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Fixed Income Analysis and Strategies
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Question 1 of 30
1. Question
Consumer spending is the amount of money spent on consumption goods in an economy. As a percentage of GDP, consumer spending is much larger than business spending. Through which of the following is consumer spending usually gauged?
I. Through the use of retail sales data.
II. Through the use of store sales data.
III. Through the use of gross income benefit data.
IV. Through the use of consumer consumption data.Correct
Consumer spending is usually gauged through the use of store sales data, retail sales, and consumer consumption data. The primary driver of consumer spending is consumer after-tax income, which in the United States is gauged using non-farm payroll data and new unemployment claims.
Incorrect
Consumer spending is usually gauged through the use of store sales data, retail sales, and consumer consumption data. The primary driver of consumer spending is consumer after-tax income, which in the United States is gauged using non-farm payroll data and new unemployment claims.
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Question 2 of 30
2. Question
Given that spending is income net of savings, savings data are also important for predicting consumer spending. Which of the following factors influences saving rates?
I. Customer/client relationship
II. Community of consumers
III. Consumer confidence
IV. Changes in the investment environmentCorrect
Saving rates are influenced by consumer confidence and changes in the investment environment. Specifically, consumer confidence increases as the economy starts to recover from a recession, and consumers begin to spend more. At the same time, stock prices start to rise and momentum begins to build. Consumers continue spending until the economy shows definite signs that it has peaked (i.e., top of the business cycle) and reversed. At this point, consumers begin saving more and more until the economy “turns the corner,” and the cycle starts over.
Incorrect
Saving rates are influenced by consumer confidence and changes in the investment environment. Specifically, consumer confidence increases as the economy starts to recover from a recession, and consumers begin to spend more. At the same time, stock prices start to rise and momentum begins to build. Consumers continue spending until the economy shows definite signs that it has peaked (i.e., top of the business cycle) and reversed. At this point, consumers begin saving more and more until the economy “turns the corner,” and the cycle starts over.
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Question 3 of 30
3. Question
Longer term stability of the growth trend is related to stability in consumer spending. Which of the following states that consumer spending is mostly driven by long-run income expectations, not cyclical swings in wealth?
Correct
The permanent income hypothesis asserts that consumer spending is mostly driven by long-run income expectations, not cyclical swings in wealth. If income temporarily declines, consumers continue to spend (from savings) as longterm income expectations are more stable.
Incorrect
The permanent income hypothesis asserts that consumer spending is mostly driven by long-run income expectations, not cyclical swings in wealth. If income temporarily declines, consumers continue to spend (from savings) as longterm income expectations are more stable.
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Question 4 of 30
4. Question
Which of the following are characteristic of a basic model for forecasting trend economic growth?
I. Focuses on growth in total factor productivity.
II. Focuses on growth in capital.
III. Focuses on growth in labor input based on growth in the labor force and labor participation.
IV. Focuses on growth in debt.Correct
The average growth rate over the economic cycle is limited by the longterm trend growth rate. A basic model for forecasting trend economic growth focuses on the following:
– Growth in labor input based on growth in the labor force and labor participation.
– Growth in capital.
– Growth in total factor productivity.Incorrect
The average growth rate over the economic cycle is limited by the longterm trend growth rate. A basic model for forecasting trend economic growth focuses on the following:
– Growth in labor input based on growth in the labor force and labor participation.
– Growth in capital.
– Growth in total factor productivity. -
Question 5 of 30
5. Question
Longer term stability of the growth trend is related to stability in consumer spending, the largest component of both developed and emerging economies growth. Which of the following suggests that consumers spend more when wealth increases and less when it decreases?
Correct
The wealth effect suggests consumers spend more when wealth increases and less when it decreases. The wealth effect would contribute to swings between higher and lower spending and would amplify swings in the business cycle.
Incorrect
The wealth effect suggests consumers spend more when wealth increases and less when it decreases. The wealth effect would contribute to swings between higher and lower spending and would amplify swings in the business cycle.
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Question 6 of 30
6. Question
In addition to being influenced by governmental policies, trends are still subject to unexpected surprises or shocks that occur outside the normal course of an economy. Which of the following terms refers to unanticipated events that occur outside the normal course of an economy?
