FIXED INCOME, PORTFOLIO MANAGEMENT

1. A 10-year bond was issued four years ago. The bond is denominated in US
dollars, offers a coupon rate of 10% with interest paid semi-annually, and is
currently priced at 102% of par. The bond’s:
A. tenor is six years.
B. nominal rate is 5%.
C. redemption value is 102% of the par value.
2. A bond that is characterized by a fixed periodic payment schedule that reduces
the bond’s outstanding principal amount to zero by the maturity date is best
described as a:
A. bullet bond.
B. plain vanilla bond.
C. fully amortized bond.
3. A 10-year, capital-indexed bond linked to the Consumer Price Index (CPI) is
issued with a coupon rate of 6% and a par value of 1,000. The bond pays interest
semi-annually. During the first six months after the bond’s issuance, the CPI
increases by 2%. On the first coupon payment date, the bond’s:
A. coupon rate increases to 8%.
B. coupon payment is equal to 40.
C. principal amount increases to 1,020.
4. Which of the following best describes a negative bond covenant? The
requirement to:
A. insure and maintain assets.
B. comply with all laws and regulations.
C. maintain a minimum interest coverage ratio.
5. Which of the following best describes a convertible bond’s conversion
premium?
A. Bond price minus conversion value
B. Par value divided by conversion price
C. Current share price multiplied by conversion ratio
6. The distinction between investment grade debt and non-investment grade debt
is best described by differences in:
A. tax status.
B. credit quality.
C. maturity dates.
7. An investment bank that underwrites a bond issue most likely:
A. buys and resells the newly issued bonds to investors or dealers.
B. acts as a broker and receives a commission for selling the bonds to investors.
C. incurs less risk associated with selling the bonds than in a best efforts offering.
8. Which of the following statements related to secondary bond markets is most
accurate?
A. Newly issued corporate bonds are issued in secondary bond markets.
B. Secondary bond markets are where bonds are traded between investors.
C. The major participants in secondary bond markets globally are retail investors.
9. Which type of sovereign bond has the lowest interest rate risk for an investor?
A. Floaters
B. Coupon bonds
C. Discount bonds
10. The repo margin on a repurchase agreement is most likely to be lower when:

Lenders Borrowers
TO: Give money and buy assets Give money and sell assets
T1: Take money back Buy asset
Repo margin = p1 – p0
Lower when undervalying collateral
price increase

A. the underlying collateral is in short supply. => repo margin lower

B. the maturity of the repurchase agreement is long. => repo margin higher
C. the credit risk associated with the underlying collateral is high.
11. An investor who owns a bond with a 9% coupon rate that pays interest
semiannually and matures in three years is considering its sale. If the required
rate of return on the bond is 11%, the price of the bond per 100 of par value is
closest to:
A. 95.00.
B. 95.11.
C. 105.15.

