Fixed Income as an asset class provides: - correct answer - Diversification
- Regular Cash Flows
- Potential Inflation Hedge
Total Return Based Mandates Include - correct answer - Pure Indexing
- Enhanced Indexing
- Active Management
What is DTS? - correct answer A measure used to adjust spread duration to account for the fact that
spread changes are larger when spread themselves are larger.
What are some key facts about convexity? - correct answer - Convexity is valuable to the bondholder
- Convexity makes bonds more expensive
- Convexity is related to the dispersion of cash flows
- Convexity leads to outperformance if yields shift in parallel manner
- Convexity increases structural risk, the risk that yields do not shift in parallel manner
What are low risk bonds likely to be driven by compared to risker bonds? - correct answer They are
likely to be driven by changes in the yield curve, risker bonds are likely to be more driven by changes in
spread
, Issues leading to illiquidity in the fixed income market include: - correct answer - Very large number
of bond issues
- Thinly traded
- Bond issues can be quite small and have unique characteristics
- Bonds trade OTC which increases the search costs to find the counterparty to transact
- Difficult to find pricing data
What is expected return composed of? - correct answer - Coupon Income
- Rolldown Return
- G/L due to yield change
- G/L due to spread change
- G/L due to currency
What role does leverage play in fixed income investing and what are its implications? - correct answer
- Can enhance portfolio returns as long leveraged return is greater than the borrowing rate
- Is attractive in periods of low interest rates
- Increases sensitivity to interest rate risk
- If interest rates rise than the value of leveraged portfolio decreases because the collateral will
decrease, and this can induce lenders to demand repayment
What are some methods for introducing leverage to the portfolio? - correct answer - Repos: are an
explicit way to borrow funds to be used as leverage
- Futures contracts: require a small initial margin deposit
- Swap Agreements
What are the different types of liabilities (I,II,III,IIII)? - correct answer - Type I: strait bonds and can be
modeled via mac/mod dur
- Type II: callable/putable bonds
- Type III: FRN
- Type IIII: DB liabilities
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