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.