Study Session 15 Fixed Income
Investmont: Basic Concepts
60. Features of Debt Securities
(一)强化习题
1. Which of the following is least likely allowed if a bond is
non-refundable? A corporation:
A. issues zero coupon bonds at a yield that is lower than the
current rate on their bonds and redeems the old bond issue.
B. calls its nonrefundable bonds and issues common equity in
their place.
C. gets a revolving credit line at the bank at a rate lower than
that on their bonds and redeems the bonds.
2. A $1000 par, semiannual-pay bond is trading for 89.14, has a
coupon rate of 8.75%, and accrued interest of $ 43.72. The clean
price of the bond is:
A. $847.69. B. $891.40. C. $935.12.
3. All else being equal, the ceiling on a floating-rate security
is most likely to benefit the:
A. issuer if interest rates fall.
B. issuer if interest rates rise.
C. bondholder if interest rates rise.
4. The current coupon period for a 10-year IBM bond with face
value $100000 and a 7% coupon rate is 183 days in length. The next
coupon will be paid 85 days from today's settlement date. What is the
accrued interest on this bond?
A. $3748. B. $1626. C. $1874.
5. Which of the following statements regarding a sinking fund
provision is TRUE? A sinking fund provision:
A. requires that the issuer should set aside money based on a
predefined schedule to accumulate the cash to retire the bonds at
maturity.
B. requires that the issuer should retire a portion of the
principal through a series of predefined principal payments over the
life of the bond.
C. must be made through the payment of cash, paid to the trustee
based on a predetermined schedule.
6. Suppose a treasury inflation protective security (TIPS) is
currently trading at its par value of $100000, and has a 4 percent
coupon rate paid semi-annually. If the annual inflation rate is 2.5
percent, what is the coupon payment after six months has passed?
A. $2000. B. $2025. C. $2050.
7. Which of the following statements regarding financing bond
purchases is TRUE?
A. In margin transactions, the broker borrows from the bank at
the call money rate plus a spread.
B. The rate the investor pays on the loan in a margin transaction
is known as the call money rate.
C. Purchasing securities on margin allows investors to leverage
assets and make larger purchases.
8. Which of the following statements regarding financing bond
purchases with margin accounts is FALSE?
A. The required margin percentage changes daily.
B. Individuals are more likely than institutions to use margin
accounts to finance bond purchases.
C. In the U. S. , margin accounts are regulated by the Federal
Reserve.
9. Which of the following embedded options benefits the bond
investor?
A. Call provision.
B. Put provision.
C. Accelerated sinking fund provision.
10. On November 15, 2008, Grinell Construction Company decided to
issue bonds to help finance the acquisition of new construction
equipment. They issued bonds totaling $10000000 with a 6% coupon rate
due June 15, 2028. Grinell has agreed to pay the entire amount
borrowed in one lump sum payment at the maturity date. Grinell is not
required to make any principal payments prior to maturity. What type
of bond structure has Grinell issued?
A. Serial bonds. B. Bullet maturity. C. Redeemable bonds.
11. Which of the following is the appropriate redemption price
when bonds are called according to the sinking fund provision?
A. Special redemption price.
B. Regular redemption price.
C. General redemption price.
12. Which of the following statements regarding a bond being
called is TRUE? Call prices are known as regular redemption prices
when bonds are called at:
A. under the call provisions specified in the bond indenture.
B. at a discount.
C. at a premium.
13. Which of the following is TRUE about a bond with a deferred
call provision?
A. It could be called at any time during the initial call period,
but not later.
B. It could not be called right after the date of issue.
C. Principal repayment can be deferred until it reaches maturity.
14. Which of the following is TRUE about the call feature of a
bond? It:
A. stipulates whether and under what circumstances the
bondholders can request an earlier repayment of the principal amount
prior to maturity.
B. describes the credit risk of the bond.
C. stipulates whether and under what circumstances the issuer can
redeem the bond prior to maturity.
15. If the issuer of a bond is in default, the bond will be
trading:
A. registered. B. on accrual. C. flat.
16. In the context of bonds, accrued interest:
A. equals interest earned from the previous coupon to the sale
date.
B. covers the part of the next coupon payment not earned by
seller.
C. is discounted along with other cash flows to arrive at the
dirty, or full price.
17. The dirty, or full, price of a bond:
A. applies if an issuer has defaulted.
B. equals the present value of all cash flows, plus accrued
interest.
C. is paid when a security trades ex-coupon.
18. Peter Stone is considering buying a $100 face value, semiannual coupon bond with a quoted price of 105.19. His colleague
points out that the bond is trading ex-coupon. Which of the following
choices best represents what Stone will pay for the bond?
A. $105.19 plus accrued interest.
B. $105.19 minus accrued interest.
C. $105.19.
19. A coupon bond:
A. does not pay interest on a regular basis, but pays a lump sum
at maturity.
B. can always be converted into a specific number of shares of
common stock in the issuing company.
C. pays interest on a regular basis (typically semi-annually).
20. Which of the following statements about zero-coupon bonds is
FALSE?
A. The lower the price, the greater the return for a given
maturity.
B. A zero-coupon bond provides a single cash flow at maturity
equal to its par value.
C. A zero coupon bond may sell at a premium to par when interest
rates decline.
21. A bond issued by the government of Italy is likely to be
denominated in which one of the following currencies?
A. U. S. dollars. B. Swiss francs. C. Euros.
22. Which one of the following alternatives represents the
correct series of payments made by a typical 6 percent U. S. Treasury
note with a par value of $100000 issued today with five years to
maturity ?
Number and size of each intermediate payment Payment made at
maturity
①A. 9 semiannual payments of $3000 $100000
②B. 4 annual payments of $6000 $106000
③C. 9 semiannual payments of $3000 $103000
A. ①B. ②C. ③
23. Which of the following is least likely an amortizing security?
A. Mortgage-backed securities (MBS).
B. Coupon Treasury bonds.
C. Bonds with sinking fund provisions.
(二)习题答案
1. A.
A company may refund debt as long as they do not issue cheaper
debt to do so. The revolving credit line refunding situation is
"gray," but the firm clearly could not issue the zero-coupon bonds.
2. B.
The clean price of the bond is the quoted price, 89. 14% of par
value, which is $891.40.
3. B.
When the interest rate increases, the periodic payment will be
limited to the ceiling rate for the issue, which does great
protection for the issuer.
4. C.
The next coupon payment will be $100000×7%/2 = $3500. The bond
has accrued interest for 183-85=98 days. The amount of accrued is
98/183×3500=$1874.
5. B.
A sinking fund actually retires the bonds based on a schedule.
This can be accomplished through either payment of cash or through
the delivery of securities. An accelerated sinking fund provision
allows the company to retire more than is stipulated in the indenture.
Sinking fund provisions provide for the repayment of principal
through a series of payments over the life of the issue.
6. B.
This coupon payment is computed as follows:
Coupon Payment =($100000×1.0125)×0.04/2=$2025.
7. C.
In margin transactions, the broker borrows from the bank at the
call money rate. The rate the investor pays on the loan in a margin
transaction is known as the call money rate plus a spread.
Remember that the broker needs to make profit, so the investor
will pay a rate higher than the broker pays to the bank. The investor
collateralizes the margin loan with the securities purchased.
8. A.
The margin percentage is fixed by contract. The required margin
dollars may vary from day to day due to fluctuations in the
underlying collateral.
9. B.
A put provision allows the investor to put the bond back to the
issuer.
10. B.
These bonds have a bullet maturity structure because the issuer
has agreed to pay the entire amount borrowed in one lump-sum payment
at maturity.
11. A.
Regular redemption and general redemption price are identical and
refer to bonds being called according to the provisions specified in
the bond indenture.
12. A.
When bonds are redeemed under the call provisions specified in
the bond indenture, these are known as regular redemptions and the
call prices are referred to as regular redemption prices which can be
either at a premium or at par.
13. B.
A deferred call provision means the issue is initially (say, for
the first 5 to 7 years) non-callable, after which time it becomes
freely callable. In other words, there is a deferment period during
which time the bond cannot be called, but after that, it becomes
freely callable.
14. 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. Call provisions do not pertain to maturity or
credit risk. A put provision gives the bondholders certain rights
regarding early payment of principal.
15. C.
If an issuer of a bond is in default (i. e. it has not been
making periodic contractual coupon payments), the bond is traded
without accrued interest and is said to trade flat.
A registered bond is a bond whose owner's name is recorded as a
book entry on the books of the issuer or its transfer agent.
16. A.
Accrued interest can occur on all bonds with periodic coupon
payments, not just bonds with payment frequencies greater than one
year. Accrued interest is not discounted when calculating the price
of the bond. The statement, "covers the part of the next coupon
payment not earned by seller," should read, "---not earned by buyer.
"
17. B.
The dirty price of a bond equals the quoted price plus accrued
interest. If an issuer has defaulted, the bond trades without
interest and is said to trade flat. When a security trades ex-coupon,
the buyer pays the clean price, which is the quoted price without
accrued interest. The dirty price of a bond is greater than the clean
price by the amount of the accrued interest. (If the bond trades on a
coupon date, the dirty price will equal the clean price. )
18. C.
Since the bond is trading ex-coupon, the buyer will pay the
seller the clean price, or the price without accrued interest. So,
Stone will pay the quoted price. The choice $105.19 plus accrued
interest represents the dirty price (also known as full price). This
bond would be said to trade cure-coupon.
19. C.
20. C.
Zero coupon bonds always sell below their par value or at a
discount prior to maturity. The amount of the discount may change as
interest rates change, but a zero coupon bond will always be priced
less than par.
21. C.
Bonds issued by governments are likely to be denominated in the
currency of the country where the bond is issued. In this case, the
Euro is the Italian currency and bonds issued by the Italian
government would normally be issued in Euros.
