity premium to compensate for the low liquidity.
Q3. Which of the following is a potential criticism of a strategy that invests in securities that are "neglected" by the market? This type of security:
A) has a lower risk-return tradeoff.
B) is often overpriced.
C) often has low liquidity.
Correct answer is C)
Since these securities are "neglected," liquidity is low and transaction costs high.
Q4. Which of the following statements about swaps is TRUE?
A) A swap spread is the spread paid by the fixed-rate payer over the seasoned Treasury rate.
B) A swap spread refers to the difference in yield between corporate issues of different quality ratings.
C) In the European market, swap spreads serve as a good proxy for credit spreads.
Correct answer is C)
It is because of the relative homogeneity of the European bond market that swap spreads are a good proxy for credit spreads. European issues are generally high in quality and intermediate in maturity. Swap spreads involve the on-the-run Treasury rate, not seasoned issues.
Q5. Which of the following statements about spread analysis is TRUE?
A) With quality-spread analysis, one risk when purchasing a security is the spread differential narrowing during the holding period.
B) Using quality-spread analysis, a bond portfolio manager would buy an issue that has a wider spread than what is justified by its intrinsic value.
C) Percentage yield analysis uses the ratio between corporate bond yields and government yields and is the only spread analysis that is based on maturity rather than duration.
Correct answer is B)
If an issue trades at a spread that is (believed by the manager to be) higher than is warranted by its intrinsic value, the expectation is that this spread will decrease over time as this fact becomes understood by the market. The risk is that the manager has misjudged the quality of the issue, and that the spread could remain high or even widen further.
Q6. Which of the following market conditions would suggest the use of callable bond structures in a corporate bond portfolio?
A) Bull bond market.
B) Increasing interest rate volatility and a bull market.
C) Bear bond market.
Correct answer is C)
In a bear bond market interest rates are increasing causing bond values to decrease thus the probability of an early call decreases. Callable bonds are issued with a higher coupon rate as compared to noncallable bonds to compensate the purchaser for the probability of the bond being called. Thus, if portfolio managers expect interest rates to increase, they should buy callable structures instead of option-free bonds in order to capture the higher return.
Q7. One portfolio constraint contributing to market inefficiency in global credit markets is seasonality. Considering the trading patterns of a given mutual fund, which of the following is least likely to reflect seasonality?
A) Relatively low secondary trading at the end of a month.
B) Relatively high secondary trading following a new primary issue.
C) Relatively low secondary trading following a portfolio rebalancing.
Correct answer is B)
Seasonality has to do with monthly, quarterly, or yearly data that appears at regular time intervals. Secondary trading following a new primary issue would not have anything to do with a seasonal pattern of repeating time intervals. The other choices are standard reasons to slow (or speed) transactions on a regular periodic basis that would represent a seasonality pattern.
Q8. The capacity to pay is a relatively more important factor in which of the following types of credit analysis?
A) Sovereign.
B) Long-term municipal.
C) Corporate.
Correct answer is C)
Capacity to pay, often measured by the adequacy of cash flows available to meet interest payments, is the key factor in corporate credit analysis.
Q9. A bond manager deciding against making an otherwise desired secondary transaction because of a desire to minimize portfolio turnover is most likely an example of what type of portfolio constraint?
A) Seasonality.
B) Exposure Limits.
C) Buy and Hold.
Correct answer is C)
A disposition toward lower trading volume can lead to buy-and-hold behavior.
Q10. With regard to credit analysis, the quality of collateral and the servicer are most relevant to which types of securities?
A) Municipal securities.
B) Corporate securities.
C) Asset-backed securities.
Correct answer is C)
The quality of collateral and the servicer is most relevant to the analysis of asset-backed securities.
Q11. The most relevant challenge to bond portfolio managers in the area of credit analysis is related to which of the following issues?
A) The capacity of corporate issuers to support cash flows needs.
B) Global economic and political instability.
C) The expansion in the universe of global bonds.
Correct answer is C)
In order to be effective, managers must establish and support an effective credit analysis system within their managerial domains to assure that appropriate information is available to make the best possible choices. This is becoming increasingly difficult as the global bond universe expands.
