CFA level lll 2013 exam AM Q9

CFA Level III Fixed Income
#1

Hi all,

it’s about question 9 - b)

Catena’s research team is currently the following trades:

Trade 1 : Sell a 3 year maturity AAA corporate bond and but a 30 year maturity AAA bond of the same issuer based on the expectation that credit spreads will tighten uniformly by 10 basis points across the credit curve.

B. Discuss the most significant risk of Trade 1 assuming that the expectation about credit spreads is correct.

CFAI answer ) The most significant risk associated with Trade 1 is that while spreads are tightening, long term interest rates could increase.

If I write about reinvestment risk, is it a completely wrong?

#2

I think historically the graders have to go by what the grading rubric says. Now, I’ve seen answer sheets of previous exams that have blurbs at the end saying “alternatively, answers blah blah blah.” So I’m guessing if they start to see a lot of similar answers that make sense, then maybe the CFAI will decide whether it is an acceptable answer.

I know this doesn’t answer your question like you were probably hoping… Also be careful using the old exams for fixed income. I think IFT says don’t even do them.