Correct
Unanticipated events that occur outside the normal course of an economy are referred to as exogenous shocks. Since the events are unanticipated, they are not already built into current market prices, whereas normal trends in an economy, which would be considered endogenous, are built into market prices.
Incorrect
Unanticipated events that occur outside the normal course of an economy are referred to as exogenous shocks. Since the events are unanticipated, they are not already built into current market prices, whereas normal trends in an economy, which would be considered endogenous, are built into market prices.
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Question 7 of 30
7. Question
An economic balance sheet contains an organization’s financial assets and liabilities, as well as any nonfinancial assets and liabilities that are applicable to the asset allocation decision. Which of the following refers to these nonfinancial assets and liabilities?
Correct
These nonfinancial assets and liabilities are referred to as extended portfolio assets and liabilities because they are not included in traditional balance sheets. The traditional accounting balance sheet encompasses an organization’s assets, liabilities, and owner’s equity.
Incorrect
These nonfinancial assets and liabilities are referred to as extended portfolio assets and liabilities because they are not included in traditional balance sheets. The traditional accounting balance sheet encompasses an organization’s assets, liabilities, and owner’s equity.
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Question 8 of 30
8. Question
Which of the following investments would most likely be part of the extended portfolio of the assets and liabilities sections on an economic balance sheet?
I. Human capital
II. Financial assets
III. Financial liabilities
IV. Nonfinancial assetsCorrect
An economic balance sheet contains all of an organization’s financial assets and liabilities, as well as any nonfinancial assets and liabilities that are applicable to the asset allocation decision. Human capital is most likely to be a part of the extended portfolio assets. The others (financial asset and financial liabilities) are already part of a more traditional balance sheet.
Incorrect
An economic balance sheet contains all of an organization’s financial assets and liabilities, as well as any nonfinancial assets and liabilities that are applicable to the asset allocation decision. Human capital is most likely to be a part of the extended portfolio assets. The others (financial asset and financial liabilities) are already part of a more traditional balance sheet.
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Question 9 of 30
9. Question
There are three types of asset allocation approaches. Which of the following types of asset allocation approaches is focused on achieving lifestyle and aspirational financial objectives?
Correct
Goals-based approaches are geared toward asset allocations for subportfolios, which help individuals or families achieve lifestyle and aspirational financial objectives. Each sub-portfolio will have a unique asset allocation designed to meet the stated goals.
Incorrect
Goals-based approaches are geared toward asset allocations for subportfolios, which help individuals or families achieve lifestyle and aspirational financial objectives. Each sub-portfolio will have a unique asset allocation designed to meet the stated goals.
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Question 10 of 30
10. Question
Risk concepts associated with asset-only approaches focus on asset class risk as well as constructing effective asset class combinations. Which of the following asset allocation approaches is concerned with the risk of not having enough assets to pay liabilities when they come due?
Correct
Risk concepts associated with liability-relative approaches focus on not having enough assets to pay liabilities when they come due. The differences between asset and liability characteristics (e.g., size, sensitivity to interest rate changes) are the main drivers of risk for liability-relative asset allocation approaches.
Incorrect
Risk concepts associated with liability-relative approaches focus on not having enough assets to pay liabilities when they come due. The differences between asset and liability characteristics (e.g., size, sensitivity to interest rate changes) are the main drivers of risk for liability-relative asset allocation approaches.
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Question 11 of 30
11. Question
Rebalancing an allocation to its precise target weight requires more or less constant trading. Which of the following terms refers to the rebalancing of a portfolio to its strategic allocation on a predetermined, regular basis (e.g., monthly or quarterly)?
Correct
Calendar rebalancing is the rebalancing of a portfolio to its strategic allocation on a predetermined, regular basis. The primary benefit of calendar rebalancing is that it provides discipline without the requirement for constant monitoring. The drawback is that the portfolio could stray considerably between rebalancing dates and return to its strategic allocation ranges on the rebalancing date.
