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Risk Latte - Quiz #1

Credit Derivaties Quiz
Team Latte
Jan 01, 2006

Quiz # 1

1) If you buy a 2 year bond at a yield of 5 %, and the yield falls to 4%, then the price of the bond will :

a) Rise by about 1.9%
b) Rise by about 2.5%
c) Fall by about 1%
d) Fall by about 2.5%

2) If you buy a 10 year bond at a yield of 5 %, and the yield falls to 4%, then the price of the bond will :

a) Rise by about 6.6%
b) Rise by about 8.1%
c) Fall by about 6.6%
d) None of the above;

3) If you are a long only fixed income fund manager and you think interest rate are going to go up then it is better to:

a) Buy longer-dated bonds
b) Buy shorter-dated bonds
c) Sell longer-dated bonds
d) Sell shorter-dated bonds

4) If you are a long only fixed income fund manager and you think interest rate are going to go down then it is better to:

a) Buy longer-dated bonds
b) Buy shorter-dated bonds
c) Sell longer-dated bonds
d) Sell shorter-dated bonds

5) Market timing is a professional fixed income fund manager's jargon which mean

a) Adjusting the duration of the bonds in the portfolio to manage interest rate risk;
b) Adjusting the convexity of the bonds in the portfolio to manage interest rate risk;
c) Buying and Selling the bonds in rapid succession;
d) None of the above;

6) If an issuer's credit spread decreases (tightens):

a) The yields on their bonds will reduce and the prices of their bonds will increase;
b) The yields on their bonds will increase and the prices of their bonds will decrease;
c) There is no well defined relationship between credit spreads and yields;
d) The yields on their bonds will increase but the prices of their bonds may not fall

7) The 5 year government bonds are trading at 3.9% and the 5 year swap rate is 4.6% . A 5 year corporate par bond trading at 160 basis points over Government bonds and 90 basis points over the swaps would very likely have the following price:

a) 102.50;
b) 98.45;
c) It is not possible to say;
d) 100.05;

8) Bond funds trade the spread without changing market timing by :

a) Buying the corporate bonds and simultaneously buying government bonds;
b) Buying the corporate bonds and simultaneously selling government bonds;
c) Simultaneously buying corporate bonds of two different rating category;
d) None of the above

9) A "switch" in the context of bond fund trading refers to:

a) Going underweight into Govt. bonds and overweight in the corporate bond;
b) Liquidating a portfolio of Govt. bonds and buying corporate bonds or vice-versa;
c) Creating opposite exposures in Govt. and corporate bonds;
d) None of the above.

10) Quote for a certain corporate bond is shown on the terminal as : 152 / 148. This mean the market maker will:

a) Buy bonds at 152 bps over the treasuries and sell at 148 bps over the treasuries;
b) Sell bonds at 148 bps over the treasuries and buy at 148 bps over the treasuries;
c) Buy bonds at $152 per $100 face value of the bond and sell at $148 per $100 face value of the bonds;
d) Buy bonds at 15.2% yield and sell bonds at 14.8% yield;

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