Fixed Income Analysis Flashcards
7 cards from real CFA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Fixed Income Analysis flashcards as text
Which bond sector typically exhibits negative convexity at low yield levels?
Answer: Mortgage-backed securities
MBS exhibit negative convexity because homeowners prepay mortgages when rates fall, causing the MBS price to underperform a straight bond.
The forward rate f(2,1) represents the:
Answer: 1-year rate two years from today
f(2,1) denotes the 1-year forward rate beginning 2 years from today, derived from the current spot rate curve.
A portfolio manager wants to eliminate interest rate risk on a bond position. The most effective hedge using futures would be to:
Answer: Sell futures with a hedge ratio based on the portfolio's dollar duration
The optimal futures hedge ratio accounts for the dollar duration of both the portfolio and the futures contract.
When a yield curve flattens, a portfolio with a barbell structure will typically outperform a bullet portfolio because:
Answer: The barbell has higher convexity, benefiting from any yield change
Barbell portfolios have higher convexity than bullet portfolios with the same duration, providing outperformance regardless of the direction of yield curve shifts.
In the context of credit analysis, a rising debt/EBITDA ratio combined with declining interest coverage most likely signals:
Answer: Deteriorating ability to service debt, increasing default risk
Rising debt/EBITDA with falling interest coverage indicates increasing leverage and reduced capacity to service debt, both negative credit signals.
Which of the following features would most increase a bond's duration relative to an otherwise identical plain-vanilla bond?
Answer: Embedded put option exercisable by the investor
A putable bond has longer effective duration because the put option shortens the bond's life only in rising rate scenarios, leaving duration longer than a callable bond.
According to the CFA curriculum, the credit spread of a bond over Treasuries compensates investors for all of the following EXCEPT:
Answer: Duration risk
Duration risk is already captured in the Treasury yield itself; the credit spread compensates for default probability, LGD, and liquidity differences.