2019 CFA level 3 qbank reading 22 introduction to fixed income portfolio management questions

Question #1 of 13 Credit risk is a major source of concern for repo agreements Protection against borrower default can be mitigated by the safety of the underlying security that is used as collateral and the "haircut" that requires additional capital over the principal borrowed amount Which of the following statements regarding the hair cut is most accurate? A) The size of the haircut increases as the volatility of the underlying asset increases en tre C) Average credit spreads determine the haircut, not volatility .in B) The size of the haircut is not related to the underlying asset’s volatility bo ok c Question #2 of 13 Tara Harris is the lead portfolio manager for the Quantas Bond Fund and needs to raise $8,000,000 to meet expected withdrawals this quarter Quantas Bond Fund's investors primarily consist of medical professionals that are taxed at the top tax bracket in the U.S Harris is considering selling two bonds this quarter to meet the expected redemptions .o m Selected data for the two bonds: Bank Bond Current Market Value $8,000,000 $8,000,000 Capital gain/loss $200,000 -$400,000 Coupon Rate 3.50% 4.00% Maturity 12 years 12 years Investment committee analysis Undervalued Overvalued w w w Telecomm Bond Top U.S Income tax rate 39% Capital Gains tax rate 15% Based on the above information, the optimal tax loss harvesting strategy is: A) Sell $6,000,000 of the Telecomm Bond and $2,000,000 of the Bank Bond B) Sell $8,000,000 of the Telecomm Bond C) Sell $8,000,000 of the Bank Bond Question #3 of 13 Jake Tyler is new to investing and has learned that correlation among assets is important in determining diversi cation bene ts However, Jake also begins to wonder if asset class volatility is also important in understanding portfolio risk A) Bonds are generally less volatile than equities Question #4 of 13 bo ok c C) Bonds have the same volatility as equities en tre B) Bonds are generally more volatile than equities .in The most correct statement regarding bond volatility by Tyler is: The bond type that provides the best in ation hedge and protects against in ation for both the m coupon payments and the principal received at maturity are: o A) xed – coupon bonds w w B) in ation linked bonds w C) oating-coupon bonds Question #5 of 13 Which of the following are common xed-income derivatives that are traded on exchanges? A) Bond futures and options on futures B) Interest rate swaps and bond futures C) Interest rate swaps and credit default swaps Question #6 of 13 Which of the following statements listing the typical liquidity of xed income sub-sectors from highest to lowest is most accurate? A) Sovereigns, corporate bonds with shorter maturity, corporate bonds with longer maturity B) Corporate bonds with shorter maturity, corporate bonds with longer maturity, Sovereigns C) Corporate bonds with shorter maturity, Sovereigns, corporate bonds with longer en tre in maturity Question #7 of 13 bo ok c Which of the following liability-based strategies provides the lowest expected return and requires the lowest risk and complexity in its design? A) Horizon matching w w o C) Cash ow matching m B) Contingent immunization w Question #8 of 13 Tami Taylor works for a large multinational corporation based in Texas that recently purchased Euro 5,000,000 of Greek bonds from a large shipping conglomerate Taylor has been called to tomorrow's Board meeting to discuss the investment Selected Data on the Greek Bond Portfolio: Euro 5.00 Average bond coupon payment (per Euro 100 par) Euro 5.50 Coupon frequency Annual Current average bond price Euro 94.12 in Notional principal of the shipping conglomerate bonds (in millions) Euro 94.74 Average bond convexity 0.25 bo ok c Average bond modi ed duration en tre Expected average bond price in one year (assuming unchanged yield curve) 5.00 Expected average yield and yield spread change 0.50% Expected credit loss 0.20% m Expected currency losses (Euro depreciation versus $) 0.25% Assuming no reinvestment income the calculated expected return of the Euro bond portfolio w w A) 4.25% .o next year is closest to: B) 3.75% w C) 3.55% Question #9 of 13 Leslie currently has 40% of her overall portfolio invested in a diversi ed xed-coupon bond portfolio with an average duration of years The remainder of her portfolio is evenly spread across both large and small cap stocks that are balanced globally across many sectors and countries, primarily through diversi ed ETFs Leslie primarily wants to reduce the overall risk of her portfolio and also keep up with in ation until she retires in 16 years Leslie is a professional photographer and has a limited