fixe Income indexes

Question 1

methods used to match underlying market index

Answer 1

pure indexing

Question 2

pure indexing

Answer 2

investor aims to replicate an existing marke Index

Question 3

flu replication approach

Answer 3

purchasing all securities within an index

Question 4

enhance indexing strategy

Answer 4

investor purchases fewer securities than the full set of index constituents but matches the primary risk factors

aim to match index performance under different market scenarios more efficiently

Question 5

active management

Answer 5

taking positions in primary risk factors that deviate from those of the index

Question 6

difficulties in track¡king fixed income indexes

Answer 6

size and breath

wide array of fixed income securities

unique issuance and trading patterns of bonds vs other securities

–effect of these patterns on index composition and co striation, pricing, and valuation

Question 7

are fixed income markets larger than equity markets?

Answer 7

yes, much more

Question 8

equity securities trade usually on market exchanges or OTC?

Answer 8

market exchanges

Question 9

fixed income securities trade usually on market exchanges or OTC?

Answer 9

OTC

Question 10

are fixed income instruments more liquid than equity securities?

Answer 10

nah, more illiquid

Question 11

matrix pricing

Answer 11

used for fixed-income instruments that are not actively traded and therefore do not have an observable price

uses observable liquid benchmark yields such as treasuries of similar maturity and duration as well as the benchmark spread of bonds with comparable times to maturity, credit quality dn sector or security type

Question 12

why do fixed income indexes change frequently?

Answer 12

as a result of both new debt issuance

the maturity of outstanding books

Question 13

rebalancing bond indexes happens at which rate?

what does this mean for managers trying to do pure indexing?

Answer 13

monthly

manager sincere higher transaction costs

Question 14

the primary risk factors present in a fixed income index that managers try to obtain with diversification

Answer 14

portfolio modified adjusted duration

key rate duration

percent in sector and quality

sector and quality spread duration contribution

sector/coupon/maturity cell weights

issuer exposure

Question 15

portfolio modified adjusted duration

Answer 15

a formula that expresses the measurable change in the value of a security in response to a change in interest rates

follows the concept that interest rates and bond prices move in opposite directions

This formula is used to determine the effect that a 100-basis-point (1%) change in interest rates will have on the price of a bond

Duration/(1 + YTM/n)

gauges the index sensitivity to parallel yield curve shifts

Question 16

percent in sector and quality

Answer 16

index yield is most effectively matched by targeting the same percentage weight across fixed income sectors and credit quality

we assume maturity parameters have been met

Question 17

sector and quality spread duration contribution

Answer 17

The credit spread is the difference between the yield of a security and the yield of a benchmark rate

Spread duration contribution equals the spread duration of a security or market segment multiplied by the size of the allocation to it

Question 18

spread duration

Answer 18

the change in non treasury security’s price given a widening or narrowing of the spread compared with the benchmark

Question 19

why should a manager seek to match the sector, coupon, and maturity weights of callable bonds by sector?

Answer 19

to offset the effects of negative convexity

Question 20

issuer exposure

Answer 20

concentration of issuers within a portfolio exposes the asset manager to issuer specific event risk

manager should therefore seek to match the portfolio duration effect from holdings in each issuer