22. C.
Payments for U. S. Treasury bonds and notes are semiannual and
are fixed for the life of each bond or note. The coupon rate is
quoted on an annual basis but each payment is made on the basis of
one half the annual rate multiplied by the maturity or par value.
23. B.
Coupon Treasury bonds and most corporate bonds are non-amortizing
securities because they pay only interest until maturity. At maturity
these bonds repay the entire par value or face value. MBS are backed
by pools of loans that generally have a schedule of partial principal
payments, making these securities amortizing securities. A sinking
fund provision is another example of an amortizing feature of a bond.
This feature is designed to pay a part or the entire total of the
issue by the maturity date.
61. Risks Associated with Investing in Bonds
(一)强化习题
1. All else equal, which of the following is least likely to
increase the interest rate risk of a bond?
A. A longer maturity. B. Inclusion of a call feature. C. A lower
coupon.
2. When determining credit risk spread, the benchmark security is
most likely a(n):
A. Low-yield corporate bond. B. Treasury bond. C. AA rated bond.
3. The return in excess of the return on a benchmark, defaultfree security demanded by investors to compensate them for the risk
of buying a risky security is called:
A. default risk premium.
B. downgrade risk premium.
C. reinvestment risk premium.
4. Which of the following statements about the risks associated
with investing in bonds is most accurate?
A. Corporate debentures are not subject to prepayment risk.
B. Liquidity risk is not relevant if the portfolio manager
intends to hold the bond to maturity.
C. All fixed income securities except short-term Treasury bills
are subject to volatility risk to some degree.
5. Which of the following statements about reinvestment risk of a
security is least accurate? Reinvestment risk:
A. is minimized with zero-coupon bond issues.
B. becomes more problematic for those investors with longer time
horizons.
C. becomes more problematic when the current coupons being
reinvested are relatively small.
6. A domestic investor is purchasing foreign bonds. Which of the
following statements regarding the exchange rate risk and price
movement of the asset is most accurate?
A. The depreciation of both the asset and the foreign currency
benefits the domestic investor.
B. The appreciation of both the asset and the foreign currency
benefits the domestic investor.
C. The appreciation of the asset and the depreciation of the
foreign currency benefit the domestic investor.
7. Which of the following is least likely the reason that
floating rate bonds may trade at prices different from their par
values?
A. Resetting interest rates makes floating rate bonds more
susceptible to the price risk that results from changing interest
rates.
B. A time lag exists between the rate change in the market and
the time when the coupon rate is reset.
C. The fixed quoted margin on the floating rate security may
differ from the margin required by the market.
8. Which of the following statements about the valuation of an
option-free bond is most likely correct? Other things equal:
A. whether the bond's value will increase or decrease when rates
increase depends on whether the bond is selling at a discount, at par,
or at a premium.
B. the value of a long-term bond is more sensitive to interest
rate changes than the value of a short-term bond.
C. the value of a low-coupon bond is less sensitive to interest
rate changes than the value of a high-coupon bond.
9. Consider the following two statements about put-able bonds:
Statement 1: As yields rise, the price of put-able bonds will
fall more quickly than similar option-free bonds (beyond a critical
point) due to the decline in value of the embedded put option.
Statement 2: As yields fall, the price of put-able bonds will
rise more quickly than similar option-free bonds (beyond a critical
point) due to the increase in value of the embedded put option.
Should an analyst agree or disagree with these statements?
Statement 1 Statement 2
①A. Agree Agree
②B. Disagree Disagree
③C. Agree Disagree
A. ①B. ②C. ③
10. An investor most concerned with reinvestment risk would be
least likely to:
A. eliminate reinvestment risk by holding a coupon bond until
maturity.
B. prefer a lower coupon bond to a higher coupon bond.
C. be more concerned in a decreasing interest rate environment.
11. Is an option-free bond's price sensitivity positively
correlated with the:
Bond's coupon rate Level of market interest rates
①A. No Yes
②B. No No
③C. Yes No
A. ①B. ②C. ③
12. A portfolio of option-free bonds is least likely to be
exposed to
A. reinvestment risk. B. interest rate risk. C. volatility risk.
13. As part of his job at an investment banking firm, Damian
O'Connor, CFA, needs to calculate the value of bonds that contain a
call option. Today, he must value a 10-year, 7.50 percent annual
coupon bond callable in five years priced at 96.5 (prices are stated
as a percentage of par). A straight bond that is similar in all other
aspects as the callable bond is priced at 99.0. Which of the
following is closest to the value of the call option?
A. 2.5. B. 3.5. C. 1.0.
14. Which of the following circumstances is an example of event
risk?
A. A currency devalues due to foreign exchange market forces.
B. A local government regulatory agency introduces more stringent
clean-water requirements that will significantly reduce the cash flow
of an area paper mill.
C. The U. S. Federal Reserve unexpectedly increases interest
rates by 100 basis points.
15. Silhouette Enterprises must make a balloon loan payment of
$1000000 in 3 years. The firm's treasurer wants to purchase a bond
that will provide funds for repayment and minimize reinvestment risk.
Assume the company has the following four investment options (all
with face values of $1000000). Market rates are at 8.00 percent. All
bonds are non-callable and are otherwise similar except as noted.
Which option best meets the treasurer's requirements?
A. A 4-year, zero coupon bond priced to yield 8.50%.
B. A 3-year, 8.00% semi-annual coupon bond priced at par.
C. A 3-year, zero coupon bond priced to yield 8.00%.
16. Which of the following statements about a callable bond is
TRUE?
A. The call option on a bond trades separately from the bond
itself.
B. A bondholder usually loses if a bond is called by being forced
to reinvest the proceeds at a lower interest rate.
C. Callable bonds follow the standard inverse relationship
between interest rates and price.
17. For a decline in interest rates, the price of a callable bond,
when compared to an otherwise identical option-free bond, will most
likely rise by:
A. less because the price of the embedded option rises.
B. less because the price of the embedded option falls.
C. more because the price of the embedded option rises.
18. David Jordan, a level Ⅲ candidate in the CFA program, is a
portfolio manager with Golson Investment Group. He manages a fixedcoupon bond portfolio with a face value of $120.75 million and a
current market value of $116.46 million. Golson's research department
has forecasted that interest rates are going to decrease by 50 basis
points. Based on this forecast, David estimates that the portfolio's
value will increase by 2.12 million if interest rates fall and will
decrease by 2.07 million if interest rates rise. Which of the
following choices is closest to the portfolio's dollar duration?
A. $4.19 million. B. $3.67 million. C. $3.50 million.
19. Gabrielle Daniels and Edin Roth, CFA candidates, are
discussing the relationship between a bond's coupon rate and the
required market yield. Looking through the local newspaper, they see
a new-issue, 10-year, $1000 face value 8.00 percent semi-annual
coupon bond priced at $950. Daniels makes the following statements.
Which statement does Roth tell her is CORRECT?
A. The current market required rate is less than the coupon rate.
B. The bond is selling at a premium.
C. The bond is selling at a discount.
20. Which of the following choices correctly places callable
bonds, straight coupon bonds, mortgage-backed securities, and zerocoupon bonds in order from the type of security with the least
reinvestment risk to the one with the most reinvestment risk?
A. zero-coupon bonds, mortgage-backed securities, straight coupon
bonds, callable bonds.
B. zero-coupon bonds, straight coupon bonds, callable bonds,
mortgage-backed securities.
C. mortgage-backed securities, zero-coupon bonds, callable bonds,
straight coupon bonds.
21. Which of the following investors is least susceptible to
inflation risk?
A. A financial institution with assets concentrated in fixed-rate
mortgages.
B. An individual with a 5 year certificate of deposit at a local
financial institution.
C. The holder of a 15-year bond with a coupon formula equal to
the U. S. prime rate plus 3.25%.
22. Benjamin Zoeller and Tara McGonigal are preparing for the
Level I CFA examination. Zoeller is studying credit spread risk.
McGonigal is farther along in her studies, but has forgotten how to
determine the default free rate if given the yield on a bond rated
BBB + of 9.50 percent and a risk premium of 3.00 percent. What does
Zoeller tell her to use for the default free rate?
A. 12.50%. B. 4.50%. C. 6.50%.
23. Which of the following will most likely have the least impact
on a corporate bond rating? The:
A. issuing company's debt burden.
B. issuing company's liquidity provision.
C. issuing company's volume of sales.
24. Which of the following statements about embedded options and
yield volatility is FALSE?
A. As yield volatility increases, the value of the call option
increases along with the value of the callable bond.
B. A call option benefits the issuer and a put option benefits
the holder.
C. The greater the volatility of the underlying price, the
greater the value of the embedded option.
25. A bond portfolio manager owns $ 5 million par valfie of a
noncallable bond issue. The duration of the bonds is 5.6 and the
current market value of the bonds is $5125000. If yield decline by 25
basis points, the approximate new price of the bonds after the
decline in yield will be closest to:
A. $5053250. B. $5070000. C. $5196750.
26. Credit risk is measured in several ways. The yield
differential above the return on a benchmark security measures the:
A. default risk. B. downgrade risk. C. credit spread risk.
27. Tom Wilkens is a portfolio manager and has a retiree as a
client. The client would like to invest in bonds with low interest
rate risk. Which bond should Tom choose for his client? The bond with
a:
A. 20 year maturity and a yield to maturity of 5%.
B. 10 year maturity and a yield to maturity of 8%.
C. 10 year maturity and a yield to maturity of 5%.
28. Which of the following statements regarding liquidity risk is
FALSE?
A. The bid-ask spread is one measurement of liquidity risk.
B. Emerging markets typically have more liquidity risk than
established markets.
C. Liquidity risk is not important to an investor who intends to
hold a security until maturity.
29. Which of the following statements does NOT describe a
characteristic of an illiquid asset or market ?