12. Suppose a bond’s price is expected to increase by 5% if its market discount

rate decreases by 100 basis points. If the bond’s market discount rate increases
by 100 basis points, the bond price is most likely to change by:
A. 5%.
B. less than 5%.
C. more than 5%.
13. A 3-year bond offers a 10% coupon rate with interest paid annually. Assuming
the following sequence of spot rates, the price of the bond is closest to:
Time-to-Maturity Spot Rates
1 year 8.0%
2 years 9.0%
3 years 9.5%
A. 96.98.
B. 101.46.
C. 102.95.
14. Bond dealers most often quote the:
A. flat price.
B. full price.
C. full price plus accrued interest.
15. When underwriting new corporate bonds, matrix pricing is used to get an
estimate of the:
A. required yield spread over the benchmark rate.
B. market discount rate of other comparable corporate bonds.
C. yield-to-maturity on a government bond having a similar time-to-maturity.
16. A 5-year, 5% semiannual coupon payment corporate bond is priced at
104.967 per 100 of par value. The bond’s yield-to-maturity, quoted on a
semiannual bond basis, is 3.897%. An analyst has been asked to convert to a
monthly periodicity. Under this conversion, the yield-to-maturity is closest to:
A. 3.87%.
B. 4.95%.
C. 7.67%.
17. The bond equivalent yield of a 180-day banker’s acceptance quoted at a
discount rate of 4.25% for a 360-day year is closest to:
A. 4.31%.
B. 4.34%.
C. 4.40%.
18. A yield curve constructed from a sequence of yields-to-maturity on zero-
coupon bonds is the:
A. par curve.
B. spot curve.
C. forward curve.
19. A corporate bond offers a 5% coupon rate and has exactly 3 years remaining
to maturity. Interest is paid annually. The following rates are from the benchmark
spot curve:
Time-to-Maturity Spot rate
1 year 4.86%
2 years 4.95%
3 years 5.65%
The bond is currently trading at a Z-spread of 234 basis points. The value of the
bond is closest to:
A. 92.38.
B. 98.35.
C. 106.56.
20. Securitization benefits financial markets by:
A. increasing the role of intermediaries.
B. establishing a barrier between investors and originating borrowers.
C. allowing investors to tailor credit risk and interest rate risk exposures to meet
their individual needs.
21. If a mortgage borrower makes prepayments without penalty to take
advantage of falling interest rates, the lender will most likely experience:
A. extension risk.
B. contraction risk.
C. yield maintenance.
22. Which of the following describes a typical feature of a non-agency residential
mortgage-backed security (RMBS)?
A. Senior/subordinated structure
B. A pool of conforming mortgages as collateral
C. A guarantee by a government-sponsored enterprise
23. In the context of mortgage-backed securities, a conditional prepayment rate
(CPR) of 8% means that approximately 8% of the outstanding mortgage pool
balance at the beginning of the year is expected to be prepaid:
A. in the current month.
B. by the end of the year.
C. over the life of the mortgages.
24. If a default occurs in a non-recourse commercial mortgage-backed security
(CMBS), the lender will most likely:
A. recover prepayment penalty points paid by the borrower to offset losses.
B. use only the proceeds received from the sale of the property to recover losses.
C. initiate a claim against the borrower for any shortfall resulting from the sale of
the property.
25. An excess spread account incorporated into a securitization is designed to
limit:
A. credit risk.
B. extension risk.
C. contraction risk.
26. A “buy-and-hold” investor purchases a fixed-rate bond at a discount and holds
the security until it matures. Which of the following sources of return is least likely
to contribute to the investor’s total return over the investment horizon, assuming
all payments are made as scheduled?
A. Capital gain
B. Principal payment
C. Reinvestment of coupon payments
27. An investor buys a 6% annual payment bond with three years to maturity. The
bond has a yield-to-maturity of 8% and is currently priced at 94.845806 per 100 of
par. The bond’s Macaulay duration is closest to:
A. 2.62.
B. 2.78.
C. 2.83.
28. A bond portfolio consists of the following three fixed-rate bonds. Assume
annual coupon payments and no accrued interest on the bonds. Prices are per
100 of par value.
Bond Maturity Market Price Coupon Yield to Modified
Value Maturity Duration
A 6 years 170.000 85.000 2.00% 4.95% 5.42
B 10 years 120.000 80.000 2.40% 4.99% 8.44
C 15 years 100.000 100.000 5.00% 5.00% 10.38
The bond portfolio’s modified duration is closest to:
A. 7.62.
B. 8.08.
C. 8.20.
29. 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.
30. When the investor’s investment horizon is less than the Macaulay duration of
the bond she owns:
A. the investor is hedged against interest rate risk.
B. reinvestment risk dominates, and the investor is at risk of lower rates.
C. market price risk dominates, and the investor is at risk of higher rates.