Incorrect
Calendar rebalancing is the rebalancing of a portfolio to its strategic allocation on a predetermined, regular basis. The primary benefit of calendar rebalancing is that it provides discipline without the requirement for constant monitoring. The drawback is that the portfolio could stray considerably between rebalancing dates and return to its strategic allocation ranges on the rebalancing date.
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Question 12 of 30
12. Question
Which of these most correctly refers to an active management strategy that deviates from the strategic asset allocation (SAA) to take advantage of perceived short-term capital market expectations?
Correct
Tactical asset allocation (TAA) is an active management strategy that deviates from the strategic asset allocation (SAA) to take advantage of perceived short-term opportunities in the market. TAA introduces additional risk, seeking incremental return, often called alpha.
Incorrect
Tactical asset allocation (TAA) is an active management strategy that deviates from the strategic asset allocation (SAA) to take advantage of perceived short-term opportunities in the market. TAA introduces additional risk, seeking incremental return, often called alpha.
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Question 13 of 30
13. Question
Investors select asset classes based on their desired exposure to common risk factors. Which of the following is/are examples of these risk factors?
I. Volatility
II. Liquidity
III. Interest rate
IV. Behavioural patternCorrect
Examples of risk factors include volatility, liquidity, inflation, interest rates, duration, foreign exchange, and default risk. Risk factor exposures may overlap across multiple asset classes. Examining these overlapping risk factors can help investors identify the correlations among asset classes.
Incorrect
Examples of risk factors include volatility, liquidity, inflation, interest rates, duration, foreign exchange, and default risk. Risk factor exposures may overlap across multiple asset classes. Examining these overlapping risk factors can help investors identify the correlations among asset classes.
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Question 14 of 30
14. Question
Which of the following statements best describes the financial equilibrium approach?
Correct
The financial equilibrium approach assumes that supply and demand in global asset markets are in balance. Financial models such as the International Capital Asset Pricing Model (ICAPM) will value securities correctly.
Incorrect
The financial equilibrium approach assumes that supply and demand in global asset markets are in balance. Financial models such as the International Capital Asset Pricing Model (ICAPM) will value securities correctly.
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Question 15 of 30
15. Question
Negative interest rates were generally considered a hypothetical curiosity before the 2007–2009 financial crises. Which of these statements correctly describes a negative interest rate?
I. A fixed deposit at a financial institution.
II. A net payment made to keep money on deposit at a financial institution.
III. The minimum amount to be invested in short-term instruments.
IV. Payment of a net fee to invest in short-term instruments.Correct
A negative interest rate is defined as a net payment made to keep money on deposit at a financial institution or payment of a net fee to invest in short-term instruments. With negative interest rates, banks charge you interest to keep cash with them, rather than paying you interest. The negative interest rate is meant to be an incentive for banks to make loans during a period in which they would rather hang on to funds.
Incorrect
A negative interest rate is defined as a net payment made to keep money on deposit at a financial institution or payment of a net fee to invest in short-term instruments. With negative interest rates, banks charge you interest to keep cash with them, rather than paying you interest. The negative interest rate is meant to be an incentive for banks to make loans during a period in which they would rather hang on to funds.
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Question 16 of 30
16. Question
Cash typically refers to short-term debt (e.g., commercial paper) with a maturity of one year or less. Cash managers adjust the maturity and creditworthiness of their cash investments depending on which of the following factors?
I. The availability of cash instruments.
II. Their forecasts for interest rates.
III. The economy.
IV. Their religious beliefs.Correct
Cash managers adjust the maturity and creditworthiness of their cash investments depending on their forecasts for interest rates and the economy. Longer maturity and less creditworthy instruments have higher expected return but also more risk.
Incorrect
Cash managers adjust the maturity and creditworthiness of their cash investments depending on their forecasts for interest rates and the economy. Longer maturity and less creditworthy instruments have higher expected return but also more risk.
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Question 17 of 30
17. Question
The interest rate for overnight loans among U.S. banks is known as the Federal Funds rate. Which of the following sets the interest rate for overnight loans among U.S. banks?
Correct
The interest rate for overnight loans among U.S. banks is the Federal Funds rate and is set by the Federal Reserve. The Federal Reserve sets the Federal Funds rate through its purchases and sales of government debt.
