Relative Value Across the Capital Structure

1.Two noncallable senior bonds from the same issuer trade at 130 and 185 basis points over maturity-matched government bonds. The investor requires 45 basis points of extra spread to extend from three to seven years. How much does the seven-year bond clear the hurdle by?

2.A two-year senior note yields 5.1% against a government yield of 3.9%. A six-year note yields 5.8% against 4.5%. How much extra spread does the six-year note offer?

3.A five-year bond has spread duration of 4.2 and a ten-year bond has spread duration of 7.4. Both widen by 30 basis points and government rates are flat. How much greater is the estimated percentage price loss on the ten-year bond?

4.A fund expects to sell in six months. A long bond offers 60 basis points more annual carry than a short bond, but has 4 more years of spread duration. If both widen by 20 basis points and other effects are ignored, what is the long bond's approximate relative return?

5.A company has enough cash to repay its 18-month note, with cash ring-fenced for that purpose. Its seven-year note depends on future earnings and refinancing. Which distinction matters most?

6.A large bank facility matures nine months before an issuer's first public bond comes due. What should you include in a short-bond credit review?

7.A two-year bond trades at 240 basis points and a five-year bond of the same rank at 185. What hypothesis should an analyst test first?

8.A seven-year note has spread duration 5.5. Over a one-year horizon it is expected to trade 20 basis points tighter as it rolls toward shorter maturities, holding the spread curve fixed. What is its approximate spread roll-down contribution?

9.A seven-year note would roll to a point on the current issuer curve where spreads are wider. If the curve is unchanged and rates are flat, how does that spread roll affect price?

10.A five-year bond has spread duration of 4 and offers 80 basis points of extra one-year carry over a duration-matched same-issuer bond. If only its spread changes, how much widening offsets that carry?

11.A ten-year note has a 7% coupon and yields 5.8%. A shorter same-issuer bond has a 4% coupon and yields 6.1%. Which has the higher yield to maturity?

12.A bond's spread stays flat but its benchmark yield rises 40 basis points. Its rate duration is 6. What is the approximate rate-related price move?

13.A manager hedges the government-rate duration on a long corporate bond. Which risk remains central when comparing it with a shorter same-issuer bond?

14.A five-year bond shows 30 basis points more spread than comparable same-issuer debt, but the quote hasn't updated in a week. What should happen before trading?

15.A portfolio must meet a known payment in 20 months. The issuer has noncallable bonds maturing in 18 months and five years. What favors the 18-month bond, assuming repayment?

16.A bond's spread rises 25 basis points while its matched government yield falls 40 basis points. Ignoring other effects, how did its total yield change?

17.Two same-issuer senior bonds have identical final maturities. One repays half its principal well before maturity and the other pays all principal at the end. Which comparison should the analyst make?

18.A debt issuer will likely have to refinance in year four. Its two-year note is fully funded, and its six-year note offers 20 basis points of extra spread. The desk requires 50 basis points to take the extra funding and duration risk. Which bond fits that rule?

19.A five-year and a ten-year issue are pari passu. You expect the spread curve to flatten through tightening of the ten-year point, with the five-year point unchanged. Which position gains from that view, ignoring carry and rates?

20.A buyer can earn 145 basis points on a four-year bond and 160 on a five-year bond. The four-year issue costs about 5 basis points of spread equivalent to trade and the five-year costs 22. Which offers the higher net spread on that comparison?

21.A long bond's higher yield comes entirely from the maturity-matched government curve. Both notes have the same spread, and the long bond has more spread duration. What is the credit relative value implication?

22.A 2029 bond spreads at 160 basis points. The same issuer's comparable noncallable 2027 and 2031 bonds of equal rank spread at 120 and 180. Under linear interpolation by maturity, how does the 2029 bond compare?

23.A seasoned note looks wider than a recently issued bond with similar maturity and rank. The older issue trades in much smaller lots. What could explain the gap?

24.A manager compares bonds using current yield, calculated as annual coupon divided by clean price. What key cash flow does that ratio omit?

25.A noncallable bond trades at 94 with a par redemption of 100. If the issuer pays as promised, what is the principal price gain by maturity per 100 face value?

