Asset Management concepts

Question 1

What legal structure is used for pooled retirement accounts

Answer 1

Collective Investment Trust (CIT)

Question 2

What is the difference between UCITS and SICAV

Answer 2

UCITIS is the rule set and SICAV is the legal structure of the fund

Question 3

What is a yield curve

Answer 3

It plots the yields on bonds of the same credit quality but with different maturity dates. The curve typically takes one of three shapes: upward-sloping (normal), flat, or downward-sloping (inverted).

Question 4

What has happened if the yield curve has steepened

Answer 4

Rising Long-term Rates: Long-term bond yields increase more than short-term bond yields. This often reflects expectations of stronger economic growth and higher inflation in the future.

Falling Short-term Rates: Short-term bond yields decrease more than long-term bond yields. This can happen if the central bank cuts short-term interest rates to stimulate the economy.

Question 5

What does a flattening or inverted yield curve signal

Answer 5

economic slowdown or recession expectations.

Question 6

What does an inverted yield curve sIgnal

Answer 6

short-term yields are higher than long-term yields. It is often considered a predictor of an economic recession, as it indicates that investors expect future interest rates to be lower than current rates, often due to anticipated economic slowdown

Question 7

How do Short-term Rates drop

Answer 7

This can happen if the central bank cuts short-term interest rates to stimulate the economy.

Question 8

What’s the difference between modified and macaulay duration

Answer 8

Macaulay duration is represented in years and focuses on the time aspect, providing a weighted average time to receive cash flows.

Modified duration is measured in % and focuses on price sensitivity, estimating the change in bond price due to changes in interest rates.

Question 9

What is Modified duration expressed in?

Answer 9

Macaulay duration is expressed in years.

Modified duration is a dimensionless measure (a percentage change).

Question 10

What is a bond?

Answer 10

A bond is a fixed income investment where an investor loans money to an entity (typically a corporation or government) for a defined period of time at a fixed interest rate.

Question 11

What is the face value of a bond?

Answer 11

The face value of a bond, also known as par value, is the amount that the bond issuer agrees to repay the bondholder at maturity.

Question 12

What is the coupon rate of a bond?

Answer 12

The coupon rate of a bond is the fixed annual interest rate paid by the issuer to the bondholder, expressed as a percentage of the face value.

Question 13

What is the yield to maturity (YTM) of a bond?

Answer 13

The yield to maturity (YTM) of a bond is the total return anticipated on a bond if held until it matures, accounting for the bond’s current market price, par value, coupon interest rate, and time to maturity.

Question 14

True or False: Zero-coupon bonds pay interest periodically.

Answer 14

False

Question 15

What is the duration of a bond?

Answer 15

The duration of a bond is a measure of the bond’s price sensitivity to changes in interest rates, representing the weighted average time until all cash flows are received.

Question 16

What is a callable bond?

Answer 16

A callable bond is a bond that can be redeemed by the issuer before its maturity date, typically at a specified call price.

Question 17

What is a credit rating?

Answer 17

A credit rating is an assessment of the creditworthiness of a bond issuer, indicating the likelihood of default on the bond’s payments.

Question 18

What is the difference between investment-grade and speculative-grade bonds?

Answer 18

Investment-grade bonds have higher credit ratings and lower default risk compared to speculative-grade bonds, which are considered riskier investments.

Question 19

What is a junk bond?

Answer 19

A junk bond is a high-yield, high-risk bond issued by companies with lower credit ratings, offering higher returns but also higher default risk.

Question 20

What is a treasury bond?

Answer 20

A treasury bond is a government-issued bond with a fixed interest rate and maturity date, considered one of the safest investments.

Question 21

What is the difference between a bond’s current yield and yield to maturity?

Answer 21

Current yield is the annual interest payment divided by the bond’s current market price, while yield to maturity considers the total return if held until maturity.

Question 22

What is a bond ladder?

Answer 22

A bond ladder is an investment strategy that involves purchasing bonds with staggered maturity dates to spread out interest rate risk and provide a steady income stream.

Question 23

What is a bond index?

Answer 23

A bond index is a benchmark that tracks the performance of a specific group of bonds, providing a reference point for bond market performance.

Question 24

What is the difference between a bond’s price and yield?

Answer 24

A bond’s price is the amount paid to purchase the bond, while the yield is the return on investment expressed as a percentage of the bond’s price.

Question 25

What is a bond fund?

Answer 25

A bond fund is a mutual fund or exchange-traded fund (ETF) that invests in a diversified portfolio of bonds to provide income and capital appreciation.

Question 26

What is the relationship between bond prices and interest rates?

Answer 26

Bond prices and interest rates have an inverse relationship, meaning that when interest rates rise, bond prices fall, and vice versa.

Question 27

What is a sinking fund provision in a bond agreement?

Answer 27

A sinking fund provision requires the issuer to set aside a portion of its revenues to retire a portion of the bond issue each year, reducing the outstanding principal amount.

Question 28

What is the difference between a fixed-rate bond and a floating-rate bond?

Answer 28

A fixed-rate bond has a set interest rate for the life of the bond, while a floating-rate bond has a variable interest rate that adjusts periodically based on a benchmark rate.

Question 29

What is a bond indenture?

Answer 29

A bond indenture is a legal document that outlines the terms and conditions of a bond issue, including details on interest payments, maturity date, and covenants.

Question 30

What is the role of a trustee in a bond issue?

Answer 30

A trustee is a third party appointed to represent bondholders’ interests, ensuring that the issuer complies with the terms of the bond indenture and protecting bondholders’ rights.

Question 31

What is a convertible bond?

Answer 31

A convertible bond is a hybrid security that can be converted into a predetermined number of common stock shares of the issuing company at certain times during the bond’s life.

Question 32

What is a bond swap?

Answer 32

A bond swap involves selling one bond and using the proceeds to purchase another bond with different characteristics, such as maturity date or credit rating, to achieve specific investment objectives.

Question 33

What is a catastrophe bond?

Answer 33

A catastrophe bond is a high-yield bond issued by an insurance company to transfer the risk of natural disasters, such as hurricanes or earthquakes, to investors in exchange for a higher interest rate.