Fixed Income - NonCal Flashcards
Reading 51-53
1
Q
Which of the following statements about the call feature of a bond is most accurate? An embedded call option:
A)
stipulates whether and under what circumstances the bondholders can request an earlier repayment of the principal amount prior to maturity.
B)
describes the maturity date of the bond.
C)
stipulates whether and under what circumstances the issuer can redeem the bond prior to maturity.
A
C
Call provisions give the issuer the right (but not the obligation) to retire all or a part of an issue prior to maturity. If the bonds are “called,” the bondholder has no choice but to turn in his bonds. Call features give the issuer the opportunity to get rid of expensive (high coupon) bonds and replace them with lower coupon issues in the event that market interest rates decline during the life of the issue.
B - Call provisions do not pertain to maturity.
A - A put provision gives the bondholders certain rights regarding early payment of principal.
2
Q
Embedded options benefit the party who has the right to exercise them. Call options benefit the ____, while put options and conversion options benefit the _______.
A
issuer; bondholder.
3
Q
Embedded options benefit the party who has the right to exercise them. ____ options benefit the issuer, while ____options benefit the bondholder.
A
Call; put options and conversion options
4
Q
Which of the following entities play a critical role in the ability to create a securitized bond with a higher credit rating than the corporation?
A) Investment banks.
B) Rating agencies.
C) Special purpose entities.
A
C
Special purpose entities (SPEs), buy the assets from the corporation. The SPE separates the assets used as collateral from the corporation that is seeking financing. This shields the assets from other creditors.
5
Q
_____ trade in the issuer’s home country and currency.
A
Domestic bonds
6
Q
Domestic bonds trade in the ____ country and ____ currency.
A
issuer’s home; issuer’s home
7
Q
_____ are from foreign issuers but denominated in the currency of the country where they trade.
A
Foreign bonds
8
Q
Foreign bonds are from _____ issuers but denominated in the currency of the _____.
A
foreign; country where they trade
9
Q
_____ are issued outside the jurisdiction of any single country and denominated in a currency other than that of the countries in which they trade.
A
Eurobonds
10
Q
Eurobonds are issued _____ country and denominated in ______ currency.
A
outside the jurisdiction of any single (country);
currency other than that of the countries in which they trade.
11
Q
Issuing entities may be? (6)
A
- a government or agency;
- a corporation, holding company, or subsidiary;
- a special purpose entity.
12
Q
Credit enhancement may be internal. What are some examples?
A
- overcollateralization,
- excess spread,
- tranches with different priority of claims
13
Q
Credit enhancement may be external. What are some examples?
A
- surety bonds,
- bank guarantees,
- letters of credit
14
Q
Identify whether these are external or internal credit enhancements:
- surety bonds,
- excess spread,
- tranches with different priority of claims
- letters of credit
- overcollateralization,
- bank guarantees,
A
- surety bonds, E
- excess spread, I
- tranches with different priority of claims, I
- letters of credit, E
- overcollateralization, I
- bank guarantees, E
15
Q
A bond with a ____ structure pays coupon interest periodically and repays the entire principal value at maturity.
A
bullet
16
Q
A bond with a bullet structure pays ____ periodically and repays _____ at maturity.
A
coupon interest; entire principal value;
17
Q
A bond with an ____ structure repays part of its principal at each payment date.
A
amortizing
18
Q
A ____ structure makes equal payments throughout the bond’s life.
A
fully amortizing
19
Q
A partially amortizing structure has ____ at maturity, which repays the remaining principal as a lump sum.
A
a balloon payment;
20
Q
A sinking fund provision requires the issuer to _____
A
retire a portion of a bond issue at specified times during the bonds’ life.
21
Q
A partially amortizing structure has a balloon payment at maturity, which _____
A
repays the remaining principal as a lump sum.
