Fixed Income — CFA® Program Level I

Question 1

The finance ministry of the Republic of Ombrana sells its new 10-year bonds through a single-price (uniform-price) auction that accepts both competitive and non-competitive bids. Which statement about this auction is least likely accurate?

Accepted Answer

Each winning competitive bidder receives its own bid yield, so winners pay different prices.

Answer

All winning competitive bidders receive the same yield, which is the highest yield the ministry accepts.

Answer

Non-competitive bidders are filled at the yield determined by the accepted competitive bids.

Question 2

The credit committee of Oyapock Asset Management discusses the risks of holding BBB-rated bonds issued by Maroni Bauxite. Which of the following statements made at the meeting is least likely accurate?

Accepted Answer

A higher expected recovery rate in default would raise the spread investors require, because it increases the loss given default.

Answer

Downgrade risk is part of spread risk: if the bonds are cut to a lower rating, their spread will usually widen even if no default occurs.

Answer

Market liquidity risk is part of spread risk and shows up in wider bid-ask spreads and higher yields for bonds that trade infrequently.

Question 3

Mahakam River Credit Fund holds USD 7,325,000 of senior unsecured notes issued by Sepinggan Harbor Towage. The fund's analysts estimate a one-year probability of default of 2.85% and expect to recover 42% of the exposure if a default occurs. The notes' expected loss over the next year is closest to:

Accepted Answer

121,082.25

Answer

87,680.25

Answer

208,762.50

Sample questions