FI R11

Question 1

Role of fixed income in portfolios

Answer 1

Provides diversification for low correlation with equities

Regular Cash Flow

Floating and inflation-indexed bonds provide forms of inflation protection

Question 2

Types of liability-based mandates

Total return fixed income strategies

Answer 2

Cash Flow Matching - matches coupons and par amounts with liabilities amounts on specific dates

Duration matching - Matches asset and liability durations. Generally allows for more flexibility in asset selection and may be more cost efficient

Horizon matching - cash flow matching for short term liabilities and duration matching for longer term

Contingent immunization - active management on surplus over immunized amount

Total return strategies:
Pure indexing - matches exact holdings of index
Enhanced indexing - allows modest deviations (but matches the duartion to control interest rate risk)
Active Management

Question 3

Describe bond market liquidity and differences among market sub-sectors

Question 4

Describe a model for fixed income returns

Question 5

Describe use of leverage and alternative methods of leverage, risks of leverage in fixed income portfolios

Question 6

Differences in managing fixed income for taxable and tax exempt investors