22
Q
____ provision requires the issuer to retire a portion of a bond issue at specified times during the bonds’ life.
A
sinking fund
23
Q
____ provision requires the issuer to retire a portion of a bond issue at specified times during the bonds’ life.
A
sinking fund
24
Q
____notes have coupon rates that adjust based on a reference rate such as Libor.
A
Floating-rate
25
Floating-rate notes have _____ that adjust based on a reference such as Libor.
coupon rates
26
Treasury Inflation Protected Securities, which provide investors with protection against inflation by adjusting the par value and keeping the coupon rate fixed, are best described as:
A) interest-indexed bonds.
B) indexed-annuity bonds.
C) capital-indexed bonds.
C
Indexed bonds that adjust the principal value while keeping the coupon rate fixed are best described as capital-indexed bonds.
A - Interest-indexed bonds adjust the coupon rate.
B - Indexed-annuity bonds are fully amortizing with the payments adjusted.
27
Indexed bonds that adjust the principal value while keeping the coupon rate fixed are best described as _____
capital-indexed bonds.
28
_____ bonds adjust the coupon rate.
Interest-indexed
29
Interest-indexed bonds adjust the ____
coupon rate.
30
Indexed-annuity bonds are ___ amortizing with the payments adjusted.
fully
31
Indexed-annuity bonds are fully amortizing with the ____ payments.
adjusted
32
____ refer to a treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation.
Treasury inflation protected securities (TIPS)
33
For TIPS, ____ rises with inflation, as measured by the _____ while the _____ remains fixed.
par value; Consumer Price Index; interest rate
34
Compared to a term repurchase agreement, an overnight repurchase agreement is most likely to have a:
A) higher repo rate and repo margin.
B) lower repo rate and repo margin.
C) lower repo rate and higher repo margin.
B
Both the repo rate and the repo margin tend to be higher for longer repo terms. Therefore an overnight repo should have a lower repo rate and a lower repo margin than a term (i.e., longer than overnight) repo.
35
A bond is trading at a premium if its:
A) redemption value is greater than its face value.
B) yield is greater than its coupon rate.
C) price is greater than its par value.
C
If a bond's price is greater than its par value, the bond is trading at a premium.
B- If a bond's yield is greater than its coupon rate, its price is less than par value and the bond is trading at a discount.
A - Face value and redemption value both refer to par value.
36
______is the total return anticipated on a bond if the bond is held until it matures.
Yield to maturity (YTM)
37
current yield = ?
it is used to determine how much money one would make by buying a bond and holding it ____.
Does/does not consider time value
annual cash flows from a bond / market price
for one year
Does not consider time value
38
Securitized bonds are most likely to be issued by:
A) banking institutions.
B) supranational entities.
C) special purpose entities.
C
39
YTM the rate where
Bond price = ____?
YTM assumes that all coupon payments are reinvested at the same rate as _____,
PV of all the cashflow
(so breakeven of current bond price and PV of all cashflow)
the bond’s current yield
40
- When the bond is priced at par, the bond’s interest rate _____
- A bond priced above par, called a premium bond, has a coupon rate ____ the interest rate,
- A bond priced below par, called a discount bond, has a coupon rate ____ the interest rate.
- interest rate = its coupon rate.
- >
-
41
- When the bond is priced ____, the bond’s interest rate = coupon rate
- A bond priced above par, called a ____ bond, has a coupon rate > the interest rate,
- A bond priced below par, called a ____ bond, has a coupon rate < the interest rate.
at par; premium; discount
42
Limitation on using YTM?
- YTM calculations usually do not account for taxes that an investor pays on the bond or selling/purchase cost
- only estimate, since price of bond could change significantly
43
The coupon rate of a fixed income security is stated as 90-day LIBOR plus 125 basis points. This security is most accurately described as a(n):
A) variable-rate note.
B) floating-rate note.
C) reference-rate note.
B
A floating-rate note has a coupon rate based on a market-determined reference rate such as 90-day LIBOR. Typically the coupon rate will be stated as a margin above the reference rate.
A - A variable-rate note has a margin above the reference rate that is not fixed over the life of the note.