A. Large block trades that do not materially affect prices.
B. Wide bid-ask spreads.
C. Small trading volumes.
30. Which of the following investors is least likely to have
liquidity risk concerns? A:
A. financial institution heavily involved in the repurchase
market.
B. portfolio manager for an emerging-market fund.
C. trader who invests exclusively in Treasury bonds.
31. Which of the following statements about currency risk is most
accurate? Generally:
A. if the home currency appreciates against the foreign currency,
each foreign currency unit will be worth more in terms of the home
currency.
B. appreciation of the foreign currency is good for domestic
investors who buy foreign securities.
C. if the foreign currency appreciates, the foreign cash flow
will be worth less for the domestic investor.
32. While working abroad, U. S. citizen Dirk Senik purchases a
foreign bond with an annual coupon of 7.5 percent for 95.5. One year
later, the exchange rate between the dollar and the foreign currency
remains unchanged and he sells the bond for 97.25, resulting in a
holding period return of 9.7 percent. If the foreign currency had
depreciated in relation to the dollar, Senik's return would be:
A. greater than 9.7 percent. B. equal to 9.7 percent. C. less
than 9.7 percent.
33. While serving as visiting conductor at the University of
Edinburgh, U. S. Citizen William Golson purchases a 9.0 percent
annual coupon bond denominated in the local currency for 93.0. One
year later, before his return to the U. S. , he sells the bond for
99.5. Using a holding period return formula he remembers from his
undergraduate studies, he calculates his return at 16.7 percent. On
the flight home, he is seated next to Kristin Meyer, CFA. She is
puzzled because she has heard that similar investments yielded
negative returns over the same time period.
After consulting her financial newspaper, she recalculates
Golson's return at a disappointing negative 5.2 percent.
Assuming Meyer is correct, which of the following statements is
the most likely reason for the difference in the calculated returns?
Golson:
A. forgot to include the impact of foreign currency appreciation
in relation to the dollar.
B. forgot to include the impact of foreign currency depreciation
in relation to the dollar.
C. omitted the impact of inflation.
34. Which of the following investors faces the least inflation
risk? An investor whose portfolio is concentrated in:
A. long-term treasury bonds.
B. medium-term fixed-rate coupon bonds.
C. equity securities.
35. David Korotkin, CFA and a broker at an investment bank, has a
client who is very concerned about maintaining purchasing power over
the next year. The investor is conservative, and to date has been
pleased with a consistent return of 8.00 percent. The bank's research
department has estimated next year's inflation rate at 2.0 percent.
The client specifically wants to invest in a fixed-coupon bond. Which
of the following statements is most correct? If Korotkin purchases a
bond with a 10.00 percent coupon, the client:
A. will realize a real gain.
B. will not lose purchasing power.
C. may lose purchasing power.
36. Simone Girard, CFA candidate, is studying yield volatility
and the value of callable bonds. She has the following information: a
callable bond with a call option value calculated at 1.25 (prices are
quoted as a percent of par) and a straight bond similar in all other
aspects priced at 98.5. Girard also wants to determine how the bond's
value will change if yield volatility increases. Which of the
following choices is closest to what Girard calculates as the value
for the callable bond and correctly describes the bond's price
behavior as yield volatility increases?
A. 97.25, price increases. B. 99.75, price decreases. C. 97.25,
price decreases.
37. Which of the following statements about balancing
reinvestment risk and price risk is TRUE? When interest rates:
A. decline, price risk decreases and reinvestment risk decreases.
B. rise, price risk increases and reinvestment risk increases.
C. decline, price risk decreases and reinvestment risk increases.
38. All other things being equal, which one of the following
bonds has the greatest duration?
A. 15-year, 8% coupon bond.
B. 5-year, 8% coupon bond.
C. 15-year, 12% coupon bond.
39. If expected yield volatility increases, the price of a(n)
A. put-able bond will increase.
B. callable bond will increase.
C. embedded put option will decrease.
40. Kirsten Thompson, CFA candidate, is studying the
relationships between a bond's coupon rate and the required market
yield. One study question concerns a new-issue, 15-year, $1000 face
value 6.75 percent semi-annual coupon bond priced at $1075. Which of
the following choices correctly describes the bond and accurately
represents the relationship of the bond's market yield to the coupon?
A. Premium bond, required market yield is less than 6.75%.
B. Premium bond, required market yield is greater than 6.75%.
C. Discount bond, required market yield is less than 6.75%.
41. Jori England, CFA candidate, is studying the value of
callable bonds. She has the following information: a callable bond
with a call option value calculated at 1.75 (prices are quoted as a
percent of par) and a straight bond similar in all other aspects
priced at 98.0. Which of the following choices is closest to what
England calculates as the value for the callable bond?
A. 96.25. B. 99.75. C. 96.0.
42. Which of the following statements is TRUE?
A. When a rating agency downgrades a security, the bond's price
usually falls.
B. Technical default usually refers to the issuer's failure to
make interest or principal payments as scheduled in the indenture.
C. Default risk is important because if a bond issuer defaults,
the bondholder likely loses his entire investment.
43. Which of the following statements about how the features of a
bond impact interest rate risk is FALSE?
A. Bond price movements depend upon the direction and magnitude
of changes in interest rates.
B. All else equal, a longer-term bond is more sensitive to
interest rates than a shorter-term bond.
C. An inverse relationship between interest rates and bond prices
means that the greater the change in interest rates, the less the
change in fixed-coupon bond prices.
44. Price compression:
A. occurs when a bond's cap and floor are set close together.
B. occurs when demand for a bond is high near the first call date.
C. reduces the potential for price appreciation and benefits the
issuer.
(二)习题答案
1. B.
Inclusion of a call feature will decrease the duration of a fixed
income security.
2. B.
The credit risk spread is measured in relation to a default-free
security. Of the choices above, the security with the least chance of
default is the Treasury bond. The AA rated bond is high quality, but
not the highest quality (which would have an AAA rating). The lowyield corporate bond is a possibility, but it is not likely that this
bond is as default-free as the Treasury security.
3. A.
Default risk is the possibility that the issuer will fail to meet
its obligations under the indenture, for which investors demand a
premium above the return on a default-risk-free security.
Downgrade risk is the risk that a bond is reclassified as a
riskier security by a credit rating agency. Reinvestment risk is the
risk that the investor will have to reinvest the proceeds available
for reinvestment at a lower interest rate than anticipated.
4. A.
Only amortizing securities with a prepayment option are subject
to prepayment risk. Volatility risk only applies to bonds that have
embedded options. Liquidity risk can be important even for a bond
held to maturity if the portfolio manager needs to mark its holdings
to market for performance reporting purposes. Low liquidity for the
bond can mean the prevailing price is not an accurate measure of the
bond's value.
5. C.
Reinvestment risk becomes more problematic when the current
coupons being reinvested are relatively large.
6. B.
When the foreign currency appreciates, each foreign currencydenominated cash flow buys more domestic currency units-increasing
the domestic currency return from the investment. The appreciation of
the foreign asset benefits the investor as well.
7. A.
Resetting interest rates makes the bond less, not more,
susceptible to interest rate changes.
8. B.
The price of a bond changes in the opposite direction to the
change in interest rates. Long-term, low-coupon bonds are more
sensitive than short-term and high-coupon bonds.
9. B.
As yields rise, the value of the embedded put option in a putable bond increases and (beyond a critical point) reduces the decline
in the value of the bond compared to a similar option-free bond. As
yields fall, the value of the embedded put option decreases, and
(beyond a critical point) the put-able bond behaves much the same as
a similar option-free bond since the embedded put option has little
or no value.
10. A.
The key term here is coupon bond. While an investor in a fixedcoupon bond can usually eliminate price risk by holding a bond until
maturity, the same is not true for reinvestment risk. The receipt of
periodic coupon payments exposes the investor to reinvestment risk.
11. B.
An option-free bond's price sensitivity (interest rate risk) is
greater when both the coupon rate and level of market interest are
low; price sensitivity is negatively correlated with both factors.
12. C.
Volatility risk is the risk of that the price of a bond with an
embedded option will decline when expected yield volatility changes.
Option-free bond is net affected by Volatility risk.
13. A.
To calculate the option value, rearrange the formula for a
callable bond to look like:
Value of embedded call option = Value of straight bond - Callable
bond value
Value of call option = 99.0-96.5=2.5.
Remember: The call option is of value to the issuer, not the
holder.
14. B.
A local government regulatory agency introducing more stringent
clean-water requirements that will significantly reduce the cash flow
of an area paper mill is an example of regulatory risk, which is a
type of event risk. The impact of regulatory risk can be long-term,
in that the company may be unable to pass on the increased cost to
customers.
15. C.
The 3-year coupon bond fulfills the treasurer's requirement
concerning funds for repayment, it does not minimize reinvestment
risk. Among the zero-coupon bonds, the one that best matches the
loan's maturity will minimize reinvestment risk. The treasurer will
thus prefer the 3-year, zero-coupon bond. ff he purchased the 4-year
zero-coupon bond, he would have to sell the bond prior to maturity to
payoff the loan and would face price risk.
16. B.
A bondholder will most likely lose if a bond is called because a
bond is most likely to be called in a declining interest rate
environment. The issuer will likely call the bond and replace it with
lower cost (lower coupon debt). The holder faces prepayment and
reinvestment risk, because he must reinvest the bond cash flows into
lower-yielding current investments.
17. A.
As interest rates decline, the price of the option-free bond
rises. However, the price Of the embedded call option also rises.
Consequently, the price of a callable bond rises by less than the
price of an otherwise identical option-free bond.
18. A.
Effective Duration = ( price when interest rates fall - price
when interest rates rise)/( 2 × initial price × basis point change)
= (118.58-114.39)/(2×116.46×0.005)=3.60.
