CPM Fixed Income Portfolio Management 1

Question 1

Duration is primarily used in fixed income portfolio management to measure:

Accepted Answer

A bond's price sensitivity to changes in interest rates

Answer

Duration quantifies the approximate percentage change in a bond's price for a 1% change in interest rates, making it the primary measure of interest rate risk.

Question 2

If a bond portfolio manager expects interest rates to rise, the appropriate adjustment would be to:

Accepted Answer

Decrease portfolio duration by shifting to shorter-maturity bonds

Answer

Shortening duration reduces interest rate sensitivity, so when rates rise, the portfolio loses less value than it would with a longer duration.

Question 3

Convexity in a bond portfolio measures:

Accepted Answer

The curvature of the price-yield relationship, improving duration's accuracy for large rate moves

Answer

Convexity captures the non-linear (curved) relationship between bond prices and yields, providing a more accurate estimate of price changes for large interest rate movements than duration alone.

Question 4

A bullet portfolio strategy concentrates bond maturities around a single target date, while a barbell strategy:

Accepted Answer

Splits holdings between very short-term and very long-term maturities

Answer

A barbell strategy holds bonds at two maturity extremes (short and long), providing flexibility and potentially higher yields than a bullet portfolio with similar overall duration.

Question 5

Spread duration measures a bond portfolio's sensitivity to changes in:

Accepted Answer

Credit spreads

Answer

Spread duration quantifies the price impact of a change in credit spreads, helping managers assess credit risk exposure separately from interest rate risk.

CPM - Certified Portfolio Manager Practice Test

CPM - Certified Portfolio Manager Practice Test

CPM Fixed Income Portfolio Management 1