An index-linked bond has a coupon payment or principal amount that adjusts based on the value of a published index such as an equity market, commodity, or inflation index.
44
Every six months a bond pays coupon interest equal to 3% of its par value. This bond is a:
A) 6% annual coupon bond.
B) 6% semiannual coupon bond.
C) 3% semiannual coupon bond.
B
The coupon rate on a bond is the percentage of its par value that it pays in interest each year. The coupon frequency states how often the bond will pay interest. A 6% semiannual coupon bond pays interest twice per year with each coupon equaling half of 6%, or 3%, of par value.
45
Which of the following statements about U.S. Treasury Inflation Protection Securities (TIPS) is most accurate?
A) The coupon rate is fixed for the life of the issue.
B) Adjustments to principal values are made annually.
C) The inflation-adjusted principal value cannot be less than par.
A
The coupon rate is set at a fixed rate determined via auction. This is called the real rate.
B - The principal that serves as the basis of the coupon payment and the maturity value is adjusted semiannually.
C - Because of the possibility of deflation, the adjusted principal value may be less than par (however, at maturity the Treasury redeems the bonds at the greater of the inflation-adjusted principal and the initial par value).
46
T or F?
| TIPS principal are always redeemed at par or above
True.
| At maturity the Treasury redeems the bonds at the greater of the inflation-adjusted principal and the initial par value
47
T or F?
| For TIPS, inflation adjusted principal cannot be lower than par
False.
Because of the possibility of deflation, the adjusted principal value may be less than par. But at redemption, treasury pays the greater of par or adjusted principal.
48
A repurchase agreement is a form of ___-term _____ in which one party sells a security to another party and agrees to buy it back at a predetermined future date and price (an obligation, not a right like an call option).
short; collateralized borrowing;
49
A ______ is a form of short-term collateralized borrowing in which one party sells a security to another party and agrees to buy it back at a predetermined future date and price.
repurchase agreement
50
The repo rate is ______
the implicit interest rate of a repurchase agreement.
51
The ____ is the implicit interest rate of a repurchase agreement.
repo rate
52
The _____, or haircut, is the difference between the amount borrowed and the value of the security.
repo margin;
53
The repo margin, or ____, is the difference between the ___ and the _____.
(in percentage form)
haircut; amount borrowed; value of the security
54
If a bond dealer is _____ instead of ____, the agreement is known as a reverse repo.
lending funds; borrowing;
55
If a bond dealer is lending funds instead of borrowing, the agreement is known as a ______.
reverse repo
56
Which of the following statements regarding repurchase agreements is most accurate?
A) Higher credit rating of the underlying collateral results in a higher repo rate.
B) Greater demand for the underlying security results in a lower repo margin.
C) Lower credit rating of the underlying collateral results in a lower repo margin.
B
Other things equal, the repo margin (percent difference between the market value of the collateral and the loan amount) is lower if the collateral is in greater demand.
The repo margin and repo rate (the annualized percent difference between the sale price and repurchase price of the collateral) are inversely related to the credit quality of the collateral.
57
The level of margin is dependent on the following factors:
- The length of the repurchase agreement: 正/反比?
- The quality of the collateral: 正/反比?
- The credit quality of the counterparty: 正/反比?
- The supply and demand for collateral: 正/反比?
- length = 正比 = The longer the repurchase agreement, the higher the repo margin.
- quality of collateral = 反比 = The higher the quality, the lower the repo margin.
- The credit quality of counterparty = 反比 = The higher the creditworthiness, the lower the repo margin.
- supply/demand of collateral = Repo margins are lower if the collateral is in high demand.
58
PRC International just completed a $234 million floating rate convertible bond offering. As stated in the indenture, the interest rate on the bond is the lesser of 90-day LIBOR or 10%. The indenture also requires PRC to retire $5.6 million per year with the option to retire as much as $10 million. Which of the following embedded options is most likely to benefit the investor? The:
A) 10% cap on the floating interest rate.
B) conversion option on the convertible bonds.