Approximate dollar change in price (dollar duration) = (effective
duration × current bond/portfolio value)/100=(3.60×116.46)/100=4.19.
19. 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.
20. B.
Of the three choices, zero-coupon bonds have the least
reinvestment risk. An investor can nearly eliminate reinvestment risk
by holding a noncallable zero-coupon bond until maturity because
zero-coupon bonds deliver all cash flows in one lump sum at maturity.
Straight coupon bonds (no prepayment or other embedded options)
have the next most reinvestment risk because of the periodic coupon
payments. If interest rates decline, the bondholder will have to
reinvest the coupons at a rate lower than that required to earn the
original expected yield-to-maturity.
Callable bonds have more reinvestment risk because the right to
prepay principal compounds reinvestment risk. A call option is one
form of prepayment right that benefits the issuer, or borrower.
Mortgage backed and other asset backed securities have the most
prepayment risk because in addition to cash flows from periodic
interest payments (bond coupons), these securities have periodic
repayment of principal. The lower the interest rate, the higher
chance that the loans underlying these assets will repay in full.
21. C.
A 15-year bond with a coupon formula equal to the U. S. prime
rate plus 3.25% is an example of a floating rate bond. The holder of
an adjustable rate asset is impacted less by inflation than the
holder of a fixed-rate asset because the increased cash flow (from
the higher coupon payments when the base rate increases) at least
partially offsets the decreased purchasing power caused by inflation.
22. C.
The formula for credit spread risk( or the yield on a risky asset)
is:
YieldRisky = YieldRF + Risk Premium, where RF = default - free rate.
Rearranging this formula results in : YieldRF = YieldRisky = Risk
Premium, or Yielder = 9.50%-3.00%=6.50%.
23. C.
The size of the issuing firm, represented by the amount of sales,
will play a role in the financial stability of the firm. However,
liquidity and leverage are more directly related to the bond's rating.
Smaller firms are not likely to issue bonds and issuers are typically
larger firms overall.
24. A.
As yield volatility increases, the value of the call option
increases, and the value of the callable bond decreases and thus the
bondholder loses. (As shown by the equation: Value of callable bond =
Value of straight bond - Call option value. )
25. C.
Duration of 5.6 means that the approximate percentage price
change for a 100 basis point change in yield will be 5.6%. A 25 basis
point change would be 5.6/4=1.4%. The approximate new price would be
$5125000×1.014=$5196750.
26. C.
The yield differential above the return on a benchmark security
measures the credit spread risk. Credit spread risk is also known as
the risk premium or spread.
27. B.
The shorter the bond's maturity and the higher the yield to
maturity, the shorter the duration and the lower the interest rate
risk.
28. C.
Even if an investor intends to hold securities to maturity,
liquidity risk impacts portfolios when marking to market and through
changes in investor tastes and preferences over time. For example,
liquidity is important to institutional investors that must determine
market values for net asset values (NAVs) and to dealers in the
repurchase market for collateral valuation.
29. A.
In a liquid market with large trading volumes, large block trades
should not affect prices. All other choices are characteristics of
illiquid markets or assets.
30. C.
Treasury securities are the most liquid of the investments
mentioned.
The repurchase market is short term in nature and the collateral
is marked-to-market daily.
Thus, the need to quickly convert securities to cash (and at
approximately market value) is very important. Emerging markets are
usually less liquid than established markets, one reason being the
small trading volumes. Even if an investor intends to hold the
security to maturity, liquidity risk impacts portfolios when marking
to market and through changes in investor tastes and preferences over
time. For example, liquidity is important to institutional investors
that must determine market values for net asset values (NAVs).
31. B.
If the home currency appreciates against the foreign (i. e.
payment) currency, each foreign currency unit will be worth less in
terms of the home currency. If the foreign currency appreciates, a
given foreign cash flow will be worth more units of the home currency,
thereby benefiting the domestic investor holding foreign securities.
32. C.
The return on a foreign bond is a combination of the return on
the bond and the movement in the foreign currency. In the base case,
the movement in the foreign security was 0 and thus the return was
just the holding period return on the bond. If the foreign currency
depreciates, the return will be lowered because the investor will
lose upon conversion to the dollar.
33. B.
Golson most likely forgot to take into account the impact of the
percentage change in the dollar value of the foreign currency. Here,
since the correct return (calculated by Meyer) is lower than that
calculated by Golson (who omitted the impact of foreign exchange),
the foreign currency depreciated in relation to the dollar. The
appreciation in the bond value was not enough to offset the currency
depreciation, and the total return in dollar terms was negative.
34. C.
Inflation risk refers to the possibility that prices of general
goods and services will increase in the economy. Empirical evidence
shows that equity securities, or stocks, have the least inflation
risk of the investments listed here. Since fixed coupon bonds pay a
constant coupon, increasing prices erode the buying power associated
with bond payments.
35. C.
Investors want to be compensated for the inflation they expect
plus for the risk that inflation will increase during the term of the
investment. Here, the bank's estimated inflation rate is just that-an
estimate. Thus, we cannot say for certain that the investor will not
lose purchasing power. Inflation risk introduces uncertainty to the
investment process.
36. C.
To calculate the callable bond value, use the following formula:
Value of callable bond = Value of straight bond - Call option
value =98.5-1.25=97.25.
Remember: The call option is subtracted from the bond value
because the call option is of value to the issuer, not the holder.
As yield volatility increases, the value of the embedded option
increases. The formula above shows that for a callable bond, an
increase in the option value results in a decreased bond value.
37. C.
All else equal, reinvestment risk and price risk move in opposite
directions. For example, when interest rates rise, bond prices
decrease, but the loss is at least partially offset by decreased
reinvestment risk (it is less likely that a bond will be called and
bondholders can invest coupon payments at higher yields). When
interest rates fall, price risk decreases because the bond value is
rising and reinvestment risk increases because it is more likely that
the issuer/ borrower will call the security and the bondholder must
reinvest coupon payments at lower yields.
38. A.
If bonds are identical except for maturity and coupon, the one
with the longest maturity and lowest coupon wilt have the greatest
duration. The rationale for this is similar to that for price
volatility. The later the cash flows are received, the greater the
duration. The longer the time to maturity, the greater the duration.
A longer-term bond pays its cash flows later than a shorter-term bond,
increasing the duration. Here, one of the 15-year bonds will have the
greatest duration.
The lower the coupon rate, the greater the duration. A lower
coupon bond pays lower annual cash flows than a higher-coupon bond
and thus has less influence on duration. Here, the 15-year bond with
the lowest coupon (8.00%) will have the greatest duration.
39. A.
Increasing yield volatility increases the value of both put
options and call options, which decreases the value of a put-able
bond but decreases the value of a callable bond.
40. A.
When the issue price is greater than par, the bond is selling at
a premium. We also know that the current market required rate is less
than the coupon rate of 6.75%, because the bond is selling at a
premium.
For the examination, remember the following relationships:
Type of Bond
Market Yield to
Price to Par
Coupon
Premium
Market Yield＜
Price＞Par
Coupon
Par
Market Yield=Coupon
Price=Par
Discount
Market Yield＞
Price＜Par
Coupon
41. A.
To calculate the callable bond value, use the following formula:
Value of callable bond = Value of straight bond - Call option
value
Value of callable bond = 98.0-1.75=96.25.
42. A.
The market will likely demand a higher yield from the downgraded
bond (the risk premium has increased) and thus the price wilt likely
fall. Technical default usually refers to an issuer's violation of
bond covenants, such as debt ratios, rather than the failure to pay
interest or principal. In the event of default, the holder (lender)
may recover some or all of the investment through legal action or
negotiation.
43. C.
The inverse relationship between interest rates and bond prices
means that when interest rates increase, fixed-coupon bond prices
decrease. In other words, the inverse relationship means that
interest rates and bond prices move in opposite directions, it does
not infer anything about the magnitude of the change.
44. C.
When a bond has a call provision, the potential for price
appreciation is reduced, because the call caps the price of the bond
near the call price, even if interest rates fall considerably. It is
unlikely that investors would pay a price that exceeds the call price.
Price compression benefits the issuer, because it allows the issuer
to call the bond if interest rates decrease allowing the issuer to
replace the existing debt with lower cost debt.
62. Overview of Bond Sectors and Instruments
(一)强化习题
1. For collateralized mortgage obligations (CMOs) , are
prepayment risk and interest rate risk, respectively, different for
the various classes (tranches) of bonds?
Prepayment risk Interest rate risk
①A. NO NO
②B. YES YES
③C. YES NO
A. ①B. ②C. ③
2. If an investor wants only investment grade bonds in her
portfolio, she would be least likely to purchase a(n):
A. A-rated municipal bond.
B. 3-year municipal bond rated BB.
C. 10-year zero-coupon corporate bond rated AAA.
3. Which of the following statements about debt securities is
least accurate?
A. Commercial paper is a short-term (less than nine months)
vehicle for corporate borrowing.
B. A MTN is a shelf-registered debt instrument that is
continually offered to investors by an agent of the issuer and varies
in maturity from nine months to over 30 years.
C. A medium-term note (MTN) differs from a corporate bond in that
a MTN is sold to investors on a "firm commitment" basis wherein the
investment banker guarantees a price to the issuer.
4. Which of the following statements regarding mortgage-backed
securities (MBS) and collateralized mortgage obligations (CMOs) is
most likely correct?
A. MBS are created from CMOs.
B. Creating CMOs does not reduce the overall prepayment risk of a
mortgage pass through security.
C. The prepayment option of an MBS benefits the security holder.
5. Which of the following statements about debt securities is
most likely correct?
A. A collateralized mortgage obligation is a derivative of a
passthrough security with a payment structure that redistributes risk
among investors in various tranches.
B. Insured bonds are bonds collateralized by an escrow of
securities guaranteed by the U. S. government.
