Credit yield spreads most likely widen in response to:

C. strengthening economic conditions.

B. weak performance of equities.

Which of the following best describes the cash flow that owners of credit card receivable asset-backed securities receive during the lockout period?

C. Only finance charges collected and fees

B. Only principal payments collected

Which of the following statements relating to yield volatility is most accurate? If the term structure of yield volatility is downward sloping, then:

B. long-term yields are more stable than short-term yields.

A. short-term rates are higher than long-term rates.

C. short-term bonds will always experience greater price fluctuation than long-term bonds.

For an option-free, fixed-rate bond the coupon reinvestment risk would most likely dominate market price risk when the investment horizon is:

A. greater than the Macaulay duration of the bond.

B. lower than the Macaulay duration of the bond.

C. equal to the Macaulay duration of the bond.

When the collateral manager fails pre-specified risk tests, a CDO is:

A. deleveraged by reducing the senior bond class.

B. restructured to reduce its most expensive funding source.

C. liquidated by paying off the bond classes in order of seniority.

The maturity effect is least likely to hold for a:

A. low-coupon, long-term bond trading at a discount.

C. low-coupon, long-term bond trading at a premium.

The variability of the coupon rate on a Libor-based floating-rate bond is most likely due to:

A. periodic resets of the reference rate.

B. market-based reassessments of the issuer’s creditworthiness.

C. changing estimates by the Libor administrator of borrowing capacity.

In credit card receivable ABSs, principal cash flows can be altered only when the:

C. early amortization provision is triggered.

B. excess spread account is depleted.

Which of the following statements related to secondary bond markets is most accurate?

B. Secondary bond markets are where bonds are traded between investors.

A. Newly issued corporate bonds are issued in secondary bond markets.

C. The major participants in secondary bond markets globally are retail investors.

Which of the following is least likely a feature typical of an agency residential mortgage-backed security (RMBS)?

C. The use of credit enhancements to reduce credit risk

A. A guarantee by a government-sponsored enterprise

B. The satisfaction of specific established underwriting standards

An investor in a country with an original issue discount tax provision purchases a 20-year zero-coupon bond at a deep discount to par value. The investor plans to hold the bond until the maturity date. The investor will most likelyreport:

C. taxable income from the bond every year until maturity.

B. a tax deduction in the year the bond is purchased.

Loss severity is best described as the:

C. portion of a bond’s value, including unpaid interest, an investor loses in the event of default.

A. default probability multiplied by the loss given default.

B. portion of a bond’s value recovered by bondholders in the event of default.

The price value of a basis point (PVBP) is best interpreted as an estimate of the change in the full price of a bond for a 1 basis point:

C. increase and decrease in the yield to maturity.

A. decrease in the yield to maturity.

B. increase in the yield to maturity.

The real rate duration for an option-free, fixed-rate bond is equivalent to the bond’s:

A. inflation duration and liquidity duration.

B. credit duration and not its inflation duration.

C. inflation duration and not its liquidity duration.

If an issuer is required to retire a specified portion of the bond’s principal each year, the bond most likely:

C. has a sinking fund provision.

Support tranches are most appropriate for investors who are:

C. willing to accept prepayment risk in exchange for higher returns.

A. concerned about their exposure to extension risk.

B. concerned about their exposure to concentration risk.

A credit analyst is least likely to use matrix pricing to estimate the required yield and price of a(n):

B. actively traded speculative grade bond.

C. inactively traded investment grade bond.

Credit risk of a corporate bond is best described as the:

C. risk of loss resulting from the issuer failing to make full and timely payments.

A. risk that an issuer’s creditworthiness deteriorates.

B. probability that the issuer fails to make full and timely payments.

FI 1.3 Test

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40 questions

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MULTIPLE CHOICE QUESTION

5 mins • 1 pt

A. 101.58.

B. 105.01.

C. 105.82.

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

In the context of commercial mortgage-backed securities (CMBS) which of the following mechanisms is most likelya structural call protection?

A. Prepayment lockouts

B. Yield maintenance charges

C. Sequential-pay tranches

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

A manufacturing company receives a ratings upgrade and the price increases on its fixed-rate bond. The price increase was most likely caused by a(n):

A. decrease in the bond’s credit spread.

B. increase in the bond’s liquidity spread.

C. increase of the bond’s underlying benchmark rate.

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

A synthetic collateralized debt obligation is a CDO backed by a portfolio of:

A. leveraged bank loans.

B. residential or commercial mortgage-backed securities.

C. credit default swaps.

MULTIPLE CHOICE QUESTION

3 mins • 1 pt

An investor sells a bond at the quoted price of $98.00. In addition, she receives accrued interest of $4.40. The flat price of the bond is equal to the:

A. par value plus accrued interest.

B. agreed-on bond price excluding accrued interest.

C. accrued interest plus the agreed-on bond price.

MULTIPLE CHOICE QUESTION

5 mins • 1 pt

A bond is currently trading for 98.722 per 100 of par value. If the bond’s yield-to-maturity (YTM) rises by 10 basis points, the bond’s full price is expected to fall to 98.669. If the bond’s YTM decreases by 10 basis points, the bond’s full price is expected to increase to 98.782. The bond’s approximate convexity is closest to:

A. 0.071.

B. 70.906.

C. 1,144.628.

MULTIPLE CHOICE QUESTION

2 mins • 1 pt

Principal payments associated with credit card receivable-backed securities are:

A. distributed to investors as a balloon payment.

B. reinvested after the lockout period.

C. distributed to investors after the lockout period.

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