C) sinking fund provision for principal repayment.
B
The conversion privilege is an option granted to the bondholder.
A - The cap benefits the issuer.
C - A sinking fund is not an embedded option; it is an obligation of the issuer.
59
Which of the following statements regarding a sinking fund provision is most accurate?
A)
It requires that the issuer retire a portion of the principal through a series of principal payments over the life of the bond.
B)
It requires that the issuer set aside money based on a predefined schedule to accumulate the cash to retire the bonds at maturity.
C)
It permits the issuer to retire more than the stipulated amount if they choose.
A
A sinking fund actually retires the bonds based on a schedule.
B - This can be accomplished through either payment of cash or through the delivery of securities.
C - A sinking fund provision may allow the issuer to retire more than is stipulated in the indenture, but not all sinking fund provisions allow this.
60
Bonds may be issued in the primary market through ____ or _____.
a public offering; a private placement
61
Bonds may be issued in the ____ market through a public offering or a private placement.
primary
62
A _____ is the sale of an entire issue to a qualified investor or group of investors, which are typically ____ institutions.
private placement; large
63
A private placement is the sale of ____ to a qualified investor or group of investors, which are typically large institutions.
an entire issue
64
A public offering using an investment bank may be _____, with the investment bank or syndicate purchasing the entire issue and selling the bonds to dealers
underwritten
65
Public offering could be on _____ basis, in which the investment bank sells the bonds on commission and (Y.N) take ownership of the securities.
best-efforts; does not take ownership
66
Public offering could be on best-efforts basis, in which the ____ sells the bonds _____.
investment bank; on commission
67
Public offerings may also take place through ___, which is the method commonly used to issue government debt.
auctions
68
Public offerings may also take place through auctions, which is the method commonly used to issue _____
government debt.
69
A public offering using an investment bank may be underwritten, with the investment bank or syndicate _____
purchasing the entire issue and selling the bonds to dealers
70
Ways to do public offering ?
- underwritten
- auction
- best effort
71
Which of the following least likely represents a primary market offering? When bonds are sold:
A) from a dealer's inventory.
B) on a best-efforts basis.
C) in a private placement.
A
When bonds are sold from a dealer's inventory, the bonds have already been sold once and the transaction takes place on the secondary market.
The other transactions in the responses take place in the primary market. When bonds are sold on a best-efforts basis, the investment banker does not take ownership of the securities and agrees to sell all she can. In a private placement, the bonds are sold privately to a small number of investors.
72
Bond yields that follow ____ use the stated coupon payment dates.
street convention
73
Bond yields that follow street convention use ____ dates.
the stated coupon payment
74
A ____ accounts for coupon payments that are delayed by weekends or holidays and may be _____ than a street convention yield.
true yield; slightly lower
75
A true yield accounts for _____ and may be slightly lower than a street convention yield.
coupon payments that are delayed by weekends or holidays
76
_____ yield is the ratio of a bond's annual coupon payments to its price.
Current
77
Current yield is the ratio of a bond's _____ to ____.
annual coupon payments; its price
78
____ yield adjusts current yield by using straight-line amortization of any discount or premium.
Simple
79
Simple yield adjusts current yield by ______.
using straight-line amortization of any discount or premium
80
For a callable bond, a yield-to-call may be calculated using each of its call dates and prices. The lowest of these yields and YTM is a callable bond's _____.
yield-to-worst
81
_____ have a quoted margin relative to a reference rate, typically Libor.
Floating rate notes
82
Floating rate notes have a _____ relative to a reference rate, typically Libor.
quoted margin
83
The quoted margin is ____ for issuers with more credit risk than the banks that quote Libor and may be _____ for issuers that have less credit risk than loans to these banks.
positive; negative
84
The quoted margin is positive for issuers with ____ than the banks that quote Libor and may be negative for issuers that have ____ than loans to these banks.
more credit risk; less credit risk
85
The required margin on a floating rate note may be greater than the quoted margin if _____, or less than the quoted margin if ______.
credit quality has decreased; credit quality has increased
86
The ____ on a floating rate note may be greater than the ____ if credit quality has decreased.
required margin; quoted margin
87
What is spot rate?
