Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

CFA L3 > Fixed Income > Flashcards

Fixed Income Flashcards

1
Q

Which has higher convexity, bullet or barbell?

A

Barbell

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

What is bull steepener?

A

Short term interest rates will fall by more than long term rates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Bear steepener

A

Long term rates will rise by more than short term rates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Bear flattener

A

Short rates will rise more than long term rates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Bull flattener

A

Long term rates will fall by more than short term rates

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Callable bond is combination of

A

Option free bond and a short call option

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Putable bond combination of

A

Option free bond and long put option

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Define rolling yield

A

Sum of coupon income and roll down return

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Which portfolio has most modified duration?

A

Barbell

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Which has least modified duration?

A

Bullet

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

G spread

A

Bonds ytm (-) interpolated ytm of 2 adjacent maturity on the run government bonds

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Yield spread

A

Bonds ytm minus the ytm of closest on the run government bond

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

I spread

A

Bonds ytm minus maturity of interpolated swap fixed rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Asw spread

A

Bonds fixed coupon minus the maturity interpolated sfr

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Anchoring bias

A

The anchoring bias is the tendency of the mind to give disproportionate weight to the first information it receives on a topic: initial impressions, estimates, or data, anchor subsequent thoughts and judgments.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Asset liability management strategy

A

Asset–liability management strategies consider both assets and liabilities in the portfolio decision-making process.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What’s yield curve inversion

A

Yield curve inversion is an extreme version of flattening in which the spread between long-term and short-term yields-to-maturity falls below zero

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

What’s immunization

A

Immunization is the process of structuring and managing a fixed-income portfolio to minimize the variance in the realized rate of return and to lock in the cash flow yield (internal rate of return) on the portfolio

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Rules of immunizing a single liability

A
  1. Initial portfolio market value (PVA) equals (or exceeds) PVL. (There are exceptions to this for more complex situations where the initial portfolio IRR differs from the initial discount rate of the liability.)
  2. Portfolio Macaulay duration matches the due date of the liability (D = DL).
  3. Minimize portfolio convexity (to minimize dispersion of asset cash flows around the liability and reduce risk to curve reshaping).
  4. Regularly rebalance the portfolio to maintain the duration match as time and yields change. (But also consider the tradeoff between higher transaction costs from morefrequent rebalancing versus the risk of allowing durations to drift apart.)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Rules of immunizing multiple liabilities

A
  1. Initial portfolio market value (PVA) equals (or exceeds) PVL. (There are exceptions to this for some situations where the initial portfolio IRR differs from the initial discount rate of the liability.)
  2. Portfolio and liability basis point values match (BPV = BPVL)
  3. Asset dispersion of cash flows and convexity exceed those of the liabilities. (But not by too much, The dispersion, as measured by convexity, of the immunizing portfolio should be as low as possible subject to being greater than or equal to the dispersion of the outflow portfolio. This will minimize the effect of non-parallel shifts in the yield curve.)
  4. Regularly rebalance the portfolio to maintain the BPV match of A and L as time and yields change.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Covered bonds

A

Senior debt obligations of a commercial Bank backed by a pool of mortgages or loans made by the bank.

The key feature of a covered bond is that it provides dual recourse: investors have a claim on both the issuer and the underlying pool of assets if the issuer defaults.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

If CDS spread is above standardized fixed coupon

A

Protection buyer needs to make upfront premium payment to the protection seller at initiation of contract

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Structural models

A

Structural credit models
use market-based variables to estimate the market value of an issuer’s assets and the volatility of asset value. The likelihood of default is defined as the probability of the asset value falling below that of liabilities.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Reduced form models

A

Look for relationship between macroeconomic conditions and individual characteristics of a borrower such as financial ratios to infer default intensity for a bond issuer

