3700 Exam 2 (HW QUESTIONS)

Bonds rated below Baa by Moody's or BBB by S&P are junk bonds.

True

Fed funds are short-term unsecured loans while repos are short-term secured loans.

True

A T-bond with a $1,000 par is quoted at a bid of 105.21875 and an ask of 105.28125. If you sell the bond, you will receive:

$1,052.19.

Subprime mortgage borrowers usually have poorer credit ratings or lower income levels compared to conventional mortgage borrowers.

True

Standard revenue bonds are:

collateralized by the earnings from a specific project.

A short-term unsecured promissory note issued by a company is:

commercial paper.

The least used form of mortgage securitization is the ______________________.

mortgage-backed bond

In a Treasury auction, preferential bidding status is granted to:

noncompetitive bidders.

Rates on federal funds and repurchase agreements are stated:

on a bond equivalent basis with a 360-day year.

The most significant borrower in the U.S. money markets is(are):

the US treasury

A fixed-rate mortgage originator is adversely affected by _______ interest rates while the borrower is adversely affected by _______ interest rates.

increasing; decreasing

You purchase a $255,000 house and you pay 20 percent down. You obtain a fixed-rate mortgage where the annual interest rate is 5.85 percent and there are 360 monthly payments. What is the monthly payment?

$1,203.48 (SOLVE: Calculator Solution: Amount borrowed is 0.80 × $255,000 = 204,000 PV = −204,000 N = 360 FV = 0 I = 0.0585/12 = 0.4875 Solve for PMT to get $1,203.48. 0.80 × $255,000 = Pmt × PVIFA (0.0585/12, 360 months); Pmt = $1,203.48)

An investor buys a $10,000 par, 4.25 percent annual coupon TIPS security with three years to maturity. If inflation every six months over the investor's holding period is 2.50 percent, what is the final payment the TIPS investor will receive?

$11,843.37 (SOLVE: ($10,000 × 1.0256) × (1 + (0.0425/2))

A 180-day $3 million CD has a 4.25 percent annual rate quote. If you buy the CD, how much will you collect in 180 days?

$3,063,750 (SOLVE: $3 million × [1 + (0.0425 × 180/360)])

You want to buy a $250,000 house and you will use a conventional mortgage. What is the minimum down payment you have to make to avoid having to purchase mortgage insurance?

$50,000 (SOLVE: 20% of $250,000 is $50,000)

What is the price of a 182-day money market security with a face value of $7,000 if the BEY is 3.574%?

$6,877.44 (SOLVE: ($7,000 − P)/P × 365/182 = 0.03574 ($7,000 − P)/P =0.01782 P = $6,877.44)

A homeowner can obtain a $250,000, 30-year fixed-rate mortgage at a rate of 6.0 percent with zero points or at a rate of 5.5 percent with 2.25 points.If you will keep the mortgage for 30 years, what is the net present value of the points (to the nearest dollar)?

$8,360 (SOLVE: Calculator Solution: The amount of points to be paid is 0.0225 × $250,000 = $5,625. First find the difference in the payments for mortgage without points and with points: Without points PV = −250,000 N = 360 FV = 0 I = 6.0/12 = 0.5 Solve for PMT to get $1,498.88. With points PV = −250,000 N = 360 FV = 0 I = 5.5/12 = 0.45833 Solve for PMT to get $1,419.47. Payment savings = $1,498.88 − $1,419.47 = $79.40. The difference is savings of $79.40 over 30 years with monthly payments. Find the Present value of this annuity stream: PMT = 79.40 N = 360 FV = 0 I = 5.5/12 = 0.45833 Solve for PV = $13,984.74. Finally, the difference between this savings and the points paid is $13,984.74 − $5,625 = $8,359.74. No Points: Pmt = $250,000/PVIFA (0.06/12, 360 months); Pmt = $1,498.88; Pay Points: Pmt = $250,000/PVIFA (0.055/12, 360 months); Pmt = $1,419.47; Pmt savings = $1,498.88 − $1,419.47 = $79.40; NPV of points: [$79.40 × PVIFA (0.055/12, 360 months)] − (0.0225 × $250,000) = $8,359.74)