Incorrect
The interest rate for overnight loans among U.S. banks is the Federal Funds rate and is set by the Federal Reserve. The Federal Reserve sets the Federal Funds rate through its purchases and sales of government debt.
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Question 18 of 30
18. Question
Credit risk is the risk taken by a bond investor that the bond’s issuer will default by failing to pay interest and repay the principal on schedule. Which of the following is the most common type of credit risk-free bonds?
Correct
The most common type of credit risk-free bonds are those issued by governments in developed countries. In practice, government bonds of financially stable countries are treated as risk-free bonds, as governments can raise taxes or indeed print money to repay their domestic currency debt. The yield on these bonds is composed of a real yield and the expected inflation over the investment horizon.
Incorrect
The most common type of credit risk-free bonds are those issued by governments in developed countries. In practice, government bonds of financially stable countries are treated as risk-free bonds, as governments can raise taxes or indeed print money to repay their domestic currency debt. The yield on these bonds is composed of a real yield and the expected inflation over the investment horizon.
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Question 19 of 30
19. Question
Credit risks are calculated based on the borrower’s overall ability to repay a loan according to its original terms. Which of the following is the most common type of credit risky bonds?
Correct
The most common type of credit risky bonds are corporate bonds. Most corporate bonds are debentures, meaning they are not secured by collateral. Corporate bonds offer a higher yield than some other fixed-income investments, but for a price in terms of added risk.
Incorrect
The most common type of credit risky bonds are corporate bonds. Most corporate bonds are debentures, meaning they are not secured by collateral. Corporate bonds offer a higher yield than some other fixed-income investments, but for a price in terms of added risk.
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Question 20 of 30
20. Question
Several governments issue bonds that adjust for inflation so that the investor is protected against it. Which of the following economic factors is the yield on these bonds correlated with?
I. Their yield rises as the real economy expands. This is primarily because their yield is tracking short-term interest rates, which also move with the economy.
II. Their yield changes with supply and demand. These markets are somewhat small, making supply and demand changes more important.
III. Their yield falls as inflation accelerates and more investors seek to buy the inflation-index bonds. The increase in demand leads to higher prices and lower yields.
IV. Their yield falls as the real economy expands. This is because their yield is tracking long-term interest rates, which also move with the economy.Correct
Several governments issue bonds that adjust for inflation so that the investor is protected against it. The yield on these bonds has been correlated with three economic factors:
– Their yield rises as the real economy expands (contracts). This is primarily because their yield is tracking short-term interest rates, which also move with the economy.
– Their yield Falls as inflation accelerates and more investors seek to buy the inflation-index bonds. The increase in demand leads to higher prices and lower yields.
– Their yield Changes with supply and demand. These markets are somewhat small, making supply and demand changes more important.Incorrect
Several governments issue bonds that adjust for inflation so that the investor is protected against it. The yield on these bonds has been correlated with three economic factors:
– Their yield rises as the real economy expands (contracts). This is primarily because their yield is tracking short-term interest rates, which also move with the economy.
– Their yield Falls as inflation accelerates and more investors seek to buy the inflation-index bonds. The increase in demand leads to higher prices and lower yields.
– Their yield Changes with supply and demand. These markets are somewhat small, making supply and demand changes more important. -
Question 21 of 30
21. Question
Emerging market risks stem from unstable political and social systems and heavy infrastructure investments financed by foreign borrowing. Which of the following are questions that investors should answer before investing in these markets?
I. What is the country’s stance regarding religion?
II. What is the government’s stance regarding structural reform?
III. Does the country have responsible fiscal and monetary policies?
IV. What is the level of foreign exchange reserves relative to short-term debt?Correct
Investors should answer the following questions before investing in unstable political and social systems and heavy infrastructure investments financed by foreign borrowing:
– Does the country have responsible fiscal and monetary policies? This is determined by examining the deficit to GDP ratio.
– What is the expected growth? It should be at least 4%.
– Does the country have reasonable currency values and current account deficits? A volatile currency discourages needed foreign investment, and an overvalued currency encourages excessive government borrowing.