C. Tax-backed municipal bonds are supported through revenues
generated from projects that are funded in whole or in part with the
proceeds of the original bond issue.
6. An investor is considering floating-rate debt and other
investments to protect against unexpected increases in inflation. Her
friend suggests Treasury Inflation Protected Securities (TIPS)
because the coupon rate is adjusted for inflation semiannually. The
friend also states on-the-run Treasury issues have narrower bid-ask
spreads than other Treasury issues. Should the investor agree or
disagree with the friend's statements about TIPS and on-the-run
issues?
TIPS On-the-run issues
①A. Agree Agree
②B. Agree Disagree
③C. Disagree Agree
A. ①B. ②C. ③
7. For an asset-backed security (ABS), a special purpose vehicle:
A. acts as an intermediary that purchases an asset from the
company issuing an ABS and then resells it to obtain sufficient
liquid funds to provide collateral for the ABS.
B. takes title to at least some of the firm's fixed assets.
C. is a legal entity responsible for separating assets used as
collateral from those of the company seeking financing through an ABS.
8. Which of the following statements about different types of
bonds is least likely correct?
A. Municipal bonds are traded primarily on the New York Stock
Exchange.
B. Tax-backed bonds are backed by the full faith and credit of
the issuer's entire taxing power.
C. Government-sponsored enterprises issue securities directly in
the marketplace, but federally related institutions generally do not.
9. Which of the following institutions is NOT a governmentsponsored enterprise (GSE)?
A. Government National Mortgage Association.
B. Student Loan Marketing Association.
C. Federal National Mortgage Association.
10. Which of the following institutions are federally-related
institutions?
A. Student Loan Marketing Association.
B. Government National Mortgage Association.
C. Federal National Mortgage Association.
11. The annual Fixed Income Analysts' Forum had just ended and
two attendees, James Purcell and Frederick Hanes, were discussing
some of the comments made by the panelists. Purcell and Hanes were
specifically concerned with the following two statements that were
made:
Panelist 1: Mortgage-backed securities and asset-backed
securities are both fixed income securities that are backed by pools
of loans and are said to be amortizing securities. For many of the
loans, no principal payments are required to be made prior to the
maturity date. These securities are said to have a bullet maturity
structure.
Panelist 2: If coupon Treasury bonds or corporate bonds are
issued with the terms specifying that the principal be repaid over
time at the option of the issuer, then these bonds are putable bonds;
if the principal is to be repaid over time at the option of the
bondholder, then the bonds are termed callable bonds.
Are the statements made by Panelist 1 and Panelist 2 correct?
Panelist 1 Panelist 2
①A. Correct Correct
②B. Correct Incorrect
③C. Incorrect Incorrect
A. ①B. ②C. ③
12. When bonds are sold in a bought deal, the transaction takes
place on the:
A. primary market. B. secondary market. C. tertiary market.
13. Which of the following does NOT represent a secondary market
offering? When bonds are sold:
A. in a Rule 144A offering.
B. in an over-the-counter dealer market.
C. on an electronic trading network.
14. Which of the following does NOT represent 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.
15. A debt security that is collateralized by various corporate
bonds would be a(n):
A. CMO. B. CDO. C. ABS.
16. Which of the following statements regarding sovereign bonds
is least accurate?
A. When a central government issues securities, those securities
can only be denominated in the local currency regardless of where the
bonds are issued.
B. A central government can issue sovereign bonds in its national
bond market, in another country's foreign bond market, or in the
Eurobond market.
C. Although the currency denomination of a government security is
generally that of the home country, a central government's bonds will
be rated by bond rating agencies as to perceived credit risk.
17. A CDO issued to profit on the spread between the return on
the underlying assets and the return paid to investors is referred to
as a(n):
A. balance sheet CDO. B. arbitrage CDO. C. spread CDO.
18. A corporation may issue asset backed securities because:
A. All of the reasons are valid.
B. it wants to change the structure of its balance sheet.
C. it wants to speed up cash flows from the assets.
19. Which of the following statements concerning asset-backed
securities (ABSs) is FALSE?
A. The asset-backed pool may be overcollateralized to provide a
credit enhancement.
B. The assets are typically placed in a special purpose vehicle
to shield them from the firm's creditors.
C. ABSs typically have lower debt ratings than the firm's other
borrowings.
20. There are several types of external credit enhancements. All
of the following are examples of external credit enhancements EXCEPT:
A. corporate guarantees.
B. letters of credit.
C. setting aside reserve funds.
21. Which of the following is a general problem associated with
external credit enhancements? External credit enhancements:
A. only provide protection against systematic risk, not against
idiosyncratic risk.
B. are very long-term agreements and are therefore relatively
expensive.
C. are subject to the credit risk of the third-party guarantor.
22. The issuance of asset backed securities (ABSs) versus
straight debt would be desirable if:
A. a better credit quality is desired on the asset backed versus
the corporation.
B. there are regulatory constraints on the deal.
C. the corporation's credit rating may go up in the future.
23. To reduce the cost of long-term borrowing, a corporation with
a below average credit rating could:
A. issue asset backed securities.
B. decrease credit enhancement.
C. increase debt outstanding.
24. Which of the following reasons is the best reason NOT to
enhance the credit quality of an asset backed security (ABS) pool?
A. Liquidity. B. Regulatory. C. Cost.
25. Which of the following statements about asset backed
securities (ABSs) is most accurate?
A. The credit rating of an ABS must be the same as that of the
issuer.
B. Residential mortgages represent the largest type of asset that
has been securitized.
C. There is an inverse relationship between credit enhancements
and ratings.
26. Which of the following statements about special purpose
vehicles (SPVs) is least accurate?
A. SPVs are also known as bankruptcy remote entities and allow
the asset backed security pool
to have a higher credit rating than the issuing entity.
B. SPVs shield the assets of the asset backed security from
creditors.
C. They are only used in asset backed security transactions.
27. Which of the following statements about special purpose
vehicles (SPVs) is most accurate?
A. SPVs have no role in the asset backed credit rating process.
B. SPVs are used exclusively for asset backed transactions.
C. If bankruptcy occurs, a judge could rule that the SPVs assets
can be considered general assets of the corporation.
28. Which of the following entities play a critical role in the
ability to create an asset backed security with a higher credit
rating than the corporation?
A. Rating agencies.
B. Investment banks.
C. Special purpose vehicles (SPVs).
29. Which of the following statements about creating a
collateralized mortgage obligation (CMO) is FALSE? A CMO:
A. redistributes the risk between the tranches on an unequal
basis.
B. redistributes the risk between the tranches on a random basis.
C. does not affect the overall risk of prepayment.
30. Paul Blackburn is describing mortgage backed securities and
makes the following statements:
Statement 1: A mortgage pass-through security is formed by
pooling a large number of mortgages and issuing certificates that
represent ownership shares in the pool. Because each mortgage
borrower has the right to prepay the mortgage, the value of a passthrough security behaves as if the security has an embedded put
feature.
Statement 2: A collateralized mortgage obligation with sequential
tranches is created by pooling mortgage pass-through certificates.
Securities are issued in different tranches that have proportionate
claims on the cash flows from the pass-through certificates.
Are Blackburn's statements correct?
Statement 1 Statement 2
①A. Correct Correct
②B. Correct Incorrect
③C. Incorrect Incorrect
A. ①B. ②C. ③
31. Which of the following statements accurately describes direct
and dealer paper?
A. The majority of direct paper issuers are financial companies.
B. Direct paper is rated, whereas dealer paper is not.
C. Direct paper tends to incur more issue costs versus dealer
paper.
32. Which of the following statements regarding Treasury bills
(T-bills) is TRUE? T-bills:
A. have maturities greater than 6 months and can be sold at a
price greater than par.
B. are considered the risk-free instrument, which means there
exists no interest rate risk.
C. carry no coupon.
33. Which of the following statements concerning taxable bonds is
TRUE?
A. Corporates have the lowest yields, followed by Treasuries,
then by corporates, which provide the highest returns.
B. Treasuries have the lowest yields, followed by corporates,
then by agencies, which provide the highest returns.
C. Treasuries have the lowest yields, followed by agencies, then
by corporates, which provide the highest returns.
34. Support for the revenue bonds comes from:
A. property taxes based on the project.
B. the gross revenues of the underlying project.
C. the net revenues of the underlying project.
35. Which statement about the risks of bond investing is FALSE?
A. Issuers of revenue bonds are not always obligated to pay
principal and interest.
B. Interest on some municipal bonds is not excluded from federal
income taxes.
C. In a competitive Treasury-bill auction, not all bidders pay
the same price.
36. Consider three municipal bonds issued by the Greater Holmen
Metropolitan Capital Improvement District, a local authority that
carries an issuer rating of single-A from the major debt rating
agencies. All three bonds have the same coupon rate and maturity date.
Series W was issued to finance the rebuilding and expansion of
local schools and is backed by the District's authority to levy
property tax.
Series X was issued to build a water purification plant for the
region. The District charges fees to the surrounding municipalities
for their use of the plant. These fees are the only source of the
interest and principal payments on the bonds.
Series Y was issued to raise funds for the general use of the
District in its ordinary maintenance projects and is backed by the
District's authority to levy property tax. These bonds carry a third
party guarantee of principal and interest payments.
What is most likely the order of the market yields on these three
bond issues, from highest to lowest?
A. Series Y, Series W, Series X.
B. Series W, Series X, Series Y.
C. Series X, Series W, Series Y.
37. Which of the following statements about municipal bonds is
FALSE?
A. A municipal bond guarantee is a form of insurance provided by
a third party other than the issuer.
B. Revenue bonds have lower yields than general obligation bonds
because there are more revenue bands and they have higher liquidity.
C. Bonds with municipal bond guarantees are more liquid in the
secondary market and generally have lower required yields.
