Question

1. True – False. Bottom-up investment approaches are duration management, yield curve positioning and sector selection.

2. Would an asset backed security typically pay more or less interest than a comparable non-asset backed security? (think risk)

3. Please briefly describe a credit default swap:

4.Why is predicting prepayments important for mortgage backed securities? When would we typically see higher prepayments

5. A money market fund has hit the value of $0.99 cents. It has

a)Broken the buck

b)It will not implement shadow pricing

c)It will continue to trade as normal

6. Please compare and contrast fundamental vs quantitative research:

7.True/False. Technical analysis seeks to predict stock performance by examining price trends.

8. Briefly describe what a spread is on a trade order? What does it say about liquidity?

9.Please briefly describe Market Impact in relation to large trades:

10. What is a basket trade? (think mutual funds)

11. When we say a broker is working a trade what does that mean and what is the goal?

12. True/False. Hedge funds and other large money managers do not like to use dark pools because it exposes their strategy to the market.

13. How would you contrast a value vs growth stock?

14. True/False Bottom-up investment approaches are issue selection and predicting calls or prepayments

15. In an environment of rising interest rates a zero coupon bond with a 5 year maturity would have:

a)A duration less than 5 years

b)A duration equal to 5 years

c)A duration greater than 5 years

Answer 1

As per rules I am answering the first 4 sub parts of this question

1. False

(In bottom up approach the investor focuses on the company rather than the economy or sector as a whole)

2. No. An asset backed security has lower risk since it is supported by an asset. Hence it will pay lesser than a non-asset backed security which is more riskier.

3. A credit default swap s one which transfers the credit exposure of fixed income securities. Under this arrangement the buyer makes the payment to the seller till the time of maturity of the instrument. In response the seller will pay the premium and all interest payments in case the issuer defaults or has another credit event.

4.IN case of MBS, prepayments are financial risks. People may pay off their loans and take up newer loans at lower rates of interest. Hence it is important to estimate the amount of prepayments and build a suitable penalty clause into the contracts. Higher prepayments occur when the rate of interest declines. This is when people opt for new loans and prepay the old and costlier ones.