Quiz #1

Question 1

Fixed income securities fall under either:

Answer 1

debt obligations or preferred stock

Question 2

debt obligations include

Answer 2

bonds, morgage-backed securities, asset-backed securities, and bank loans

Question 3

key features of a bond

Answer 3

coupon rate, face value, and maturity

Question 4

affirmative covenants

Answer 4

set forth what the borrower needs to do

Question 5

tenor vs maturity

Answer 5

tenor: residual life of bod or in other words the number ofyears left until final prinicpal payments, maturity is the stated lifetime of the bond

Question 6

par value

Answer 6

what issuer agrees to pay back at or by maturity date

Question 7

par value =

Answer 7

100

Question 8

coupon rate =

Answer 8

interest rate
that the issuer agrees to pay each year

Question 9

spot rate =

Answer 9

yield on treasury zero-coupon bond

Question 10

step-up =

Answer 10

coupon rates increasing overtime

Question 11

deffered coupon bond

Answer 11

no int payment until bond matures

Question 12

floating rate

Answer 12

rate resets over period of time

Question 13

coupon rate =

Answer 13

reference rate + quoted margin

Question 14

coupon int paid every

Answer 14

6 months

Question 15

embedded options are:

Answer 15

the right to call, the right of borrowers in a pool of loans to prepay principalearly, accelerated sinking fund provisions, cap on a floater

Question 16

most common embedded options:

Answer 16

conversion priviliage, right to put, floor on a floater

Question 17

accelerated sinking fund provision allows the
issuer:

Answer 17

to retire more than the amount stipulated to
satisfy the periodic sinking fund requirement.

Question 18

A convertible bond is an issue that allows the investor

Answer 18

right to convert the bond into a specified number of
shares of common stock

Question 19

Foreign bond:

Answer 19

bond issued in a host country’s
financial market, in the host country’s currency, by
a nonresident corporation (e.g. Toyota issuing US
dollar denominated bonds in the US)

Question 20

straight fixed rate bond

Answer 20

int and principal paid with different currencies

Question 21

But why they (currency option bonds) exist since the investor may replicate the position by
buying a currency option?
Currency Option Bonds

Answer 21

ANSWER: because the durations with currency-option
bonds are usually much longer than afforded by options
(only a few months).
Valuation is done by breaking down the bond into a
straight bond in currency X and an option to swap a
bond in currency X for another of same rate in currency
Y at an a priori set exchange rate of X:Y
Currency Option Bonds

Question 22

asset evaluation involves:

Answer 22

estmating cash flows, determining int rate used to discount flows, calaute present values of those cash flows using the int rates

Question 23

if rates fall far enough:

Answer 23

issuer will refinance, and borrower has incentive to refinance

Question 24

on the run

Answer 24

minimum int rate

Question 25

interest rate is the same as

Answer 25

yield

Question 26

coupon rate = market yield= coupon rate market yield =

Answer 26

par value discount premium

Question 27

traditional bond evaluation

Answer 27

iscount every cash flow of a security by the same interest rate (or discount rate), thereby incorrectly viewing each security as the same package of cash flows.

Question 28

arbitrage-free approach

Answer 28

values a bond as a package of cash flows, with each cash flow viewed as a zero-coupon bond and each cash flow discounted at its own unique discount rate

Question 29

credit spreads increase with

Answer 29

maturity

Question 30

bond prices and yields are ______ _________

Answer 30

inversely related

Question 31

cash flows do not change for int rates, this does not apply for :

Answer 31

cmo, callable bonds, loss reserves

Question 32

A call option has the following effects on the price of the option-free bond

Answer 32

At high interest rates, the call option has almost no value (very unlikely to be exercised). * The price behaves at this point like an option-free bond * As interest rates decrease, the call option takes on negative value because it is more likely to be called. * The price behaves at this point differently than an option-free bond

Question 33

YTC is obtained b

Answer 33

replacing maturity with the time until the call is first possible, and replacing the par value with call price

Question 34

When interest rates are far higher than coupon rate, duration is: When interest rates drop, duration reduces because: * Sometimes callable bond prices are slightly above the call price because :

Answer 34

almost identical to that of a straight bond. the price of the bond will increasingly be asymptotic to the call value. the company doesn’t call and they enjoy a higher coupon rate. In that case duration becomes negative.