– Is the country too highly levered? Too much debt can lead to a financial crisis if foreign capital flees the country.
– What is the level of foreign exchange reserves relative to short-term debt? Many emerging country loans must be paid back in a foreign currency.
– What is the government’s stance regarding structural reform? A supportive government makes the investment environment more hospitable.Incorrect
Investors should answer the following questions before investing in unstable political and social systems and heavy infrastructure investments financed by foreign borrowing:
– Does the country have responsible fiscal and monetary policies? This is determined by examining the deficit to GDP ratio.
– What is the expected growth? It should be at least 4%.
– Does the country have reasonable currency values and current account deficits? A volatile currency discourages needed foreign investment, and an overvalued currency encourages excessive government borrowing.
– Is the country too highly levered? Too much debt can lead to a financial crisis if foreign capital flees the country.
– What is the level of foreign exchange reserves relative to short-term debt? Many emerging country loans must be paid back in a foreign currency.
– What is the government’s stance regarding structural reform? A supportive government makes the investment environment more hospitable. -
Question 22 of 30
22. Question
The government can promote competition by restricting the practices used by firms to kill or reduce competition. Which of the following is an effect of a government’s promotion of competition in the marketplace?
I. The efficiency of the economy increases.
II. The efficiency of the economy decreases.
III. Higher long-term growth in the economy.
IV. Higher long-term growth in the stock market.Correct
The effect of a government’s promotion of competition in the marketplace is the increase in the efficiency of the economy, likely leading to higher long-term growth in the economy and the stock market.
Incorrect
The effect of a government’s promotion of competition in the marketplace is the increase in the efficiency of the economy, likely leading to higher long-term growth in the economy and the stock market.
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Question 23 of 30
23. Question
Which of the following approaches is the idea that diversification is achieved by ensuring that each asset class contributes the same amount to the total portfolio risk, associated with?
Correct
The idea that diversification is achieved by ensuring that each asset class contributes the same amount to the total portfolio risk is associated with the risk parity asset allocation approach. The criticism of this approach is that it ignores expected returns and focuses only on risk.
Incorrect
The idea that diversification is achieved by ensuring that each asset class contributes the same amount to the total portfolio risk is associated with the risk parity asset allocation approach. The criticism of this approach is that it ignores expected returns and focuses only on risk.
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Question 24 of 30
24. Question
Rebalancing is the process of selling some assets and buying others to align your portfolio with a stated goal and target asset allocation. For which of the following reasons do investment managers rebalance portfolios?
I. As a response to changing client goals.
II. To remain in good terms with government officials.
III. In response to capital market expectations.
IV. In response to changes in tactical allocations.Correct
Rebalancing is the act of adjusting portfolio asset weights in order to restore target allocations or risk levels over time. Investment managers rebalance portfolios for a number of reasons, including in response to changing client goals and capital market expectations or changes in tactical allocations.
Incorrect
Rebalancing is the act of adjusting portfolio asset weights in order to restore target allocations or risk levels over time. Investment managers rebalance portfolios for a number of reasons, including in response to changing client goals and capital market expectations or changes in tactical allocations.
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Question 25 of 30
25. Question
Rebalancing is an essential component of the portfolio management process. Which of the following factors affect the optimal corridor width or the rebalancing range of an asset class?
I. The volatility of the rest of the portfolio.
II. Correlations with the rest of the portfolio.
III. The transaction costs.
IV. The return rate.Correct
Portfolio rebalancing safeguards the investor from being overly exposed to undesirable risks. The key factors that impact the optimal corridor width (or the rebalancing range) of an asset class include the following:
– Transaction costs.
– Risk tolerance.
– Correlations with the rest of the portfolio.
– The volatility of the rest of the portfolio.Incorrect
Portfolio rebalancing safeguards the investor from being overly exposed to undesirable risks. The key factors that impact the optimal corridor width (or the rebalancing range) of an asset class include the following:
– Transaction costs.
– Risk tolerance.
– Correlations with the rest of the portfolio.
– The volatility of the rest of the portfolio. -
Question 26 of 30
26. Question
Which of the following involves setting trigger points around the optimal percentage allocation and rebalancing back to the target allocation or partially correcting when those trigger points are hit?
