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标题: Fixed Income【Session10- Reading 25】习题精选 [打印本页]
作者: jawz    时间: 2012-4-1 16:46     标题: [2012 L3] Fixed Income【Session10- Reading 25】习题精选

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.
作者: jawz    时间: 2012-4-1 16:46

Which of the following is an advantage of leverage? Leverage:
A)
decreases the risk for a given return potential.
B)
magnifies the return from a security for a given price change.
C)
increases the return potential without incurring larger risk.


Leveraging increases the return potential but also increases the risk, resulting in a wider range of possible outcomes.
作者: jawz    时间: 2012-4-1 16:47

Which of the following best characterizes leveraging? Leveraging involves:
A)
exploiting mispricings in the market.
B)
borrowing funds to implement a trade.
C)
writing options.


Leverage refers to the use of borrowed funds to purchase a portion of the securities in a portfolio. A leverage-based strategy is used with the objective of earning a return over and above the cost of borrowed funds.
作者: jawz    时间: 2012-4-1 16:48

Which of the following CORRECTLY describes a repurchase agreement?
A)
The sale of a security with a commitment to repurchase the same security at a specified future date and a designated price.
B)
The sale of a security with a commitment to repurchase the same security at a future date left unspecified, at a designated price.
C)
The purchase of a security with a commitment to purchase more of the same security at a specified future date.


A repurchase agreement is an agreement whereby the seller of a security agrees to “repurchase” it from the buyer on an agreed upon date at an agreed upon price. Repos are typically used by securities dealers as a means for obtaining funds to purchase securities.
作者: jawz    时间: 2012-4-1 16:50

An agreement whereby the seller of a security agrees to “repurchase” it from the buyer on an agreed upon date at an agreed upon price is called a:
A)
commercial paper.
B)
repurchase agreement.
C)
negotiable certificate of deposit.


An agreement whereby the seller of a security agrees to “repurchase” it from the buyer on an agreed upon date at an agreed upon price is called a repurchase agreement.
作者: jawz    时间: 2012-4-1 16:50

Which of the following is least likely to expose the lender in a repurchase agreement (repo) to credit risk related to the delivery of the collateral?
A)
The borrower files for bankruptcy before the collateral is delivered.
B)
The borrower sells the collateral prior to delivery.
C)
The borrower has their bank hold the collateral instead of the lender in the repo agreement.


While the lender would prefer to have possession of the collateral, having the borrower’s bank hold the collateral is the least likely of the above to expose the lender to credit risk.
作者: jawz    时间: 2012-4-1 16:51

Carlos Mendoza is a portfolio manager for a money management firm that caters to high net worth individuals. Mendoza’s firm has recently acquired the account of a new client, Forrest Thompson, and Mendoza has just met with him to establish his investment profile, return requirements, and tolerance for risk. Subsequent to the meeting, Mendoza has written an investment policy statement for Thompson that outlines approximate asset class allocations. Thompson informed Mendoza that his main investment objective is to maximize current income rather than to pursue aggressive growth opportunities. With this in mind, Mendoza suggested that approximately 40 percent of the portfolio’s assets should be allocated to fixed income securities, 40 percent in domestic equities, with the remainder in cash or cash equivalents. In accordance with Thompson’s tolerance for risk, suitable fixed-income investments have been defined as U.S. Treasury securities, mortgage-backed securities, asset-backed securities, and corporate bonds. All investments purchased for the portfolio must be rated investment grade or higher.
For the fixed income portion of the portfolio, Mendoza, with the approval of Thompson, has established the Salomon Brothers Broad Investment Grade Index (BIG) as the return benchmark. Mendoza will typically seek to keep the portfolio’s duration equal to that of the index. However, when market conditions warrant, the portfolio composition will be allowed to deviate slightly from the index from time to time in order to capitalize on short-term opportunities. In specific, Mendoza is authorized to alter the portfolio duration, within a specified range, to take advantage of any anticipated rate shifts. Because deviations from the index have the potential to lead to increased exposure to tracking risk, the portfolio is expected to outperform the index by 50 basis points, less management and transaction fees.
Thompson’s portfolio was previously managed by another asset management firm that Thompson felt had exposed his portfolio to excessive risk. One practice the other money manager frequently engaged in was to utilize repurchase transactions as a short-term investment vehicle. From time to time, cash in Thompson’s portfolio was loaned to broker-dealers in exchange for Treasury securities, which were deposited in a custodial account at a mutually agreed-upon bank. The repos were structured for time periods of thirty days or less, and Thompson was paid the prevailing rate of interest. Thompson has never been quite sure what the risks involved in the repo transactions were, and thought the previous manager did not provide him with enough information. Thompson has asked Mendoza to evaluate whether or not entering into repo agreements is an appropriate practice given his risk tolerance, and Mendoza offered to outline the associated advantages and risks.
Thompson’s inquiry about the basics of repo transactions leads Mendoza to examine other investment strategies that may or may not be appropriate for Thompson’s investment profile. Mendoza gives some consideration to introducing leverage to the portfolio, but he is concerned that Thompson does not fully understand the implications of a leveraged portfolio. Mendoza believes that without leverage, it will be difficult to achieve the stated objective of outperforming the BIG index by 50 basis points. He decides to demonstrate the effect of leverage on a sample portfolio to enable Thompson to be able to make informed decisions regarding basic portfolio management decisions. Mendoza constructs a hypothetical $5,000,000 bond portfolio with an unleveraged duration of 3.1 years. He then runs scenario analyses utilizing several levels of leverage under different changes in interest rates. Mendoza then calculates how the leverage affects the overall risk of the portfolio by measuring the change in the portfolio’s duration. He believes this is the best way to demonstrate to Thompson the potential benefits and drawbacks from such a strategy. Mendoza’s normal approach to the management of Thompson’s bond portfolio would most likely be classified as:
A)
enhanced indexing by matching primary risk factors.
B)
indexing by minor risk factor mismatching.
C)
active management by larger risk factor mismatches.


