Fixed Income Analysis 3rd Edition

1 PART I LEARNING OBJECTIVES, SUMMARY OVERVIEW, AND PROBLEMS 3 CHAPTER 1 FIXEDfiINCOME SECURITIES: DEFINING ELEMENTS PROBLEMS is question set was developed by Lee M. Dunham, CFA (Omaha, NE, USA), and Elbie Louw, CFA, CIPM (Pretoria, South Africa). Copyright 2013 CFA Institute. is question set was developed by Lee M. Dunham, CFA (Omaha, NE, USA), and Elbie Louw,

103 CHAPTER 1 FIXEDINCOME SECURITIES: DEFINING ELEMENTS SOLUTIONS 1 . A is correct. e tenor of the bond is the time remaining until the bonds maturity date. Although the bond had a maturity of 10 years at issuance (original maturity), it was issued 1 . A

51 CHAPTER 10 THE TERM STRUCTURE AND INTEREST RATE DYNAMICS PROBLEMS Prepared by Professor Adam Schwartz, CFA. Copyright 2014 CFA Institute. Prepared by Professor Adam Schwartz, CFA. Copyright 2014 CFA Institute. Prepared by Professor Adam Schwartz, CFA. Copyright 2014 CFA Institute. 1. Given spot rates for one-, two-, and three-year zero coupon bonds, how many

151 CHAPTER 10 THE TERM STRUCTURE AND INTEREST RATE DYNAMICS SOLUTIONS 1 . ree forward rates can be calculated from the one-, two-, and three-year spot rates. e rate on a one-year loan that begins at the end of Year 1 can be calculated using the one-

55 CHAPTER 11 FIXED-INCOME PORTFOLIO MANAGEMENTPART I PROBLEMS Practice Problems and Solutions: 13 taken from from Managing Investment Portfolios: A Dy- namic Process, ird Edition, John L. Maginn, CFA, Donald L. Tuttle, CFA, Jerald E. Pinto, CFA, and Dennis W. McLeavey, CFA, editors. Copyright 2007 by CFA Institute. All other problems and solutions copyright CFA

155 CHAPTER 11 FIXEDINCOME PORTFOLIO MANAGEMENTPART I SOLUTIONS 1 . e tracking risk is the standard deviation of the active returns. For the data shown in the problem, the tracking risk is 28.284 bps, as shown below: Period Portfolio Return Benchmark Return Active Return

61 CHAPTER 12 FIXEDINCOME PORTFOLIO MANAGEMENTPART II PROBLEMS Practice Problems and Solutions 110 and 29 taken from Managing Investment Portfolios: A Dynamic Process, ird Edition, John L. Maginn, CFA, Donald L. Tuttle, CFA, Jerald E. Pinto, CFA, and Dennis W. McLeavey, CFA, editors. Copyright 2007 by CFA Institute. All other problems and solutions copyright

159falling below the speci ed minimum target return, but it does not provide any informa-tion about the extent to which the return may be below the speci ed minimum target. 2 . A . Because the fund desires to increase the duration, it would need to buy futures contracts. B

69 CHAPTER 13 RELATIVEVALUE METHODOLOGIES FOR GLOBAL CREDIT BOND PORTFOLIO MANAGEMENT PROBLEMS Practice Problems and Solutions 120 taken from Fixed Income Readings for the Chartered Financial Analyst Program, Second Edition, edited by Frank J. Fabozzi, CFA. Copyright 2005 by CFA Institute. All other problems and solutions copyright CFA Institute. Practice Problems and Solutions 120 taken

165 CHAPTER 13 RELATIVE-VALUE METHODOLOGIES FOR GLOBAL CREDIT BOND PORTFOLIO MANAGEMENT SOLUTIONS Note: Many of the questions are conceptual in nature. e solutions o ered are one interpre- tation, and there may be other valid views. 1 . Relative value refers to ranking credit sectors, bond

7 CHAPTER 2 FIXEDINCOME MARKETS: ISSUANCE, TRADING, AND FUNDING PROBLEMS is question set was developed by Michael Whitehurst, CFA (San Diego, CA, USA). Copy-right 2013 by CFA Institute. is question set was developed by Michael Whitehurst, CFA (San Diego, CA, USA). Copy-right 2013 by CFA Institute. is question set was developed by Michael Whitehurst, CFA (San

107 CHAPTER 2 FIXED-INCOME MARKETS: ISSUANCE, TRADING, AND FUNDING SOLUTIONS 1 . C is correct. In most countries, the largest issuers of bonds are the national and local gov-ernments as well as nancial institutions. us, the bond market sector with the smallest 1 . C is

11 CHAPTER 3 INTRODUCTION TO FIXEDINCOME VALUATION PROBLEMS is question set was created by Mark Bhasin, CFA (New York, NY), Ryan C. Fuhrmann, CFA (Carmel, IN), Louis Lemos, CFA (Louisville, KY), Susan Ryan, CFA (East Hartland, CT), and Michael Whitehurst, CFA (San Diego, CA). Copyright 2013 by CFA Institute. is question set was created by

