Reading 30: Relative-Value Methodologies for Global Credit

statements, structure, including, following

LOS d: Discuss the primary reasons for secondary market trading, including yield/spread pickup trades, credit-upside trades, credit-defense trades, new issue swaps, sector-rotation trades, yield curve-adjustment trades, structure trades, and cash flow reinvestment.

Q1. Which of the following statements about the rationale for trading in the secondary bond market is FALSE?

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

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

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.

Q2. Which of the following is the best rationale for purchasing an issue in the secondary market?

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

B) High-default rates in a particular sector.

C) Increasing credit risk for a particular bond.

Q3. Estimates are that more than 50% of all secondary bond trading is due to which type of trade?

A) Yield/spread pickup.

B) Curve adjustment.

C) New issue swaps.

Q4. 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.

Q5. 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.