Spot rates are market discount rates for single payments to be made in the future.
88
____ rates are market discount rates for single payments to be made in the future.
Spot
89
The no-arbitrage price of a bond is calculated using (no-arbitrage) spot rates as follows:
= coupon/(1+S1) + coupon/(1+S2)^2 +.... + coupon/(1+Sn)^n
90
What does the following formula calculate?
| coupon/(1+S1) + coupon/(1+S2)^2 +.... + coupon/(1+Sn)^n
No-arbitrage price of a bond
91
1Y3Y rate means?
rate for a 3 year loan 1 year from now
92
a dollar compouded at S3 (3 year spot rate) for three years is the same as a dollar ______
compounded at current 1 year spot rate for the first year, 1Y1Y for the 2nd year, and 2Y1Y for the third year.
93
Flat price = ?
Flat price = full price - accrued interest
94
full price - accrued interest = ?
Flat price, clean price
95
full price of the bond is also known as?
Dirty price
96
_____ method is used often with government bonds
actual/actual method
97
What is the actual/actual method?
It uses actual number of days between coupon payments and actual number of days between the last coupon date and the settlement date.
98
Actual/actual uses actual number of days between _____ and actual number of days between _____
coupon payments; the last coupon date and the settlement date.
99
The _____ method is most often used for corporate bonds.
30/360
100
The 30/360 method is most often used for _____
corporate bonds
101
_____ of the annual rate refers to how frequently coupon payments are made
Periodicity
102
Periodicity of the annual rate refers to ____
how frequently coupon payments are made
103
a semiannual-pay bond (periodicity of ___) with an 8% YTM has an effective yield of ____ (calculation is fine)
2; 1.04^2-1=8.16%
104
Bond yields calculated using the stated coupon payment dates are following ____
street convention
105
Yield calculated using actual coupon payment dates is _____
true yield
106
Bond yields calculated using _____ are following street convention
the stated coupon payment dates
107
Yield calculated using _____ is true yield
actual coupon payment dates
108
current yield = ?
annual cash coupon payment / bond price
109
The current yield does not account for _____
gains and losses (as the bond's price moves toward its par value over time)
110
A bond's _____ yield takes a discount or premium into account by assuming _____
simple; discount/premium declines evenly over the remaining years to maturity
111
The current yield _______ (does/does not) account for gains and losses as the bond's price moves towards its par value
Does not
112
______ yield is calculated by adding the value of the call option to the bond's current flat price
option-adjusted
113
option-adjusted yield is calculated by _____ the value of the call option to bond's _____ price
adding; current flat price
114
The option-adjusted yield is _____ than the yield to maturity for a callable bond
less than
115
Valuing a bond using forward rates is equivalent of valuing a bond using _____
spot rate (as for arbitrage-free valuation)
116
A yield curve for coupon bonds is composed of yields on bonds with similar:
A) coupon rates.
B) maturities.
C) issuers.
C
Yield curves are typically constructed for bonds of the same or similar issuers, such as a government bond yield curve or AA rated corporate bond yield curve.
117
____ shows yields by maturity
Yield curve
118
Yield curve shows yields by _____
maturity
119
The _____ of interest rates refers to the yields at different maturities for _____
term structure; like securities or interest rates
120
______curve shows the YTMs for coupon bonds at various maturities
Yield curve for coupon bonds
121
Yield curve for coupon bonds shows the YTMs for coupon bonds at _____
various maturities
122
on a yield curve, x-axis is _____, y-axis is _____
```
x = maturity
y = YTM
```
123
A ______ curve is not calculated from yields on actual bonds but is constructed from the spot curve
par bond yield curve (or par curve);
124
A par curve is calculated from ____
the spot curve
125
Par curve reflects _______ that a hypothetical bond at each maturity would need to have to _____
coupon rate; be priced at par
126
T or F?
