FI 1.12 Test

None

• A. lower than AB plc.
• B. higher than AB plc.
• C. the same as AB plc.

Q. The CDO tranche with a credit-rating status between senior and subordinated bond classes is called the:

• A. equity tranche.
• B. residual tranche.
• C. mezzanine tranche.

For bonds that are otherwise identical, the one exhibiting the highest level of positive convexity is most likely the one that is:

• A. callable.
• B. option-free.
• C. putable.

None

• A. Bond A
• B. Bond B
• C. Bond C

Quasi-governmental bonds are most likely:

• A. issued by a national government in a foreign currency.
• B. issued by a governmental body below the national level.
• C. repaid from cash flows generated by the issuer or from the project being financed.

A key distinction between commercial mortgage-backed securities (CMBSs) and residential mortgage-backed securities (RMBSs) is that CMBSs most likely:

• A. have balloon maturities.
• B. have amortizing principal.
• C. do not have call protection.

Q. The legal contract that describes the form of the bond, the obligations of the issuer, and the rights of the bondholders can be best described as a bond’s:

• A. covenant.
• B. indenture.
• C. debenture.

None

• A. 180 bps.
• B. 400 bps.
• C. 221 bps.

Q. Empirical duration is likely the best measure of the impact of yield changes on portfolio value, especially under stressed market conditions, for a portfolio consisting of:

• A. 100% sovereign bonds of several AAA rated euro area issuers.
• B. 100% covered bonds of several AAA rated euro area corporate issuers.
• C. 25% AAA rated sovereign bonds, 25% AAA rated corporate bonds, and 50% high-yield (i.e., speculative-grade) corporate bonds, all from various euro area sovereign and corporate issuers.

When a bond investor’s coupon reinvestment risk dominates market price risk, the investor’s investment horizon must be:

• A. less than the Macaulay duration of the bond.
• B. equal to the Macaulay duration of the bond.
• C. greater than the Macaulay duration of the bond.