optiix

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

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

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

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

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Investors that desire to sacrifice liquidity in exchange for increased returns are least likely interested in which of the following types of bonds:

A) private placements.

B) smaller-sized issues.

C) Treasury issues.

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Some investors are willing to give up liquidity by investing in issues that possess relatively higher expected returns.
Treasury issues do not fall into this category because they have relatively high liquidity, and little or no liquidity yield premium.

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Investors that are willing to give up additional return in exchange for increased liquidity are least likely interested in which of the following types of bonds:

A) private placements.

B) large-sized issues.

C) Treasury issues.

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Many investors are willing to give up additional return in exchange for greater liquidity.  Private placement issues typically have relatively low liquidity.

optiix

The ability to buy or sell quickly at a fair price is best described by which of the following terms?

A) Liquidity.

B) Efficiency.

C) Marketability.

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Liquidity is the ability to buy or sell quickly at a fair price.

optiix

Which of the following statements about the rationale for trading in the secondary bond market is least accurate?

A) Altering the duration of a portfolio because of anticipated yield curve changes is labeled a curve adjustment trade.

B) The popularity of credit-defense trades is not related to expected levels of economic uncertainty.

C) The reason to engage in a sector-rotation trade is to shift out of a sector that is expected to underperform on a total return basis, and buy into a sector that is expected to outperform in total return.

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Credit-defense trades result from a bond manager’s desire to reduce the portfolio’s exposure to expected credit downgrades. As such, during periods of anticipated economic uncertainty, credit-defense trades normally increase.

optiix

Which of the following is the best rationale for purchasing an issue in the secondary market?

A) High-default rates in a particular sector.

B) Expectations of an upgrade in an issuer's credit quality.

C) Increasing credit risk for a particular bond.

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An upgrade in credit quality will result in less credit-premium demanded by investors. Since discount rates and prices move in opposite directions for bonds, credit upgrades will result in an increase in price that will generate a greater total return from the investment.

optiix

Estimates are that more than 50% of all secondary bond trading is due to which type of trade?

A) Curve adjustment.

B) Yield/spread pickup.

C) New issue swaps.

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The motivation behind yield/spread pickup trades is to increase yield within specified duration and credit quality bounds. This motivation is estimated to account for more than 50% of all secondary trades.

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Expectations that an issue will experience a quality upgrade that is not already reflected in the current spread could result in which type of trade?

A) Sector rotation.

B) Credit defense.

C) Credit-upside.

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A credit-upside trade is motivated by a bond portfolio manager’s expectation that an issuer will experience a credit upgrade, and belief that this is not already reflected in the market value of the issue.

optiix

On-the-run Treasuries are frequently perceived to have superior liquidity. Based on this rational, many bond managers engage in:

A) curve adjustment trades.

B) new issue swaps.

C) credit defense trades.

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Relatively large new issues, particularly Treasuries that have just been issued (on-the-run), are believed to have superior liquidity—a rationale for including more of them in the portfolio.

optiix

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.

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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.