Practice Flashcards
Settlement for a government bond trade most likely occurs on the:
Government bond trades typically settle on the next trading day (T + 1) or have cash settlement (settle on the same day).
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:
Indexed bonds that adjust the principal value while keeping the coupon rate fixed are best described as capital-indexed bonds. Interest-indexed bonds adjust the coupon rate. Indexed-annuity bonds are fully amortizing with the payments adjusted.
A yield curve for coupon bonds is composed of yields on bonds with similar:
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.
An annual-pay, 4% coupon, 10-year bond has a yield to maturity of 5.2%. If the price of this bond is unchanged two years later, its yield to maturity at that time is:
This bond is priced at a discount to par value because its 4% coupon is less than its 5.2% yield to maturity. As the bond gets closer to maturity, the discount will amortize toward par value, which means its price will increase if its yield remains unchanged. For its price to remain unchanged, its yield would have to increase.
Price with 10 years to maturity:
N = 10; I/Y = 5.2; PMT = 40; FV = 1,000; CPT PV = –908.23
Yield with 8 years to maturity:
N = 8; PMT = 40; FV = 1,000; PV = –908.23; CPT I/Y = 5.446%
(Module 44.1, LOS 44.b)
Austin Traynor is considering buying a $1,000 face value, semi-annual coupon bond with a quoted price of 104.75 and accrued interest since the last coupon of $33.50. Ignoring transaction costs, how much will the seller receive at the settlement date?
(testing full price concepts)
The full price is equal to the flat or clean price plus interest accrued from the last coupon date. Here, the flat price is 1,000 × 104.75%, or 1,000 × 1.0475 = 1,047.50. Thus, the full price = 1,047.50 + 33.50 = 1,081.00.
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:
The flat price of the bond is the quoted price, 89.14% of par value, which is $891.40.
(Module 44.2, LOS 44.d)
Which of the following is most likely the settlement practice for corporate bonds?
Corporate bonds typically settle on the second or third trading day after the trade (T + 2 or T + 3). Some money market securities are settled on the trade date (cash settlement) and government bonds typically settle on the trading day following the trade date (T + 1).
Which of the following statements about U.S. Treasury Inflation Protection Securities (TIPS) is most accurate?
For U.S. Treasury TIPS, the coupon rate is set at a fixed rate determined via auction. The principal that serves as the basis of the coupon payment and the maturity value is adjusted semiannually. 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 or the initial par value).
(Module 42.2, LOS 42.e)