| A par bond yield curve (or par curve) is calculated from yields on actual bond by maturity
F, it's constructed using spot curve
127
Par curve could be viewed as _____ at each maturity
YTM of a par bond
128
A ______ shows the future rates for bonds or money market securities for the same maturities for annual periods in the future.
forward curve
129
Typically, the forward curve would show the yield of ____ for _____, quoted on a _____ bond basis
1-year securities for each future year; semiannual
130
Typically, the ____ curve would show the yield of 1-year securities for each future year, quoted on a _____ bond basis
semiannual
131
The _____ curve is a yield curve for single payments in the future, such as zero-coupon bonds or stripped Treasury bonds.
spot
132
The spot curve is a yield curve for single payments in the future, such as ______ or ______.
zero-coupon bonds; stripped Treasury bond (both refer to U.S. treasury bonds)
133
The spot curve is a yield curve for ____ in the future, such as zero-coupon bonds or stripped Treasury bonds.
single payments
134
Bond X is a noncallable corporate bond maturing in ten years. Bond Y is also a corporate bond maturing in ten years, but Bond Y is callable at any time beginning three years from now. Both bonds carry a credit rating of AA. Based on this information:
A)
Bond Y will have a higher zero-volatility spread than Bond X.
B)
The zero-volatility spread of Bond X will be greater than its option-adjusted spread.
C)
The option adjusted spread of Bond Y will be greater than its zero-volatility spread.
A
Bond Y will have the higher Z-spread due to the call option embedded in the bond. This option benefits the issuer, and investors will demand a higher yield to compensate for this feature. The option-adjusted spread removes the value of the option from the spread calculation, and would always be less than the Z-spread for a callable bond. Since Bond X is noncallable, the Z-spread and the OAS will be the same.
135
Yield spread is the difference between _____ and ___, and is typically quoted in ___
the yield of two different bonds; basis points
136
benchmark spread is ?
A yield spread relevant to a benchmark, such as treasury note rate
137
G-spread is?
A yield spread over a government bond
138
I-spread aka ____, is yield spread related to ____
| What is it normally used for?
- interpolated spreads;
- swap rates in the same currency and with the same tenor as a bond;
- Normally used for eurobonds
139
Yield spread related to swap rates in the same currency and with the same tenor as a bond is _____
i-spread or interpolated spread
140
If a bond's yield increases, but spread stay the same, it is a due to a ____ (macro/micro) economic factor
macro (external) factor
141
If a bond's yield increases, and spread also increases, it is a due to a _____ (macro/micro) economic factor
- what are some examples?
micro (internal) factor; credit risk or issue's liquidity
142
G-spread and I-spread is theoretically correct only if ____
the spot yield curve is flat, so that yields are approximately the same across maturities.
143
OAS (option-adjusted-spread) = ?
Z - spread - option value
144
The margin above or below LIBOR that is used to determine a floating-rate note's coupon payments is most accurately described as its:
A) required margin.
B) quoted margin.
C) discount margin.
B
The quoted margin of a floating-rate note is the number of basis points added to or subtracted from the note's reference rate to determine its coupon payments.
A - The required margin or discount margin is the number of basis points above or below the reference rate that would cause the note's price to return to par value at each reset date. Required margin may be different from quoted margin if a note's credit quality has changed since issuance.
145
A year ago a company issued a bond with a face value of $1,000 with an 8% coupon. Now the prevailing market yield is 10%. What happens to the bond? The bond:
A)
price is not affected by the change in market yield, and will continue to trade at $1,000.
B)
is traded at a market price of less than $1,000.
C)
is traded at a market price higher than $1,000.
B
A bonds price/value has an inverse relationship with interest rates. Since interest rates are increasing (from 8% when issued to 10% now) the bond will be selling at a discount. This happens so an investor will be able to purchase the bond and still earn the same yield that the market currently offers.
146
A disadvantage of G-spreads and I-spreads is that they are theoretically correct only if the spot yield curve is:
A) flat.