111 1 . B is correct. e bond price is closest to 101.36. e price is determined in the following manner:PVPMTPMTPMTFVFF=()r+()r++()r+)r+(12+()+(3 where: PV= present value, or the price of the bond PMT= coupon payment per periodFV= future value paid at maturity, or the par value of the bondr= market discount

Chapter 3 Introduction to Fixed-Income Valuation 119 11 + 1 AP R P P m AP R P P n m RR m n RR n 1 0 0 3897 21211221212()101949.+1=APR1PP1039351121212.+1=APR1PP1121121212112()103935.+1=APR1PP10032211212.+1=APR1PP10032211212.=1APR1PPAPR12= 0.00322 12 = 0.03865, or approximately 3.87%. 27 . B is correct. e yield-to-maturity is 5.77%. e formula for calculating this bonds yield-to-maturity is:PVPMTPMTPMTPMT=()r+()r++()r++()r+)r+()r+(12+()+(391990+()1+PMTF+VFF where: PV = present value, or the price of the bond PMT= coupon payment per periodFV = future value

21 CHAPTER 4 UNDERSTANDING FIXEDINCOME RISK AND RETURN PROBLEMS ese questions were developed by Danny Hassett, CFA (Cedar Hill, TX, USA), Lou Lemos, CFA (Louisville, KY, USA), and Bin Wang, CFA (Austin, TX, USA). Copyright 2013 by CFA (Louisville, KY, USA), and Bin Wang, CFA (Austin, TX, USA). Copyright 2013 by CFA (Louisville,

125 C HAPTER 4 4 UN DER ST A N DI NG F IXED-I NCO ME RI SK AN D RET U R N SOLUTIONS 1 . A is correct. A capita l gain is l east l i k e l y to contri b ute to t h e investors tota l return. ere is no capita l gain (or l oss) b ecause t h e b on d is h e ld to maturity. e carrying va l ue o f t h e

27 CHAPTER 5 FUNDAMENTALS OF CREDIT ANALYSIS PROBLEMS 1. e risk that a bonds creditworthiness declines is best described by: A. credit migration risk. B. market liquidity risk. C. spread widening risk. 2. Stedsmart Ltd and Fignermo Ltd are alike with respect to financial and operating char- acteristics, except that Stedsmart Ltd has less publicly traded debt

131 CHAPTER 5 FUNDAMENTALS OF CREDIT ANALYSIS SOLUTIONS 1. A is correct. Credit migration risk or downgrade risk refers to the risk that a bond issuers 1. A is correct. Credit migration risk or downgrade risk refers to the risk that a bond issuers 1. A is

31 CHAPTER 6 CREDIT ANALYSIS MODELS PROBLEMS is question set was developed by Don Taylor, CFA (Chadds Ford, PA, USA). Copyright is question set was developed by Don Taylor, CFA (Chadds Ford, PA, USA). Copyright is question set was developed by Don Taylor, CFA (Chadds Ford, PA, USA). Copyright 2013 by CFA Institute. Campbell

133 CHAPTER 6 CREDIT ANALYSIS MODELS SOLUTIONS 1 . B is correct. Limitation B is incorrect. Credit ratings tend to be stable, not variable, across time and across the business cycle. Rating agencies may be motivated to keep their ratings stable across time to reduce unnecessary volatility

35 CHAPTER 7 INTRODUCTION TO ASSET-BACKED SECURITIES PROBLEMS 1. Securitization is beneficial for banks because it: A. repackages bank loans into simpler structures. B. increases the funds available for banks to lend. C. allows banks to maintain ownership of their securitized assets. 2. In a securitization, a special purpose vehicle (SPV) is responsible for the: A.

135 CHAPTER 7 INTRODUCTION TO ASSET-BACKED SECURITIES SOLUTIONS 1 . B is correct. Securitization increases the funds available for banks to lend because they no longer have to hold all the loans they originate on their balance sheet. e securitization process allows banks to remove loans from

39 CHAPTER 8 THE ARBITRAGE-FREE VALUATION FRAMEWORK PROBLEMS is item set was developed by Karen OConnor Rubsam, CFA (Phoenix, AZ, USA). Copy- right 2014 CFA Institute. right 2014 CFA Institute. right 2014 CFA Institute. e following information relates to Questions 16 Katrina Black, portfolio manager at Coral Bond Management, Ltd., is conducting a training session with Alex

141 CHAPTER 8 THE ARBITRAGE-FREE VALUATION FRAMEWORK SOLUTIONS 1 . A is correct. is is the same bond being sold at three di erent prices, so an arbitrage opportunity exists by buying the bond from the exchange where it is priced lowest and immediately selling it on

45 CHAPTER 9 VALUATION AND ANALYSIS: BONDS WITH EMBEDDED OPTIONS PROBLEMS fie following information relates to Questions 1101 Samuel & Sons is a fixed-income specialty firm that offers advisory services to investment management companies. On 1 October 20X0, Steele Ferguson, a senior analyst at Samuel, is reviewing three fixed-rate bonds issued by a

145 CHAPTER 9 VALUATION AND ANALYSIS: BONDS WITH EMBEDDED OPTIONS SOLUTIONS 1 . C is correct. e call option embedded in Bond #2 can be exercised only at two predeter- mined dates: 1 October 20X1 and 1 October 20X2. us, the call feature is Bermudan 1