2019 CFA level 3 qbank r 24 25 yield curve str credit str questions

10/12/2018

Learning Management System

Question #1 of 19
Je Nordby is a currency trader at a regional investment bank in Baltimore, MD. His research
department is anticipating a stable yield curve environment for the remainder of the year and
Japan's central bank will continue to depress the value of the Yen versus the Dollar for the near
future. As a result of his team's forecast, Je decides to enter into a Yen carry trade with the
U.S. dollar.
The position that Je used to execute his strategy is most likely:

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A) Borrowing at the lower Yen rate, converting the Yen to dollars and purchasing U.S.
Treasuries.

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B) Borrowing at the U.S. short-term rate, converting the dollar to Yen and purchasing Yen
Gov’t securities.

C) Borrowing at the higher dollar rate, converting the dollars to Yen and purchasing Yen

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Question #2 of 19

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Gov’t securities.

As a result of the continued global low interest since the nancial crisis of 2008, investors have

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been investing in larger amounts of emerging market corporate bonds to nd increased yields.

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However, investing in emerging market corporate bonds is very di erent than investing in
developed market corporate bonds.

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The following statement correctly identi es these general di erences:

A) Emerging market bonds have an increased concentration in commodities and banking
compared to developed market bonds.
B) Since the most recent nancial crisis, the developed bond market is overcontrated in
government issued bonds as compared to emerging market capital markets as
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C) Developed market bonds tend to have lower average credit quality compared to
emerging market bonds.

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10/12/2018

Learning Management System

Question #3 of 19
Tara Timura is a new xed income analyst for a U.S. bond fund. She has only been at the rm
for a few weeks and has asked to assist the lead portfolio manager in modeling the rm's yield
curve quarterly forecast.
Modeling the yield curve for xed income professionals is complicated because:

A) Observations are normally consistent with the neighboring values which helps to
reduce the complexity associated with yield curve modeling.
B) Gaps in maturities are common and must be interpolated, increasing model complexity.

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C) Luckily, di erences in accounting rarely impact bond prices, so modeling complexity is

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reduced.

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Question #4 of 19

Global portfolio managers can often hedge emerging market currency risk by all of the
following, except:

A) selling currency forwards.

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B) selling currency futures.

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C) swapping the foreign currency for domestic currency of the investor.

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Question #5 of 19

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10/12/2018

Learning Management System

Derek Main is a recent college graduate and has been hired as a full-time junior analyst for
Falcon Financial, a rm that specializes in providing xed income investment advice to local
pensions. Main has been assigned to analyze a newly issued putable bond.
Main calculates various credit spread measures to begin his analysis.
The calculated spread measures are as follows:

G – Spread 322
I – Spread

325

Z – Spread 334

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Main notices that he forgot to calculate an OAS measure, would the OAS be similar to, lower

A) OAS would be lower than the Z spread.
B) OAS would be higher than the Z Spread.

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Question #6 of 19

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C) OAS would be similar to the Z spread.

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than, or higher than the Z spread measure:

Laura Timura is the chief risk manager for Quanta Financial, a U.K. based consulting rm that

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specializes in risk management strategies for xed income investors. A large endowment

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recently received a signi cant holding in a publicly traded gold mining stock and has hired
Quanta to help them hedge this position until they can sell the shares in 5 years.

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Quanta has recommended a hedging strategy to minimize tail risk that most likely includes:

A) selling put options on gold futures contracts.
B) purchasing calls on gold futures.
C) buying credit spread options on the bonds of gold miners they nd least attractively
valued.

Question #7 of 19
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10/12/2018

Learning Management System

David Stephen is a Fixed Income Strategist for a large hedge fund. After extensive analysis and
research, Stephen is predicting an extremely stable yield curve environment for the next few
quarters that will remain upward sloping. Assuming Stephen's prediction is correct, what active
management strategy would Stephen least likely pursue?

A) Riding the yield curve.
B) The carry trade.

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C) Buying convexity by shifting to a barbell strategy.

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Question #8 of 19

If a new government bond is issued with a negative coupon rate due to low rates of interest,
the duration of the new bond will:

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A) not be a ected by its negative coupon rate.

B) be shorter than its maturity.

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C) be longer than its maturity.

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Question #9 of 19

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Bill Mclaughlin is a xed income consultant based in the US. Last year, he forecasted very little
changes in the yield curve for the next 14 months with a normal yield curve. Mclaughlin

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concentrated his portfolio on 10-Year US Treasury Bonds that had a 2.25% coupon and he
purchased his holdings at an average price of 100.38. Mclaughlin expected to sell the bonds in
one year at 101.92. Mclaughlin selected the 10-year maturities because they were the steepest
part of the yield curve that he could purchase since he was constrained to a 10-year maturity
from the IPS.
At the start of last year, the expected rolling yield on the portfolio was closest to:

A) 2.24%.
B) 1.05%.
C) 3.74%.

