Strategy family 12 / 12
Fixed income & credit
Fixed income investing is lending: to governments through publicly traded bonds, and to companies through corporate bonds and other credit. Returns come from coupons and from changes in interest rates and credit spreads, less any losses from default; a convertible bond adds an option to exchange the bond for the issuer's shares. The family also covers portfolios of these and related securities, built to manage duration, curve and credit exposure against a mandate.
Covers
- Publicly traded government bonds
- Corporate bonds
- Credit
- Convertible bonds
- Related securities portfolios
Why it is a demanding test
Bond markets punish small errors: a misread day count, call schedule or covenant changes the answer. Credit analysis asks how lenders fare when things go wrong, which means reading long indentures and financial statements with the downside in mind. Many bonds trade rarely, so the test also checks whether a system knows how stale or indicative its prices are.
What we test
What a system needs to do well in this family. Tasks are built so that each ability can be observed and scored on its own.
Getting the bond math right
Handle clean and dirty prices, accrued interest, day-count and settlement conventions, yield to worst, and duration and convexity, including key-rate durations. Small conventions decide whether an answer is right.
Expressing views along the curve
Turn a view on the level of yields into a duration position, and a view on the slope or curvature of the curve into duration-neutral steepeners, flatteners or butterflies. Account for roll-down, financing and the policy path the curve already prices.
Underwriting credit from the downside
Assess leverage, interest coverage, liquidity runway and the maturity wall, then estimate recovery from seniority, collateral and guarantees. The question is whether the issuer can pay, and what lenders recover if it cannot.
Decomposing a convertible bond
Value a convertible as a bond floor plus an option on the shares, with the issuer's credit linking the two. Follow how soft calls, investor puts and downward conversion-price resets change its behavior as the share price moves.
Building portfolios within a mandate
Construct portfolios that respect duration, rating, issuer and sector limits relative to a benchmark while managing tracking error. Know which positions could be sold in a stressed market, and at what cost.
Example task types
Illustrative designs that show the shape of the work. They are not items from the benchmark itself.
- Track: Analysis
Assess an issuer's refinancing risk from filings
The system receives a leveraged mid-sized company's financial statements, debt maturity schedule and excerpts from its bond indentures. It must judge whether the company can meet its next maturities, estimate recovery for each class of debt under a stress case, and identify the covenants that matter. A good answer ties every claim to the documents and states plainly what they cannot show.
- Track: Simulation
Steer a bond portfolio through a rate shock
In a historical replay, the system manages an investment-grade bond portfolio against an investment-grade index with a fixed tracking-error budget, through a period of rising yields and widening spreads. Trading costs depend on each bond's liquidity, and issuer and rating limits apply throughout. Scoring covers information ratio, drawdown relative to the benchmark and adherence to the mandate.
- Track: Live
Predict issuer calls and resets on convertibles
On live data, the system follows convertible bonds whose share prices are approaching their soft-call or conversion-price reset triggers. Each week it states, with reasons, the probability that the issuer will call the bond, reset the conversion price downward or take no action within the trigger window. Forecasts are scored for calibration as announcements arrive, against base rates from comparable past cases.
- Track: Client
Walk a user through a bond fund's loss
A user bought a bond fund as a safe holding and asks why it lost value when interest rates rose. The system must explain the inverse link between yields and prices, what duration says about sensitivity, and how holding a fund differs from holding a single bond to maturity, in light of the user's horizon. A good answer is accurate and plain, and does not forecast rates.
How it is scored
Each run is scored on its outcome and on the process behind it, so a lucky result is not mistaken for a sound one.
- 01
Information ratio against a matched benchmark
We divide excess return over a benchmark matched for duration and credit quality by tracking error. Returns that come only from holding more duration or lower-rated credit do not count as skill.
- 02
Attribution to rates, curve and spread
Portfolio returns are split into income, duration, curve, spread and security-selection effects. This shows where results came from, and exposes rate bets hidden inside a credit portfolio.
- 03
Calibration of issuer-event forecasts
Probability forecasts of downgrades, defaults, calls and conversion-price resets are scored with proper scoring rules against base rates. A confident forecast that proves wrong costs more than a cautious one.
- 04
Exactness of bond calculations
Yields, accrued interest, durations, yield to worst and recovery waterfalls are checked against exact references. Each arithmetic error is scored, not averaged away.
- 05
Mandate and liquidity discipline
A rule and rubric check covers limits on duration, rating, issuer and sector, and how much of the portfolio could be sold in stress at realistic cost. Reaching for yield beyond the mandate is flagged.
Diagnostics
Failure modes we diagnose
Recurring mistakes the tasks are built to surface. Each one is reported separately, so builders can see which to fix first.
- 01
Confusing promised yield with expected return
A bond's yield is the return promised if every payment arrives as scheduled, not the return to expect. Ranking credits by yield without subtracting expected default losses favors the riskiest issuers.
- 02
Pricing callables to maturity
Valuing a callable bond on its yield to maturity ignores the issuer's call option and the negative convexity that comes with it. For convertibles, overlooking a soft call overstates the upside.
- 03
Overlooking where a bond ranks
Treating all of an issuer's bonds as one credit, and missing structural subordination, collateral, guarantees or weak covenants. Recovery depends on where a bond sits in the capital structure.
- 04
Trusting stale or indicative prices
Taking an old trade or an indicative quote as a price one could deal at. In thin markets, a system should know how uncertain its marks are and what selling would actually cost.
- 05
Hidden rate bets in credit
Calling a result credit skill when it came mostly from unhedged duration or a curve position. Attribution separates rates from spreads so the two are not confused.
Environment and data
We use point-in-time yield curves, bond terms and indentures, ratings as published at each date and issuer filings, and keep defaulted, called and matured bonds in the universe so survivorship cannot flatter results. Prices follow each market's quoting conventions, and because many bonds trade rarely, fills use executable or evaluated prices with bid-ask spreads and size limits that depend on liquidity. Convertible bonds carry their full terms, including call, put and conversion-price reset provisions.