B) downward sloping.
C) upward sloping.
A
G-spreads and I-spreads are only correct when the spot yield curve is flat (yields are about the same across maturities).
147
Matrix pricing is used primarily for pricing bonds that:
A) have low liquidity.
B) differ from their benchmark bond's maturity.
C) differ from their benchmark bond's credit rating.
A
For bonds that do not trade or trade infrequently, matrix pricing uses the yields on similar issues that do trade to estimate the required yield on the illiquid bonds.
148
The Treasury spot rate yield curve is closest to which of the following curves?
A) Forward yield curve rate.
B) Zero-coupon bond yield curve.
C) Par bond yield curve.
B
The spot rate yield curve shows the appropriate rates for discounting single cash flows occurring at different times in the future. Conceptually, these rates are equivalent to yields on zero-coupon bonds.
C - The par bond yield curve shows the YTMs at which bonds of various maturities would trade at par value.
A - Forward rates are expected future short-term rates.
149
If the required margin on a floating rate note is greater than the quoted margin, it is most likely that the:
A) bond will be priced above par at the reset date.
B) credit quality of the FRN has decreased.
C) reference rate on the FRN has increased.
B
If the required margin is greater than the quoted margin, the credit quality of the bond must have decreased and the bond will be priced below par at the reset date.
150
McClintock 8% coupon bonds maturing in 10 years are currently trading at 97.55. These bonds are option-free and pay coupons semiannually. The McClintock bonds have a:
A) yield to maturity greater than 8.0%.
B) current yield less than 8.0%.
C) true yield greater than the street convention.
A
A bond trading at a discount will have a YTM greater than its coupon. The current yield is 8 / 97.55 = 8.2%. True yield is adjusted for payments delayed by weekends and holidays and is equal to or slightly less than the yield on a street convention basis.
151
A 10-year, $1,000 face value 8% semi-annual coupon bond is priced at $950. Which of the following statements about this bond is most accurate?
A) The bond is selling at a premium.
B) The current market required rate is less than the coupon rate.
C) The bond is selling at a discount.
C
When the issue price is less than par, the bond is selling at a discount.
We also know that the current market required rate is greater than the coupon rate because the bond is selling at a discount.
152
For money market instruments, yields may be quoted on a/an ____ basis or a/an ____, and may use ____-day years.
discount; add-on basis; 360 or 365
153
For money market instruments, a ____ yield is an add-on yield based on a 365-day year.
bond-equivalent
154
For money market instruments, a bond-equivalent yield is an ___ yield based on a ___-day year.
add-on; 365
155
A $1,000 par, semiannual-pay bond is trading for 89.14, has a coupon rate of 8.75%, and accrued interest of $43.72. The flat price of the bond is:
A) $847.69.
B) $891.40.
C) $935.12.
B?
i think it should be A, according to the definition:
Clean price, aka flat price, is the price of a coupon bond that does not include any interest that accrues. That is, a clean price is the price of a bond discounting future cash flows.
156
Suppose the 3-year spot rate is 12.1% and the 2-year spot rate is 11.3%. Which of the following statements concerning forward and spot rates is most accurate? The 1-year:
A) forward rate one year from today is 13.7%.
B) forward rate two years from today is 13.2%.
C) forward rate two years from today is 13.7%.
C
The equation for the three-year spot rate, S3, is (1 + S1)(1 + 1y1y)(1 + 2y1y) = (1 + S3)^3. Also, (1 + S1)(1 + 1y1y) = (1 + S2)^2. So, (1 + 2y1y) = (1 + S3)^3 / (1 + S2)^2, computed as: (1 + 0.121)^3 / (1 + 0.113)^2 = 1.137. Thus, 2y1y = 0.137, or 13.7%.
First time picked A...
157
What value would an investor place on a 20-year, 10% annual coupon bond, if the investor required a 10% rate of return?
A) $1,104.
B) $1,000.
C) $920.
