The Theory and Practice of Investment Management: Asset Allocation, Valuation, Portfolio Construction, and Strategies, Second Edition

QUESTIONS

1.

a. What is the advantage of a call provision for an issuer?

b. What are the disadvantages of a call provision for the bondholder?

2. Explain why you agree or disagree with the following statement: “The debt of government-owned corporations is guaranteed by the full faith and credit of the U.S. government, but that is not the case for the debt of government sponsored enterprises.”

3. How do investors gauge the default risk of a bond issue?

4. Why is the maturity of an amortizing bond not a useful measure?

5. Explain why you agree or disagree with the following statements:

a. “All municipal bonds are exempt from federal income taxes.”

b. “All municipal bonds are exempt from state and local taxes.”

6. What is the difference between a municipal tax-backed bond and a municipal revenue bond?

7.

a. Why is the cash flow of a residential mortgage loan unknown?

b. In what sense has the investor in a residential mortgage loan granted the borrower (homeowner) a loan similar to a callable bond?

8. Why is an assumed prepayment speed necessary to project the cash flow of a mortgage passthrough security?

9.

a. What is meant by prepayment risk for a residential mortgage-backed security?

b. What are contraction risk and extension risk?

c. “By creating a CMO, an issuer eliminates the prepayment risk associated with the underlying pool of mortgage loans.” Do you agree with this statement?

10.

a. Why is it necessary for a nonagency mortgage-backed security to have credit enhancement? ...