Indexing by minor risk factor mismatching allows minor mismatches in certain risk factors of the index, such as sector and quality, but is generally supposed to have the same duration as the index. Mendoza is allowed to deviate from the index to capitalize on market opportunities, but he will generally mimic the index. Also, as noted in the vignette, this strategy assumes more tracking risk. (Study Session 9, LOS 23.b)
In the course of managing Thompson’s portfolio, Mendoza will utilize which of the following value-added strategies?
A)
Market selection.
B)
Yield curve management.
C)
Sector selection.


Since Mendoza plans to alter the portfolio duration, within a specified range, to take advantage of any anticipated interest rate changes, he plans to use an interest rate expectations strategy also referred to as duration management or yield curve management which involves forecasting interest rates and adjusting the portfolio accordingly. (Study Session 10, LOS 25.h)
Which one of the following statements regarding repo transactions is most accurate?
A)
The credit risk of a repo agreement depends solely upon the quality of the collateral.
B)
As a short-term investment, a properly structured repurchase agreement is considered to be a high-quality investment.
C)
When a securities dealer uses a repurchase agreement to borrow funds, it is called a reverse repo transaction.


A repurchase agreement is generally considered to be a high-quality money market investment. Repos are considerably much more risky when used as a source of funds to create leverage. (Study Session 10, LOS 25.b)
Mendoza decides to loan out $4,000,000 of the portfolio’s Treasury securities on a 30-day repo. Assuming a repo margin of 3% and a repo rate of 4.5%, calculate the cash due at the conclusion of the trade.
A)
$3,894,550.
B)
$3,894,351.
C)
$3,880,000.


Amount of Loan = $4,000,000 × (100%- 3%) = $3,880,000.
Cash due at conclusion of repo = $3,880,000 + ($3,880,000 × 4.5% × (30/360)) = $3,894,550.
(Study Session 10, LOS 25.b)

Which of the following factors is least likely to cause a lower repo rate from the perspective of the lender?
A)
Delivery of the collateral to the lender.
B)
Collateral with a short term to maturity.
C)
Hot collateral.


The repo rate is a function of the repo term and not a function of the maturity of the collateral securities. (Study Session 10, LOS 25.b)
Utilize the hypothetical portfolio constructed by Mendoza and assume the portfolio is leveraged by 10 percent using a 30-day repo transaction. What is the duration of the leveraged portfolio?
A)
3.10 years.
B)
2.82 years.
C)
3.44 years.