38. Which of the following statements about fixed income
securities is FALSE?
A. The corporate bond sector is more important in the US than in
Japan and Germany.
B. Coupon interest and capital gains from municipal bonds are tax
exempt at the federal level.
C. Treasuries and agencies are quoted in 32nds of a price point.
Based on the following information to answer questions from 39 to
40:
A mortgage-backed security has been divided into three classes or
tranches as follows:
Tranche Ⅰ receives net interest and all the principal payments
until it is completely paid off.
Tranche Ⅱ receives its share of net interest and starts
receiving all the principal repayments after
Tranche Ⅰ has been completely paid off. Prior to that, it only
receives interest payments.
Tranche Ⅲ receives monthly net interest and starts receiving all
principal repayments after
Tranches Ⅰ and Ⅱ have been completely paid off. Prior to that,
it only receives interest payments.
39. For a relatively small decline in mortgage interest rates,
which of the tranches has the least amount of prepayment risk?
A. Tranche Ⅲ. B. Tranche Ⅰ. C. Tranche Ⅱ.
40. For an investor who is interested in long-term gains, in
which tranche should she invest?
A. Tranche Ⅲ. B. Tranche Ⅰ. C. Tranche Ⅱ.
41. Which of the following bond price calculations is INCORRECT?
An investor would pay:
A. $9684. 38 for a $10000 Treasury note quoted at 96 27/32.
B. $941.00 for a $1000 Treasury bond quoted at 94 10/32.
C. $956.25 for a $1000 corporate bond quoted at 95 20/32.
42. Which of the following statements regarding separate trading
of registered interest and principal of securities (STRIPS) is TRUE?
A 20-year Treasury bond can be used as the basis for:
A. 40 coupon strips and 1 principal strip.
B. 40 principal strips and 1 coupon strip.
C. 41 coupon strips.
43. Which of the following best describes a Treasury note? Pays:
A. implicit interest; is non-callable; has a 2- to 10-year
maturity.
B. explicit interest; is callable; has a 1- to 15-year maturity.
C. explicit interest; is non-callable; has a 2- to 10-year
maturity.
44. Fernando Golpas and Javier Solada were reviewing the
financial reports of several Latin American governments. They noticed
that the central governments of many Latin American countries such as
Argentina, Chile, Peru, and Ecuador had recently been issuing
sovereign debt. This sparked a discussion between the two analysts
about sovereign debt ratings. During their discussion they made the
following statements:
Golpas: The rating agencies, such as Moody's, generally assign
two ratings to sovereign debt.
One is a local currency debt rating and the other is a foreign
currency debt rating. The reason for the two ratings is that the
default frequency has been greater on local currency denominated debt.
Solada: If a central government is willing to raise taxes and
control its internal financial system, it should be able to generate
sufficient local currency to meet its local currency obligation. That
is why the rating on local currency denominated debt is generally
higher than the rating on foreign currency denominated debt.
Are the statements made by Golpas and Solada regarding sovereign
debt ratings correct?
Golpas Solada
①A. Correct Correct
②B. Incorrect Correct
③C. Incorrect Incorrect
A. ①B. ②C. ③
(二)习题答案
1. B.
CMOs are structured so as to redistribute prepayment risk and
interest rate risk among the different classes, or tranches, of bonds
using rules for the distribution of interest and principal. For
example, if there are three classes of bonds, the distribution rules
ensure that the first class of bonds receives all principal until
they are completely paid off. Then the next class of bonds receives
all principal until they are paid off. Finally, the last class
receives principal payments.
Effectively, the first tranche has the shortest maturity
(duration) while the last tranche has the longest maturity (duration).
Thus prepayment risk and interest rate risk have been redistributed
across the bond classes with the first tranche experiencing the
greatest prepayment risk and the last tranche experiencing the most
interest rate risk.
2. B.
Investment grade bonds are BBB and above. This bond is rated BB,
which is below BBB.
3. C.
A medium-term note is sold on a "best efforts" basis where the
underwriter does not guarantee a price for the bonds to the issuer
but tries to get the best price possible. Price risk is completely
borne by the issuing firm.
4. B.
Creating a CMO can redistribute the prepayment risk among the
tranches, but it does not alter the overall prepayment risk of a
mortgage passthrough security. CMOs are created from MBS.
5. A.
Prefunded municipal bonds are bonds collateralized by an escrow
of securities guaranteed by the U. S. government. Revenue bonds are
supported through revenues generated from projects that are funded
with the proceeds of the original bond issue.
6. C.
The friend is incorrect about the TIPS (the coupon rate is fixed,
the par value is adjusted for inflation) and is correct about the
bid-ask spread for on-the-run issues (on-the-run issues are more
liquid and thus have a narrower bid-ask spread).
7. C.
A special purpose vehicle is a legal entity to which the assets
used as collateral in an ABS issue are sold. This transaction
separates the company providing the collateral from the company that
needs the financing. The assets transferred to the special purpose
vehicle are financial assets, not fixed assets.
8. A.
Municipal bonds are traded in the over-the-counter market
supported by municipal bond dealers across the country.
9. A.
Federally-related (or government-owned) agencies are arms of the
federal government. All other institutions listed are governmentsponsored enterprises.
10. B.
Federally-related (or government-owned) agencies are arms of the
federal government. All other institutions listed are governmentsponsored enterprises.
11. C.
Panelist 1 is incorrect. These securities do not have a bullet
maturity structure. The payments are structured so that the loan is
paid off when the last loan payment is made.
Panelist 2 is incorrect. If coupon Treasury bonds or corporate
bonds are issued with the terms specifying that the principal be
repaid over time at the option of the issuer, then these bonds are
callable bonds the call provision grants the issuer an option to
retire part of the issue or the entire issue prior to the maturity
date. On the other hand, if the principal is to be repaid over time
at the option of the bondholder, then these bonds are put-able bonds
- the put provision entitles the bondholder to put (sell) the issue
back to the issuer at the put price (if interest rates increase and
the bond's price declines below the put price).
12. A.
When bonds are sold in a bought deal, the transaction takes place
on the primary markets. In a bought deal, the investment banker buys
the issue of bonds from the issuer and then resells them (i. e. they
have underwritten the offer and the arrangement is termed a firm
commitment). Bonds are sold in secondary markets after being sold the
first time (after they have been issued in the primary market).
13. A.
When bonds are sold in a Rule 144A offering, they are sold
privately to a small number of investors or institutions. This
offering does not require registration with the SEC and this is
valuable to the issuer. The investor will require a slightly higher
yield because the bonds cannot be resold to the public unless they
are registered with the SEC.
14. 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. 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.
15. B.
A CDO (collaterized debt obligation) is a debt obligation that is
backed by an underlying diversified pool of business loans, mortgages,
emerging market debt, corporate bonds, asset-backed securities, or
non-performing loans. An ABS (asset-backed security) is a debt
obligation that is backed by credit card debt, auto loans, bank loans,
and corporate receivables. A CMO (collaterized mortgage obligation)
is a debt obligation that is backed by mortgages.
16. A.
When a central government issues securities, those securities are
generally denominated in the currency of the issuing country, but a
government can issue bonds denominated in any currency.
17. B.
A CDO (collaterized debt obligation) issued to profit on the
spread between the return on the underlying assets and the return
paid to investors is referred to as an arbitrage CDO. A balance sheet
CDO is created by a bank or insurance company wishing to reduce their
loan exposure on the balance sheet. The other types of CDOs are
fabricated terms.
18. A.
19. C.
The objective of the firm with an ABS issue typically is to get a
higher debt rating (a lower cost of borrowing). Typically, the ABS
has a higher debt rating, perhaps because of credit enhancements.
20. C.
Setting aside reserve funds is an example of internal, not
external credit enhancement.
21. C.
According to the "weak link" philosophy adopted by rating
agencies, the credit quality of an issue can not be higher than the
credit rating of the third-party guarantor. Along these lines, if the
guarantor is downgraded, the issue itself could be subject to
downgrade even if the structure is performing as expected.
22. A.
K there are time constraints or regulatory issues, straight debt
would be easier to issue. Also, if the corporation could be upgraded,
it would benefit in straight debt but not its ABSs.
23. A.
Commercial paper is a short-term promissory note. Increasing debt
would increase the cost of borrowing.
24. C.
Credit enhancements increase the costs associated with borrowing
using ABS.
25. B.
The credit rating of an ABS pool is a function of its credit
enhancements, which are quite common. The more credit enhancements,
the higher the ratings.
26. C.
27. C.
Legal experts believe this is unlikely, but the issue is still a
bit ambiguous legally.
28. C.
SPVs, or special purpose corporations, buy the assets from the
corporation. The SPV separates the assets used as collateral from the
corporation that is seeking financing. This shields the assets from
other creditors.
29. B.
Creating a CMO usually redistributes the risk between the
tranches on an unequal basis, not on a random basis.
30. C.
Statement 1 is incorrect. A borrower who prepays a mortgage is in
effect exercising a call option, similar to a corporate bond issuer
who calls a bond and prepays the principal. Therefore the pool of
mortgages and the securities created from it behave as if they had an
embedded call feature.
Statement 2 is incorrect. Sequential tranches issued as a
collateralized mortgage obligation do not have proportionate claims
on the cash flows from the pool. Instead they have sequential claims.
The shortest-term tranche receives principal and interest payments
until it is paid off. The cash flows then go to the second tranche
until it is paid off, and so on. This structure allows securities
with different timing and risk profiles to be issued from the same
pool of certificates.
31. A.
Dealer paper is issued via agents, whereas direct paper is issued
directly by the issuer. Both types of commercial paper are rated.
Since it is issued directly by the company, direct paper is less
expensive to issue.