26.A callable high-coupon note is compared with a noncallable issue using maturity spread only. What issue should the analyst address before comparing curve levels?

27.A noncallable bond's quoted yield is unchanged, but its maturity-matched benchmark yield falls by 12 basis points. What happened to the simple yield spread?

28.A fund compares two bonds for a one-year holding period. One pays 70 basis points more carry, but the bid-ask cost expected over the trade is 90 basis points higher. Ignoring other differences, what is its relative benefit?

29.A borrower has a seasonal cash trough before its near-term note comes due. Management cites positive year-end cash flow. What information would better assess the near note?

30.A three-year and a six-year bond have the same rank. The analyst expects widening concentrated in the six-year maturity after an unfunded acquisition. Which comparison should drive the recommendation?

31.A desk compares a fixed-rate bond with a floating-rate note of the same issuer. The floater resets to a reference rate plus a margin. Which approach best controls for rate structure?

32.Two noncallable notes of equal rank offer yields of 5.4% and 5.9%. The higher-yielding issue has a wider bid-ask, longer duration, and a less favorable curve point. What is a defensible ranking method?

33.A bond fund limits spread duration to five. A six-year same-issuer bond has spread duration 4.8 and a seven-year bond has spread duration 5.3. Which fits on its own?

34.A one-year bond trades wide after a large seller exits, while cash to repay is already identified. What evidence would support a technical rather than credit explanation?

35.A 100-basis-point parallel spread shock is used to compare a two-year bond and an eight-year bond. Why also test a front-end-only shock?

36.Secured and unsecured bonds have the same maturity and default probability. Expected recoveries on invested capital in default are 70% and 40%. What is the unsecured bond's extra expected loss at a 4% default probability?

37.A first-lien bond is secured on assets worth $150 million in distress. Liquidation costs are $20 million, and $180 million of debt shares the lien equally. Ignoring all other recoveries, what percentage of face does the collateral cover?

38.A first lien has a $100 million claim and a second lien has an $80 million claim on the same pool. Net proceeds are $140 million. What percentage of face does the second lien recover from that pool?

39.A holding company's bond is labeled senior, but nearly all assets and cash flows sit in a subsidiary. The operating subsidiary has its own debt and does not guarantee the holding company bond. What matters for recovery?

40.An operating subsidiary guarantees one bond but not another of the same parent issuer. What should the analyst review before valuing the guarantee?

41.Two bonds have the same maturity and senior unsecured rank. Their indentures give identical payment priority, but one has a stricter debt-incurrence test. How should the difference be modeled?

42.A secured note yields 5.6% and a subordinated note yields 7.0%. At equal price near par, their modeled loss severity differs by 40 percentage points. Under a simple one-year screen with equal default odds and no other differences, what default probability makes the yield pickup equal the extra expected loss?

43.A junior bond offers 160 basis points more annual carry than a senior bond at the same price. Modeled one-year default probability is 5%, and junior loss severity exceeds senior by 30 percentage points. What carry remains after incremental expected loss, ignoring other differences?

44.One bond is secured by specialized machinery. Another is unsecured but guaranteed by several profitable subsidiaries. What is the best way to rank expected recovery?

45.A firm raises $60 million of additional debt under an existing first-lien facility. The net collateral pool stays at $120 million. The previous $120 million of first-lien claims and the new debt share equally. What is the implied collateral coverage for the old debt?

46.A junior issue is wider than a senior issue by 210 basis points. Its estimated incremental default loss is 130 basis points and the desk requires 100 basis points after expected loss for liquidity and downside. How does the issue compare with that hurdle?

47.Net assets available to a legal entity's creditors are $320 million. A $200 million senior class ranks ahead of a $240 million subordinated class. What is the subordinated recovery as a percentage of face in this simplified waterfall?

48.A senior bond trades at 96 and a junior bond at 76. In a stress scenario, recoveries per 100 face are 72 and 57. What is each bond's loss as a percentage of purchase price, ignoring coupons?

49.A bond expected to recover 55 per 100 face trades at 75. What is the loss relative to purchase price if that recovery occurs, ignoring coupons?

50.A senior bond and a junior bond both recover in full in your base case. Why can the senior still deserve a lower spread?

