CFA Institute FIXED INCOME practice questions

HOW TO CALCULATE THIS?? Consider the following information relating to a corporate bond:Full price of bond (PVFull)$100,367,242Modified duration (AnnModDur)8.124 yearsAccrued interest$303,218 The money duration of the corporate bond is closest to: $812,920,131. $815,383,474. $817,846,817.

$815,383,474. 8.124 × $100,367,242

Interest rate formula for a floating rate note =

(Libor + BPS) * Par value Divided by M

A 90-day commercial paper issue is quoted at a discount rate of 4.75% for a 360-day year. The bond equivalent yield for this instrument is closest to: 4.87%. 4.81%. 4.75%.

4.87%.

Which of the following is the best example of an embedded option granted to bondholders? An increasing sinking fund provision A prepayment option A put if the issuer's rating changes

A put if the issuer's rating changes

The yield spread on a corporate bond would most likely narrow as: A) issuer size increases. B) downgrade risk increases. C) trading frequency decreases.

A) issuer size increases.

In which scenario would yields most likely narrow? A) Weak financial markets B) High demand for bonds C) Slowdown in market-making activity

B) High demand for bonds In periods of high demand, bond prices will increase and yields will decrease (since bond price and yield are inversely related); consequently, yield spreads (the difference in yield between a corporate bond and default-free bond) will tighten (narrow).

A problem for bond investors relying on credit ratings as a basis for buy and sell decisions is that credit ratings: A) are historically inaccurate. B) can badly lag changes in bond prices. C) are less reliable for investment-grade bonds.

B) can badly lag changes in bond prices.

Which of the following balance sheet items is least likely a sign of high-quality assets? High amounts of: A) patents. B) goodwill. C) capital expenditure relative to depreciation.

B) goodwill.

Which of the following is the best example of an embedded option granted to bondholders? A) An increasing sinking fund provision B) A prepayment option C) A put if the issuer's rating changes

C) A put if the issuer's rating changes

Which of the following is most likely an example of a Eurobond? A) A Canadian borrower issuing British pound-denominated bonds in the UK market. B) A Japanese borrower issuing US dollar-denominated bonds in the US market. C) An Australian borrower issuing Canadian dollar-denominated bonds in the UK market.

C) An Australian borrower issuing Canadian dollar-denominated bonds in the UK market.

Which of the following is most likely an example of a Eurobond? A) A Canadian borrower issuing British pound-denominated bonds in the UK market. B) A Japanese borrower issuing US dollar-denominated bonds in the US market. C) An Australian borrower issuing Canadian dollar-denominated bonds in the UK market.

C) An Australian borrower issuing Canadian dollar-denominated bonds in the UK market. A Eurobond is an international bond issued outside the jurisdiction of any one country and not denominated in the currency of the country where it is issued.

Which of the following statements relating to parallel and non-parallel shifts in the yield curve is correct? A) A parallel shift requires the yield curve to be a straight line. B) Calculations of effective duration can accommodate non-parallel shifts in the yield curve. C) Factors affecting supply and demand of short-term versus longer-term securities can change the shape of the yield curve.

C) Factors affecting supply and demand of short-term versus longer-term securities can change the shape of the yield curve.

The effective convexity of a bond is a measurement of the effect of a change in: A) horizon yield. B) the yield to maturity. C) a benchmark yield curve.

C) a benchmark yield curve. The effective convexity of a bond is a curve convexity statistic that measures the secondary effect of a change in a benchmark yield curve.

Which of the following is the least likely reason a company would issue subordinated debt? Subordinated debt is less: A) expensive than equity. B) restrictive than secured debt. C) expensive than senior debt.

C) expensive than senior debt.

Investors in commercial mortgage-backed securities (CMBS) face balloon risk, which is most likely a type of: A) call risk. B) contraction risk. C) extension risk.

C) extension risk.

When a bond investor's coupon reinvestment risk dominates market price risk, the investor's investment horizon must be: A) less than the Macaulay duration of the bond. B) equal to the Macaulay duration of the bond. C) greater than the Macaulay duration of the bond.

C) greater than the Macaulay duration of the bond.

When compared with an option-free bond, which type of bond most likely offers a higher yield to bondholders? Putable Convertible Callable

Callable

with a bond, the nominal rate is the same as the

Coupon rate

Which of the following are most likely a kind of supranational bonds? Bonds issued by the: Federal Farm Agency of the United States. Government of Malaysia. European Investment Bank.

European Investment Bank.