32. C.
The maturities of T-bills range from 4 weeks to 6 months. T-bills
are always sold on a discount basis. Risk-free means there is no
credit risk, however, interest rate risk and price risk still exist.
33. C.
The difference in yields is largely due to the default risk
premium. Treasuries are considered to be default-risk free, while
corporate bonds have the highest default risk.
34. C.
Revenue bonds are serviced by the net income generated from
specific income-producing projects (e. g. toll roads).
35. C.
All T-bills are auctioned using the single-price method, in which
all-successful bidders pay the price implied by the stop yield, which
is the yield at which the quality demanded equals the quantity for
sale. Most municipal bonds are exempt from federal taxes, but not all
of them. Revenue bond issuers are not required to meet their
obligations unless the project backing the bonds generates enough
revenue.
36. C.
Series X is a revenue bond. Because they pay interest and
principal only if revenues from the project they finance are
sufficient, revenue bonds are typically riskier and therefore have
higher market yields than general obligation bonds. Series Y is an
insured bond. Municipal bond insurance typically results in a higher
rating, and therefore a lower market yield, than an equivalent bond
from the same municipal issuer. So of these three bonds, Series X
should have the highest market yield and Series Y the lowest.
37. B.
General obligation bonds are backed by the full faith, credit,
and taxing power of the issuer. Revenue bonds are serviced by the
income generated from specific income-producing projects and can not
be paid from other proceeds unrelated to the project. Therefore, they
are riskier than general obligation bonds.
38. B.
Coupon or interest income is exempt from federal income taxes.
Capital gains taxes associated with municipal bonds are not exempt
from federal taxes.
39. A.
Tranche Ⅲ has the least amount of prepayment risk since it
receives the prepayments last.
40. A.
Tranche Ⅲ has the least amount of prepayment risk; therefore,
there is a greater chance that the investor will be able to hold on
to the investment for a longer time horizon.
41. B.
Bond prices are quoted in 32nds. A quote of 94 10/32=94.3125% ,
for a price of $943.125 for a $1000 Treasury bond. A quote of 96
27/32=96.84, for a price of $9684.38 for a $10000 bond. A quote of 95
20/32=95.625, for a price of $956.25 for a $1000 bond.
42. A.
A 20-year Treasury bond can be used as the basis for 40 coupon
strips and 1 principal strip.
43. C.
While some Treasury bonds issued prior to 1984 are callable,
notes are not. They pay explicit, semi-annual interest and have
original maturities ranging from 2 to 10 years.
44. B.
Golpas' statement is incorrect because the reason for the two
ratings (the local currency and the foreign currency debt ratings) is
that the default frequency has been greater on foreign currency
denominated debt. It is often easier for a central government to
print local currency to meet its obligations in the home currency
than to exchange the local currency in the foreign exchange markets
for a given amount of foreign currency.
63. Understanding Yield Spreads
(一)强化习题
Use the following information for Questions 1 to 2.
Peter is considering two bonds:
Bond A yield 10%
Bond B yield 7 %
1. Using Bond B as the reference bond, calculate the absolute
yield spread.
A. -3.0%. B. 0%. C. 3%.
2. Using Bond B as the reference bond, calculate the relative
yield spread.
A. 40%. B. 43%. C. 47%.
3. An analyst is considering two bonds: Bond A yields 7.5% , and
Bond B yields 7.0%.
Using Bond B as the reference bond, the absolute yield spread and
the yield ratio for Bond A are closest to:
Spread Ratio
①A. -0.5% 1.07
②B. -015% 0.93
③C. 0.5% 1.07
A. ①B. ②C. ③
4. An investor is choosing between a 10% corporate bond and a 6%
municipal bond with similar risk and similar maturity. What is the
marginal tax rate that will make the investor indifferent between the
two bonds?
A. 0%. B. 30%. C. 40%.
5. The yield on an industrial bonds is 8.59 percent while the
yield on a benchmark bond with the same maturity is 6. 83 percent.
The relative yield spread is closest to;
A. 1.8% B. 20.5% C. 25.8%
6. The concept that forward rates reflect investors' expectations
of future rates plus a liquidity premium to compensate them for
exposure to interest rate risk is associated with which of the
following explanations of the term structure of interest rates?
A. Liquidity premium theory
B. Segmented market theory.
C. Expectations hypothesis.
7. An analyst gathered the following information:
Taxable security, quoted yield 9.8%
Tax-exempt security, quoted yield 5.7%
Investor's marginal tax rate 35%
For the tax-exempt security, the investor's tax-equivalent yield
is closest to
A. 5.7% B. 8.8% C. 10.7%
8. John Harris earns $ 800000, and pays $200000 in taxes. His
marginal tax rate is 40%. What would the taxable-equivalent yield be
for John if he were to purchase a municipal bond with a yield of
3.25%?
A. 4.33%. B. 5.42%. C. 3.25%.
9. An investor is considering the purchase of two bonds. One of
the bonds is tax-exempt and yields 4.5% while the other bond is
taxable and yield 6.0%. If the two bonds are alike in all other
characteristics, the rate that would make the investor indifferent
between the two bonds is closest to:
A. 9.0%. B. 25.0%. C. 27.0%.
10. If investors expect stable rates of inflation in the future,
the pure expectations theory suggests that the yield curve now will
be:
A. flat. B. inverted. C. humped.
11. Generally speaking, all else being equal, an upward-sloping
yield curve can be expected when:
A. inflationary expectations are beginning to subside and
investors begin to show a preference for more liquid/less risky
short-term securities.
B. the supply of long-term funds falls short of demand and
investors begin to show a preference for more liquid/less risky
short-term securities.
C. inflationary expectations are beginning to subside.
12. If the Federal Reserve wishes to lower market interest rates
without changing the discount rate, it can:
A. increase bank reserve requirements.
B. raise the yield on Treasury securities.
C. buy Treasury securities.
13. Which of the following are the two most important tools
available to the Federal Reserve?
A. Changing the discount rate and changing bank reserve
requirements.
B. Open market operations and changing bank reserve requirements.
C. Changing the discount rate and open market operations.
14. Which of the following policy tools is the least likely to be
available to the U. S. Federal Reserve Board?
A. Setting the discount rate at which banks can borrow from the
Federal Reserve.
B. Requiring the banking system to tighten or loosen its credit
policies.
C. Increasing or decreasing bank reserve requirements.
15. A normally sloped yield curve has a:
A. positive slope. B. zero slope. C. negative slope.
16. Which of the following yield curves represents a situation
where long-term rates are less than short-term rates?
A. Normal yield curve. B. Inverted yield curve. C. Flat yield
curve.
17. A downward sloping yield curve generally implies:
A. interest rates are expected to increase in the future.
B. longer-term bonds are riskier than short-term bonds.
C. interest rates are expected to decline in the future.
18. If investors expect future rates will be higher than current
rates, the yield curve should be:
A. upward sweeping. B. downward sweeping. C. flat.
19. The concept of spot and forward rates is most closely
associated with which of the following explanations of the term
structure of interest rates?
A. Segmented market theory.
B. Expectations hypothesis.
C. Liquidity premium theory.
20. Which of the following best explains the slope of the yield
curve?
A. The term spread between the yields of two maturities.
B. The credit spread between two securities with different
maturities.
C. The nominal spread between two securities with different
maturities.
21. An analyst forecasts that spot interest rates will increase
more than the increase implied by the current forward interest rates.
Under these circumstances:
A. the analyst should establish a bearish bond portfolio.
B. all bond positions earn the same return.
C. the analyst should establish a bullish bond portfolio.
22. The liquidity preference theory holds that:
A. rational investors should show no preferences for either
short- or long-term debt securities.
B. the yield curve should be upward-sloping.
C. cash should be preferred to Treasury securities because it is
more liquid.
23. According to the expectations hypothesis, investors'
expectations of decreasing inflation will result in:
A. a downward-sloping yield curve.
B. an upward-sloping yield curve.
C. a flat yield curve.
24. The term structure theory that rests on the interaction of
supply and demand forces in the debt market is the:
A. GIC inverse term structure theory.
B. market segmentation theory.
C. bootstrap theory of sliding rates.
25. Which of the following statements regarding the different
theories of the term structure of interest rates is FALSE?
A. The preferred habitat theory can be described as investors
that prefer to stay within a particular maturity range of the yield
curve regardless of yields in other maturity ranges.
B. The market segmentation theory, pure expectations theory,
preferred habitat theory, and liquidity preference theory are all
consistent with any shape of the yield curve.
C. An upward sloping yield curve can be consistent with the
liquidity preference theory even with expectations of declining short
term interest rates.
26. Suppose that the one-year forward rate starting one year from
now is 6%. Which of the following statements is TRUE under the pure
expectations hypothesis? The expected:
A. future risk premium for short-term bills is 6%.
B. future one-year spot rate in one year's time is equal to 6%.
C. future risk premium for long-term bonds is 6%.
27. According to the pure expectations theory, an upward-sloping
yield curve implies:
A. interest rates are expected to decline in the future.
B. interest rates are expected to increase in the future.
C. longer-term bonds are riskier than short-term bonds.
28. The liquidity preference theory of the term structure of
interest rates implies that the shape of the yield curve should be:
A. flat or humped. B. downward-sloping. C. upward-sloping.
29. If the slope of the yield curve begins to rise sharply, it is
usually an indication that:
A. the rate of inflation is starting to increase or is expected
to do so in the near future.
B. stocks are offering abnormally high rates of return.
C. the Fed has been aggressively driving up short-term interest
rates.
30. The Treasury spot rate yield curve is closest to which of the
following curves?