understanding of the nancial markets During a recent meeting with her nancial advisor, Leslie was informed of some changes she should consider making to her portfolio Her advisor identi ed that the correlation coe cient of Leslie's current bond portfolio with her equity holdings is - 05 Also, the correlation coe cient between her equity holdings and an ETF consisting of in ation-linked bonds is 23 en tre and the proposed in ation-linked ETF is relatively high at 55 .in Finally, the approximate correlation coe cient between Leslie's current xed income portfolio Her advisor recommends that Leslie should diversify her current xed-coupon bond holdings by adding in ation- linked bonds to her portfolio The following action Leslie would take considering her primary goal is to reduce her portfolio bo ok c risk and also keep up with in ation until she retires is most likely: A) ignore the recommendation since her portfolio is already properly diversi ed B) reduce her current bond holdings by 25% and purchase small cap emerging market m stocks with the proceeds w w o C) rebalance 25% of her xed Income holdings into in ation-linked bonds w Question #10 of 13 Jim is a new associate in operations at a mid-sized xed income consulting rm Jim is trying to learn the bene ts of cash ow matching versus duration matching and reaches out to some of his friends on Wall Street for assistance in understanding the key features of liability-based mandates Jim's friend Je tells Jim that the key features of cash ow matching include: making no yield curve assumptions, matching the bond portfolio's cash ows to existing liabilities and frequent rebalancing is not required Jim also called his friend Ted who tells Jim the bene ts of cash ow matching include: accommodating multiple yield curve assumptions, frequent rebalancing and the ability to in handle increased complexity, so many advanced traders like this strategy overall A) Ted’s statement B) Neither Je nor Ted statements are correct m Question #11 of 13 bo ok c C) Je ’s statement en tre Which of Jim's friend's explanation of cash ow matching is most accurate? Amanda Smith is a new member of a large pension fund and her team is focused on xed o income investing Amanda has been researching in ation-linked bond volatility and how this w w volatility compares to the volatility found with conventional bonds and equities After concluding her analysis, Amanda is most likely to nd: w A) In ation-linked bonds generally are more volatile than conventional bonds but less volatile than equities B) In ation-linked bonds have the same volatility as conventional bonds but less volatility than equities C) In ation-linked bonds generally have lower return volatility than conventional bonds and equities Question #12 of 13 The following is selected data on Omega Fixed-Income Mutual Fund Current average bond price $105.00 Average Modi ed duration 8.50 Average Annual Coupon $1.50 PV of assets (millions) $120.00 Value of borrowed funds (millions) $30.26 Borrowing rate 1.75% Return on Invested Funds 4.25% in Value of Portfolio's equity (millions) $62.25 en tre The leveraged portfolio return for the Omega Fixed Income Mutual Fund is closest to: A) 9.43% C) 5.47% m Question #13 of 13 bo ok c B) 5.75% .o Je Timura is currently the lead portfolio manager for an International xed income portfolio Timura has an upcoming meeting on December 20th with his largest client, Tucker Powell, to w w discuss the rm's outlook for the upcoming year At the meeting, Timura tells Powell that he expects the yield curve to continue to remain unchanged for the next 16 months Assuming the w forecast is correct, which of the following statements is most likely correct? A) The current yield (yield income) of an international global portfolio is an incomplete measure of the portfolio’s expected return B) Since Timura is expecting a stable yield curve, yield income is a good estimate of the bond portfolio’s expected return for next year C) The best estimate of the bond’s return is the portfolio’s yield income plus its rolldown return minus its expected credit losses  ... reinvestment income the calculated expected return of the Euro bond portfolio w w A) 4.25% .o next year is closest to: B) 3. 75% w C) 3. 55% Question #9 of 13 Leslie currently has 40% of her overall portfolio. .. Mutual Fund is closest to: A) 9. 43% C) 5.47% m Question # 13 of 13 bo ok c B) 5.75% .o Je Timura is currently the lead portfolio manager for an International xed income portfolio Timura has an... funds (millions) $30 .26 Borrowing rate 1.75% Return on Invested Funds 4.25% in Value of Portfolio' s equity (millions) $62.25 en tre The leveraged portfolio return for the Omega Fixed Income Mutual