B
N = 20; I/Y = 10; PMT= 100; FV = 1,000; CPT → PV = 1,000
(而且coupon rate和rate of return一样，所以price一样）
158
What is the present value of a 7% semiannual-pay bond with a $1,000 face value and 20 years to maturity if similar bonds are now yielding 8.25%?
A) $1,000.00.
B) $879.52.
C) $878.56.
C
N = 20 × 2 = 40; I/Y = 8.25/2 = 4.125; PMT = 70/2 = 35; and FV = 1,000.
Compute PV = 878.56.
159
Consider a bond selling for $1,150. This bond has 28 years to maturity, pays a 12% annual coupon, and is callable in 8 years for $1,100. The yield to maturity is closest to:
A) 10.55%.
B) 10.34%.
C) 9.26%.
B
| N = 28; PMT = 120; PV = −1,150; FV = 1,000; CPT I/Y = 10.3432.
160
A 6-year annual interest coupon bond was purchased one year ago. The coupon rate is 10% and par value is $1,000. At the time the bond was bought, the yield to maturity (YTM) was 8%. If the bond is sold after receiving the first interest payment and the bond's yield to maturity had changed to 7%, the annual total rate of return on holding the bond for that year would have been:
A) 8.00%.
B) 11.95%.
C) 7.00%.
B
Price 1 year ago N = 6, PMT = 100, FV = 1,000, I = 8, Compute PV = 1,092
Price now N = 5, PMT = 100, FV = 1,000, I = 7, Compute PV = 1,123
% Return = (1,123.00 + 100 − 1,092.46)/1,092.46 x 100 = 11.95%
161
What is the probable change in price of a 30-year semiannual 6.5% coupon, $1000 par value bond yielding 8% if the yield decreases to 7%?
A) $106.34.
B) $98.83.
C) $107.31.
C
Price at 8% is N = 60, FV = $1,000, I = 4%, PMT = $32.50, CPT PV = $830.32; price at 7% is N = 60, FV = $1,000, I = 3.5%, PMT = $32.50, CPT PV = $937.64. Change in price is $937.64 - $830.32 = $107.31.
162
A Treasury bond due in one-year has a yield of 8.5%. A Treasury bond due in 5 years has a yield of 9.3%. A bond issued by General Motors due in 5 years has a yield of 9.9%. A bond issued by Exxon due in one year has a yield of 9.4%. The yield spreads on the bonds issued by Exxon and General Motors are:
Exxon General Motors
A) 0.9% 0.6%
B) 0.1% 1.4%
C) 0.1% 0.6%
A
9. 4 − 8.5 = 0.9
9. 9 − 9.3 = 0.6
163
An investor purchases a 5-year, A-rated, 7.95% coupon, semiannual-pay corporate bond at a yield to maturity of 8.20%. The bond is callable at 102 in three years. The bond's yield to call is closest to:
A) 8.6%.
B) 8.9%.
C) 8.3%.
B
First determine the price paid for the bond:
N = 5 × 2 = 10; I/Y = 8.20 / 2 = 4.10; PMT = 7.95 / 2 = 3.975; FV = 100; CPT PV = -98.99
Then use this value and the call price and date to determine the yield to call:
N = 3 × 2 = 6; PMT = 7.95 / 2 = 3.975; PV = -98.99; FV = 102; CPT I/Y = 4.4686 × 2 = 8.937%
164
Assume the following corporate spot yield curve.
One-year rate: 5%
Two-year rate: 6%
Three-year rate: 7%
If a 3-year annual-pay corporate bond has a coupon of 6%, its yield to maturity is closest to:
A) 7.00%.
B) 6.08%.
C) 6.92%.
C
First determine the current price of the corporate bond:
= 6 / 1.05 + 6 / (1.06)2 + 106 / (1.07)3 = 5.71 + 5.34 + 86.53 = 97.58
Then compute the yield of the bond:
N = 3; PMT = 6; FV = 100; PV = -97.58; CPT → I/Y = 6.92%