31. During bankruptcy proceedings of a firm, the priority of claims was not strictly
adhered to. Which of the following is the least likely explanation for this outcome?
A. Senior creditors compromised.
B. The value of secured assets was less than the amount of the claims.
C. A judge’s order resulted in actual claims not adhering to strict priority of claims.
32. In order to analyze the collateral of a company a credit analyst should assess
the:
A. cash flows of the company.
B. soundness of management’s strategy.
C. value of the company’s assets in relation to the level of debt.
33. Funds from operations (FFO) of Pay Handle Ltd increased in 2011. In 2011
the total debt of the company remained unchanged, while additional common
shares were issued. Pay Handle Ltd’s ability to service its debt in 2011, as
compared to 2010, most likely:
A. improved.
B. worsened.
C. remained the same.
34. Loss severity is best described as the:
A. default probability multiplied by the loss given default.
B. portion of a bond’s value recovered by bondholders in the event of default.
C. portion of a bond’s value, including unpaid interest, an investor loses in the
event of default.
35. In a bankruptcy proceeding, when the absolute priority of claims is enforced:
A. senior subordinated creditors rank above second lien holders.
B. preferred equity shareholders rank above unsecured creditors.
C. creditors with a secured claim have the first right to the value of that specific
property.
36. Which type of security is most likely to have the same rating as the issuer?
A. Preferred stock
B. Senior secured bond
C. Senior unsecured bond
37. Which industry characteristic most likely has a positive effect on a company’s
ability to service debt?
A. Low barriers to entry in the industry
B. High number of suppliers to the industry
C. Broadly dispersed market share among large number of companies in the
industry
38. In credit analysis, capacity is best described as the:
A. quality of management.
B. ability of the borrower to make its debt payments on time.
C. quality and value of the assets supporting an issuer’s indebtedness.
39. Credit spreads are most likely to widen:
A. in a strengthening economy.
B. as the credit cycle improves.
C. in periods of heavy new issue supply and low borrower demand.
40. Which of the following factors would best justify a decision to avoid investing
in a country’s sovereign debt?
A. Freely floating currency
B. A population that is not growing
C. Suitable checks and balances in policymaking
41. Investors should use a portfolio approach to:
A. reduce risk.
B. monitor risk.
C. eliminate risk.
42. With respect to the portfolio management process, the asset allocation is
determined in the:
A. planning step.
B. feedback step.
C. execution step.

43. Which of the following investment products is most likely to trade at their net
asset value per share?
A. Exchange traded funds.
B. Open-end mutual funds.
C. Closed-end mutual funds.
44. Which of the following return calculating methods is best for evaluating the
annualized returns of a buy-and-hold strategy of an investor who has made
annual deposits to an account for each of the last five years?
A. Geometric mean return.
B. Arithmetic mean return.
C. Money-weighted return.
45. A portfolio manager creates the following portfolio:
Security Weight (%) Expected Standard Deviation (%)
1 30 20
2 70 12
If the covariance of returns between the two securities is −0.0240, the expected
standard deviation of the portfolio is closest to:
A. 2.4%.
B. 7.5%.
C. 9.2%.
46. With respect to risk-averse investors, a risk-free asset will generate a
numerical utility that is:
A. the same for all individuals.
B. positive for risk-averse investors.
C. equal to zero for risk seeking investors.
47. Two individual investors with different levels of risk aversion will have optimal
portfolios that are:
A. below the capital allocation line.
B. on the capital allocation line.
C. above the capital allocation line.

48. The correlation between assets in a two-asset portfolio increases during a

market decline. If there is no change in the proportion of each asset held in the
portfolio or the expected standard deviation of the individual assets, the volatility
of the portfolio is most likely to:
A. increase.
B. decrease.
C. remain the same.
49. The portfolio on the minimum-variance frontier with the lowest standard
deviation is:
A. unattainable.
B. the optimal risky portfolio.
C. the global minimum-variance portfolio.
50. Compared to the efficient frontier of risky assets, the dominant capital
allocation line has higher rates of return for levels of risk greater than the optimal
risky portfolio because of the investor’s ability to:
A. lend at the risk-free rate.
B. borrow at the risk-free rate.
C. purchase the risk-free asset.
51. Highly risk-averse investors will most likely invest the majority of their wealth
in:
A. risky assets.
B. risk-free assets.
C. the optimal risky portfolio.
52. A portfolio on the capital market line with returns greater than the returns on
the market portfolio represents a(n):
A. lending portfolio.
B. borrowing portfolio.
C. unachievable portfolio.

53. The sum of an asset’s systematic variance and its nonsystematic variance of
returns is equal to the asset’s:
A. beta.
B. total risk.
C. total variance.
54. With respect to return-generating models, which of the following statements is
most accurate? Return-generating models are used to directly estimate the:
A. expected return of a security.
B. weights of securities in a portfolio.
C. parameters of the capital market line.
55. The graph of the capital asset pricing model is the:
A. capital market line.
B. security market line.
C. security characteristic line.
56. With respect to the capital asset pricing model, the market risk premium is:
A. less than the excess market return.
B. equal to the excess market return.
C. greater than the excess market return.
57. Which of the following performance measures is most appropriate for an
investor who is not fully diversified?
A. M-squared.
B. Treynor ratio.
C. Jensen’s alpha.
58. Portfolio managers, who are maximizing risk-adjusted returns, will seek to
invest less in securities with:
A. lower values for nonsystematic variance.
B. values of nonsystematic variance equal to 0.
C. higher values for nonsystematic variance.

