Question

Question1:

Answer the following question fixed income securities:

1(i):

The effect on a bond portfolio’s value of a decrease in yield would be most accurately estimated by using:

(a) the price value of a basis point

(b) both the portfolio’s duration and convexity

(c) the duration approach

(d) the full valuation approach

1(ii):

A pass-through security is best characterised as

(a) A security with a prorata claim to the underlying pool of assets

(b) A bond backed by real estate

(c) A part of a loan sale

(d) A multi-class mortgage backed bond

1(iii)

An estimate of the price change for an option-free bond caused by a 1% decline in its yield to maturity based only on its modified duration will result in an answer that:

(a) is accurate

(b) is too small

(c) may be too small or too large

(d) is too large

1(iv)

If a mortgage pass through experiences large prepayments early on in the life of the security the result will be that pass through holders will receive _______ than expected cash flows early on and _______ than expected cash flows later on.

(a) Greater; Less

(b) Less; Greater

(c) Greater; Greater

(d) Less; Less

Answer 1

1(i), B, The effect on a bond portfolio’s value of a decrease in yield would be most accurately estimated by using both the portfolios duration & convexity.

1(ii), A, Pass-through security is best characterised as a security with a prorata claim to the underlying pool of assets

1(iii), A, An estimate of the price change for an option-free bond caused by a 1% decline in its yield to maturity based only on its modified duration will result in an answer that is accurate

1(iv), A, If a mortgage pass through experiences large prepayments early on in the life of the security the result will be that pass through holders will receive greater than expected cash flows early on and less than expected cash flows later on.