On September 1, 2012, an investor purchases a $10,000 par T-bond that matures in 12 years. The coupon rate is 6 percent and the investor buys the bond 70 days after the last coupon payment (110 days before the next). The ask yield is 7 percent. The dirty price of the bond is:

$9,313.75. (SOLVE: Using the financial calculator: FV = −10,000 PMT = −300 N = 24 I/Y = 3.5 Solve for PV to get the clean price of $9,197.08; The accrued interest is (70/180) × 300 = $116.67. The dirty price is $9,197.08 + $116.67 = $9,313.75.)

A dealer is quoting a $10,000 face value, 180-day T-bill quoted at 2.75 bid, 2.65 ask. You could buy this bill at ______________ or sell it at _______________.

$9,867.50; $9,862.50 (SOLVE: Buy at 10,000 × [1 − (0.0265 × 180/360)]; sell at 10,000 × [1 − (0.0275 × 180/360)].)

What is the amount of non-competitive bids tendered?

1,560,670,500

What is the amount of non-competitive bids accepted?

1,560,670,500 (SOLVE: $6,611,971,000 - $5,051,300,500 =$1,560,670,500) (USE TREASURY BILL AUCTION RESULTS)

An investor is in the 28 percent federal tax bracket and pays a 9 percent state tax rate and 4 percent in local income taxes. For this investor, a municipal bond paying 6 percent interest is equivalent to a corporate bond paying _____ interest.

10.17 percent (SOLVE: 0.06/[1 − (0.28 + 0.09 + 0.04)])

A new issue of 30-year T-bonds was recently auctioned at a stop-out yield of 2.872%. What is the coupon rate for this issue?

2.750%

For the purposes for which they are used, money market securities should have which of the following characteristics? I. Low trading costs II. Little price risk III. High rate of return IV. Life greater than one year

I and II

You obtained a sample of Treasury bill auction results, but some of the key info is missing. Based on the information provided in the table below, answer the following questions. Treasury Auction Results Term and Type of Security: 56-day Bill CUSIP Number: 917536YD6 High Rate: 2.875% Allotted at High: (missing) Price: (missing) Investment Rate: (missing) Median Rate: 2.750% Low Rate: 2.500% Issue Date: September 30, 2022 Maturity Date: November 25, 2022 Tendered Competitive: $110,325,483,000 Accepted Competitive: $5,051,300,500 Noncompetitive Tender: (missing) Noncompetitive Accepted: (missing) Total: $6,611,971,000 1. What is the stop-out yield?

2.875%

What is the investment rate (in %) of the T-bill? (Hint: the investment rate is the bond equivalent yield)

2.928 (SOLVE: (100-99.553)/99.553*(365/56)=2.928%) (USE TREASURY BILL AUCTION RESULTS)

A holder of Rainbow Funds convertible bonds with a $1,000 par and a $1,100 price can convert the bond to 25 shares of common stock. The stock is currently priced at $36 per share. By what percent does the stock price have to rise to make conversion potentially attractive?

22.22% (SOLVE: [($1,100/25)/$36] − 1 = 0.2222, or 22.22%)

Suppose that $10 million face value commercial paper with a 270-day maturity is selling for $9.55 million. What is the BEY on the paper?

6.37% (SOLVE: [($10 million/$9.55 million) − 1] × (365/270) = 0.0637, or 6.37%)

A homeowner can obtain a $250,000, 30-year fixed-rate mortgage at a rate of 6.0 percent with zero points or at a rate of 5.5 percent with 2.25 points.How long must the owner stay in the house to make it worthwhile to pay the points if the payment saving is invested monthly?