51.A secured note offers 110 basis points and an unsecured note of equal maturity offers 180. Your modeled collateral is worth less than you previously assumed, narrowing the recovery advantage. What happens to the value of the secured protection, all else equal?

52.A subsidiary's senior debt totals $90 million and its net distributable value is $120 million. It owes nothing else, has no guarantees, and the parent owns it outright. What is the maximum residual from this subsidiary available to parent creditors under these assumptions?

53.A parent company reports $500 million of consolidated cash. Most of it is in a partly owned subsidiary with restricted distributions. What should you examine before relying on the cash for a parent bond?

54.A lender says a note is first lien. A borrowing-base facility has priority over it on accounts receivable and inventory. What is the right takeaway?

55.A company says its new debt will be senior unsecured and pari passu with existing senior unsecured bonds. What does that support, assuming equivalent issuers and guarantees?

56.Two equal-ranking bonds have face amounts of $100 million and $300 million. Net funds available for the class total $180 million. What is the recovery percentage for each bond under a pro rata allocation?

57.A distressed company has a $140 million first-lien class, a $100 million unsecured class, and $200 million of net distributable value. Under strict priority in the simplified model, how much additional value would need to disappear before the first lien takes any principal loss?

58.A low-priced junior note looks cheap versus a senior bond. What is a useful two-part downside test?

59.A first-lien bond trades tightly even though its collateral is cyclical. Which sensitivity is most informative?

60.A junior bond at par offers a 200-basis-point spread pickup. In a one-year stress model, its expected loss is 140 basis points higher than on senior debt, and its incremental trading cost is 35 basis points. What is the residual pickup in this screen?

61.A secured and an unsecured bond show the same spread at the same maturity. What could explain why the secured issue is not obviously better?

62.A fund already holds a substantial first-lien position. It considers switching some into a junior note of the same issuer for more carry. What new risk should the analyst highlight?

63.A holding-company bond and an operating-company bond are offered at 260 and 220 basis points. The desk requires 55 basis points for structural subordination. What is the relative value conclusion under this rule?

64.A junior note sits behind $500 million of senior debt. An analyst reduces stressed distributable value from $650 million to $550 million. The junior class has $200 million of claims. How does estimated junior recovery change?

65.A secured issue is backed by receivables from a major customer whose health is correlated with the issuer's. What scenario belongs in the analysis?

66.A junior note offers 120 basis points more spread than a senior bond. Under a simple one-year model, their loss-severity gap is 20 percentage points. What default probability would use up the entire pickup in expected loss?

67.An issuer proposes moving valuable assets to an entity that will not guarantee the existing notes. Which part of a same-issuer comparison needs an immediate refresh?

68.A bond has a guarantee from a subsidiary with its own equal-ranking creditors. How should the guarantee be valued in a stressed case?

69.A company discloses better liquidity but lower estimated sale proceeds for assets pledged to a secured note. Which analysis separates the two effects?

70.A mandate prohibits subordinated credit. A junior note offers a wider spread and your scenarios show better expected return than senior debt. What should the recommendation say?

71.A callable bond's yields are 6.3% to maturity, 5.4% to its first call, and 5.1% to a later call. Under a convention that tests all three outcomes, what is its yield to worst?

72.A callable note yields 6.4% to maturity and 4.9% to worst. A noncallable same-issuer bond yields 5.5%, with similar duration and seniority. Which offers more yield under the stated worst redemption comparison?

73.A callable bond bought at 108 can be redeemed at 102 in one year. Its coupon is 7 per 100 face, paid at year-end. What is the one-year return if called then, ignoring accrued interest and costs?

74.A bond bought at 94 pays 6 per 100 face at year-end. The issuer calls it at 100 then. What is the one-year return, ignoring accrued interest and trading costs?

75.A bond pays an 8% coupon and is callable at par today. The issuer can refinance at 5% on comparable terms. What should the analyst test next?

76.Market rates and the issuer's spread fall sharply. Compared with a similar noncallable bond, how might a near-par callable bond behave as a call becomes likely?

77.A callable note was priced as though it would be redeemed in two years. The issuer's spread widens and refinancing becomes costly. What risk should the holder revisit?

