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.

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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

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

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

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.

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.

optiix

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

C) The relative performance of corporate bonds has decreased.

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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.

optiix

Which of the following statements about bond markets is least accurate?

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

B) 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.

C) 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.

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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.

optiix

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

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

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

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

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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 least accurate?

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

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

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

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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.