Fixed Income - NonCal

Question 1

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.

Answer 1

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.

Question 2

Embedded options benefit the party who has the right to exercise them. Call options benefit the ____, while put options and conversion options benefit the _______.

Answer 2

issuer; bondholder.

Question 3

Embedded options benefit the party who has the right to exercise them. ____ options benefit the issuer, while ____options benefit the bondholder.

Answer 3

Call; put options and conversion options

Question 4

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.

Answer 4

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.

Question 5

_____ trade in the issuer’s home country and currency.

Answer 5

Domestic bonds

Question 6

Domestic bonds trade in the ____ country and ____ currency.

Answer 6

issuer’s home; issuer’s home

Question 7

_____ are from foreign issuers but denominated in the currency of the country where they trade.

Answer 7

Foreign bonds

Question 8

Foreign bonds are from _____ issuers but denominated in the currency of the _____.

Answer 8

foreign; country where they trade

Question 9

_____ are issued outside the jurisdiction of any single country and denominated in a currency other than that of the countries in which they trade.

Answer 9

Eurobonds

Question 10

Eurobonds are issued _____ country and denominated in ______ currency.

Answer 10

outside the jurisdiction of any single (country);

currency other than that of the countries in which they trade.

Question 11

Issuing entities may be? (6)

Answer 11

• a government or agency;
• a corporation, holding company, or subsidiary;
• a special purpose entity.

Question 12

Credit enhancement may be internal. What are some examples?

Answer 12

• overcollateralization,
• excess spread,
• tranches with different priority of claims

Question 13

Credit enhancement may be external. What are some examples?

Answer 13

• surety bonds,
• bank guarantees,
• letters of credit

Question 14

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,

Answer 14

• surety bonds, E
• excess spread, I
• tranches with different priority of claims, I
• letters of credit, E
• overcollateralization, I
• bank guarantees, E

Question 15

A bond with a ____ structure pays coupon interest periodically and repays the entire principal value at maturity.

Answer 15

bullet

Question 16

A bond with a bullet structure pays ____ periodically and repays _____ at maturity.

Answer 16

coupon interest; entire principal value;

Question 17

A bond with an ____ structure repays part of its principal at each payment date.

Answer 17

amortizing

Question 18

A ____ structure makes equal payments throughout the bond’s life.

Answer 18

fully amortizing

Question 19

A partially amortizing structure has ____ at maturity, which repays the remaining principal as a lump sum.

Answer 19

a balloon payment;

Question 20

A sinking fund provision requires the issuer to _____

Answer 20

retire a portion of a bond issue at specified times during the bonds’ life.

Question 21

A partially amortizing structure has a balloon payment at maturity, which _____

Answer 21

repays the remaining principal as a lump sum.

Question 22

____ provision requires the issuer to retire a portion of a bond issue at specified times during the bonds’ life.

Answer 22

sinking fund

Question 23

____ provision requires the issuer to retire a portion of a bond issue at specified times during the bonds’ life.

Answer 23

sinking fund

Question 24

____notes have coupon rates that adjust based on a reference rate such as Libor.

Answer 24

Floating-rate

Question 25

Floating-rate notes have _____ that adjust based on a reference such as Libor.

Answer 25

coupon rates

Question 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.

Answer 26

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.

Question 27

Indexed bonds that adjust the principal value while keeping the coupon rate fixed are best described as _____

Answer 27

capital-indexed bonds.

Question 28

_____ bonds adjust the coupon rate.

Answer 28

Interest-indexed

Question 29

Interest-indexed bonds adjust the ____

Answer 29

coupon rate.

Question 30

Indexed-annuity bonds are ___ amortizing with the payments adjusted.

Answer 30

fully

Question 31

Indexed-annuity bonds are fully amortizing with the ____ payments.

Answer 31

adjusted

Question 32

____ refer to a treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation.

Answer 32

Treasury inflation protected securities (TIPS)

Question 33

For TIPS, ____ rises with inflation, as measured by the _____ while the _____ remains fixed.

Answer 33

par value; Consumer Price Index; interest rate

Question 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.

Answer 34

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.

Question 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.

Answer 35

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.

Question 36

______is the total return anticipated on a bond if the bond is held until it matures.

Answer 36

Yield to maturity (YTM)

Question 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

Answer 37

annual cash flows from a bond / market price
for one year
Does not consider time value

Question 38

Securitized bonds are most likely to be issued by:

A) banking institutions.
B) supranational entities.
C) special purpose entities.

Answer 38

C

Question 39

YTM the rate where
Bond price = ____?

YTM assumes that all coupon payments are reinvested at the same rate as _____,

Answer 39

PV of all the cashflow
(so breakeven of current bond price and PV of all cashflow)

the bond’s current yield

Question 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.

Answer 40

• interest rate = its coupon rate.
• > -

Question 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.

Answer 41

at par; premium; discount

Question 42

Limitation on using YTM?

Answer 42

• 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

Question 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.

Answer 43

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.

Question 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.

Answer 44

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.

Question 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.

Answer 45

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).

Question 46

T or F?

TIPS principal are always redeemed at par or above

Answer 46

True.

At maturity the Treasury redeems the bonds at the greater of the inflation-adjusted principal and the initial par value

Question 47

T or F?

For TIPS, inflation adjusted principal cannot be lower than par

Answer 47

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.

Question 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).

Answer 48

short; collateralized borrowing;

Question 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.

Answer 49

repurchase agreement

Question 50

The repo rate is ______

Answer 50

the implicit interest rate of a repurchase agreement.

Question 51

The ____ is the implicit interest rate of a repurchase agreement.

Answer 51

repo rate

Question 52

The _____, or haircut, is the difference between the amount borrowed and the value of the security.

Answer 52

repo margin;

Question 53

The repo margin, or ____, is the difference between the ___ and the _____.
(in percentage form)

Answer 53

haircut; amount borrowed; value of the security

Question 54

If a bond dealer is _____ instead of ____, the agreement is known as a reverse repo.

Answer 54

lending funds; borrowing;

Question 55

If a bond dealer is lending funds instead of borrowing, the agreement is known as a ______.

Answer 55

reverse repo

Question 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.

Answer 56

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.

Question 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?

Answer 57

• 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.

Question 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.

Answer 58

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.

Question 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.

Answer 59

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.

Question 60

Bonds may be issued in the primary market through ____ or _____.

Answer 60

a public offering; a private placement

Question 61

Bonds may be issued in the ____ market through a public offering or a private placement.

Answer 61

primary

Question 62

A _____ is the sale of an entire issue to a qualified investor or group of investors, which are typically ____ institutions.

Answer 62

private placement; large

Question 63

A private placement is the sale of ____ to a qualified investor or group of investors, which are typically large institutions.

Answer 63

an entire issue

Question 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

Answer 64

underwritten

Question 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.

Answer 65

best-efforts; does not take ownership

Question 66

Public offering could be on best-efforts basis, in which the ____ sells the bonds _____.

Answer 66

investment bank; on commission

Question 67

Public offerings may also take place through ___, which is the method commonly used to issue government debt.

Answer 67

auctions

Question 68

Public offerings may also take place through auctions, which is the method commonly used to issue _____

Answer 68

government debt.

Question 69

A public offering using an investment bank may be underwritten, with the investment bank or syndicate _____

Answer 69

purchasing the entire issue and selling the bonds to dealers

Question 70

Ways to do public offering ?

Answer 70

• underwritten
• auction
• best effort

Question 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.

Answer 71

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.

Question 72

Bond yields that follow ____ use the stated coupon payment dates.

Answer 72

street convention

Question 73

Bond yields that follow street convention use ____ dates.

Answer 73

the stated coupon payment

Question 74

A ____ accounts for coupon payments that are delayed by weekends or holidays and may be _____ than a street convention yield.

Answer 74

true yield; slightly lower

Question 75

A true yield accounts for _____ and may be slightly lower than a street convention yield.

Answer 75

coupon payments that are delayed by weekends or holidays

Question 76

_____ yield is the ratio of a bond’s annual coupon payments to its price.

Answer 76

Current

Question 77

Current yield is the ratio of a bond’s _____ to ____.

Answer 77

annual coupon payments; its price

Question 78

____ yield adjusts current yield by using straight-line amortization of any discount or premium.

Answer 78

Simple

Question 79

Simple yield adjusts current yield by ______.

Answer 79

using straight-line amortization of any discount or premium

Question 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 _____.

Answer 80

yield-to-worst

Question 81

_____ have a quoted margin relative to a reference rate, typically Libor.

Answer 81

Floating rate notes

Question 82

Floating rate notes have a _____ relative to a reference rate, typically Libor.

Answer 82

quoted margin

Question 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.

Answer 83

positive; negative

Question 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.

Answer 84

more credit risk; less credit risk

Question 85

The required margin on a floating rate note may be greater than the quoted margin if _____, or less than the quoted margin if ______.

Answer 85

credit quality has decreased; credit quality has increased

Question 86

The ____ on a floating rate note may be greater than the ____ if credit quality has decreased.

Answer 86

required margin; quoted margin

Question 87

What is spot rate?

Answer 87

Spot rates are market discount rates for single payments to be made in the future.

Question 88

____ rates are market discount rates for single payments to be made in the future.

Answer 88

Spot

Question 89

The no-arbitrage price of a bond is calculated using (no-arbitrage) spot rates as follows:

Answer 89

= coupon/(1+S1) + coupon/(1+S2)^2 +…. + coupon/(1+Sn)^n

Question 90

What does the following formula calculate?

coupon/(1+S1) + coupon/(1+S2)^2 +…. + coupon/(1+Sn)^n

Answer 90

No-arbitrage price of a bond

Question 91

1Y3Y rate means?

Answer 91

rate for a 3 year loan 1 year from now

Question 92

a dollar compouded at S3 (3 year spot rate) for three years is the same as a dollar ______

Answer 92

compounded at current 1 year spot rate for the first year, 1Y1Y for the 2nd year, and 2Y1Y for the third year.

Question 93

Flat price = ?

Answer 93

Flat price = full price - accrued interest

Question 94

full price - accrued interest = ?

Answer 94

Flat price, clean price

Question 95

full price of the bond is also known as?

Answer 95

Dirty price

Question 96

_____ method is used often with government bonds

Answer 96

actual/actual method

Question 97

What is the actual/actual method?

Answer 97

It uses actual number of days between coupon payments and actual number of days between the last coupon date and the settlement date.

Question 98

Actual/actual uses actual number of days between _____ and actual number of days between _____

Answer 98

coupon payments; the last coupon date and the settlement date.

Question 99

The _____ method is most often used for corporate bonds.

Answer 99

30/360

Question 100

The 30/360 method is most often used for _____

Answer 100

corporate bonds

Question 101

_____ of the annual rate refers to how frequently coupon payments are made

Answer 101

Periodicity

Question 102

Periodicity of the annual rate refers to ____

Answer 102

how frequently coupon payments are made

Question 103

a semiannual-pay bond (periodicity of ___) with an 8% YTM has an effective yield of ____ (calculation is fine)

Answer 103

2; 1.04^2-1=8.16%

Question 104

Bond yields calculated using the stated coupon payment dates are following ____

Answer 104

street convention

Question 105

Yield calculated using actual coupon payment dates is _____

Answer 105

true yield

Question 106

Bond yields calculated using _____ are following street convention

Answer 106

the stated coupon payment dates

Question 107

Yield calculated using _____ is true yield

Answer 107

actual coupon payment dates

Question 108

current yield = ?

Answer 108

annual cash coupon payment / bond price

Question 109

The current yield does not account for _____

Answer 109

gains and losses (as the bond’s price moves toward its par value over time)

Question 110

A bond’s _____ yield takes a discount or premium into account by assuming _____

Answer 110

simple; discount/premium declines evenly over the remaining years to maturity

Question 111

The current yield _______ (does/does not) account for gains and losses as the bond’s price moves towards its par value

Answer 111

Does not

Question 112

______ yield is calculated by adding the value of the call option to the bond’s current flat price

Answer 112

option-adjusted

Question 113

option-adjusted yield is calculated by _____ the value of the call option to bond’s _____ price

Answer 113

adding; current flat price

Question 114

The option-adjusted yield is _____ than the yield to maturity for a callable bond

Answer 114

less than

Question 115

Valuing a bond using forward rates is equivalent of valuing a bond using _____

Answer 115

spot rate (as for arbitrage-free valuation)

Question 116

A yield curve for coupon bonds is composed of yields on bonds with similar:

A) coupon rates.
B) maturities.
C) issuers.

Answer 116

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.

