CPM Fixed Income Portfolio Management 3

Question 1

In a falling interest rate environment, which bond portfolio strategy would produce the best price appreciation?

Accepted Answer

Long-duration strategy

Answer

When interest rates fall, bond prices rise, and longer-duration portfolios experience greater price appreciation due to their higher sensitivity to rate changes.

Question 2

A bond with a higher coupon rate, all else equal, will have:

Accepted Answer

Lower duration because more of its value is returned sooner via coupon payments

Answer

Higher coupon bonds have lower duration because more cash flows are received earlier (in the form of coupons), reducing the weighted average time of all cash flows.

Question 3

Which of the following bond sectors typically offers the highest yield but also carries the greatest credit risk?

Accepted Answer

High-yield (junk) corporate bonds

Answer

High-yield bonds (rated below investment grade) offer higher yields as compensation for greater default risk, making them the highest-risk, highest-yield sector in the investment-grade universe.

Question 4

Duration-matched immunization breaks down when:

Accepted Answer

Non-parallel yield curve shifts occur (e.g., twists or flattening)

Answer

Duration matching only fully immunizes against parallel yield curve shifts; non-parallel shifts (where short and long rates move differently) can cause asset and liability values to diverge.

Question 5

A portfolio manager benchmarked to the Bloomberg U.S. Aggregate Bond Index takes a significant underweight in government bonds and overweight in corporate bonds. This represents:

Accepted Answer

An active credit sector rotation bet

Answer

Deviating meaningfully from benchmark sector weights (underweighting governments, overweighting corporates) is an active sector rotation strategy driven by a view on relative value.

CPM - Certified Portfolio Manager Practice Test

CPM - Certified Portfolio Manager Practice Test

CPM Fixed Income Portfolio Management 3