Reading 30: Relative-Value Methodologies for Global Credit expected, following, describes, corporate, management

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LOS a: Discuss relative-value analysis in top-down and bottom-up approaches to credit bond portfolio management.

Q1. Which of the following best describes the basis for relative-value analysis?

A)   Identifies mispricings.

B)   Generates rankings of expected returns.

C)   Identifies the value of corporate bonds relative to government bonds.

 

Q2. 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.

 

Q3. In the bond market, relative-value analysis refers to the:

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

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

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

 

Q4. In classic relative-value analysis the top-down approach refers to:

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

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

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

 

Q5. Which of the following is an example of a bottom-up approach of classic relative value analysis that would indicate an undervalued issue?

A)   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.

B)   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.

C)   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.

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