Q12. Which of the following statements about classic relative-value analysis is FALSE?
A) Classic relative-value analysis only uses a top-down micro type approach.
B) The analytical process has substantially changed due to the recent increases in the amount of available information and technology.
C) Sector, issuer, and structural analysis are the core of relative-value analysis.
Correct answer is A)
Both the top-down and bottom-up approaches are used with classic relative-value analysis.
Q13. Which of the following comments about relative-value analysis is FALSE?
A) Relative-value analysis gives bond portfolio managers an analytical structure that allows them to develop a strategic perspective on the global corporate market.
B) Relative-value analysis is consistent with the concept that bond markets are efficient.
C) Relative-value analysis is used to rank issues in terms of their expected performance based upon total returns.
Correct answer is B)
If bond markets were perfectly efficient then relative-value analysis would not lead to superior returns on a consistent basis.
Q14. Which of the following tools is thought to suffer from methodological deficiencies thereby rendering it inaccurate, and therefore, of little use?
A) Mean-reversion analysis.
B) Structural analysis.
C) Percentage yield spread analysis.
Correct answer is C)
Percentage yield spread analysis uses the ratio of yields of corporate to government issues of similar duration. However, as so many other factors such as supply and demand, profitability, and liquidity have an effect on corporate yields, this analysis has little usefulness.
Q15. With mean-reversion analysis:
A) if the current spread of a sector or issue is significantly greater than the historical mean spread, then buy the sector or issue.
B) if the current yield spread is greater than the historic mean, the market value of the security will be higher than if the spread were negligible.
C) statistical tools cannot be utilized to determine if the yield spread is significantly different from the historical mean.
Correct answer is A)
Mean-reversion analysis is the most used tool for the analysis of spreads between individual issues and across industry sectors and assumes that spreads will revert to their historic means. If a current spread is greater than its historic mean, then as the issue reverts to its mean, its yield will decline and its market value will therefore increase.
Q16. Edward Justice, CFA, is an analyst for Sierra Funds (Sierra). Justice is investigating the use of relative value methodologies for global corporate bond portfolio management and needs assistance from several Sierra Fund managers and traders. He explains that relative value analysis involves comparing bonds and bond portfolios on characteristics such as sector, issue, and structure. He adds that firms may use a top-down or a bottom-up approach to the analysis. Sierra prefers a top-down approach.
Sierra manages an employee pension fund for Ice Dreams, Inc. (Ice Dreams). Sierra has been doing very little trading in Ice Dreams’ account and has avoided specific structures and foreign bonds entirely. Due to a recent increase in interest rates, there are several accounting losses in the portfolio at this time. Sierra traders have been getting conflicting advice from buy side and sell side analysts and at this point are unsure of the optimal trading strategies for the pension fund. Justin James, a Sierra trader, believes that it is a great time to trade. He suggests that trading out of telecommunications industy bonds and into pharmaceutical industry bonds may enhance returns in the Ice Dreams portfolio. He also believes that insurance industry bonds will see a ratings upgrade in the near future and is contemplating shifting a portion of the portfolio into insurance industry bonds.
Bond manager Mike Steere is interested in the implications of issues such as changes in dominant product structure and new issue supply for fixed-income portfolio managers. In an attempt to understand these issues, he asks Justice several questions. He is specifically interested in the implications of cyclical and secular changes for fixed-income portfolio managers.
Dan Baker is interested in the terminology related to different yield spreads. He states that swap spreads are the difference in the fixed and floating rates in a swap. Ashley Carlton, a Baker colleague at Sierra adds “the option adjusted spread is the spread on corporate securities after removing any embedded options when comparing them to mortgage-backed and U.S. Agency issues.”
Alexis Jones, a Sierra Funds bond trader is considering the following swap deal.
- On January 1, 2001, TTT Corporate 7.0s of 2006 traded at a bid side price of 120 basis points over the 5-year U.S. Treasury yield of 6.20% at a time when LIBOR was 5.90%.
- On the same day, 5-year LIBOR-based swap spreads were at 100 basis points (to the U.S. Treasury).