7.15 years (SOLVE: Calculator Solution: The amount of points to be paid is 0.0225 × $250,000 = $5,625. First find the difference in the payments for mortgage without points and with points: Without points PV = −250,000 N = 360 FV = 0 I = 6.0/12 = 0.5 Solve for PMT to get $1,498.88. With points PV = −250,000 N = 360 FV = 0 I = 5.5/12 = 0.45833 Solve for PMT to get $1,419.47. Payment savings = $1,498.88 − $1,419.47 = $79.40. PV = − 5,625 PMT = 79.41 I = 5.5/12 = 0.45833 FV = 0 Solving for N you get 85.85 months which is 7.15 years.

There were two bids at the stop-out yield. The bid amounts of them are as follows: Bid 1: $50,000,000; Bid 2: $ 30,000,000 Suppose the remaining amount of T-bills at the stop-out yield was $64,000,000. What is the allotted-at-high ratio?

80.00% (SOLVE: allotted-at-high ratio = $64,000,000/($50,000,000 + $30,000,000) =0.8)

What is the price of the new issue per 100 face value?

99.553 (SOLVE: 100-0.02875*100*56/360=99.553) (USE TREASURY BILL AUCTION RESULTS)

If the current interest environment is low, lenders tend to prefer a(n) ________ ; while borrowers tend to prefer a(n) ________.

ARM; fixed-rate mortgage

As compared to fixed-rate mortgages, ARMs result in which of the following for the lender? I. Higher interest rate risk II. Lower default risk

None of these choices are correct.

A larger portion of the mortgage payment goes towards the principal during the early life of a mortgage loan versus the later life of the loan.

False

Debt securities with maturities of one year or less are traded in capital markets.

False

GNMA creates pools of mortgages and issues securities.

False

The majority of money market securities are low-denomination, low-risk investments designed to appeal to individual investors with excess cash.

False

Treasury notes, Treasury bonds, and municipal bonds are default risk free.

False

With TIPS, the security's coupon rate is changed every six months by the inflation rate as measured by the CPI.

False

Which one of the following entities is an actual government-owned enterprise dealing with mortgages?

GNMA

An MBB differs from a CMO or a pass-through in that: I. the MBB does not result in the removal of mortgages from the balance sheet. II. an MBB holder has no prepayment risk. III. cash flows on an MBB are not directly passed through from mortgages.

I, II, and III

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 bond holder or the bond issuer IV. Have higher required returns than noncallable bonds

II and IV only

Convertible bonds are: I. options attached to bonds that give the bond holder the right to purchase stock at a preset price without giving up the bond. II. bonds in which the issue matures (converts) a little each year. III. bonds collateralized with certain types of automobiles. IV. bonds that may be converted to a certain number of shares of stock determined by the conversion ratio.

IV only

A ___________ placed against mortgaged property ensures that the property cannot be sold (except by the lender) until the mortgage is paid off.

Lien

The most liquid of the money market securities are:

T-bills

Which of the following situations would require an increase in the coupon rate for a bond selling at par?

The addition of a call provision

Accrued interest owed to the bond seller increases as the next coupon payment date approaches.

True

"On the run" Treasury notes and bonds are newly issued securities and "off the run" Treasuries are securities that have been previously issued.

True

360/n times the difference between the face value and the current value divided by the face value gives you the discount yield on an instrument

True

A borrower using a conventional mortgage will typically have to put up at least a 20 percent down payment or purchase private mortgage insurance.

True

A subprime mortgage is a mortgage made to a borrower who has a below normal credit rating.

True

The role of GNMA is to provide insurance to pass-through mortgage securities.

True

The schedule showing how monthly mortgage payments are split into principal and interest is called a(n):

amortization schedule.

A time draft payable to a seller of goods with payment guaranteed by a bank is a:

banker's acceptance.

An adjustable rate mortgage originator is adversely affected by _______ interest rates while the borrower is adversely affected by _______ interest rates.

decreasing; increasing

By far, the largest holder of U.S. Treasury securities is ________.

foreign investors

The process of packaging and/or selling mortgages that are then used to back publicly traded debt securities is called:

securitization

Interest income from Treasury securities is ________________, and interest income from municipal bonds is always ________________.

taxable at the federal level only; exempt from federal taxes