78.A bond can be redeemed at 103 this year or 101 next year. What is needed to compare calling now versus waiting from the issuer's perspective?

79.A note has a make-whole provision tied to a benchmark rate plus a contractual spread. What should the analyst use to estimate the redemption amount?

80.Two otherwise similar bonds have first ordinary par-call dates in one and four years. If rates fall soon, which provides more protection against an early ordinary par call?

81.Two bonds have equal option-adjusted spread under one model. What should an analyst check before saying they offer equal value?

82.A callable note offers 210 basis points on a spread measure that ignores its call. Its option-adjusted spread is 155 basis points. An otherwise comparable noncallable note offers 170 basis points of option-adjusted spread. Which is wider on the comparable measure?

83.An analyst increases the assumed rate volatility used to value an issuer's call option. Holding other inputs fixed, why can the call become more valuable?

84.A callable issue offers 50 basis points more option-adjusted spread than a noncallable peer. The callable trades infrequently and its quoted spread is based on a small lot. What is the next step?

85.A credit fund needs at least four years of predictable coupon income. A five-year note can be called after six months, and another five-year note is noncallable. Assuming scheduled payments continue, which fits better?

86.A premium bond quotes 4.7% to call and 5.6% to maturity. The issuer says it expects to call, but has not sent a binding notice. How should the analyst model the horizon?

87.A debt analyst wants to know whether a higher call price makes an otherwise identical bond better for the holder. What two effects belong in the comparison?

88.An issuer can call a bond only after three years. What assumption should a one-year holding-period model make about the call?

89.A five-year callable bond has a 2.8 duration under a call scenario and a 4.4 duration under extension. What is the difference in approximate loss for a 50-basis-point increase in yield using these durations?

90.A same-issuer switch would sell a noncallable senior issue and buy a callable junior issue. Which downside can combine in a deteriorating credit scenario?

91.A bond can be redeemed at par in one year and is trading at 105. What principal loss occurs per 100 face if it is called then, before coupons?

92.A callable issue was assumed to redeem at par next year. The indenture instead specifies 102 for that date. What changes when the assumption is corrected?

93.A callable bond priced at 100 would earn 4% if called after one year and 7% over the same horizon if it extends. You put 75% probability on a call. What is the scenario-weighted one-year return?

94.A premium bond's yield to worst is 4.2%. Does that establish a floor for an investor who might sell before redemption?

95.A callable note's option-adjusted spread looks attractive, but the analyst modeled only a par call. The terms also permit an earlier partial equity-funded redemption at a premium. What is the right next step?

96.A new issue trades 25 basis points wider than a secondary bond of similar maturity and rank. The desk assigns a 30-basis-point cost equivalent to weaker call protection. Under this simplified comparison, what is the net pickup?

97.A short secured issue yields 5.2%, a long secured issue yields 6.1%, and a callable junior issue has 7.5% yield to maturity and 5.9% yield to worst. A mandate permits only secured bonds maturing in five years or less. Only the short issue meets the maturity cap. Which is eligible?

98.A portfolio can buy a callable senior bond with 175 basis points of option-adjusted spread or a noncallable junior bond with 245. Estimated incremental loss and liquidity costs on the junior issue total 65 basis points on the same comparison basis. What remaining pickup does the junior offer?

99.A three-year unsecured note and a seven-year first-lien note have similar modeled returns. What would justify preferring the shorter note despite weaker recovery?

100.A same-issuer comparison favors a premium callable note in the base case. Which fact should be prominent in the recommendation?

101.A callable bond's spread is wide only if the analyst assumes a steep increase in rates keeps it outstanding. What makes the recommendation stronger?

102.A junior bond has the widest spread of three issues but misses your stress-loss limit. A senior bond meets the limit and clears its return hurdle. Which should the memo recommend under those criteria?

103.A noncallable note and a callable note trade at equal yields to worst. What additional question helps decide which best pays for risk?

104.A junior issue narrowly clears your return hurdle. A new forecast implies default probability is twice as high, while recovery and quoted spreads are unchanged. Under a simple one-year model, what happens to the junior issue's incremental expected loss versus senior?

105.A switch recommendation depends on a short bond being fully funded and a longer callable bond being unlikely to refinance. What facts should trigger a new comparison?