- Assume that a bond manager bought the TTT issue and simultaneously enters into this 5-year swap.
Jones indicates that a key advantage of the swaps spread framework for evaluating corporate bond purchases is “the applicability of swap spreads across the quality spectrum.” William Greavey adds that another key advantage of the framework is “the convergence to a single spread standard derived from swap spreads. “ Both Jones and Greavey believe that the swaps spread framework is an important tool for traders and analysts alike when evaluating corporate bonds.
Regarding yield spreads, ffice:smarttags" />Carlton and Baker are, respectively:
A) incorrect; correct.
B) correct; incorrect.
C) incorrect; incorrect.
Correct answer is B)
Carlton is correct and Baker is incorrect regarding yield spreads. A swap spread is the spread paid by the fixed-rate payer over the rate on the on-the-run Treasury with the same maturity as the swap. The option adjusted spread is the effective spread for the class after removing any embedded options.
Q17. In answer to Steere’s queries, Justice is most likely to indicate that all of the following are implications of both cyclical and secular changes in the corporate bond market EXCEPT:
A) securities with embedded options will command a premium price due to their scarcity value.
B) effective duration and aggregate interest-rate risk sensitivity will increase.
C) asset/liability managers with long horizons may be willing to pay a premium for long-term bonds.
Correct answer is B)
Secular changes show that bullet and intermediate structures dominate the corporate bond market. Implications associated with these product structures:
§ Securities with embedded options will command a premium price due to their scarcity value.
§ The percentage of long-term issues will decline. Thus, effective duration and aggregate interest-rate risk sensitivity will decline. Asset/liability managers with long horizons may be willing to pay a premium for long-term bonds.
§ Credit-based derivatives will become increasingly used to achieve desired exposure to credit sectors, issuers, and structures.
Q18. Regarding a swaps framework to evaluate corporate bond purchases, Jones and Greavey are, respectively:
A) correct; correct.
B) correct; incorrect;
C) incorrect; correct.
Correct answer is C)
Jones is incorrect and Greavey is correct. Many market practitioners expect a worldwide convergence to a single spread standard derived from swap spreads. Swap spreads facilitate the comparison of securities across fixed-rate and floating-rate markets, particularly for investment-grade securities. On the negative side, individual investors may not understand swap spreads and they are not applicable across the entire quality spectrum.
Q19. In the trade Jones is considering, the fixed rate corporate bond's spread over LIBOR would be closest to:
A) 50 basis points.
B) 20 basis points.
C) 10 basis points.
Correct answer is B)
The fixed rate corporate bond's spread over LIBOR would be:
|
Receive from BSC (6.20% + 120 bp) |
7.40% |
|
- pay on swap (6.20% + 100 bp) |
7.20% |
|
+ receive from swap |
LIBOR |
|
Net |
LIBOR + 20 bp |
Q20. Justice is contemplating the differences between callable bond and bullet bond strategies. Which of the following statements does NOT accurately describe the relationship between callable bonds and bullet strategies? Callables:
A) outperform bullets when rates increase due to positive convexity.
B) do not fully participate when bond markets rally due to the "resistance" level set by the call price.
C) outperform bullets in bear markets because the probability of an early call diminishes.
Correct answer is A)
Callable bonds:
§ Underperform bullets when rates decline due to their negative convexity.
§ Do not fully participate when bond markets rally due to the "resistance" level set by the call price.
§ Outperform bullets in bear markets because the probability of an early call diminishes.
Q21. James’ trading strategies regarding telecommunications and pharmaceutical industry bonds, and with respect to insurance industry bonds are, respectively:
A) structure trades; credit defense trades.
B) yield/spread pickup trades; credit upside trades.
C) sector rotation trades; credit upside trades.
Correct answer is C)
The first trade that James describes, swapping out of telecommunications bonds and into pharmaceutical bonds because of a belief that the pharmaceutical bonds will perform better, is known as a sector rotation trade. Expecting insurance company bonds to be upgraded, and trading on that expectation, is known as a credit-upside trade.
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发表于 2009-3-6 09:33
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