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Smart beta
Identifying relatively simple definable rules that can be followed to add value
26
Contingent immunization
It is a hybrid active/passive strategy that requires a significant surplus
27
Asset driven investing
Takes the assets as a given and manages or adjusts the liabilities in relation to those assets
28
Type 1, 2, 3 and 4 liabilities (these are the type of LDI strategies)
- known future amounts and payout dates - known future amounts but uncertain payout dates - uncertain future amounts but known payout dates - unknown everything
29
Repurchase agreement (repos)
An explicit way to borrow funds that could be used for leveraging. A securities owner sells a security for cash and simultaneously agrees to buy it back at a specified future date
30
credit spread volatility and interest rate volatility
more in investmnent grade bonds
31
CDS long short strategy
Buying protection on issuers where spreads are expected to widen relative to other issuers and shorting vice versa
32
positive key rate duration significance
manager expects interest rates to rise
33
Random interesting fact
If the yield curve is upward-sloping, buying bonds with a maturity beyond the investment horizon offers a total return (higher coupon plus price appreciation) greater than the purchase of a bond with maturity matching the investment horizon if the curve remains static.
34
Bottom up credit strategies for credit strategies
Bottom-up credit strategies include the use of financial ratio analysis, reduced form credit models (such as the Z-score model), and structural credit models, including Bloomberg’s DRSK mode
35
Fixed income is a good diversifier
has low correlation with equity
36
OAS spread
OAS is like the extra reward (in terms of higher interest or yield) you get from a bond compared to a risk-free bond (like a government bond) after accounting for the uncertainty caused by options built into the bond.
37
Duration neutral flattening strategy
A duration-neutral flattening trade involves taking opposite positions in short-term and long-term bonds such that the net duration exposure is zero, but the portfolio is positioned to benefit from changes in the slope of the yield curve
38
bottom up approach
The bottom-up approach involves selecting the individual bonds or issuers that the investor views as having the best relative value from among a set of bonds or issuers with similar characteristics (usually the same industry and often the same country of domicile).
39
Top down approach
The top-down approach involves the investor formulating a view on major macroeconomic trends, such as economic growth and corporate default rates, and then selecting the bonds that the investor expects to perform best in a given environment.
40
youve got this buddy
I have complete trust on you
41
In LDI, certain risks like longevity and inflation risks are not included
42
credit cycle charachteristics - Early expansion (recovery)
Economic Activity - Stable Corporate Profitability - Rising Corporate Leverage - Falling Corporate Defaults - Peak Credit Spread Level - Stable Credit Spread Slope -Stable for high grade, inverted for low ratings
43
CCC - Late expansion
Economic Activity - Accelerating Corporate Profitability - Peak Corporate Leverage - Falling Corporate Defaults - Falling Credit Spread Level - Stable Credit Spread Slope -Steeper for both higher and lower ratings
44
CCC - Peak
Economic Activity - Decelerating Corporate Profitability - Stable Corporate Leverage - Rising Corporate Defaults - Stable Credit Spread Level - Rising Credit Spread Slope - Steeper for both higher and lower ratings
45
CCC - Contraction
Economic Activity - Declining Corporate Profitability - Falling Corporate Leverage - Peak Corporate Defaults - Rising Credit Spread Level - Peak Credit Spread Slope Flatter for high grade, inverted for low ratings
46
Reduced form models
Reduced form models solve for default intensity, or the POD over a specific time period, using observable company-specific variables such as financial ratios and recovery assumptions as well as macroeconomic variables, including economic growth and market volatility measures.
47
what is a payer option on CDS index?
Option buyer pays premium for right to buy protection (“pay” coupons) on CDS index contract at a future date
48
what is a receiver option on CDS index?
Option buyer pays premium for right to sell protection (“receive” coupons) on CDS index contract at a future date
49
Role of fixed income securities in a portfolio
- Diversification benefits - Benefits of regular cash flows - Inflation hedging potential
50
Portfolio dispersion
Portfolio dispersion tells you how spread out those payment times are compared to the average waiting time (called duration).
51
Embedded call option reaction to volatility
Will increase as volatility rises, reducing the value of the bond versus a similar option-free bond, thus causing nominal spreads to increase.
52
MBS bond and convexity
An MBS is a bond with an embedded short call option. A short call option has negative convexity. Adding more MBS to a portfolio will decrease the convexity of the portfolio and thus result in a smaller (not greater) benefit from a large change in interest rates.
53
what is a receiver swaption?
The plan buys an option to enter into a receive-fixed swap. If floating rate ends up below fixed rate
54
What are the different risks in liability driven investing while structuring liability
Here are brief explanations for each risk in liability-driven investing (LDI): 1. Model Risk – This arises when the financial models used to estimate liabilities and investment returns are flawed or make incorrect assumptions, leading to inaccurate risk management and investment decisions. In LDI, reliance on imperfect models can result in underfunding or excessive risk exposure. 2. Spread Risk – Spread risk refers to the possibility that the yield spread between corporate bonds and risk-free government bonds changes, affecting the valuation of assets. If credit spreads widen, the value of corporate bonds in an LDI portfolio may decline, impacting funding levels. 3. Counterparty Credit Risk – This is the risk that a counterparty in a financial contract, such as a swap agreement, defaults on its obligations. In LDI, institutions often use derivatives to hedge liabilities, so counterparty failure could lead to unexpected financial losses. 4. Asset Liquidity Risk – This is the risk that assets cannot be sold quickly at a fair price without causing a significant market impact. In LDI, illiquid assets can create challenges when adjusting portfolios to meet changing liabilities or funding needs.
55
Cash flow matching strategy
Cash flow matching involves aligning the cash flows from an investment portfolio to meet specific liabilities. This strategy ensures that the timing and amount of cash flows from investments perfectly offset the liability obligations.
56
Duration matching strategy
Duration matching aligns the duration of an investment portfolio with the duration of the liabilities. This minimizes the impact of interest rate changes on the portfolio’s ability to meet liabilities.
57
advantages and disadvantages of cash flow matching
Advantages - Perfect Liability Coverage: Eliminates reinvestment risk since cash flows directly match liabilities. - Simplicity: Once set, minimal adjustments are needed unless liabilities change. Disadvantages - high cost - constrained universe
58
advantages and disadvantages of duration matching strategy
- hedging against interest rate changes - flexible Disadvantages - Imperfect liability coverage - Complexity
59
why is there convexity?
A bond has greater convexity when its cash flows (coupons) are more widely dispersed around the duration point. A zero-coupon bond will have only one cash flow (i.e., at the time of maturity); therefore its dispersion around the duration point is the smallest.
60
Difference between asw and I spread?
I-spread: Compares the bond’s yield to the swap rate directly, useful for valuation and assessing credit risk relative to swaps. ASW spread: Involves cash flows and reflects the bond’s total return relative to the swap, used primarily in trading and hedging.
61
Give me an example of ADL
With ADL, the asset side of the balance sheet results from a company’s under lying businesses, and the debt manager seeks a liability structure to reduce interest rate risk. One example might be a leasing company with short-term contracts that chooses to finance itself with short-term debt. The company is aiming to match the maturities of its assets and liabilities to minimize risk.
62
Liability based mandates
- Cash flow matching - Duration matching - Contingent Immunization - Derivatives overlay
63
Total return mandates
- Pure indexing - Enhanced indexing - Active management
64
Key considerations for fixed-income analytical tools
- Accuracy of model inputs and assumptions - alignment between model outputs and fixed-income manager objectives.
65

CFA L3 (8 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions