1. The value of a 5 - year semi-annul zero-coupon bond with a $ 500 maturity value and 9 percent discount rate is closest to:
A.$307.87.
B.$321.96.
C.$500.
A B C
B
N=10, 1=4.5, FV= 500, CPT PV=$321.96.
2. Which of the following approaches in measuring interest rate risk is most accurate when properly performed?
A.Duration/convexity approach.
B.Full Valuation approach.
C.Duration approach.
A B C
B
The most accurate approach method for measuring interest rate risk is the so-called full valuation approach. Essentially this boils down to the following four steps: (1) begin with the current market yield and price, (2) estimate hypothetical changes in required yields, (3) recompute bond prices using the new required yields, and(4) compare the resulting price changes. Duration and convexity are summary measures and sacrifice some accuracy.
3. A year ago a company issued a bond with a face value of $1000 with an 8 percent coupon. Now the prevailing market yield is 10 percent. What happens to the bond? The:
A.bond is traded at a market price higher than $1000.
B.bond is traded at a market price less than $1000.
C.company has to issue a new 2 -percent coupon bond.
A B C
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.
4. The current 4 - year spot rate is 4% and the current 5 - year spot rate is 5.5%. What is the 1 - year forward rate in four years?
A.8.62%.
B.9.58%.
C.11.72%.
A B C
C
1f4=(1.055)5/(1.04)4-1=0.1172
5. Assuming a flat term structure of interest rates of 5 percent, the duration of a zero-coupon bond with 5 years remaining to maturity is closest to:
A.5.00.
B.4.35.
C.6.34.
A B C
A
The duration of a zero coupon bond is approximately equal to its time to maturity.
6. An investor has a 1-year, semiannual, 10% coupon bond which is priced at $1025. If the 6-month spot rate on a bond-equivalent basis is 8%, the 1-year theoretical spot rate as a BEY is:
A.6.4%.
B.7.3%.
C.8.0%.
A B C
B
A BEY of 8% is equivalent to a 6 - month discount rate of 8/2=4%. 1025=50/1.04+1050/(1+r)2 1025-48.08=1050/(1+r)2 (1+r)2=1050/946.92=1.0748 r=(1.0748)0.50-1 r=0.0367 or 7.34% on a bond equivalent basis.
7. Which of the following bonds has the shortest duration? A bond with a:
A.20-year maturity, 6 percent coupon rate.
B.10-year maturity, 6 percent coupon rate.
C.10-year maturity, 10 percent coupon rate.
A B C
C
All else constant, a bond with a longer maturity will be more sensitive to changes in interest rates. All else constant, a bond with a lower coupon will have greater interest rate risk.
8. The zero volatility spread (Z-spread) is the spread that:
A.is added to the yield to maturity of a similar maturity Treasury bond to equal the yield to maturity of the risky bond.
B.is added to each spot rate on the Treasury yield curve that will cause the present value of the bond's cash flows to equal its market price.
C.results when the cost of the call option in percent is subtracted from the option adjusted spread.
A B C
B
The zero volatility spread (Z-spread) is the interest rate that is added to each zero-coupon bond spot rate and that will cause the present value of the risky bond's cash flows to equal its market value.
9. Which of the following statements about duration is FALSE?
A.The numerator of the effective duration formula assumes that market rates increase and decrease by the same number of basis points.
B.Effective duration is the exact change in price due to a 100 basis point change in rates.
C.For a specific bond, the effective duration formula results in a value of 8.80%. For a 50 basis point change in yield, the approximate change in price of the bond would be 4.40%.
A B C
B
Effective duration is an approximation because the duration calculation ignores the curvature in the price/yield graph.
10. Suppose that IBM has a $1000 par value bond outstanding with a 12 percent semiannual coupon that is currently trading at 102.25 with seven years to maturity. Which of the following is closest to the yield to maturity on the bond?
A.11.21%.
B.11.64%.
C.11.52%.
A B C
C
To find the YTM, enter PV=-$1022.50, PMT=$60, N=14, FV=$1000 and solve for I/Y=5.76%. Now multiply by 2 for the semiannual coupon payments: 5.76×2=11.52%.
11. An investor buys a 15-year, 10 percent annual pay coupon bond for $1000. He plans to hold the bond for 5 years while reinvesting the coupons at 12 percent. At the end of the 5-year period he feels he can sell the bond to yield 9 percent. What is the expected realized (horizon) yield?
A.10.0%.
B.11.8%.
C.11.2%.
A B C
C
Value of coupons: N=5, I/Y=12, PMT=100, PV=0, CPT FV=635.28. Value of the bond at the end of fifth year: N=10, I/Y=9, PMT=100, FV=1000, CPT PV=1064.18. Realized Return =[(Total future value/Present Value)1/(n×m)-1]×m=[($1699.46/$1000)1/(n×m]×1=11.2%.
12. A 30-year, 12% bond that pays interest annually is discounted priced to yield 14%. However, interest payments will be invested at 12%. The realized compound yield on this bond must be:
A.between 12.0% and 14.0%.
B.12.0%.
C.14.0%.
A B C
A
Since you are reinvesting the current income at 12%, you will have a return of at least 12%. And since the bond is priced to yield 14%, you will earn no more than 14%.
13. Given the following forward rates, the value of a 4 -year, 11 percent annual pay, $1000 par bond, is closest to:
Year
Rate
1
7.00%
2
8.15%
3
10.30%
4
12.00%
Note that the year 1 rate is the current rate (or spot rate) on a 1 -year security.
A.$1060.36.
B.$984.25.
C.$1052.63.
A B C
A
Spot Rates: Year 1=7%. Year 2= [1.07×1.0815]1/2-1=7.57%. Year3=[1.07×1.0815×1.103]1/3-1=8.48%. Year 4=[1.07×1.0815×1.103×1.120]1/4-1=9.35%.
Bond Value:
N=I; FV=110; I/Y=7; CPT PV=
102.80
N=2; FV=110; I/Y=7.57; CPT PV=
95.06
N=3; FV=110; I/Y=8.48; CPT PV =
86.17
N=4; FV=1110; I/Y=9.35; CPT PV=
776.33
1060.36
14. A $1000 par value, 10% semiannual, 20 - year debenture 1s currently selling for $1100. The bond's current yield is:
A.8.9%.
B.9. 1%.
C.10.0%.
A B C
B
Current yield = annual dollar coupon interest/bond price = $100/$1100=0.0909.
15. The arbitrage-free bond valuation approach can best be described as the:
A.use of a single discount factor.
B.use of a series of spot interest rates that reflect the current term structure.
C.arithmetic average of the spot interest rates.
A B C
B
The use of multiple discount rates (i. e. , a series of spot rates that reflect the current term structure) will result in more accurate bond pricing and in so doing, will eliminate any meaningful arbitrage opportunities. That is why the use of a series of spot rates to discount bond cash flows is considered to be an arbitrage-free valuation procedure.
16. How does the price-yield relationship for a callable bond compare to the same relationship for an option-free bond? The price-yield relationship is:
A.concave for low yields for the callable bond and always convex for the option-free bond.
B.concave for an option-free bond and convex for a callable bond.
C.concave for the callable bond and convex for an option-free bond.
A B C
A
Since the issuer of a callable bond has an incentive to call the bond when interest rates are very low in order to get cheaper financing, this puts an upper limit on the bond price for low interest rates and thus introduces the concave relationship between yields and prices.
17. The table below summarizes the yields and corresponding price for a hypothetical 15 -year option-free bond that is initially priced to sell at 7% yield: Yield (%) Price ($) 6.90% 100.925 47.00 % 100.0000 7.10% 99.0861 Using a 10 basis point rate shock, the effective duration for this bond closest to:
18. Reynaldo and Apple are training a new analyst, Norah Spears. They ask Spears what she knows about duration and convexity. Spears replies with four statements:
Statement 1:
Modified duration is a better measure than effective duration for bonds with embedded options.
Statement 2:
The convexity adjustment corrects for the error embedded in the duration.
Statement 3:
Modified duration ignores the negative convexity of a callable bond.
Statement 4:
Convexity of option-free bonds is always added to duration to modify the errors in calculating price volatility.
Which of the following regarding Spears' statements is TRUE?
A.Spears is correct with respect to all four statements.
B.Spears is correct with respect to Statement 2, but incorrect with respect to Statement 4.
C.Spears is correct with respect to Statement 3, but incorrect with respect to Statement 1.
A B C
C
Effective duration is a better measure than modified duration for bonds with embedded options because modified duration does not explicitly recognize the change in cash flows that will occur in a bond with embedded options as yield changes. Therefore, Statement 1 is incorrect.
19. An investor purchased a 6 - year annual interest coupon bond one year ago. The coupon interest rate was 10 percent and the par value was $1000. At the time he purchased the bond, the yield to maturity was 8 percent. If he sold the bond after receiving the first interest payment and the yield to maturity continued to be 8 percent, his annual total rate of return on holding the bond for that year would have been:
20. Georgia-Pacific has $1000 par value bonds with 10 years remaining maturity. The bonds carry a 7.5 percent coupon that is paid semi-annually. If the current yield to maturity on similar bonds is 8.2 percent, what is the current value of the bonds?
A.$1123.89.
B.$569.52.
C.$952.85.
A B C
C
The coupon payment each six months is $1000×0.075/2=$37.50. To value the bond, enter FV=$1000, PMT=$37.50, N=10×2=20, I/Y=8.2/2=4.1%. The value of the bond is then PV =-952.85.
21. For a bond currently priced at $1018 with an effective duration of 7.48, if rates moved down 75 basis points, the new price would be approximately:
A.$942.
B.$961.
C.$1075.
A B C
C
(1+7.48×0.0075)×1018=$1075.
22. With respect to an option-free bond, when interest-rate changes are large, the duration measure will overestimate the:
A.fall in a bond's price from a given increase in interest rates.
B.increase in a bond's price from a given increase in interest rates.
C.final bond price from a given increase in interest rates.
A B C
A
When interest rates increase by 50 - 100 basis points or more, the duration measure overestimates the decrease in the bond's price.
23. What happens to bond durations when coupon rates increase and maturities increase? As coupon rates increase, duration: As maturities increase, duration: ①A. decreases decreases ②B. decreases increases ③C. increases increases A. ①B. ②C. ③
A B C
B
As coupon rates increase the duration on the bond will decrease because investors are receiving more cash flow sooner. As maturity increases, duration will increase because the payments are spread out over a longer period of time.
24. If interest rates and risk factors are constant over a given period, then a fixed income bond trading at a discount will have a:
A.positive current yield, only.
B.negative current yield and a positive capital gain yield.
C.positive current yield and a positive capital gain yield.
A B C
C
A bond is designed to have a current yield. If it is trading at a discount, and other things remain constant, then it will rise in value over the given time period.
25. An investor gathers the following information about three U. S. Treasury annual coupon bonds:
Bond 1
Bond 2
Bond 3
Maturity
2 - year
1 - year
2 - year
Price
$10000
$384.62
$9660
Coupon
4%
0%
0%
Par Value
$10000
$400
$10400
Given the above information, how can the investor generate an arbitrage profit?
A.Purchase bond 1 while selling bonds 2 and 3.
B.Purchase bonds 2 and 3 and selling bond 1.
C.Purchase bonds 1 and 3 while selling bond 2.
A B C
A
By purchasing bond 1 and selling bonds 2 and 3, the investor could obtain an arbitrage profit of $44.62(-10000+384.62+9660). This action will result in positive income today in return for no future obligation - an arbitrage opportunity. Notice that in year 1, the coupon payments from bond 1 will cover the bond 2 par value obligation. In year 2, the coupon payment and principal payment from bond 1 will cover the bond 3 obligation.
26. Which of the following statements about the effects of interest rate volatility on value of bonds with embedded options is least accurate?
A.As yield volatility increases, the value of a put-able bond increases.
B.A put-able bond's value is its straight bond value plus the value of the embedded put option.
C.A callable bond's value is its straight bond value plus the value of the embedded call option.
A B C
C
A callable bond's value is its straight bond value minus the value of the embedded call option. Since the bondholder is effectively short a call option, the value of the option is subtracted from the bond price. This is why the value of callable bonds decreases when yield volatility rises.
27. Which of the following statements concerning the arbitrage-free valuation of non-Treasury securities is TRUE? The credit spread is:
A.only a function of the bond's default risk.
B.only a function of the bond's term to maturity.
C.a function of default risk and the term to maturity.
A B C
C
For valuing non-Treasury securities, a credit spread is added to each treasury spot yields. The credit spread is a function of default risk and the term to maturity.
28. Do measures that take into account how the expected cash flows from a bond may change as yields change include: Modified duration Modified convexity ①A. No No ②B. No Yes ③C. Yes No A. ①B. ②C. ③
A B C
A
Modified duration and modified convexity assume that expected cash flows do not change as yield change.
29. Which of the following statements regarding yield spreads is least accurate? The:
A.option cost in percentage terms can be computed by subtracting the OAS from the zero-volatility spread.
B.nominal yield spread measures the difference between the YTM on a risky bond and the YTM on a Treasury bond of similar maturity.
C.zero-volatility spread is the constant spread that is added to each Treasury spot rate to equate the present value of a bond's cash flows to the price of an otherwise identical option-free bond.
A B C
C
30. The following interest rate information is observed:
Spot Rates
1 year
10%
2 years
11%
3 years
12%
Based on this data, the 2 - year forward rate one year from now is closest to:
31. An analyst determines that an 8% option-free bond, maturing, in 2015, would experience a 3% change in price if market interest rise by 50 basis points. If market interest rates instead fall by 50 basis points, the bond's price would:
A.increase by less than 3%.
B.increase by more than 3%.
C.decrease by less than 3%.
A B C
B
The bond is option-free and will therefore exhibit positive convexity. An equal change in rates will produce a greater percentage gain when rates decrease than the percentage loss produced when rates increase.
32. A bond has a modified duration of 6 and a convexity of 62.5. What happens to the bond's price if interest rates rise 25 basis points? It goes:
33. The yield to maturity for a semiannual-pay, 10 -year corporate bond is 5.25 percent. What is the bond's annual equivalent yield?
A.5.00%.
B.5.25%.
C.5.32%.
A B C
C
The annual equivalent yield is equal to [1 + (nominal yield/number of payments per year)]number of pay per year-1=(1+0.0525/2)2-1=5.32%.
34. An analyst gathered the following information about spot rates and a coupon bond (all rates are annual) issued by Farrili Corporation: Spot rate, six-month aero coupon bond 7.0% Spot rate, one-year zero coupon bond 8.0% One year risk-free rate 6% Price for one-year, 9% coupon bond $1010 (semiannual payments, par value $1000) Using the arbitrage-freed approach to valuing bonds, the coupon bond is:
A.overvalued.
B.properly valued.
C.undervalued.
A B C
A
Bond - value = (45/1.035)+(1045/1.042)=1009.395<1010.
35. For a given change in yields, the difference between the actual change in a bond's price and that predicted using the duration measure will be greater for:
A.a bond with greater convexity.
B.a short-term bond.
C.inverse convexity.
A B C
A
Duration is a linear measure of the relationship between a bond's price and yield. The true relationship is not linear as measured by the convexity. When convexity is higher, duration will be less accurate in predicting a bond's price for a given change in interest rates. Short-term bonds generally have low convexity.
36. Which of the following statements on spreads is FALSE?
A.The Z-spread may be used for bonds that contain call options.
B.The Z-spread will equal the nominal spread if the term structure of interest rates is flat.
C.The nominal spread is the difference of specific security's yield-to-maturity (YTM) and the YTM of a Treasury security of similar maturity.
A B C
A
The Z-spread is used for risky bonds that do NOT contain call options in an attempt to improve on the shortcomings of the nominal spread.
37. How does the convexity of a bond influence the yield on the bond? All else the same, for a bond with high convexity investors will require:
A.a higher yield.
B.a lower yield.
C.the same yield as for a low convexity bond.
A B C
B
Convexity is to the advantage of the bond holder because a high-convexity bond's price will decrease less when rates increase and will increase more when rates decrease than a low-convexity bond's price.
38. An international bond investor has gathered the following information on a 10 - year, annualpay U. S. corporate bond: Currently trading at par value Annual coupon of 10% Estimated price if rates increase 50 basis points is 96.99% Estimated price is rates decrease 50 basis points is 103.14% The bond's duration is closest to:
A.6.58.
B.0.62.
C.6.15.
A B C
C
Duration = (V--V+)/[2V0 (change in required yield)]. Thus, duration = (103.14-96.99)/(2×100×0.005)=6.15. Remember that the change in interest rates must be in decimal form.
39. Magmyre Investments, Ltd. , hold two bonds: a callable bond issued by Mudd Manufacturing Inc. and a put-able bond issued by Precarious Builders. Both bonds have option adjusted spreads (OAS) of 135 basis points (bp). Kevin Grisly, a junior analyst at the firm, makes the following statements (each statement is independent). Apparently, Grisly could benefit from a CFA review course, because the only statement that could be accurate is:
A.Given a nominal spread for Precarious Builders of 110 bp, the option cost is -25 bp.
B.The cost of the call option on the Mudd bond is - 15bp.
C.The spread over the spot rates for a Treasury security similar to Mudd's bond is 145 bp.
A B C
C
The "spread over the spot rates for a Treasury security similar to Mudd's bond" refers to the Z-spread on the bond. For a callable bond, the OAS < Z-spread, so this could be a true statement because 135bp < 145 bp. The other statements are false. The option cost is calculated using the OAS and the Z-spread, not the nominal spread. The cost of the call option should be positive. (The issuer has to compensate for increased uncertainty from the call option.)
40. Using the following information about spot rates, what is the price of a three-year bond with $100 par and annual coupon payments of 5 percent? One-year rate: 4.78% Two-year rate: 5.56% Three-year rate: 5.98%
A.$97.47.
B.$96.33.
C.$98.87.
A B C
A
The bond price is computed as follows: Bond price =5/1.0478+5/1.05562+105/1.05983=$97.47.
41. A company has two $1000 face value bonds outstanding both selling for $701.22. The first issue has an annual coupon of 8% and 20 years to maturity. The second bond has the same yield as the first bond but has only five years remaining until maturity. The second issue pays interest annually as well. What is the annual interest payment on the second issue?
A.$13.59.
B.$18.56.
C.$37.12.
A B C
C
First find the yield to maturity (YTM) of the first bond and use it in the second bond calculation. The calculator sequence to determine the YTM is: PV=-701.22; FV=1000; PMT= 80; N=20; CPT→I/Y=12.00%. We discount the cash flows of the second bond at 12.00%. The calculator steps are: PV=-701.22; FV=1000; N=5; I/Y=12; CPT→PMT=$37.12.
42. An investor gathers the following information about three U. S. Treasury annual coupon bonds:
Bond 1
Bond 2
Bond 3
Maturity
2 - year
1 - year
2 - year
Price
$10000
$476.19
$9500
Coupon
5%
0%
0%
Par Value
$10000
$500
$10500
Misvaluation
$o
$o
9
If bond price converge to their arbitrage-free value, what should happen to the price of Bond 3?
A.Selling pressure should decrease its value.
B.Buying pressure should increase its value.
C.Selling pressure should increase its value.
A B C
B
Currently, an arbitrage opportunity exists with the three bonds. An investor could purchase Bonds 2 and 3 and sell Bond 1 for an arbitrage-free profit of $23.81(10000-476.19-9500). This action will result in positive income today in return for no future obligation - an arbitrage opportunity. Hence, buying pressure on Bond 3 should increase its value to the point where the arbitrage opportunity would cease to exist.
43. Exactly one year ago, an investor purchased a $1000 face value, zero- coupon bond with 11 years remaining to maturity. The YTM was 8.0%. Now, one year later, with market rates unchanged, an investor purchases an annuity that pays $ 40 every six months for 10 years. The combined value of the two investments based on the 8% BEY is approximately:
A.$966.
B.$1000.
C.$1007.
A B C
B
The two investments combine to form a 10 - year, $1000 face value, 8.0% semiannual coupon bond that would sell at par because the YTM (expressed as a BEY) equals the coupon rate. Thus the combined value is $1000. The zero-coupon bond is worth: 1000/1.0420=$456.39 and the annuity payments are worth $543.61 (N=10×2=20, PMT=40, I/Y=8/2=4,FV=0, PV=-543.61).
44. Which of the following statements best describes the concept of negative convexity in bond prices? As interest rates:
A.fall, the bond's price increases at an increasing rate.
B.rise, the bond's price approaches a minimum value.
C.fall, the bond's price increases at a decreasing rate.
A B C
C
Negative convexity occurs with bonds that have prepayment/call features. As interest rates fall, the borrower/issuer is more likely to repay/call the bond, which causes the bond's price to approach a maximum. As such, the bond's price increases at a decreasing rate as interest rates decrease.
45. James Waiters, CFA, is an active fixed income portfolio manager. He manages a portfolio of fixed income securities worth $ 7500000 for an institutional client. Waiters expects a widening yield spread between intermediate and long term securities. He would like to capitalize on his expectations and considers several transactions in a number of different securities. On 01/31/ 06, Waiters expects the yield of the 2 - Year Treasury Note to decrease by 10 basis points and the yield of the 30 - Year Treasury Bond to increase by 11 basis points. The characteristics of these two fixed income securities are shown in Table 1. Prices are quoted as a percentage of par value and the Price Value of a Basis Point is per $1 million par amount.
Table 1 Security Characteristics
2 - Year T - Note
30 - Year T - Bond
Maturity
01/31/08
11/15/35
Bid-Ask Spread (basis points)
5.0
5.0
Coupon
5.375%
6.125%
Bid Price
99.7236
104.6086
Ask Price
99.7736
104.6586
Yield to Maturity
5.51%
5.80%
Price Value of a Basis Point
186.6484
1461.1733
He also has the three year term structure of interest rates. This is shown in Table 2.
Table 2
Term Structure of Interest Rates
Year
Spot Rate
0.50
5.5227%
1.00
5.5537%
1.50
5.5444%
2.00
5.5205%
2.50
5.5114%
3.00
5.5156%
Walters thinks of several different trading strategies that would allow him to take advantage of his expectations. He would like to evaluate each strategy to determine which offers the best risk-return tradeoff. James wants to translate the estimated price change into a change in value of a position in a particular security. What is the best estimate of the change in value of a $100000 principal position in Treasury Notes if yields change by - 10 basis points?
A.$1866.48.
B.$18.66.
C.$186.65.
A B C
C
The change in value is computed as follows: Change in ValueT-Note = Price Value of a Basis Point/10 × (-Yield Change) So we have Price ChangeT-Rond = 186.6484/10×(-10 bp)=-$186.65.
46. What is the present value of a 7% semiannual-pay bond with a $1000 face value and 20 years to maturity if similar bonds are now yielding 8.25%?
A.$1000.00.
B.$879.52.
C.$878.56.
A B C
C
N=20×2=40; I/Y=8.25/2=4.125; PMT=70/2=35; and FV=1000. PV=878.56.
47. Which of the following statements about option-adjusted spread and nominal spread is most accurate?
A.Option-adjusted spread will equal nominal spread if the option favors the investor.
B.Option-adjusted spread will be greater than nominal spread if the option favors the issuer.
C.The longer the deferred call period, the closer the value of the option-adjusted spread will be to the value of the nominal spread.
A B C
C
The longer the deferral period, the lower the value of the call option; the nominal spread and option adjusted spread will be closer the longer the deferment period.
48. Which of the following steps is NOT used in the full valuation approach in measuring interest rate risk?
A.Estimate hypothetical changes in required yields.
B.Calculate the bond's convexity.
C.Recompute bond prices using the new required yields.
A B C
B
The most straightforward approach method for measuring interest rate risk is the so-called full valuation approach. Essentially this boils down to the following four steps: (1) begin with the current market yield and price, (2) estimate hypothetical changes in required yields, (3) recompute bond prices using the new required yields, and (4) compare the resulting price changes.
49. One year ago, an investor purchased a 10-year, $1000 par value, 8% semiannual coupon bond with an 8% yield to maturity. Now, one year later, interest rates remain unchanged at 8%. If the investor sells the bond today (immediately after receiving the second coupon payment, and with no transaction costs) he will have a capital:
A.gain of $80.
B.loss of $80.
C.gain of $0.
A B C
C
At the time of purchase, the coupon rate = the market rate, so the bond traded at par. One year later, with interest rates unchanged, the bond would still trade at par, or $1000. Thus, there would be no capital gain or loss from the sale.
50. A 3-year option-free bond (par value of $1000) has an annual coupon of 9 percent. An investor determines that the spot rate of year 1 is 6 percent, the year 2 spot rate is 12 percent, and the year 3 spot rate is 13 percent. Using the arbitrage-free valuation approach, the bond price is closest to :
A.$968.
B.$1000.
C.$912.
A B C
C
Price=[90/(1.06)]+[90/(1.12)2]+[1090/(1.13)3]=912. Or, in keeping with the notion that each cash flow is a separate bond, sum the following transactions: N=I, I/Y=6.0, PMT=0, FV=90, CPT PV=84.91 N=2, I/Y=12.0, PMT=0, FV=90, CPT PV=71.75 N=3, I/Y=13.0, PMT=0, FV=1090, CPT PV=755.42 Price=84.91+71.75+755.42=$912.08.
51. Jayce Arnold, a CFA candidate, is studying how the market yield environment affects bond prices. She considers a $1000 face value, option-free bond issued at par. Which of the following statements about the bond's dollar price behavior is most likely accurate when yields rise and fall by 200 basis points, respectively? Price will:
A.decrease by $124, price will increase by $149.
B.increase by $124, price will decrease by $149.
C.decrease by $149, price will increase by $124.
A B C
A
As yields increase, bond prices fall, the price curve gets flatter, and changes in yield have a smaller effect on bond prices. As yields decrease, bond prices rise, the price curve gets steeper, and changes in yield have a larger effect on bond prices. Thus, the price increases when interest rates decline must be greater than the price decrease when interest rates rise (for the same basis point change). Remember that this applies to percentage changes as well.
52. For which of the following securities is estimating the future cash flows least difficult?
A.5-year, 6% bond with two years of call protection.
B.3-year note with a coupon of Libor + 100 basis points.
C.8% preferred stock with mandatory redemption in five years.
A B C
C
If preferred stock must be redeemed on a specific date, its future cash flows are as predictable as those of an option-free bond: the (dividend) payments are known, the principal repayment date is known, and the security is not convertible or exchangeable. The principal repayment date is not known with certainty for a callable bond and the coupon payments are not known for a floating-rate security.
53. Cure All General Hospital has been forced to fife for bankruptcy protection. The company managing the hospital has been allowed to reorganize under the name United Hospital of Hope. The courts have specified that a new indenture should be written to accompany a planned new bond issue. The issue would have ten years to maturity and carry a 10% coupon that would be paid annually. The new agreement would relieve the company of the obligation to make interest payments during the first five years after the bond is issued. For the remaining five years, regular interest payments would resume. Finally, at maturity, the principal ($1000) plus the interest that was not paid during the first five years would be paid. However, no additional interest would be payable on the deferred interest. If the bond's YTM is 10%, its value is closest to:
A.$778.31.
B.$813.69.
C.$827.54.
A B C
B
This bond has no cash flows for the first five years. It then has a $100 cash flow for years 6 through 10. Additionally, the accrued interest ($500) that wasn't paid in the first five years would have to be paid at the end, along with the principal. The required inputs are CF0=0, CF1=0, F1=5, CF2=100, F2=4, CF3=1600, F3=1, NPV, I=10%, CPT. Note that CF3 is made up of the principal ($1000) plus the remaining $100 coupon plus the accrued interest (S500) that was not paid during the first five years of the bond's life.
54. A 15-year, $1000 face value zero-coupon bond is priced to yield a return of 8.00 percent compounded semi-annually. What is the price of the bond, and how much interest will the bond pay over its life, respectively? Bond Price Interest ①A. $691.68 $308.32 ②B. $610.25 389.75 ③C. $308.32 691.68 A. ①B. ②C. ③
A B C
C
Using an equation : Price zero - coupon = Face Value×[1/(1+i/n)n×2] Here, Price zero - coupon = 1000/(1+0.080/2)15×2=308.32. So, interest = Face-Price=1000-308.32=691.68. Using the calculator: N=(15×2)=30, I/Y=8.00/2=4.00, FV=1000, PMT=0. PV=-308.32. Again, Face -Price =1000-308.32=691.68.
55. To estimate the actual return of a bond when a callable bond's market price is higher than par use:
A.YTC.
B.YTM.
C.HPY.
A B C
A
To estimate the return at the point of a call the yield to call (YTC. measure is used. This is different from the YTM because the YTC uses the call price as the future value and uses the time to first call instead of the time to maturity.
56. The yield to maturity on an annual-pay bond 5.6 percent, what is the bond equivalent yield for this bond?
A.5.43%.
B.5.60%.
C.5.52%.
A B C
C
The bond-equivalent yield is computed as follows: Bond-equivalent yield =2[(1+0.056)0.5-1]=5.52%.
57. Negative convexity is most likely to be observed in:
A.callable bonds.
B.zero coupon bonds.
C.municipal bonds.
A B C
A
All noncallable bonds exhibit the trait of being positively convex and callable bonds have a negative convexity. Callable bonds have a negative convexity because once the yield falls below a certain point, as yields fall, prices will rise at a decreasing rate, thus giving the curve a negative convex shape.
58. The price value of a basis point (PVBP) for a 18 year, 8 percent annual pay bond with a par value of $1000 and yield of 9 percent is closest to:
A.$0.82.
B.$0.44.
C.$0.63.
A B C
A
PVBP = initial price - price if yield changed by 1 bps.
Initial price:
Price with change:
FV=1000
FV=1000
PMT=80
PMT=80
N=18
N=18
I/Y =9%
I/Y =9.01
CPT PV=912.44375
CPT PV=911.6271
PVBP = 912.44375-911.6271=0.82( PVBP is always the absolute value. )
59. The face value of a $1000000 T-bill with 78 days to maturity is priced at $987845. What is the bank discount yield (annualized) quote for the T-bill?
A.5.160%.
B.5.750%.
C.5.610%.
A B C
C
rBD=D/F×(360/t); D=$1000000-$987845=$12155; F=$1000000; t=78 days rBD=$12155/$1000000×(360/78)=0.0561.