Just finished the Mock Exam from CFAI and only scored 63%…how is everyone else scoring? Quick question: If investor expects short term interest rates to decline by 25 bps and long term rates to increase by 75 bps - what should we invest in? 1. Short term barbell strategy 2. Short term bullet strategy 3. Long term barbell strategy 4. Long term bullet strategy I had picked 4 - since bullets have less interest rate risk exposure vs. barbells. Also, when interest rates decline, we choose longer term bonds. Answer was 2.
The questions states that long term rates are increasing by 75 bps so why would you want to invest in longer duration bonds. Since the short term rate were heading south, answer 2 seems pretty logical to me.
Thanks FF…guess I was reading to much into that question and got caught up with the barbell vs. bullet portion of it. Makes sense…
Another one - PM expects spreads to narrow for all spread product sectors. He should? 1. underweight allocation to Tresuries and overweight allocation to Mortgage securities/CMBS…?
Inconel738 Wrote: ------------------------------------------------------- > Another one - > > PM expects spreads to narrow for all spread > product sectors. He should? > > 1. underweight allocation to Tresuries and > overweight allocation to Mortgage > securities/CMBS…? Sounds right. You want to purchase securities if you expect their spreads to narrow. When spreads fall, prices increase. Think of spreads as an add-on to the discount rate. The lower the discount rate, the higher the price. The lower the spread, the higher the price.
ok - So, its a different case when hedging risks associated with mortgage securities - right? Basically - we treat interest rate risk and spread risk seperately. Let’s say we own mortgage securities in our portfolio and hedge away interest rate risk - then we are left only with spread risk. So, if manger wants to benefit from spread movements - he increases exposure to mortgage securities when spreads increase and turns around and sells when spreads narrow… But in standalone question with spreads -what you said is right.
I heard the mock exam gives a breakdown of your results. But does it not identify which questions you got wrong and with the correct answers (i.e. a,b,c, or d) at the end?
you are right - they are a waste of time. Big value add (IMHO) of tests is to go back and see why you were wrong in the quetions. If I cannot see why I was wrong - not worth the 2 hours spent on taking these tests…
so i assume you’re saying you can’t see the correct answers?
you can’t see the correct answer, but you could write down your choice for each question as you take the exam, the answers are pretty short so you could write it down. it wouldn’t take too long. the question with the answer where you want to underweight treasuries and overweight the mortgage backed, why underweight treasuries when spreads narrow? I can’t reason it out… help please.
Iwona pass Wrote: ------------------------------------------------------- > you can’t see the correct answer, but you could > write down your choice for each question as you > take the exam, the answers are pretty short so you > could write it down. it wouldn’t take too long. > > the question with the answer where you want to > underweight treasuries and overweight the mortgage > backed, why underweight treasuries when spreads > narrow? I can’t reason it out… help please. you have 100 mil portfolio how else you will do it without change portfolio notional?
I had posted the exact same Q earlier … you have to keep in mind that the treasury yield is static . When spreads narrow the value of your MBS securities will increase relative to treasuries …hence you overweight them .
------------------------------------------------------- > you can’t see the correct answer, but you could > write down your choice for each question as you > take the exam, the answers are pretty short so you > could write it down. it wouldn’t take too long. and what good would writing down your answer be if you can’t see the coreect answers?
thanks guys I get it now! UAECFA, I’m sorry I thought that your question was: Can I see the answer that I chose - answer is no Can I see what the correct answer is - answer is yes therefore you can write down for example that your answer was B, then compare it to the answer key. It’s still pretty dumb but might help.
> therefore you can write down for example that your > answer was B, then compare it to the answer key. > It’s still pretty dumb but might help. Goodstuff, thanks
Also, if you have time - the test is pretty short. They allocate 2 hours - you can finish the test in less than 1 hour and 15 minutes… So, worthwhile since it is free anyways. I would not pay for the second one though.