CFA Fixed Income Analysis 3

Question 1

Which bond sector typically exhibits negative convexity at low yield levels?

Accepted Answer

Mortgage-backed securities

Answer

MBS exhibit negative convexity because homeowners prepay mortgages when rates fall, causing the MBS price to underperform a straight bond.

Question 2

The forward rate f(2,1) represents the:

Accepted Answer

1-year rate two years from today

Answer

f(2,1) denotes the 1-year forward rate beginning 2 years from today, derived from the current spot rate curve.

Question 3

A portfolio manager wants to eliminate interest rate risk on a bond position. The most effective hedge using futures would be to:

Accepted Answer

Sell futures with a hedge ratio based on the portfolio's dollar duration

Answer

The optimal futures hedge ratio accounts for the dollar duration of both the portfolio and the futures contract.

Question 4

When a yield curve flattens, a portfolio with a barbell structure will typically outperform a bullet portfolio because:

Accepted Answer

The barbell has higher convexity, benefiting from any yield change

Answer

Barbell portfolios have higher convexity than bullet portfolios with the same duration, providing outperformance regardless of the direction of yield curve shifts.

Question 5

In the context of credit analysis, a rising debt/EBITDA ratio combined with declining interest coverage most likely signals:

Accepted Answer

Deteriorating ability to service debt, increasing default risk

Answer

Rising debt/EBITDA with falling interest coverage indicates increasing leverage and reduced capacity to service debt, both negative credit signals.

CFA Practice Test

CFA Practice Test

CFA Fixed Income Analysis 3