Which of the following instruments is most likely to offer investors some protection against increases in the market interest rate? Inverse floating-rate notes Fixed-rate bonds Floating-rate notes

Floating-rate notes A floating-rate note will be less affected when market interest rates increase because the coupon rate varies directly with market interest rates and is reset at regular intervals.

Which of the following is least likely to be a form of internal credit enhancement associated with a corporate bond issue? Debt overcollateralization Debt subordination Letter of credit

Letter of credit

Which of the following terms in a bond issue most likely helps to reduce credit risk? Term maturity structure Floating-rate note Sinking fund arrangement

Sinking fund arrangement

Which of the following is least likely a short-term funding method available to banks? Central bank funds Negotiable certificate of deposits Syndicated loans

Syndicated loans A syndicated loan is a loan from a group of lenders, called the "syndicate," to a single borrower. Syndicated loans are primarily originated by banks, and the loans are extended to companies but also to governments and government-related entities.

An investor purchases a 5% coupon bond maturing in 15 years for par value. Immediately after purchase, the yield required by the market increases. The investor would then most likely have to sell the bond at: a premium. a discount. par.

a discount.

An investor purchases the bonds of JLD Corp., which pay an annual coupon of 10% and mature in 10 years, at an annual yield to maturity of 12%. The bonds will most likely be selling at: par. a premium. a discount.

a discount.

The estimated percentage change in bond price for a given change in the term structure of yield volatility depends on modified duration and: convexity only. the change in yield to maturity only. both convexity and the change in yield to maturity.

both convexity and the change in yield to maturity

Which of the following is least likely to be a type of embedded option in a bond issue granted to bondholders? The right to: put the issue. convert the issue. call the issue.

call the issue.

If a bank wants the ability to retire debt prior to maturity in order to take advantage of lower borrowing rates, it most likely issues a: convertible bond. callable bond. putable bond.

callable bond.

In the securitization process, which of the following is most likely a third party to the transaction? The: seller of the collateral. special purpose entity. financial guarantor.

financial guarantor.

The type of residential mortgage least likely to contain a "balloon" payment is a(n): interest-only mortgage. fully amortizing mortgage. partially amortizing mortgage.

fully amortizing mortgage.

Consider two bonds that are identical except for their coupon rates. The bond that will have the highest interest rate risk most likely has the: lowest coupon rate. coupon rate closest to its market yield. highest coupon rate.

lowest coupon rate.

Ted Nguyen is an investor domiciled in a country with an original issue discount tax provision. He purchases a zero-coupon bond at a deep discount to par value with the intention of holding the bond until maturity. At maturity, he will most likely face: a capital gain. neither a capital loss nor gain. a capital loss.

neither a capital loss nor gain. An original issue discount tax provision allows the investor to increase the cost basis of the bond, so when the bond matures, the investor faces no capital gain or loss.

AMK Corp. purchased US government bonds through the Bloomberg fixed-income electronic trading platform. This transaction is most likely known as: exchange traded. private placement. over-the-counter.

over-the-counter. In the over-the-counter market, buy and sell orders initiated from various locations are matched through a communication network, such as the Bloomberg fixed-income electronic trading platform.

To obtain the spot yield curve, a bond analyst would most likely use the most: recently issued and actively traded corporate bonds. recently issued and actively traded government bonds. seasoned and actively traded government bonds.

recently issued and actively traded government bonds. To obtain the spot yield curve, a bond analyst would prefer to use the most recently issued and actively traded government bonds. Such bonds will have similar liquidity as well as fewer tax effects because they will be priced closer to par value.

A BBB rated corporation wishes to issue debt to finance its operations at the lowest cost possible. If it decides to sell a pool of receivables into a special purpose vehicle (SPV), its primary motivation is most likely to: receive a guaranty from the SPV to improve the corporation's credit rating. allow the corporation to retain a first lien on the assets of the SPV. segregate the assets into a bankruptcy-remote entity for bondholders.

segregate the assets into a bankruptcy-remote entity for bondholders.

In a securitization structure, credit tranching allows investors to choose between: subordinated bonds and senior bonds. extension risk and contraction risk. partially amortizing loans and fully amortizing loans.

subordinated bonds and senior bonds.

A 10-year bond was issued four years ago. The bond is denominated in US dollars, offers a coupon rate of 10% with interest paid semi-annually, and is currently priced at 102% of par. The bond's: tenor is six years. nominal rate is 5%. redemption value is 102% of the par value.

tenor is six years.