Top 107 Free CFA Level 2 Mock Exam Questions and Answers on Fixed Income

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mkt conv. pre. per share/ favourable inc. dif per share

• Credit Tranching
• Premium payback period
• Key Rate Duration
• Nominal Spread

Class that receives only the interest portion of each payment. CF starts big + gets smaller over time. Thus, they have shorter effective lives than PO. The major risk is that the value of the CF the investor receives may be less than intially expeceted, and possibly less than originally invested due to prepayment speed.

• Emperical Duration
• Implied Yield Volatility
• Reset notes:
• Interest Only (IO) Strips

Measure the firm's ability to repay its debt + lease obligations out of operating CF.EBIT Coverage Ratio = EBIT/ Annual Interest Expense. EBITDA Coverage Ratio = EBITDA/ Annual interest expense. Variability of these ratios is an important consideration to a bondholder

• Modified Duration
• Emperical Duration
• Effective Duration
• Coverage Ratios

1. Senior sector of synthetic doesnt require funding. 2. Ramp - up period is shorter. 3. it is cheaper to buy exposure to an asset through a CDS rather than buying the asset directly.

• Prepayment/Time Tranching
• When to use Z - Spread?
• Synthetic CDO
• Why Synthetic rather than Cash CDO?

Parallel shifts: ≈ 90%- all maturities ∆ by the = amountsTwists shitfts (nonparallel) ≈ 8,5%- slopes of the yield curve either steepens or flattensButterfly shifts: ≈1.5%-∆s in the "humped" mature of the curve-positive = less less humped or flatten-negative = more curved

• OAS Analysis
• Yield curve shifts
• Yield Volatility
• Effective Duration

Fully amortizing loans, simlar to mortgage. Lower prepayments due to: smaller loan balances, depreciation of home> reduction of principal in early months, borrowers likely to have low credit ratings which makes refinancing difficult.

• Avg. life of a MBS v. maturity
• Manufactured Housing Backed Security
• Premium payback period
• Credit Card Receivable Backed Securities

Assumes that: 1. CFs will be reinvested @ CFY prevailing when the MBS is issued. (Reinvestment Risk) 2. The MBS will be held until maturity. If security is sold prior to maturity, uncertainty is introduced regarding terminal CF (price risk). 3. The CFs will be realized as expected (prepayment risk)

• Commercial MBS (CMBS)
• Delinquencies
• Amortizing Assets
• Major Deficiencies of CFY

= NOI / Debt Service . CF coverage ratio of the amount of the CF from a commercial property available to make debt service payments. NOI is calculated after the deduction of real estate taxes, but before any relevante income taxes. The higher the better for this ratio from the perspective of the MBS investor.

• Debt to Service Coverage Ratio
• CMBS Level Call Protection
• Effective Duration
• When to use Nominal Spread?

Used to asses performance of receivables portfolio. = Gross Portfolio Yield - Charge Offs. - If wgtd avg coupon promised to ABS Tranches > net portfolio yield, there is risk that the tranches will not be paid off as promised.

• Cash Flow Yield
• Net Portfolio Yield
• Key Rate Duration
• Reset notes:

If Std. Dev. = 10%, and Yield = 8%, the std. deviation = 80 bps (8% x .10) The std. deviation of yield chngs in bps is then used to construct confidence intervals. This can determine the probability of yield chngs. w/in a certain number of std. deviations.

• Interpreting Historical Yield Volatility
• Increase in int. rate volatily:
• Implied Yield Volatility
• Increase in stock volatily: