Overview

Question 1

investment mandate

Answer 1

+ a set of rules laying out how a pool of assets should be invested
+ include guidelines on priorities, goals, benchmarks, risk, and types of funds to be either chosen or avoided
+ Mutual funds, exchange-traded funds, and other pooled assets always have investment mandates

Question 2

Liability - based mandate

Answer 2

managed to match or cover expected liability payments (future cash outflows) with future projected cash inflows

Question 3

immunization

Answer 3

+ is process
+ structuring and managing FI Bond portfolio
+ minimize the variance in the realized rate of return over the known time horizon

Question 4

cash flow matching

Answer 4

+ is an immunization approach
+ ensure all future liability payouts are matched precisely by cash flows from bonds or FI derivatives

Question 5

Duration matching

Answer 5

+ an immunization approach
+ Based on duration of assets and liabilities
+ the liabilities being matched (the liability portfolio) and the portfolio of assets (the bond portfolio) should be affected similarly by a change in interest rates
+ effectively in parallel shift

Question 6

contingent immunization

Answer 6

+ fund manager switches to a defensive strategy if the portfolio return drops below a predetermined point
+ fund manager uses an active management approach to individually select securities in hopes of outperforming a benchmark

Question 7

pure indexing

Answer 7

replicate a bond index as closely as possible and is sometimes referred to as “full replication.”

Question 8

active return

Answer 8

tracking difference

Question 9

active risk

Answer 9

benchmark tracking risk or tracking error

Question 10

enhanced indexing approach

Answer 10

maintains a close link to the benchmark but seeks to generate some outperformance relative to the benchmark

Question 11

Active management

Answer 11

allows larger risk factor mismatches relative to a benchmark index. These mismatches may cause significant return differences between the active
portfolio and the underlying benchmark

Question 12

Macaulay Duration

Answer 12

weighter average of time to receive bond’s full payment

Question 13

Modified Duration

Answer 13

= Macaulay Duration / (1+r/n)

Question 14

Effective Duration

Answer 14

Delta Price/ Delta Yield curve

Question 15

key rate Duration / Partial Duration

Answer 15

Delta price / Delta yield curve at a specific point / segment

Question 16

empirical duration

Answer 16

interest rate sensitivity determine from market data

Question 17

money duration / Dollar duration

Answer 17

price change in units of currency

Question 18

PVBP

Answer 18

Price value a basis point: change in bond price in a 1bp change in yield

Question 19

convexity

Answer 19

a second order of price change to yield change

Question 20

Effective convexity

Answer 20

like convexity but delta yield replace by Delta curve

Question 21

Bond portfolio duration

Answer 21

sensitivity of Bond portfolio change to change in interest rates

Question 22

Mod Du of bond portfolio

Answer 22

percentage change in MV to change in YTM

Question 23

convexity of a bond portfolio

Answer 23

second order effect of change in yield curve

Question 24

relative value

Answer 24

the technique to rank bond

Question 25

total return receiver

Answer 25

related to TRS, the party receive both CF from underlying index and the appreciation in the index

Question 26

total return payer

Answer 26

responsible for paying the reference obligation CF & return to the receiver

Question 27

method for leveraging FI portfolio

Answer 27

+ future contracts + Swap agreement + reperchase agreement + Security lending

Question 28

total return swap (TRS)

Answer 28

+ an OTC derivative, + allows an institutional investor to transform an asset or liability from one asset category to another— for instance, from variable-rate cash flows referencing the market reference rate to the total return on a particular bond index

Question 29

strategy for manage taxable account:

Answer 29

(1) realize capital gain to offset loss (2) Extend holding period to realize long term (3) Consider differentials in income vs gain tax rate when selecting investment -> trade off

Question 30

flight to quality

Answer 30

buying safer assets, such as government bonds (increasing their prices), and selling riskier assets

Question 31

3 types of total return mandage

Answer 31

(1) pure indexing: active risk, active return = 0. In pratice, active risk = 0, active return <0 because of fee, cost (2) enhanced indexing approach: minor investment risk factor mismatch (3) active management: allow risk factor mismatch -> large active return It is not similar to equity include 6 approachs: (1) pure indexing (2) Closet indexing (3) Factor neutral and diversified stock picking (4) Diversified factor bets (5) Concentrated factor bets (6) concentrated stock picks

Question 32

3 Strategies to use when managing taxable accounts

Answer 32

(1) Realize capital losses to offset gains (2) Extend holding periods to realize long-term, rather than short-term, capital gains. (3) Consider differentials in income versus gain tax rates when selecting investments.

Question 33

portfolio dispersion

Answer 33

the variance of the times to receipt of cash flows with respect to the duration. + bản chất Port. Dispersion khác so với convexity + đo lường biến động của Asset Mac Dur so với Liab Mac Dur

Question 34

Duration times spread

Answer 34

+ This measure give a higher sensitivity when spread themselves are higher + Reflect that HY junk bond with higher spreads -> expected higher spread changes

Question 35

local richness/cheap ness

Answer 35

Biết thêm về khái niệm Local richness/Local cheapness: phát sinh do đường yield curve đa phần chúng ta xây trên lý thuyết v/v dựa trên những điểm yield có thể khảo sát được. Thực tế khi phát sinh, Yield có thể cao hơn/thấp hơn yield curve đã xây

Question 36

Pass-through

Answer 36

Pass-through: relate to can not delay tax. Đối với interest income -> must pass through. Đối với capital gain sẽ có trường hợp pass-through (phải đánh thuế luôn) hoặc not pass-through (có thể delay cho đến khi realize return mới bị đánh thuế)

Question 37

repo and reverse repo

Answer 37

repo đứng trên góc độ borrower, còn reverse repo đứng trên gốc độ của lender

Question 38

Bilaterals & Triparties

Answer 38

Bilaterals liên quan đến 2 parties làm việc trực tiếp với nhau. Còn triparties liên quan đến bên thứ 3 (thường là Bank) có vai trò quản lý TSBĐ

Question 38

Bilaterals & Triparties

Answer 38

Bilaterals liên quan đến 2 parties làm việc trực tiếp với nhau. Còn triparties liên quan đến bên thứ 3 (thường là Bank) có vai trò quản lý TSBĐ

Question 39

cash driven & securities driven

Answer 39

đề cập đến động lực của repo. Với cash driven, general collaterals là OK. Đối với securities driven, cần có specific collaterals

Question 40

Holding period vs Maccaulay Duration đối với price risk và reinvestment risk

Answer 40

nếu Holding period > Maccaulay Duration -> Price risk lớn hơn

Question 41

Pros & Cons của phương pháp Aggregate/ Average khi tính Duration, convexity của Portfolio

Answer 41

Có 2 cách để tính được DUration và Convexity của Portfolio. (1) là aggregate và (2) là average các tài sản có trong danh mục. Trong đó (1) là chuẩn nhất, còn (2) thì trong 1 số trường hợp bị overestimate.