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10/12/2018

Learning Management System

Question #10 of 19
Valerie is the investment strategist for a local nancial advisor and is thinking of making tactical
changes to her xed income investment model. Valerie decides to match the primary risk factor
of her target benchmark but also take advantage of an expected increase in yield curvature.

A) Create a bullet portfolio that is focused on the middle of the yield curve.
B) Short the barbell and long intermediate-term bonds.

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C) Create a butter y portfolio.

Question #11 of 19

Gerhard Thompson is a xed income PM for a large investment consulting rm based in the US

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and has spent the last few weeks analyzing the bond market, speci cally focusing on yield curve
forecasting. Thompson's forecast is for the yield curve to remain relatively stable for the rst
half of the year. The investment strategy that Thompson is most likely to follow over the next
few months, assuming his forecast is correct, is:

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A) replacing callable bonds with straight bullet bonds.

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B) selling options indirectly by purchasing Mortgage Backed Securities (MBS).

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C) buying options indirectly by selling MBS.

Question #12 of 19

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10/12/2018

Learning Management System

Randolph David has just won a Request For Proposal to manage a portion of a large
multinational corporation's xed income portfolio that totals $25 million. David is preparing to
implement the portfolio and he is now wondering if he should make a temporary tactical
adjustment to take advantage of an expected steepening of the yield curve with a curvature
decrease.
David forecasts partial durations of his original portfolio and his proposed portfolio (see PVBP
below).

Key Rate PVBPs 1 year 2 year 3 year 5 year 10 year
.0049

.0061

.0135

.0136

Tactical Portfolio 0

.0087

.0030

.0065

.0146

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Original Portfolio 0

a curvature decrease is:

A) David should select the original portfolio.

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The most optimal portfolio assuming David is correct and the yield curve steepens and also has

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B) David should invest 50% in the original portfolio and 50% in the tactical portfolio.

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C) David should select the tactical portfolio.

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Question #13 of 19

A credit investor has been conducting extensive research on incorporating ESG considerations

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into his security selection in the technology sector. The investor has created a custom

benchmark consisting of corporate technology bonds and his goal is to outperform the

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benchmark.

Which credit investment strategy is most appropriate for the credit investor to follow?

A) Top-down approach.
B) Bottom-up approach.
C) Multi-factor approach that focuses on predicting economic cycles.

Question #14 of 19
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10/12/2018

Learning Management System

Fixed Income Portfolio managers can use butter y spreads to take advantage of changes in
curvature of the yield curve. A butter y spread trade that will pro t from a relative decrease in
intermediate rates is:

A) long the 2- and 30-Year yield, short the 10-Year yield
B) short the 2- and 10-Year yield, long the 30-Year yield
C) short the 2- and 30-Year yield, long the 10-Year yield

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Question #15 of 19

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Sunil Ranieel is an investment-grade xed income investment strategist for a large pension
fund based in the UK. Ranieel was at a recent luncheon and was describing his investment
process to some local college students at his lunch table. Ranieel's investment process will
primarily be focused on:

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A) collateral valuation.
B) interest rates.

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C) debt covenants.

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Question #16 of 19

There are potential bene ts for a corporate bond portfolio manager to include CDOs in their

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portfolio except:

A) relative value opportunities.
B) diversi cation.
C) leverage opportunities.

Question #17 of 19
Bid-ask spreads have historically been used to assess liquidity in xed income markets.
However, this indicator has proven to be less reliable primarily because:
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10/12/2018

Learning Management System

A) of increased assets under management in Fixed-Income ETFs.
B) of reduced spread sensitivity to fund out ows.
C) bond dealers and brokers generally hold much less inventory than in the past because
of regulatory and capital constraints.

Question #18 of 19
Susan Walrad has currently been hired as a summer intern for a prestigious investment bank

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and wants to impress her boss. Susan learns that her boss, Ted, is currently preparing for an
upcoming meeting with one of their top clients to discuss the performance of bullet and barbell

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investment strategies under di erent yield curve scenarios. Susan talks with Ted and learns
that Ted is going to recommend an investment strategy that works best in an increased interest
rate volatility environment.

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The strategy that Ted would most likely select:

A) a barbell strategy consisting of buying 5-year and 20-year Treasury government bonds.
B) a carry trade.

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C) a bullet strategy that will only purchase a 10-Year Treasury government bond.

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Question #19 of 19

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A bond portfolio manager using the bottom-up approach to security selection would most likely
begin their analysis by focusing on:

A) bonds that have comparable credit risk.
B) average credit spreads.
C) macro factors that drive interest rates.

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