10% leverage equals $4,500,000 in equity and $500,000 of debt.
The duration of the repo is very close to zero.
The duration of the portfolio is calculated as follows:
Dp = (Di</SUB)I - DI - D</SUB)I - DBB)/E
Dp = [(3.1)( 5,000,000) - (0)(500,000)] / 4,500,000 = 3.44
Where:

Dp = Duration of portfolio

Di = Duration of invested assets

DB = Duration of borrowed funds

I = amount of invested funds

B = amount of borrowed funds

E = amount of equity invested


(Study Session 10, LOS 25.a)
作者: jawz    时间: 2012-4-1 16:52

An analyst is considering various risk measures to apply to a bond portfolio. He requires a measure that will use all the data so no information will be lost. Given this requirement, as he considers using the semivariance and/or value at risk, he would reject:
A)
value at risk but not the semivariance.
B)
the semivariance but not value at risk.
C)
both value at risk and the semivariance.


The measures to compute value at risk use all the data. The semivariance only uses the portion of data below a given value.
作者: jawz    时间: 2012-4-1 16:52

An analyst is considering various risk measures to apply to a bond portfolio. She requires a measure that accounts for the magnitude of the losses. Given this requirement, as she considers using the semivariance and/or shortfall risk, she would reject using:
A)
both shortfall risk and the semivariance.
B)
the semivariance but not shortfall risk.
C)
shortfall risk but not the semivariance.


Shortfall risk gives an indication of the probability of not achieving a minimum return. The semivariance gives a measure expressed in returns.
作者: jawz    时间: 2012-4-1 16:52

An analyst is assessing the risk of a bond portfolio by applying measures of risk to the returns of the portfolio and the bonds. The portfolio includes a large position in bonds with embedded derivatives. Using the standard deviation as a risk measure for the bond portfolio is:
A)
not appropriate because the existence of the embedded derivatives would make the distribution of returns normal.
B)
not appropriate because the existence of the embedded derivatives would make the distribution of returns not normal.
C)
appropriate because the existence of the embedded derivatives would make the distribution of returns not normal.


The standard deviation is a measure for normal distributions. Embedded options would make the distribution of the bond returns not normal. Therefore, the standard deviation would not be an appropriate measure.
作者: jawz    时间: 2012-4-1 16:55

Which of the following is an advantage of using financial futures for asset allocation purposes instead of the cash market securities? Futures:
A)
can be tailored to an investor's particular requirements.
B)
offer time savings.
C)
are traded over-the-counter which eliminates the market impact of large transactions.


It will take less time to execute the asset allocation shift using futures than with buying and selling individual stocks and bonds.
作者: jawz    时间: 2012-4-1 16:55

Which of the following statements about bond portfolio management is least accurate?
A)
To increase the duration of a bond portfolio through futures, the portfolio manager should sell futures contracts.
B)
A portfolio managers sold a floor to finance the purchase of a cap in anticipation of higher interest rates on a floating-rate liability.
C)
A portfolio manager with a $50 million face value in bonds and a futures contract with $100,000 face value should use 500 futures contracts according to the Face Value Naive model.


To increase the duration of a bond portfolio through futures, the portfolio manager should buy futures contracts.
作者: jawz    时间: 2012-4-1 16:57

Which of the following is NOT an advantage of using financial futures for asset allocation?
A)
Less portfolio disruption.
B)
More precise hedging.
C)
Time savings.


Using financial futures contracts will save time and cause less portfolio disruption. However, futures contracts expose the manager to basis risk, wherein the futures contract and the portfolio are not perfectly correlated, leading to return differences between the futures position and the underlying exposure that is being replicated.
作者: jawz    时间: 2012-4-1 16:57

Which of the following is NOT an advantage of using futures instead of cash market instruments to alter portfolio risk?
A)
Lower transaction costs.
B)
Higher margin requirements.
C)
Greater leverage opportunities.


Lower margin requirements are one of the advantages of using futures instead of cash market instruments. The margin requirements are lower for futures, which allows for greater leverage.
作者: jawz    时间: 2012-4-1 16:58

John Hanes serves as a portfolio manager for Stackhouse Investments. One of his clients, the Red Wing Corporation, holds a $50 million face value position in a T-bill that matures in 182 days on March 21 (today is September 21). Red Wing also owns a $100 million position in a floating rate note (FRN) that matures in one year, pays LIBOR plus 25bp and has interest rate reset dates on December 21, March 21, and June 21. Red Wing has indicated that they need to sell the T-bill investment sooner than anticipated to fund an unexpected series of cash outflows.
Which of the following positions would effectively shorten the maturity of your client's Treasury bill investment and hedge your client against adverse movements in interest rates until the sale date given that one T-bill contract controls $1,000,000 in T-bills?
A)
Buy 50 T-bill futures contracts.
B)
Sell 500 T-bill futures contracts.
C)
Sell 50 T-bill futures contracts.


