Fixed Midterm MC Samples
After the lockout period, the principle received from borrowers of credit card accounts is paid to
1) all bondholders in a pro rata basis 2) all bondholders in one lump sum 3) bond holders according to a pre-specified schedule
The modified duration of a perpetuity equation is
1/r
the relationship between modified duration and macaulay duration is ___________
A. the modified duration is the Macauley duration divided by (1+yield/k)
what is a disadvantage to the bondholder?
a cap
A municipal bond that is offered at a yield-to-maturity lower than its coupon rate is recognized as trading
at a premium
Unsecured obligations of the companies
debentures
A zero coupon bond is also known as a
deep discount bond
Bootstrapping is a method of
extracting spot rates from period to period zero coupon bonds
Can issue fixed income securities to the general public
non-sovereign government
is a nonparallel or parallel shift more common in regards to yield curve?
nonparrallel shift
initial call price of a bond
principal plus a premium
The coupon rate of a bond is
the interest rate the issuer agrees to pay each year
Value of a callable bond = equation?
value of an option-free bond − value of an embedded call option.
does The prepayment option on a mortgage loan benefits the issuer.
yse
which bonds have no reinvestment risk
zero coupon
Which of the following situations lead to short-term profit opportunities in the bond market?
Interest rates become more volatile.
Arbitrage free approach is different from traditional valuation because
It is broken down into zero coupon bonds & discounted at multiple spot rates and these spot rates are estimated for each CF at maturity
equals interest earned from the previous coupon of the sale date
accrued interest
The convexity adjustment is ____ on traditional (option-free) fixed rate bond for either an increase or decrease in the yield
always positive
Bonds redeemed at the special redemption price are typically redeemed ...
at par
Potable bonds sensativity
at yield levels above the coupon rate, potable bonds become sensitive to small changes in yield
Bond and interest rate risk relationship
bonds w/ higher coupon have lower interest rate risk
With respect to bond investing, reinvestment risk is a very important component of what other type of risk?
call risk
what is a reason that the prices of floating rate bonds fluctuate from par?
call risk
less potential for price appreciation
callable bond
what happens to callable bonds when yields rise?
callable bond is less sensative to & will exhibit less of a price change
Greatest reinvestment risk
callable bond w/ highest coupon
If the volatility of interest rates increases, which of the following will experience the smallest price increase resulting from lower rates?
callable bonds
Which of the following bonds contains an embedded option that provides the issuer certain rights?
callable bonds
what type of bonds have negative convexity?
callable bonds
When interest rates are low, the effective duration of a ______ bond is _______ than that of an otherwise comparable ________ bond
callable;lower than;non callable
bond w/ deferred call provision
cannot be called right after the date of issue
The price movement of option free bonds are
characterized by the inverse relationship between required yield and price & positive convexity
Modified duration is calculated based on measuring the interest rate sensitivity of price with
constant expected CFs and discounted at new interest rates and yields
The ______ must be reinvested at the _____ to earn expected YTM
coupon payments; YYM
Credit risk is measured in several ways. The yield differential above the return on a benchmark security measures the:
credit spread risk
bond prices are more sensitive to a _______ in market yields to maturity than to a _________ market yields to maturity
decrease;increase
As the discount rate ______ relative to the stated coupon rate, the price of the bond _____ relative to par value
decreases;increases
longer time to maturity may lead to a lower duration for a bond priced at
discount
Modified convexity is different from effective convexity because
effective convexity assumes that cash flows change as yields changes but modified convexity does not
Which duration measures can be used to measure a bond with embedded options?
effective duration
duration of a pure discount bond is ____ to maturity
equal
zero coupons effective duration
equal to its years to maturity
The Macauley duration is ______ the modified duration in estimating duration for bonds with embedded options _____
equal to; because neither consider changing cash flows
If the issuer of a bond is in default, the bond will be trading:
flat
what is a disadvantage to the issuer?
floor
Spot rates are equivalent to the ____ of the current spot rate and the forward rates
geometric average
Convexity of bonds increases in importance when IR are....
high
Which of the following bond features would result in lower interest rate risk?
higher YTM
The most junior type of municipal bond is the:
income or revenue bond
the duration of a bond _____ whenever the bond pays a coupon
increases
For both callable and potable bonds When yield volatility __________, the value of the option __________
increases, increases
bond price sensitivity _______ at a ________ rate as maturity increases
increases; decreasing
Interest rate risk for a bond refers to the fact that when interest rates:
increases; the value decreases
The price of a bond _____ as its life approaches maturity when the IR is constant for a ____ bond
increases;discount
risk that arises from the uncertainty about the bond's return caused by changes in interest rates over time.
interest rate risk
What will happen to interest rate risk for an option-free bond if market yields decrease?
interest rate risk will increase
How are the annual rate and periodicity related?
inversely
Macauley duration of a zero coupon bond ______________
is equal to bonds maturity in years
foreign bond
issued in a specific country, in the currency of that country by an issuer who lives in another country
An advantage of the duration/convexity approach over the full valuation approach is:
it saves considerable time when working with portfolios of bonds.
least volatility = ____ years & ____ coupon bond
least years & highest coupon bond
shortest duration = ____ years & _____ coupon
least years, highest coupon
price of floating rate securities are _____ sensitive to changes in market yields than the prices of fixed rate securities
less
the market rate of interest is greater than the coupon rate, the bond will be valued:
less than par
Purchasing securities on margin allows investors to
leverage assets and make larger purchases.