A. Par bond yield curve.
B. Zero-coupon bond yield curve.
C. Reinvestment rate yield curve.
31. Bond A has a yield of 8.75 percent. Bond B, the reference
bond, has a yield of 7.45 percent. The risk-free rate of return is
3.50 percent. Assuming both bonds have the same maturity, the
relative yield spread is closest to:
A. 1.30. B. 0.17. C. 1.17.
32. A Treasury bond due in one-year has a yield of 8.5 percent. A
Treasury bond due in 5 years has a yield of 9.3 percent. A bond
issued by General Motors due in 5 years has a yield of 9.9 percent. A
bond issued by Exxon due in one year has a yield of 9.4 percent. The
default risk premiums on the bonds issued by Exxon and General Motors
are:
Exxon General Motors
①A. 0.1% 0.6%
②B. 0.1% 1.4%
③C. 0.9% 0.6%
A. ①B. ②C. ③
33. Which of the following is the reason why credit spreads
between high quality bonds and low quality bonds widen during poor
economic conditions?
A. indenture provisions. B. interest risk. C. default risk.
34. If investors expect greater uncertainty in the bond markets,
yon should see yield spreads between AAA and B rates bonds:
A. widen. B. narrow. C. slope downward.
35. As compared to an equivalent non-put-able bond, a put-able
bond's yield should be:
A. higher. B. the same. C. lower.
36. A municipal bond selling at 12% above par offers a yield of
3.2%. A taxable Treasury note selling at an 8% discount offers a
yield of 4. 6%. An investor in the 32.5% tax bracket wishes to
purchase an equal dollar amount of both bonds. The after-tax yield of
the two-bond portfolio is closest to:
A. 2.63%. B. 3.90%. C. 3.15%.
37. A 6% annual coupon paying bond has two years remaining to
maturity and is priced at par. Assuming a 40% tax rate, the after-tax
yield for this bond is closest to:
A. 2.4%. B. 3.6%. C. 4.8%.
38. Which of the following statements regarding zero-coupon bonds
and spot interest rates is TRUE?
A. Price appreciation creates all of the zero-coupon bond's
return.
B. Spot interest rates will never vary across the term structure.
C. If the yield to maturity on a 2-year zero coupon bond is 6%,
then the 2-year spot rate is 3%.
39. The structure of interest rates results from all the
following EXCEPT:
A. viewing each bond coupon payment as a separate zero coupon
bond.
B. viewing a bond's cash flows as having maturities ranging from
the next coupon payment to the final payment at maturity.
C. creating the yield curve by plotting term to maturity against
the coupon rate.
(二)习题答案
1. C.
Absolute yield spread = Yield on Bond A- Yield on Bond B = 10%7%=3%.
2. B.
Relative yield spread = (Yield on Bond A -Yield on Bond
B)/( Yield on Bond B)=(10%-7%)/7%=0.43=43%.
3. C.
absolute yield spread = yield on Bond A- yield on Bond B =7.5%7.0%=0.5%
yield ratio = Bond A yield/Bond B yield =7.5%/7.0% =1.071.
4. C.
10%×(1-x)=6%, x=40%.
5. C.
(8.59%-6.83%)/6.83%=25.8%.
6. A.
The pure expectations hypothesis suggests that forward rates are
solely a function of expected future spot rates. This theory implies
that an investor could earn the same return by investing in a oneyear bond or by sequentially investing in two six-month bonds.
The liquidity preference theory proposes that forward rates
reflect investors' expectations of future rates plus a liquidity
premium to compensate them for exposure to interest rate risk. This
theory suggests that the liquidity premium is positively related to
maturity.
The market segmentation theory proposes that lenders and
borrowers have preferred maturity ranges. This theory relies on the
idea that some investors have restrictions (either legal or practical)
on their maturity structure.
7. B.
5.7%/(1-35%)=8.8%.
8. B.
3.25%/(1-40%)=5.42%.
9. B.
The indifference point would be the rate satisfies the equation:
6.0%×(1-T)=4.5%. solving for T, the marginal tax rate =25%.
10. A.
The pure expectations theory explains the term structure in terms
of expected future short-term interest rates. Assuming that interest
rates reflect a relatively stable real rate of interest plus a
premium for expected inflation, stability in inflation expectations
would mean unchanged future short-term interest rates and a flat
yield curve.
11. B.
When demand for loanable funds outstrips supply, interest rates
can be expected to rise in that (long-term) segment of the market;
also, more preference for short-term securities can be expected to
drive up long-term rates as the liquidity premium rises. Thus, both
circumstances in the answer can be expected to put upward pressure on
the long end of the yield curve.
12. C.
Buying Treasury securities pumps money into the economy, lowering
interest rates. Higher reserve requirements and tighter lending
requirements will restrict the money supply, causing rates to rise.
The Federal Reserve has no direct control over the yield on existing
Treasury securities.
13. C.
The two most important tools available to the Fed are changing
the discount rate, the rate at which banks can borrow from the Fed's
discount window, and open market operations, the Fed's activity of
buying and selling Treasury securities.
14. B.
The U. S. Federal Reserve can encourage or persuade banks as a
whole to tighten or loosen their credit policies, but it cannot
compel them to do so.
15. A.
A normally shaped yield curve is one in which long-term rates are
greater than short-term rates, thus the curve exhibits a positive
slope.
16. B.
A normal yield curve is one in which long-term rates are greater
than short-term rates. A flat yield curve represents a situation
where the yield on all maturities is essentially the same.
17. C.
Since a yield curve has time on the x-axis and rates on the yaxis, when the yield curve is downward sloping it means that rates
are expected to decline.
18. A.
When interest rates are expected to go up in the future the yield
curve will be upward sweeping because time is on the x-axis and rates
are on the y-axis, thus forming an upward sweeping curve.
19. B.
The pure expectations theory says that forward rates are solely a
function of expected future spot rates. In other words, long-term
interest rates equal the mean of future expected short-term rates.
This implies that an investor could earn the same return by investing
in a 1-year bond or by sequentially investing in two 6-month bonds.
The implications for the shape of the yield curve under the pure
expectations theory are:
If the yield-curve is upward sloping, short-term rates are
expected to rise.
If the curve is downward sloping, short-term rates are expected
to fall.
A fiat yield curve implies that the market expects short-term
rates to remain constant.
20. A.
Since the yield curve depicts the yield on securities with
different maturities, the slope of the curve between two maturities
is a function of the maturity spread.
21. A.
Bond prices fall with a rise in interest rates. If realized rates
rise more than the associated forward rate implied, then a bearish
bond position will be the most beneficial.
22. B.
The liquidity preference theory definitely has an upward-sloping
bias with regard to the shape of the yield curve. That is because it
holds that investors generally prefer the greater liquidity and
reduced risk that accompanies short-term securities and, as a result,
require a premium (higher yields) to get them to invest in longerterm securities.
23. A.
The expectations hypothesis holds that the shape of the yield
curve reflects investor expectations about the future behavior of
inflation and market interest rates. Thus, if investors believe
inflation wilt be slowing down in the future, they will require lower
long-term rates today and, therefore, the yield curve will be
downward-sloping.
24. B.
The market segmentation theory holds that the market is segmented
into different parts based on the maturity preferences of investors.
The theory also holds that the supply and demand forces at work
within each segment determine the prevailing level of interest rates
for that part of the market.
25. A.
The preferred habitat theory states that investors will move from
their preferred maturity on the yield curve to another area on the
yield curve to achieve higher yields. With the liquidity preference
theory the yield curve can remain upward sloping even if short term
rates are predicted to decline as long as the liquidity premium is
sufficiently large. With the market segmentation theory the supply of
bonds and demand for bonds at various maturities determine their
yields and the resulting yield curve.
26. B.
Under the pure expectations hypothesis, forward rates are equal
to expected future spot rates.
27. B.
According to the expectations hypothesis, the shape of the yield
curve results from the interest rate expectations of market
participants. More specifically, it holds that any long-term interest
rate simply represents the geometric mean of current and future 1year interest rates expected to prevail over the maturity of the
issue.
28. C.
The liquidity preference theory definitely puts upward pressure
on the long end of the term structure and, by itself, would lead to
an upward-sloping yield curve.
29. A.
According to the expectations hypothesis, higher long-term
interest rates and, therefore, up-ward-sloping yield curves will
occur if the rate of inflation starts to heat up or is expected to do
so in the near future.
30. B.
The spot rate yield curve shows the appropriate rates for
discounting single cash flows occuring at different times in the
future. Conceptually, these rates are equivalent to yields on zerocoupon bonds. The par bond yield curve shows the YTMs on coupon bonds
by maturity. Forward rates are expected future short-term rates.
Reinvestment rates are not part of the spot rate yield curve.
31. B.
Relative yield spread = absolute yield spread/yield on reference
bond
Relative yield spread = (8.75%-7.45%)/7.45% =0.17.
32. C.
9.4-8.5=0.9; 9.9-9.3=0.6.
33. C.
During poor economic conditions, the probability of default
increases and thus credit spreads widen.
34. A.
With greater uncertainty, investors require a higher return for
taking on more risk. Therefore credit spreads will widen.
35. C.
A put-able bond favors the buyer (investor). Hence, a premium
will be paid for the option, which means the yield will be lower.
36. C.
The after-tax yield of the Treasury note is the stated yield
times one minus the tax rate, or 4.6% times 67.5% , or 3.1%. To
calculate the portfolio yield, take the average after-tax yields of
both bonds, which is 3.15%.
37. B.
Since the bond is trading at par, its yield to maturity is equal
to its coupon rate of 6.0%. The after-tax yield is (10.4)×(6.0%)=3.6%.
38. A.
Because zero-coupon bonds have no coupons (all of the bond's
return comes from price appreciation), investors have no uncertainty
about the rate at which coupons will be invested.
Spot rates are defined as interest rates used to discount a
single cash flow to be received in the future. If the yield to
maturity on a 2-year zero is 607o, we can say that the 2-year spot
rate is 6%.
39. C.
The yield curve plots term to maturity and yield to maturity.