Since the client owns $50 million of face value of the T-bill, we should sell 50 December T-bill futures contracts. We sell 50 contracts because each contract controls a $1 million T-bill with a 90-92 day maturity upon expiration of the futures.
Assuming interest rates rise, which of the following CORRECTLY describes the outcome regarding the ultimate disposal of the T-bill?
A)
The T-bill will lose value, but the short T-bill futures contracts will gain in value to offset the loss.
B)
The T-bill futures contract will lose value, but the Treasury bill will gain in value to offset the loss.
C)
The holdings of T-bill futures contracts will have to be reduced (rebalanced) in order to maintain the current hedged relationship.


This position will also hedge your client against adverse movements in interest rates should he decide to sell before the expiry of the T-bill futures. If interest rates rise, the T-bill will lose value, but the short T-bill futures position will gain value to offset this loss.
Which of the following is a methodology that could be employed to convert your client's FRN to a one-year fixed rate structure?
A)
Enter into an interest rate collar.
B)
Purchase an interest rate cap.
C)
Enter into a one-year, quarterly, receive-fixed interest rate swap.


The swap will have a single fixed rate that will be received on a quarterly basis. The LIBOR payments from the swap will cancel with the LIBOR receipts from the client’s FRN. The net cash flow will be the swap fixed rate plus 25bp.
作者: jawz    时间: 2012-4-1 16:59

Which of the following is NOT an advantage of using financial futures for asset allocation purposes instead of the cash market securities?
A)
Large orders have a very small market impact in the futures market.
B)
Futures are priced exactly the same as the underlying asset but are more liquid.
C)
Futures have lower brokerage fees.


Futures are not priced exactly the same as the underlying cash asset. The difference between the two prices is the basis which is normally not equal to zero.
作者: jawz    时间: 2012-4-1 16:59

Which of the following is an advantage of using futures instead of cash market instruments to alter portfolio risk?
A)
Transaction costs for trading futures are lower than trading in the cash market.
B)
Futures provide higher returns than cash market instruments.
C)
Futures can be customized to match any specific customer needs.


There are three main advantages to using futures over cash market instruments. All three advantages are derived from the fact that there are low transactions costs and a great deal of depth in the futures market.Compared to cash market instruments, futures:
1. Are more liquid.
2. Are less expensive.
3. Make short positions more readily obtainable, because the contracts can be more easily shorted than an actual bond.
作者: jawz    时间: 2012-4-1 17:00

A portfolio manager is considering increasing the dollar duration of a portfolio by either buying more bonds or buying futures contracts. Having used a reliable model to determine a bond position and a futures position that have equal dollar durations, choosing to add the futures position to the existing portfolio will increase the final portfolio’s dollar duration:
A)
by an amount equal to the proposed bond position.
B)
more than the proposed bond position.
C)
significantly, but less than the proposed bond position.


Theoretically, using bonds or futures can accomplish the same goal.
作者: jawz    时间: 2012-4-1 17:00

A manager buys a position in futures contracts that have a dollar duration (for a forecasted interest rate change) equal to $22,500. Before buying the futures contracts, the manager’s fixed income portfolio had a dollar duration (for the forecasted interest rate change) equal to $40,500. The dollar duration of the combined position is:
A)
-$18,000.
B)
$63,000.
C)
$18,000.


This is an application of the formula DDP = DDP w/o futures + DDFutures position
作者: jawz    时间: 2012-4-1 17:00

A manager of a fixed-income portfolio sells futures contracts identical to contracts it already owns. With respect to the portfolio under management, the effect of this will be to:
A)
increase modified duration.
B)
increase the value.
C)
decrease dollar duration.


The only one of the choices we know for sure is that dollar duration will decline. The act of closing a futures contract does not necessarily change a portfolio’s value one way or another. The modified duration is a weighted average of the durations of the positions and not the dollar durations, it may go up or down.
作者: jawz    时间: 2012-4-1 17:01

A mutual fund portfolio manager has a large investment in bonds. They anticipate that interest rates are going to increase and are concerned as to how that will affect the value of their bonds. They have decided to hedge the interest rate risk. Indicate whether the portfolio manager should increase or decrease the duration of their bond portfolio and what kind of derivative product they should use?
A)
Increase duration by entering into a receive fixed pay floating swap.
B)
Decrease duration by entering into a receive floating pay fixed swap.
C)
Decrease duration by selling Treasury futures.


