optiix

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

A) 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.

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

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

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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.

optiix

Which of the following is an example of a bottom-up approach of classic relative value analysis that would indicate an undervalued issue?

A) Due to continued strong earnings growth of XMP Corporation, their bond’s credit rating is expected to be upgraded. The manager of a corporate bond portfolio does not believe this is reflected in the current market value.

B) The manager of a corporate bond portfolio expects the increased debt usage of Corey, Inc., together with the prospect of greater competition and lower profit margins, will lead to a decrease in the credit rating of Corey bonds. These expectations are not reflected in the current market value of the bonds.

C) General economic conditions indicate the inflation rate will decline over the next year, with the expectation this will result in reducing the required yield for outstanding bonds in all maturity classes.

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If a bond’s credit rating is upgraded, the required yield will decline and the market value of the bond will increase. If this event is not currently reflected in the value of the bond then it represents an undervalued security.

optiix

In classic relative-value analysis the top-down approach refers to:

A) ranking the holdings in a corporate bond portfolio according to the relative market value of each asset class, beginning with the highest value.

B) looking for undervalued assets and ranking them from most to least undervalued.

C) using large-scale economic information to allocate funds to various corporate asset classes.

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Large scale (i.e. macro) economic information concerns data such as inflation, interest rate changes, and the level and direction of the overall economy (both domestic and foreign). Top-down analysis seeks to allocate funds to those issues that would benefit the most from the expected large-scale economic changes/trends.

optiix

In the bond market, relative-value analysis refers to the:

A) relative market value of each holding to the total value of the portfolio.

B) methodologies employed to generate rankings of fixed income securities according to various attributes such as sectors and expected performance.

C) relative risk and return characteristics between a corporations’ common stock and its debt issues.

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Relative-value analysis refers to several related methodologies used to rate and rank fixed-income securities.

optiix

Which of the following is the major emphasis of the bottom-up approach of classic relative-value analysis? Identifying:

A) individual issues that are expected to outperform their peer groups.

B) high-convexity issues.

C) optimal allocations to individual issuers.

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Bottom-up approaches focus on security by security analyses in the attempt to find those individual issues expected to outperform others.