59. A written investment policy statement (IPS) is most likely to succeed if:
A. it is created by a software program to assure consistent quality.
B. it is a collaborative effort of the client and the portfolio manager.
C. it reflects the investment philosophy of the portfolio manager.
60. Risk assessment questionnaires for investment management clients are most
useful in measuring:
A. value at risk.
B. ability to take risk.
C. willingness to take risk.
61. After interviewing a client in order to prepare a written investment policy
statement (IPS), you have established the following:
The client has earnings that have exceeded €120,000 (pre-tax) each year
for the past five years.
She has no dependents.
The client’s subsistence needs are approximately €45,000 per year.
The client states that she feels uncomfortable with her lack of
understanding of securities markets.
All of the client’s current savings are invested in short-term securities
guaranteed by an agency of her national government.
The client’s responses to a standard risk assessment questionnaire
suggest she has low risk tolerance.
The client is best described as having a:
A. low ability to take risk, but a high willingness to take risk.
B. high ability to take risk, but a low willingness to take risk.
C. high ability to take risk and a high willingness to take risk.
62. Tactical asset allocation is best described as:
A. attempts to exploit arbitrage possibilities among asset classes.
B. the decision to deliberately deviate from the policy portfolio.
C. selecting asset classes with the desired exposures to sources of systematic
risk in an investment portfolio.
63. Risk governance:
A. aligns risk management activities with the goals of the overall enterprise.
B. defines the qualitative assessment and evaluation of potential sources of risk
in an organization.
C. delegates responsibility for risk management to all levels of the organization’s
hierarchy.
64. A firm’s risk management committee would be expected to do all of the
following except:
A. approving the governing body’s proposed risk policies.
B. deliberating the governing body’s risk policies at the operational level.
C. providing top decision-makers with a forum for considering risk management
issues.
65. A benefit of risk budgeting is that it:
A. considers risk tradeoffs.
B. establishes a firm’s risk tolerance.
C. reduces uncertainty facing the firm.
66. If a company has a one-day 5% Value at Risk of $1 million, this means:
A. 5% of the time the firm is expected to lose at least $1 million in one day.
B. 95% of the time the firm is expected to lose at least $1 million in one day.
C. 5% of the time the firm is expected to lose no more than $1 million in one day.
67. A correct description of fintech is that it:
A. is driven by rapid growth in data and related technological advances.
B. increases the need for intermediaries.
C. is at its most advanced state using systems that follow specified rules and
instructions.
68. A benefit of distributed ledger technology (DLT) favoring its use by the
investment industry is its:
A. scalability of underlying systems.
B. ease of integration with existing systems.
C. streamlining of current post-trade processes.
69. Why is technical analysis especially useful in the analysis of commodities and
currencies?
A. Valuation models cannot be used to determine fundamental intrinsic value for
these securities.
B. Government regulators are more likely to intervene in these markets.
C. These types of securities display clearer trends than equities and bonds do.
70. Which of the following is not a momentum oscillator?
A. MACD.
B. Stochastic oscillator.
C. Bollinger Bands.
1. A 25. A 48. A
2. C 26. A 49. C
3. C 27. C 50. B
4. C 28. A 51. A
5. A 29. B 52. B
6. B 30. C 53. C
7. A 31. B 54. A
8. B 32. C 55. B
9. A 33. A 56. B
10. A 34. C 57. A
11. A 35. C 58. C
12. B 36. C 59. B
13. B 37. B 60. C
14. A 38. B 61. B
15. A 39. C 62. B
16. A 40. B 63. A
17. C 41. A 64. A
18. B 42. C 65. A
19. A 43. B 66. A
20. C 44. A 67. A
21. B 45. A 68. C
22. A 46. A 69. A
23. B 47. B 70. C
24. B