Interest rates are predicted to increase which will decrease the value of any fixed income assets (or liabilities). In a rising interest rate environment one would want to decrease the duration of their bonds so they are less sensitive to changing interest rates. This can be accomplished through a swap by receiving floating and paying fixed or by selling Treasury futures contracts. Using a swap is the preferred method because it is cheaper to implement than using futures. The duration of a swap is determined by what is received minus what is paid out: Dswap = Dreceived − Dpay. Since the duration of the floating side is very small the duration of a receive floating pay fixed swap should be very small and lower the duration of their portfolio: Dswap = Dreceived − Dpay < 0.
作者: jawz    时间: 2012-4-1 17:01

A bond portfolio manager believes that interest rates are relatively stable and will not change much in the near future. The best strategy the manager can pursue in the short term is to:
A)
enter into a covered call strategy using Treasury futures.
B)
buy a protective put on Treasury futures.
C)
do nothing.


In a stable interest rate environment the manager is not concerned about interest rates increasing which would decrease the value of their bond portfolio. In this type of environment they can earn additional income by entering into a covered call strategy which means they own the underlying asset, in this case bonds, and sell interest rate call options based on Treasury futures contracts. This strategy will provide income in the form of premiums earned from the sale of the call options. If interest rates decrease, the Treasury futures will increase in price and the call options will be exercised if the Treasury futures is above the strike price reducing the seller of the call options return. The covered call strategy does not protect against an increase in interest rates where bond values would decrease except for the amount of the premium earned on the sale of the call options.
作者: jawz    时间: 2012-4-1 17:01

The Reliable Insurance Company sells fixed rate annuities as part of its product mix and uses the proceeds to invest in floating rate notes. What kind of interest rate change should they hedge against and which is the most appropriate hedging strategy? They would be concerned with interest rates:
A)
increasing and would hedge this risk by selling a floor and buying a cap.
B)
decreasing and would hedge this risk by buying a cap and selling a floor.
C)
decreasing and would hedge this risk by selling a cap and buying a floor.


An insurance company that sold a fixed rate annuity and invests the proceeds in a floating rate note would be concerned that interest rates would decrease thus causing the return on their floating rate note to be less than what they owe on the fixed rate annuity. They can mitigate this risk by selling a cap and using the proceeds to buy a floor which would payoff in the event that interest rates decreased below the floor strike price.
作者: jawz    时间: 2012-4-1 17:02

Which of the following refers to the risk that a bond-rating agency may lower the credit rating on a bond issue?
A)
Bond rating risk.
B)
Downgrade risk.
C)
Credit spread risk.


Downgrade risk refers to the risk that a bond-rating agency lowers (or downgrades) the credit rating on the bond issue.
作者: jawz    时间: 2012-4-1 17:03

FI Investment Co. (FI) has recently observed an increase in the credit risk of their fixed income portfolios. Management has never used credit derivatives to hedge this risk, but thinks that this might be time to try them. Bill Bales, one of the portfolio managers, is instructed to learn about the basics of credit derivatives and then use them to hedge credit risk in FI’s portfolios.
First, Bales looks at why investors would sell credit protection. He makes some notes as to why credit protection would be sold:
Next, Bales explores the use of binary credit options. He realizes there are quite a few of them. To put them in perspective, he develops a list of binary credit options that might be appropriate for FI portfolios:
Bales’ research indicates that not only can credit derivates be used to protect FI’s fixed income portfolios from certain types of risks, but they can also be employed to lower the firm’s borrowing costs. Bales is able to convince FI’s CEO Tim Brown to issue the following bond:Regarding the sellers of credit protection, which statement is most accurate?
A)
Statement 1.
B)
Statement 2.
C)
Statement 3.


Sellers of credit protection are speculators that are motivated by potential increases in credit quality. They believe in a possible ratings upgrade, takeover, or redemption of outstanding bonds due to the availability of lower cost financing sources. (Study Session 10, LOS 25.g)
Regarding a total return credit swap which of the following statements is least accurate?
A)
The total return payer receives an amount based on a specified reference at the swap’s settlement dates.
B)
The total return payer owns the underlying assets.
C)
The swap can hedge many types of risk with a single contract.


