Fixed Income Midterm 1 Review

Large well-known companies often issue their own short-term unsecured debt notes directly to the public, rather than borrowing from banks; their notes are called

Commerical Paper

The curvature of the price yield curve for a given bond is referred to as the bond's

Convexity

The cap and floor of a floating-rate bond refers to the minimum and maximum:

Coupon Rates

Floating-rate bonds have a __________ that is adjusted with current market interest rates.

Coupon rate

If a corporate bond pays interest on Jan 15 and June 15th. Total accrued interest in $550.99 and the bond has a 5% YTM at purchase. Assume $1mil bonds with 5% coupon. What is the dirty price?

$1,000,550.99

Are offered a fully taxable corporate bond yielding 5.25% and a tax-free muni bond yielding 4.00% Your state does not have an income tax (ie Texas or Florida). Your accountant tells you they have the same after-tax return. What is your Federal Tax Rate?

24%

A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at a $75.25 discount from par value. The current yield on this bond is

6.49% Current price = $1,000 - 75.25 = $924.75, so Current yield = $60/$924.75 = 6.49%

What is considered a good FICO score

700

A coupon bond that pays interest of 4% annually has a par value of $1,000, matures in 5 years, and is selling today at $785. The actual yield to maturity on this bond is ________.

9.6%

Which one of the following bonds is likely to have the highest required rate of return, ceteris paribus? AA-rated callable corporate bond with a sinking fund AA-rated callable corporate bond without a sinking fund AAA-rated non-callable corporate bond with a sinking fund AAA-rated callable corporate bond with a sinking fund High-quality municipal bond

AA-rated callable corporate bond without a sinking fund

Which one of the following bonds is likely to have the highest required rate of return, ceteris paribus? - AAA-rated callable corporate bond with a sinking fund - AA-rated callable corporate bond with a sinking fund - AA-rated callable corporate bond without a sinking fund - AAA-rated non-callable corporate bond with a sinking fund - High-quality municipal bond

AA-rated callable corporate bond without a sinking fund

Interest on U.S. Treasury Notes and Bonds is exempt from

Both state and local

T/F A subprime mortgage is a mortgage made to a borrower who has a below a good credit rating.

True

T/F Changes in the expected inflation rate have a direct and pronounced effect on market interest rates.

True

BAN's TAN's and RAN's are all examples of

Short-term municipal funding

T/F Rutgers U issues both Federal taxable and tax-exempt bonds?

True

Which of the following is NOT part of the expected loss calculation?

Effective duration

Where did the author meet his future boss' wife

England

What does FICO stand for

Fair Isaac Corporation

A callable bond is one where the issuer is required to retire a certain amount of the outstanding bonds each year to ensure that all the bond principal is paid by final maturity. (T/F)

False

All Red (Republican) states agree that ESG is bad for investing

False

T/F Muni bonds can not file for bankruptcy

False

Yield to Maturity represent the exact return you earn if you hold the bond to maturity. T/F

False

Which of the following is NOT part of the return of owning a non-dollar bond? Income Capital Gain/Loss in Local Currency Capital Gain/Loss in Foreign Currency GDP Changes within the Foreign Country

GDP Changes within the Foreign Country

Assuming the same WAC, WAM, and PSA expectations which will have the lowest yield? GNMA FNMA FHLMC Private Label

GNMA

The most common use of proceeds for a corporate bond issue is:

General Corporate Purposes

True or False: In a U.S. Treasury Auction, all buyers receive the same price/yield.

True

The ________ the ratio of municipal bond yields to corporate bond yields, the ________ the cutoff tax bracket at which more individuals will prefer to hold municipal debt.

Higher; lower

Which of the following factors are included in the rating analysis of a corporate bond? I.the issue's indenture provisions II.the liquidity position of the issuing company III.the issuing company's relative debt burden IV.the stability of the company's earnings

I, II, III, and IV

Which of the following is/are true about callable bonds? I. Must always be called at par II. Will normally be called after interest rates drop III. Can be called by either the bondholder or the bond issuer IV. Have higher required returns than non-callable bonds

II & IV

A year ago a company issued a bond with a face value of $1000 and a 8% coupon. Now the current market yield is 10%. What has happened to the bond price?

Is trading at a price lower than $1000

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur?

Long-term; zero coupon.

Yield to worst is the ____________________________ of Yield to Maturity, Yield to Call, and Yield to Put

Lowest

Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years?

Sinking fund

The primary difference between Treasury notes and bonds is

Maturity at issue

The Phillips Curve attempts to explain the relationship between unemployment and Inflation. Positive or Negative

Negative

If you have security with a 0% PSA, what is your expected principal payment going to consist of?

No Prepays Scheduled Principal only

If an MBS security prepays faster than expected then the total return of that investment will be higher than expected.

Not enough information

The Liquidity Theory states that the shape of the yield curve should be __________ as investors look at risk.

Positive

Which of the following statements is false? - An increase in a bond's YTM results in a smaller price change than a decrease in yield of equal magnitude. - The US Treasury Market is more active than the Corporate Bond Market - Prices of short-term bonds tend to be more sensitive to interest rate changes than prices of long-term bonds. - Interest rate risk is inversely related to the bond's coupon rate. - Bond prices and yields are inversely related.

Prices of short-term bonds tend to be more sensitive to interest rate changes than prices of long-term bonds.

Where did the author of liars poker go to college

Princeton in NJ

The S in ESG stands for

Social

Which one of the following statements concerning bond ratings is correct? - A "fallen angel" is a term applied to all "junk" bonds. - The highest rating issued by Moody's is AAA. - Bond ratings assess both interest rate risk and default risk. - Split-rated bonds are called crossover bonds. - Investment grade bonds are rated BB or higher by Standard & Poor's.

Split-rated bonds are called crossover bonds.

Explain Greenwashing

When corporatiosn issue green bonds, there are more people who want these bonds. Because of the demand, the price is high which means the yield is low. So companys will realize is they issue green bonds they get to issue them are lower interest rates and get a higher price in comparison to a normal bond. So now they will try to make as many bond issues green as they can, even if it means diluting what it means to actually be green. So now the line for what is a gree project and what isn't is blurred which is what green washing does.

The current yield on a bond is equal to

annual interest payment divided by the current market price.

Key rate duration is best described as a measure of price sensitivity to a:

change in yield at a single point

In an era of particularly low interest rates, which of the following bonds is most likely to be called?

coupon bonds selling at a premium

Floating-rate bonds have a ________ that is adjusted with current market interest rates

coupon rate

Which type of risk is least significant for U.S. Government Backed MBS bonds?

default risk

True or false: Prepayments on Gnma mortgages have a penalty

false

The ________ is the document that defines the contract between the bond issuer and the bondholder.

indenture

Which type of risk is most significant for U.S. Government Backed MBS bonds?

prepayment risk

A mortgage bond is

secured by property owned by the firm

An investor who expects declining interest rates would maximize her capital gain by purchasing a bond that has a ________ coupon and a ________ term to maturity.

zero; long