SS 16. Fixed Income Analysis of Risk

Question 1

In a securitization, the seller of the pool of securitized assets is the:

Answer 1

Depositor

Question 2

The lower and upper PSA prepayment assumptions are called the:

Answer 2

Initial PAC collar

Question 3

PAC stands for:

Answer 3

planned amortization class

Question 4

When interest rates rise, the duration (increases/decreases)

Answer 4

Decreases

Question 5

Proceeds for repaying securitized bonds come from the:

Answer 5

cash flows of the underlying financial assets.

Question 6

Which type of bond is preferred by investors in a falling interest rate environment?

Answer 6

A floored floating-rate note

Question 7

A bond that makes coupon payments in one currency and pays the par value at maturity in another currency is called:

Answer 7

A dual currency bond

Question 8

Bonds with a higher duration:

Are _____ dated

Have a _____ coupon

Have a _____ yield

Answer 8

Are longer dated

Have a lower coupon

Have a lower yield

Question 9

What are the Four Cs of credit analysis?

Answer 9

Capacity

Collateral

Covenants

Character

Question 10

A putable bond exhibits (higher/lower) convexity than a normal option-free bond

Answer 10

Higher

Question 11

Approximate percentage price change of a bond =

Answer 11

(-)(duration)(change in yield)

Question 12

All non-callable bonds exhibit ______ convexity

Answer 12

Positive

Question 13

PSA stands for:

Answer 13

Public Securities Association

Question 14

‘The risk that an issuers creditworthiness may deteriorate’ defines:

Answer 14

Credit migration risk or downgrade risk

Question 15

Free cash flow =

Answer 15

Cash flow from operations - capital expenditures

Question 16

Principal payments associated with credit card receivable-backed securities are:

Answer 16

distributed to investors after the lockout period.

Question 17

CMO stands for:

Answer 17

Collateralized mortgage obligation

Question 18

A yield spread over a government

bond is also known as a:

Answer 18

G-spread

Question 19

What is the risk to senior tranche investors in a collateralized debt obligation (CDO)?

Answer 19

In default, the manager will not earn a return sufficient to payoff investors.

Question 20

A negative duration gap means the investment horizon is ______ than the Macaulay duration

Answer 20

Greater

Question 21

If interest rates are low, the convexity of a callable bond will be:

Answer 21

Negative

Convexity of callable bonds will be negative at low yields and positive at high yields.

Question 22

A synthetic collateralized debt obligation is a CDO backed by a portfolio of:

Answer 22

Credit Default Swaps

Question 23

What is the formula used to calculate the expected loss on a corporate bond?

Answer 23

Default risk * (1 - recovery rate)

Question 24

Modified/Effective duration formula:

Answer 24

(price when bond yield drops - price when bond yield rises)
/
2 * bond price * change in yield