Fixed Income

Question 1

Which has higher convexity, bullet or barbell?

Answer 1

Barbell

Question 2

What is bull steepener?

Answer 2

Short term interest rates will fall by more than long term rates

Question 3

Bear steepener

Answer 3

Long term rates will rise by more than short term rates

Question 4

Bear flattener

Answer 4

Short rates will rise more than long term rates

Question 5

Bull flattener

Answer 5

Long term rates will fall by more than short term rates

Question 6

Callable bond is combination of

Answer 6

Option free bond and a short call option

Question 7

Putable bond combination of

Answer 7

Option free bond and long put option

Question 8

Define rolling yield

Answer 8

Sum of coupon income and roll down return

Question 9

Which portfolio has most modified duration?

Answer 9

Barbell

Question 10

Which has least modified duration?

Answer 10

Bullet

Question 11

G spread

Answer 11

Bonds ytm (-) interpolated ytm of 2 adjacent maturity on the run government bonds

Question 12

Yield spread

Answer 12

Bonds ytm minus the ytm of closest on the run government bond

Question 13

I spread

Answer 13

Bonds ytm minus maturity of interpolated swap fixed rate

Question 14

Asw spread

Answer 14

Bonds fixed coupon minus the maturity interpolated sfr

Question 15

Anchoring bias

Answer 15

The anchoring bias is the tendency of the mind to give disproportionate weight to the first information it receives on a topic: initial impressions, estimates, or data, anchor subsequent thoughts and judgments.

Question 16

Asset liability management strategy

Answer 16

Asset–liability management strategies consider both assets and liabilities in the portfolio decision-making process.

Question 17

What’s yield curve inversion

Answer 17

Yield curve inversion is an extreme version of flattening in which the spread between long-term and short-term yields-to-maturity falls below zero

Question 18

What’s immunization

Answer 18

Immunization is the process of structuring and managing a fixed-income portfolio to minimize the variance in the realized rate of return and to lock in the cash flow yield (internal rate of return) on the portfolio

Question 19

Rules of immunizing a single liability

Answer 19

1. Initial portfolio market value (PVA) equals (or exceeds) PVL. (There are exceptions to this for more complex situations where the initial portfolio IRR differs from the initial discount rate of the liability.)
2. Portfolio Macaulay duration matches the due date of the liability (D = DL).
3. Minimize portfolio convexity (to minimize dispersion of asset cash flows around the liability and reduce risk to curve reshaping).
4. Regularly rebalance the portfolio to maintain the duration match as time and yields change. (But also consider the tradeoff between higher transaction costs from morefrequent rebalancing versus the risk of allowing durations to drift apart.)

Question 20

Rules of immunizing multiple liabilities

Answer 20

1. Initial portfolio market value (PVA) equals (or exceeds) PVL. (There are exceptions to this for some situations where the initial portfolio IRR differs from the initial discount rate of the liability.)
2. Portfolio and liability basis point values match (BPV = BPVL)
3. Asset dispersion of cash flows and convexity exceed those of the liabilities. (But not by too much, in order to minimize structural risk exposure to curve reshaping).
4. Regularly rebalance the portfolio to maintain the BPV match of A and L as time and yields change.

Question 21

Covered bonds

Answer 21

Senior debt obligations of a commercial Bank backed by a pool of mortgages or loans made by the bank

Question 22

If fair CDS spread is above standardized fixed coupon

Answer 22

Protection buyer needs to make upfront premium payment to the protection seller at initiation of contract

Question 23

Structural models

Answer 23

Assume POD to be driven by the likelihood of the future value of the assets of a borrower falling below the threshold that would trigger default

Question 24

Reduced form models

Answer 24

Look for relationship between macroeconomic conditions and individual characteristics of a borrower such as financial ratios to infer default intensity for a bond issuer

Question 25

Smart beta

Answer 25

Identifying relatively simple definable rules that can be followed to add value

Question 26

Contingent immunization

Answer 26

It is a hybrid active/passive strategy that requires a significant surplus

Question 27

Asset liability management

Answer 27

Means strategies that consider assets in relation to liabilities

Question 28

Asset driven investing

Answer 28

Takes the assets as a given and manages or adjusts the liabilities in relation to those assets

Question 29

Type 1, 2, 3 and 4 liabilities

Answer 29

• known future amounts and payout dates
• known future amounts but uncertain payout dates
• uncertain future amounts but known payout dates
• unknown everything

Question 30

Repurchase agreement (repos)

Answer 30

An explicit way to borrow funds that could be used for leveraging. A securities owner sells a security for cash and simultaneously agrees to buy it back at a specified future date

Question 31

credit spread volatility and interest rate volatility

Answer 31

more in investmnent grade bonds

Question 32

CDS long short strategy

Answer 32

Buying protection on issuers where spreads are expected to widen relative to other issuers and shorting vice versa

Question 33

positive key rate duration significance

Answer 33

manager expects interest rates to rise