Correct
There are several strategies for rebalancing. Percentage range rebalancing involves setting trigger points around the optimal percentage allocation and rebalancing back to the target allocation or partially correcting when those trigger points are hit.
Incorrect
There are several strategies for rebalancing. Percentage range rebalancing involves setting trigger points around the optimal percentage allocation and rebalancing back to the target allocation or partially correcting when those trigger points are hit.
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Question 27 of 30
27. Question
A carry trade is one of the most simple strategies for currency trading that exists and is another form of leverage. Which of the following ways can be used to implement a carry trade?
I. Borrowing at lower shorter-term rates to invest at higher longer-term rates.
II. Borrowing at higher shorter-term rates to invest at lower longer-term rates.
III. Borrowing in a lower interest rate and investing in a higher interest rate currency.
IV. Borrowing in a higher interest rate and investing in a lower interest rate currency.Correct
A carry trade is just another form of leverage that has the potential to be highly profitable over the long term if correctly managed. Return is enhanced by borrowing at a lower rate to invest the funds in an asset that will generate a higher rate of return. The following ways are used to implement a carry trade:
– Borrowing at lower shorter-term rates to invest at higher longer-term rates.
– Borrowing in a lower interest rate and investing in a higher interest rate currency.Incorrect
A carry trade is just another form of leverage that has the potential to be highly profitable over the long term if correctly managed. Return is enhanced by borrowing at a lower rate to invest the funds in an asset that will generate a higher rate of return. The following ways are used to implement a carry trade:
– Borrowing at lower shorter-term rates to invest at higher longer-term rates.
– Borrowing in a lower interest rate and investing in a higher interest rate currency. -
Question 28 of 30
28. Question
An investment-grade bond is a bond classification used to denote bonds that carry a relatively low credit risk compared to other bonds. Which of the following refers to bonds that are rated below investment-grade?
I. High-yield (HY) bonds
II. Government bonds
III. Junk bonds
IV. Speculative-grade bondsCorrect
High-yield bonds are bonds that pay higher interest rates because they have lower credit ratings than investment-grade bonds. Speculative-grade bonds also known as junk bonds are high-yielding high-risk security, typically issued by a company seeking to raise capital quickly in order to finance a takeover. They are securities deemed to not be of investment quality by a credit rating agency.
Incorrect
High-yield bonds are bonds that pay higher interest rates because they have lower credit ratings than investment-grade bonds. Speculative-grade bonds also known as junk bonds are high-yielding high-risk security, typically issued by a company seeking to raise capital quickly in order to finance a takeover. They are securities deemed to not be of investment quality by a credit rating agency.
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Question 29 of 30
29. Question
Credit risk is defined as a loss caused by a counterparty’s or debtor’s failure to pay. Credit risks are calculated based on the borrower’s overall ability to repay a loan according to its original terms. Which of the following are components of credit risk?
I. Accumulated risk
II. Default risk
III. Loss severity
IV. Redundant effectCorrect
Credit risk, or default risk, is the risk that a financial loss will be incurred if a counterparty to a transaction does not fulfill its financial obligations in a timely manner. Credit risk is made up of two components. They are default risk and loss severity (or loss given default).
Incorrect
Credit risk, or default risk, is the risk that a financial loss will be incurred if a counterparty to a transaction does not fulfill its financial obligations in a timely manner. Credit risk is made up of two components. They are default risk and loss severity (or loss given default).
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Question 30 of 30
30. Question
The specific forms of risk exposures in any specific bond can vary substantially. Which of the following refers to a decline in price relative to credit risk free bonds due to spread widening?
Correct
Spread risk refers to a decline in price relative to credit risk free bonds due to spread widening. Spread risk refers to the danger that the interest rate on a loan or bond turns out to be too low relative to an investment with a lower default risk for it to be a good use of funds.
Incorrect
Spread risk refers to a decline in price relative to credit risk free bonds due to spread widening. Spread risk refers to the danger that the interest rate on a loan or bond turns out to be too low relative to an investment with a lower default risk for it to be a good use of funds.