The total return payer may or may not own the underlying securities. Entering into a credit swap as the total return payer without owning the underlying assets is a way to short a bond. A total return credit swap does hedge many types of risk. Also, the number of transactions will likely be less than trading the underlying, and the total return receiver pays an amount based on a specified reference at the swap’s settlement dates. (Study Session 10, LOS 25.g)
Suppose the investor who buys FI's bond issue holds 1,000 bonds with a $1 million face value position. Subsequently a credit downgrade occurs and the bond declines in value to $700. What is the option value?
A)
$700.
B)
$300,000.
C)
$300.

The following equation is used:
OV = max[(strike − value), 0]
= (1,000 − 700) = $300.

(Note: if protection were purchased on the entire position, the overall payoff would be $300,000 (= $300 × 1,000), less the cost of purchasing the options.) (Study Session 10, LOS 25.g)

Assume that instead of a binary credit put option, FI intends to issue the bond with a credit spread call option. The bond’s risk factor is 2 and assume it is now one year from today. The value of the credit call option is closest to:
A)
$225,000.
B)
$300,000.
C)
the credit call is out-of-the-money.


The value of the credit call is equal to the actual spread over the benchmark versus the specified spread over the benchmark times the principal times the risk factor. Note that the payoff is not binary – the payoff to the option will increase as the spread over the benchmark gets larger.
(0.0925 – 0.0700 – 0.0150) × $20,000,000 × 2 = $300,000
(Study Session 10, LOS 25.g)

With regard to the binary credit options, which of the statements given are least accurate?
A)
Option 1.
B)
Option 2.
C)
Option 4.


The key to a binary option is that it assumes one of two possible states. The option either pays or does not pay. The value does not continue to rise (or fall) based on the value of the underlying. Thus, a call that has a payoff as an increasing function of the credit spread would not be binary. (Study Session 10, LOS 25.g)
FI holds a large position with a 10-year maturity. Recently, Bales has observed a significant increase in the spread relative to the 10-year Treasury. Today he learns that Moody’s has changed the rating on the bond from investment grade to speculative. In terms of credit risk, FI is dealing with:
A)
credit spread and default risk. Credit spread risk can be managed with credit options and credit forwards. Default risk can be managed with credit forwards, swaps, and credit options.
B)
credit spread, default and downgrade risk. Credit spread risk can be managed with credit options and credit forwards. Downgrade risk can be managed with either credit forwards or swaps. Default risk can only be managed with swaps.
C)
credit spread and downgrade risk. Credit spread risk can be managed with credit spread options, credit spread forwards, and total return swaps. Downgrade risk can be managed with credit options, credit swaps, and total return swaps.


These are examples of credit spread and downgrade risks. Credit spread risk is the risk that the yield premium over the relevant risk free benchmark will increase. Downgrade risk reflects the possibility that the credit rating of an asset/issuer is downgraded by a major credit-rating organization. The investor can use credit spread options, credit spread forwards, or total return swaps to manage credit spread risk. Credit options, credit swaps, and total return swaps can be used to manage downgrade risk. (Study Session 10, LOS 25.g)
作者: jawz    时间: 2012-4-1 17:03

Which of the following refers to the risk that the difference between the yield on a risky asset and the yield on a risk-free asset increases?
A)
Credit spread risk.
B)
Interest rate risk.
C)
Default risk.


Credit spread risk refers to the risk that the difference between the yield on a risky asset and the yield on a risk-free asset, the credit spread, increases. Default risk is the risk that the issuer will not pay principal or interest when due; and interest rate risk refers to the risk of rising rates decreasing a bond’s market value.
作者: jawz    时间: 2012-4-1 17:04

Which of the following is the best explanation of credit spread risk? Credit spread risk refers to the risk that an:
A)
asset's bid-ask spread will increase.
B)
asset will be downgraded in the future.
C)
asset's appropriate discount rate increases relative to the comparable risk-free rate.


