Fixed Income

Question 1

What is the tenor?

Answer 1

Time remaining until maturity

Question 2

What is a surety bond?

Answer 2

A bond guaranteed by a third party

Question 3

Compare Eurobonds, foreign bonds, global bonds

Answer 3

Euro: Outside jurisdictions
Foreign: Issued by foreign entity in local currency
Global: Issued in both euro market and domestic market

Question 4

What is an original issue tax discount provision?

Answer 4

Able to include prorated amount of discount in TI every year

Question 5

What happens to a capital indexed bond with a CPI increase?

Answer 5

Principal amount increases by % amount

Question 6

What are covered bonds?

Answer 6

Backed by asset pool that is updated when non-performing

Question 7

How are new issue sovereign bonds offered?

Answer 7

Auction

Question 8

What is a shelf registration?

Answer 8

Sell more bonds to public without a new offering circular

Question 9

In regard to bonds what is the inverse effect?

Answer 9

Bond price inversely related to market discount rate

Question 10

In regard to bonds what is the convexity effect?

Answer 10

% is greater when market discount goes down than when it goes up

Question 11

In regard to bonds what is the coupon effect?

Answer 11

Lower coupon bond has higher % change with same change in market discount

Question 12

In regard to bonds what is the maturity effect?

Answer 12

Longer term bond has greater % change with same change in market discount

Question 13

What needs to happen when calculating bond with a variable spot rate?

Answer 13

Do full PV calc on each year using spot rate as discount rate

Question 14

What is a par curve?

Answer 14

A sequence of YTMs such that each bond is at par

Question 15

What is a spot curve?

Answer 15

A yield curve constructed from a sequence of YTMs on zero-coupons

Question 16

What is a g-spread?

Answer 16

Spread on a government bond. G for Gov

Question 17

What is an I spread?

Answer 17

Spread on interest rate swap rate. I for interest swap

Question 18

What is a z- spread?

Answer 18

Spread on zero volatility. Z for zero-volatility

Question 19

What is the OAS?

Answer 19

Option adjusted spread is Z-spread minus value of option

Question 20

In securitization the SPE is responsible for:

Answer 20

Issuing the security

Question 21

What does time tranching provide for investors?

Answer 21

The ability to choose between extension and contraction risk

Question 22

What is contraction risk?

Answer 22

Interest declines: prepayments increase contracting the loan

Question 23

What is extension risk?

Answer 23

Interest rises: prepayments decrease, extending the loan

Question 24

What are credit enhancements for a non-agency RMBS?

Answer 24

Subordinated debt
Reserve accounts
Overcollateralization

Question 25

What are the most common CMO tranches?

Answer 25

Sequential pay:
PAC:
Support:
Floating-rate:

Question 26

What is the main difference between RMBS and CMBS?

Answer 26

CMBS can have call protection.

Question 27

What does duration measure?

Answer 27

Sensitivity of a bond’s full price to changes in YTM

Question 28

What is yield duration?

Answer 28

Sensitivity of a bond to its own YTM

Question 29

What is curve duration?

Answer 29

Sensitivity of the bond price to a benchmark yield curve

Question 30

What is the Macaulay Duration?

Answer 30

Weighted average of time to payments, with weights being each share of the full price attributable to each payment

Question 31

What is a horizon yield?

Answer 31

IRR between total return and purchase price

Question 32

What is the typical debt subordination?

Answer 32

Mortgage/Lien/
Secured Senior
Senior unsecured
Senior subordinated
Junior/

Question 33

What is notching?

Answer 33

Moving ratings up or down from issuer rating after other factors considered
Higher the rating, the smaller the notching adjustment

Question 34

What is structural subordination?

Answer 34

Debt at parent and child company