FIXED INCOME Flashcards
Which yield curve is least likely to consist of observed yields in the market?
Par Bond Yield
Based on theoretical yields that would cause bonds at each maturity to be priced at par
A corporate bond is quoted at a spread of +235 basis points over an interpolated 12-year U.S. Treasury bond yield. This spread is:
G-Spread
Based on government bond; I-Spreads take swaps into account.
Bond X is a noncallable corporate bond maturing in ten years. Bond Y is also a corporate bond maturing in ten years, but Bond Y is callable at any time beginning three years from now. Both bonds carry a credit rating of AA. Based on this information:
Bond Y will have a higher zero-volatility spread than Bond X.
Economic benefits of securitization least likely include:
reducing excessive lending by banks.
Banks that securitize loans they hold as assets receive cash with which they can make additional loans. The primary benefits of securitization to the economy include reducing firms’ funding costs and increasing the liquidity of the financial assets that are securitized. (LOS 53.a)
In a securitization, the issuer of asset-backed securities is best described as:
an SPE, they can only be issued by an SPE apparently
The primary motivation for issuing collateralized mortgage obligations (CMOs) is to reduce:
funding costs
This does not reduce risk, because that was the job of the pool. CMO reduces funding costs by creating tranches that appeal to different levels of investors.
The largest component of returns for a 7-year zero-coupon bond yielding 8% and held to maturity is:
interest income
The increase in value of a zero-coupon bond over its life is interest income. A zero-coupon bond has no reinvestment risk over its life. A bond held to maturity has no capital gain or loss. (LOS 54.a)
Which of the following measures is lowest for a callable bond?
effective duration
takes into account embedded options, with benchmark yields which account for uncertainty of cash flows. Less is better here, because it is assumed to be more accurate in this case.
Other things equal, Macaulay duration is less when yield is ______ and when maturity is ________. The bond with the highest yield and shortest maturity must have the lowest Macaulay duration.
Higher, Short
LOS 54.e
An investor with an investment horizon of six years buys a bond with a modified duration of 6.0. This investment has _____ duration gap.
a positive duration gap.
duration gap is calculated with MacDur, not ModDur (which is calculated MacDur / (1 + YTM)). There for this bond has MacDur greater than 6 years, so there is a positive gap.
Remember: Duration Gap = MacDur - Investment Horizon
