Fixed Income【Session10- Reading 25】习题精选 regarding, following, statements, 2012

jawz

Which of the following statements regarding leverage is least accurate?

A) A leverage-based strategy decreases portfolio returns when the return on the strategy is greater than the cost of borrowed funds.

B) Leverage is beneficial only when the strategy earns a return greater than the cost of borrowing.

C) Leverage refers to using borrowed funds to purchase a portion of the securities in the portfolio.

---

A leverage-based strategy increases, not decreases portfolio returns when the return on the strategy is greater than the cost of borrowed funds.

burning0spear

When the sponsor is choosing a fixed-income manager, with respect to the fees the manager charges, the evidence shows:

A) that there is no relationship between fees and information ratios.

B) that fixed-income managers with the highest fees have the lowest information ratios.

C) that fixed-income managers with the highest fees have the highest information ratios.

---

Just like the equity markets, a company should avoid hiring managers with higher fees. The evidence shows that fixed-income managers with the highest fees have the lowest information ratios.

burning0spear

In choosing equity managers, firms frequently use consultants and make choices using qualitative factors such as philosophy, market opportunity, and delegation of responsibility. In choosing a fixed-income manager, firms:

A) never use consultants but do make choices using qualitative factors.

B) frequently use consultants but never make choices using qualitative factors.

C) frequently use consultants and make choices using qualitative factors.

---

These are common steps in the process of choosing both equity and fixed-income managers.

burning0spear

Executives of a company are in the process of hiring managers for the company’s fixed-income portfolios. The company will hire two managers. In selecting the managers, all other things being equal, it is optimal to hire managers whose alphas have been:

A) positive and are uncorrelated.

B) positive and are highly correlated.

C) negative and are uncorrelated.

---

The company would want to hire managers who have a proven track record for adding value, i.e., who have had positive alphas. It is better to hire managers whose alphas are uncorrelated because that would lower portfolio risk.

burning0spear

In the emerging market debt market, it is generally true that volatility is:

A) low, and the returns have significant positive skewness.

B) high, and the returns have significant positive skewness.

C) high, and the returns have significant negative skewness.

---

Volatility in the emerging market debt market is high, and the returns are also frequently characterized by significant negative skewness.

burning0spear

Jill Upton, CFA, and Al Grey, CFA, are planning to add foreign bonds to the domestic portfolio, which they manage. They are discussing the advantage of adding bonds issued by sovereign emerging market governments. Compared to bonds issued by corporations, all of the following are advantages of sovereign emerging market government debt with EXCEPT:

A) the issuers tend to have reserves to absorb shocks.

B) the issuers can react more decisively to negative economic events.

C) the bonds are free of default risk.

---

The other advantages listed are true along with lower default risk, but the bonds are not free of default risk. Governments have and will default on bonds.

burning0spear

When compared to the debt issued by corporations in developed nations, the sovereign debt of emerging market governments tend to have a:

A) lower level of standardized covenants and a less enforceable seniority structure.

B) lower level of standardized covenants but a more enforceable seniority structure.

C) higher level of standardized covenants but a less enforceable seniority structure.

---

Sovereign debt typically lacks an enforceable seniority structure, in contrast to private debt, and little standardization of covenants exists among the various emerging market issuers.

burning0spear

Mary Brickland, CFA, is analyzing two different domestic bonds. Bond A has the longer modified duration at 9.50 with a yield of 9.12%. Bond B has a modified duration of 7.30 and a yield of 7.80%. Brickland has an investment-holding period of one year and expects a favorable credit quality change for Bond B to increase its market value during this time frame. If Brickland buys Bond B, what is the required basis point change in the spread (in terms of the required yield on Bond B) to offset Bond A’s yield advantage?

A) 18.08219 bp due to a decline in the yield.

B) 13.89474 bp due to a decline in the yield.

C) 14.72190 bp due to an increase in the yield.

---

Bond A has a yield advantage of 132 basis points relative to Bond B. An increase in Bond B’s credit rating will increase its price and lower its yield. Since we are looking at this in terms of Bond B: (1.32/-7.30) x 100 = -18.08219bp, the breakeven change in yield is –18.08219bp, or a decline in the yield on Bond B meaning interest rates are going to go down by this much resulting in the widening of the spread between A and B by this amount. The increase in price for Bond B will result in capital gains for Bond B, which will offset A’s original yield advantage. Note that the CFA curriculum specifies using the bond with the greater duration which in this case would be bond A although as we have demonstrated in this question the bond with the shorter duration can also be used. Thus, if you are not told which bond to use to perform the calculation you should use the one with the greater duration.

burning0spear

Steve Kiteman, CFA, manages a domestic bond portfolio and is evaluating two bonds. Bond A has a yield of 6.42% and a modified duration of 11.45. Bond B has a yield of 8.25% and a modified duration of 9.50. Kiteman has an expected holding period of three months. The breakeven change in the spread due to a change in the yield on bond B is:

A) 4.12783 bp due to a decrease in the yield for Bond B.

B) 3.99563 bp due to an increase in the yield for Bond B.

C) 4.81579 bp due to an increase in the yield for Bond B.

---

The Bond B has a yield advantage of 183 basis points. With a three-month investment time horizon, the yield advantage is (183/4) = 45.75 basis points. Since we are looking at this in terms of Bond B: (-0.4575/-9.50) x 100 = +4.81579bp, implying that the spread must increase by 4.81579 basis points. Hence, in terms of the yield on Bond B, the breakeven change in yield is +4.81579bp, or an increase in the yield on Bond B (thus resulting in the widening of the spread between A and B by this amount). This change will result in capital losses for Bond B, which will offset B’s original yield advantage. Note that the CFA curriculum specifies using the bond with the greater duration which in this case would be bond A although as we have demonstrated in this question the bond with the shorter duration can also be used. Thus, if you are not told which bond to use to perform the calculation you should use the one with the greater duration.

burning0spear

Jack Hopper, CFA, manages a domestic bond portfolio and is evaluating two bonds. Bond A has a yield of 5.60% and a modified duration of 8.15. Bond B has a yield of 6.45% and a modified duration of 4.50. Hopper can realize a yield gain of 85 basis points with Bond B if there are no offsetting changes in the relative prices of the two bonds. Hopper has an expected holding period of six months. The breakeven change in the basis point (bp) spread due to a change in the yield on bond A is:

A) 5.21472 bp, due to a decline in the yield.

B) 10.42945 bp due to a decline in the yield.

C) 5.21472 bp due to an increase in the yield.

---

By purchasing Bond B Hopper can realize a yield gain of (6.45 – 5.60) = 85 basis points if the yield spread does not increase. The yield advantage for the 6-month time horizon is (85/2) = 42.5 basis points to bond B. This is the yield advantage that must be offset in order to break even, hence we use 42.5 basis points in the formula to indicate the price of bond A will increase. Since we are looking at this from the standpoint of a change in yield on Bond A: (0.425/-8.15) x 100 = -5.21472, implying that the change in yield for bond A is -5.21472bp and the spread must increase by 5.21472 basis points. This change will result in capital gains for Bond A, which will offset B’s yield advantage.