Question 117

____ shows yields by maturity

Answer 117

Yield curve

Question 118

Yield curve shows yields by _____

Answer 118

maturity

Question 119

The _____ of interest rates refers to the yields at different maturities for _____

Answer 119

term structure; like securities or interest rates

Question 120

______curve shows the YTMs for coupon bonds at various maturities

Answer 120

Yield curve for coupon bonds

Question 121

Yield curve for coupon bonds shows the YTMs for coupon bonds at _____

Answer 121

various maturities

Question 122

on a yield curve, x-axis is _____, y-axis is _____

Answer 122

x = maturity
y = YTM

Question 123

A ______ curve is not calculated from yields on actual bonds but is constructed from the spot curve

Answer 123

par bond yield curve (or par curve);

Question 124

A par curve is calculated from ____

Answer 124

the spot curve

Question 125

Par curve reflects _______ that a hypothetical bond at each maturity would need to have to _____

Answer 125

coupon rate; be priced at par

Question 126

T or F?

A par bond yield curve (or par curve) is calculated from yields on actual bond by maturity

Answer 126

F, it’s constructed using spot curve

Question 127

Par curve could be viewed as _____ at each maturity

Answer 127

YTM of a par bond

Question 128

A ______ shows the future rates for bonds or money market securities for the same maturities for annual periods in the future.

Answer 128

forward curve

Question 129

Typically, the forward curve would show the yield of ____ for _____, quoted on a _____ bond basis

Answer 129

1-year securities for each future year; semiannual

Question 130

Typically, the ____ curve would show the yield of 1-year securities for each future year, quoted on a _____ bond basis

Answer 130

semiannual

Question 131

The _____ curve is a yield curve for single payments in the future, such as zero-coupon bonds or stripped Treasury bonds.

Answer 131

spot

Question 132

The spot curve is a yield curve for single payments in the future, such as ______ or ______.

Answer 132

zero-coupon bonds; stripped Treasury bond (both refer to U.S. treasury bonds)

Question 133

The spot curve is a yield curve for ____ in the future, such as zero-coupon bonds or stripped Treasury bonds.

Answer 133

single payments

Question 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.

Answer 134

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.

Question 135

Yield spread is the difference between _____ and ___, and is typically quoted in ___

Answer 135

the yield of two different bonds; basis points

Question 136

benchmark spread is ?

Answer 136

A yield spread relevant to a benchmark, such as treasury note rate

Question 137

G-spread is?

Answer 137

A yield spread over a government bond

Question 138

I-spread aka ____, is yield spread related to ____

What is it normally used for?

Answer 138

• interpolated spreads;
• swap rates in the same currency and with the same tenor as a bond;
• Normally used for eurobonds

Question 139

Yield spread related to swap rates in the same currency and with the same tenor as a bond is _____

Answer 139

i-spread or interpolated spread

Question 140

If a bond’s yield increases, but spread stay the same, it is a due to a ____ (macro/micro) economic factor

Answer 140

macro (external) factor

Question 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?

Answer 141

micro (internal) factor; credit risk or issue’s liquidity

Question 142

G-spread and I-spread is theoretically correct only if ____

Answer 142

the spot yield curve is flat, so that yields are approximately the same across maturities.

Question 143

OAS (option-adjusted-spread) = ?

Answer 143

Z - spread - option value

Question 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.

Answer 144

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.

Question 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.

Answer 145

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.

Question 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.

Answer 146

A
G-spreads and I-spreads are only correct when the spot yield curve is flat (yields are about the same across maturities).

Question 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.

Answer 147

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.

Question 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.

Answer 148

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.

Question 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.

Answer 149

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.

Question 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.

Answer 150

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.

Question 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.

Answer 151

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.

Question 152

For money market instruments, yields may be quoted on a/an ____ basis or a/an ____, and may use ____-day years.

Answer 152

discount; add-on basis; 360 or 365

Question 153

For money market instruments, a ____ yield is an add-on yield based on a 365-day year.

Answer 153

bond-equivalent

Question 154

For money market instruments, a bond-equivalent yield is an ___ yield based on a ___-day year.

Answer 154

add-on; 365

Question 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.

Answer 155

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.

Question 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%.

Answer 156

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…

Question 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.

Answer 157

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）

Question 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.

Answer 158

C
N = 20 × 2 = 40; I/Y = 8.25/2 = 4.125; PMT = 70/2 = 35; and FV = 1,000.
Compute PV = 878.56.

Question 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%.

Answer 159

B

N = 28; PMT = 120; PV = −1,150; FV = 1,000; CPT I/Y = 10.3432.

Question 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%.

Answer 160

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%

Question 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.

Answer 161

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.

Question 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%

Answer 162

A

9. 4 − 8.5 = 0.9
10. 9 − 9.3 = 0.6

Question 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%.

Answer 163

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%

Question 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%.

Answer 164

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%