CFM CFM Fixed Income & Credit Analysis 2

Question 1

What does a Z-spread represent in fixed income analysis?

Accepted Answer

The constant spread added to the entire Treasury spot rate curve to equal a bond's price

Answer

The Z-spread (zero-volatility spread) is added to each point on the spot rate curve to discount a bond's cash flows to its current market price.

Question 2

What does a flattening yield curve typically signal in fixed income markets?

Accepted Answer

Slowing economic growth or potential recession expectations

Answer

A flattening curve, where short-term rates rise toward long-term rates, often signals market concerns about future economic slowdown.

Question 3

What is a collateralized debt obligation (CDO)?

Accepted Answer

A structured product that pools debt instruments and issues tranches with different risk/return profiles

Answer

A CDO pools various debt assets (loans, bonds, MBS) and repackages them into tranches ranging from senior (least risky) to equity (most risky).

Question 4

What is accrued interest on a bond?

Accepted Answer

Interest earned since the last coupon payment that must be paid by the buyer at settlement

Answer

When a bond is purchased between coupon dates, the buyer compensates the seller for interest accrued since the last coupon payment.

Question 5

How is yield to maturity (YTM) best defined?

Accepted Answer

The single discount rate that equates a bond's cash flows to its current market price

Answer

YTM is the internal rate of return of a bond investment assuming all coupons are reinvested at the same rate until maturity.

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