Lower yield to maturity = ______ duration & ______ interest rate risk
longer duration and higher IRR
as bond YTM gets lower what happens to the duration & interest rate risk?
longer duration, higher interest rate risk
High IRR = ________ maturity& ________ YTM
longer maturity & shorter YTM
What do companies have to do to earn a high rating?
low debt to equity ratio, high quick ratio
the higher the YTM, the ______ the Macauley duration
lower
the higher the coupon rate the _____ Macauley duration of a bond
lower
What is a zero-coupon bonds time to maturity?
macauley duration
what has a direct relationship with convexity
maturity
what happens to the value of a callable bond when yields rise?
may not fall as much as a similar straight bond
Yield to maturity definition
measures the IRR that makes the PV of cash flows equal to the bond price
Which duration measures can be used to measure an option-free bond?
modified, macauley, effective
greatest volatility = ____ years & ____ coupon bond
most years & lowest coupon bond
longest duration = _______ years & _______ coupon
most years, highest coupon
What is a positive covenant?
must maintain
The presence of embedded options may cause the effective convexity to be _____ while the modified duration wil always be
negative;positive
does the required margin percentage changes daily?
no
Which of the following bond covenants is considered negative?
no additional debt
may only be called if the source of funds for the redemption is other than a new bond issue with a lower coupon rate.
non refundable bonds
the treasury par curve is named that because
on the run treasuries are coupon adjusted to sell at par
The possibility that a portfolio manager will lose money because the bond valuation model he uses is flawed is an example of:
operational risk
A bond that has no maturity date
perpetual bond
sensitivity of a portfolio's value to equal changes in yield for all the bonds in the portfolio.
portfolio duration
callable bonds have ___ convexity
positive & negative
Callable bond prices at yields greater than the coupon rate exhibit
positive convexity
a primary motivation for investment in commodities is
positive correlation of commodities with stock & bond investments
Given that the coupon rate of a bond is higher than the market interest rate on bonds with similar maturities and payment structures, the bond will be trading:
premium
reinvestment risk is increased if there are _________ on the bond
prepayment provisions`
asset backed securities distributing prepayment risk is called
prepayment tranching & time tranching
what is the dirty price
present value of CFs plus accrued interest
Risk that typically has the least impact on the price behavior of junk bonds is
purchasing power risk
Which of the following embedded options benefits the bond investor?
put provision
Which of the following embedded options most likely benefits the bondholder?
put provision at par on a bond that is trading at a premium
__________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date.
puttable
in an embedded option, the effective duration of a bond
reduces
when planning to hold a coupon-paying Treasury bond until maturity, which of the following types of risk would be the most important?
reinvestment
The risk that an investor will earn less than the quoted yield-to-maturity on a fixed-coupon bond due to a decrease in interest rates is known as:
reinvestment risk
What is a form of internal credit enhancement?
senior/subordinate debt structures
Low IRR = ________ maturity& ________ YTM
shorter maturity & longer YTM
If a portfolio manager anticipates a major increase in market interest rates, the most appropriate trading strategy is to purchase:
shorter maturity bonds w/ higher coupon rates
Which trading strategy would be most likely to generate above average returns in a bond investment? Purchasing:
shoter maturity with high coupon rates
the call option
shows under what circumstances the issuer can redeem the bond prior to maturity
When interest rates are high relative to a bond's coupon, the effective duration of a callable bond should be _______ that of an otherwise identical straight bond
similar
It requires that the issuer retire a portion of the principal through a series of principal payments over the life of the bond.
sinking fund provision
For a non-callable bond, the price change resulting from a 200 bp increase in required yield will be ______ in magnitude
smaller
The central governments of other countries issue debt obligations called
sovereign debt
The par curve is obtained from a
spot curve
The rate earned on a zero coupon bond for its time to maturity
spot rate
The graph of current corporate bond yields
spot yield curve
when a bond has negative convexity it means that for a large change in interest rates
the amount of price appreciation is less than the amount of price decline
Which of the following is closest to the maximum price for a bond that is currently callable?
the call price
the convexity of a bond measures
the change in price not explained by duration when large IR changes occur
Callable bonds exhibit negative convexity at low yields because
the coupon rate is higher than the yield and the call as an option becomes valuable to the issuer
The refunding provision found in nonrefundable bonds allows bonds to be retired unless
the funds come from a lower cost bond issue
support for the revenue bonds come from
the net revenues of the underlying project
If the required return on a bond does not change from year to year, then over the same period if you ignore changes in default risk
the price of a bond selling at par will remain unchanged
Which of the following actions taken by a central bank is expansionary?
the purchase of government bonds
Yield to maturity is calculated as
the same formula as IRR
Which of the following is an advantage of the arbitrage-free valuation approach to valuing fixed income securities, relative to the traditional valuation approach?
the valuation of individual CDs based on specific spot rates
When determining credit risk spread, the benchmark security is most likely a(n):
treasury bond
Call prices are known as regular redemption prices when bonds are called at:
under call provisions specified in the bond indenture
Which of the following five year bonds has the highest interest rate sensitivity?
zero coupon bond
The rate used to discount stripped Treasury bond payments are
zero coupon bond rate for treasury bond of the same maturity
What bond has the highest price volatility & IR sensitivity?
zero coupon bonds
least- most reinvestment risk
zero-coupon bonds, straight coupon bonds, callable bonds, mortgage-backed securities.