Credit spread risk is the risk of an increase in the yield spread on an asset. Yield spread is the asset’s yield minus the relevant risk-free benchmark. This risk is a function of potential changes in the market’s collective evaluation of credit quality, as reflected by the spread.
作者: jawz    时间: 2012-4-1 17:04

One way that international bond portfolio managers attempt to enhance portfolio returns is to correctly anticipate interest rate and yield curve changes. This strategy is called:
A)
sector selection.
B)
duration management.
C)
bond market selection.


With duration management, bond portfolio managers are able to increase returns by correctly forecasting interest rate shifts and changes in the shape of the yield curve. By correctly estimating these changes, the bond manager can capitalize on the inverse relationship between interest rate changes and the market value of bond issues.
作者: jawz    时间: 2012-4-1 17:05

A U.S. investor holds a bond portfolio that includes bonds that are an obligation of a British company and denominated in British pounds. In estimating the sensitivity of the value of that foreign position to rates in the United States, with respect to the country beta for Great Britain and the British bond’s duration, it is most correct to say a:
A)
higher country beta and higher bond duration will lead to higher interest rate risk.
B)
lower country beta and higher bond duration will lead to lower interest rate risk.
C)
lower country beta and lower bond duration will lead to higher interest rate risk.


The duration contribution to the domestic portfolio is the product of the country beta and the bond’s duration. It is most correct to say that when both go up, the interest rate risk increases.
作者: jawz    时间: 2012-4-1 17:05

Which of the following foreign bond positions will have the highest sensitivity to changes in domestic interest rates? A foreign bond that has a duration equal to:
A)
5 and a country beta equal to 0.2.
B)
2 and a country beta equal to 0.5.
C)
4 and a country beta equal to 0.3.


The total sensitivity is given by the duration times the country beta. The product of 4 times 0.3 is the highest of the three.
作者: burning0spear    时间: 2012-4-1 17:06

A bond-portfolio manager is considering adding a position to the portfolio. He is choosing between a domestic bond with a duration equal to 4.8 or a foreign bond that has a duration of 6.0 and a country beta equal to 0.8. If the manager wishes to add the bond with the lower sensitivity to domestic interest rates, the manager:
A)
would choose the foreign bond.
B)
would choose the domestic bond.
C)
would be indifferent between the two bonds.


Both bonds have the same sensitivity to domestic rates: 6.0 × 0.8 = 4.8.
作者: burning0spear    时间: 2012-4-1 17:07

Which of the following is a valid reason for NOT using forwards to hedge exposure to currency risk? The portfolio manager expects:
A)
the future currency exchange rate to be less than the forward exchange rate.
B)
that the percentage return from exposure to a currency is greater than the forward discount or premium.
C)
home interest rates to rise relative to foreign interest rates.


If the return from being exposed to a currency is greater than the forward premium, then using the forward to hedge will result in a return less than that if there were no hedge.
作者: burning0spear    时间: 2012-4-1 17:07

Which of the following most accurately describes the purpose of using break-even analysis (forward rates) to make relative value decisions? Break-even analysis is used to determine:
A)
whether or not to hedge.
B)
the currency risk isolated from interest rate risk for different markets.
C)
the credit risk isolated from interest rate risk for different markets.


The strategic outlook is what you "expect" to happen to the currency. The market price can be determined from the forward rate. Comparing the two dictates whether you should hedge or not hedge (which is the ultimate decision).
作者: burning0spear    时间: 2012-4-1 17:08

Which of the following statements concerning how breakeven rate analysis can be used to make relative value or currency hedging decisions between foreign bond markets is CORRECT? Break-even analysis can be used to:
A)
quantify the amount of spread widening that would erase the yield advantage from investing in a higher yielding market.
B)
quantify the correct amount of currency exposure to hedge.
C)
identify mispriced bonds in foreign markets and to take advantage of the mispricing.


Breakeven rate analysis can be used to determine how many basis points the spread would have to change in order for yield advantages to be eliminated.
作者: burning0spear    时间: 2012-4-1 17:08

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.
作者: burning0spear    时间: 2012-4-1 17:08

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.
作者: burning0spear    时间: 2012-4-1 17:09

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.
作者: burning0spear    时间: 2012-4-1 17:09

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.
作者: burning0spear    时间: 2012-4-1 17:10

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.
作者: burning0spear    时间: 2012-4-1 17:10

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.
作者: burning0spear    时间: 2012-4-1 17:11

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.
作者: burning0spear    时间: 2012-4-1 17:11

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.
作者: burning0spear    时间: 2012-4-1 17:12

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.



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