Fixed Income 2

Inflationary - what duration would you want

low

What is the intrinsic value of a 4-year bond if the coupon rate is 8%; the required rate of return is 7%.

$1,033.87

What is the price of a 30-year bond, 9% coupon (paid semiannually), if the 30-year T-bond is yielding 3.5%, and the default risk premium 600 basis points and liquidity premium 50 basis points.

$905.35

Lower the coupon....

...more interest rate risk!

Average Investment Grade Yield

1.6%

STRIPS

10 yr-T Note can be stripped into 21

PCE Rate - FED Prefers PCE

2-2.5%

CPI Rate

2.1 or 2%

US High Yield Spread

22.5%

What is the YTM of a 10-year bond that has a price of $960, 6% coupon (paid semiannually)

3.27x2=6.55%

Junk Current Rating

3.5%.... Used to get 6%

What is the YTM of a 15-year bond that has a price of $1,050, 8% coupon (paid annually).

7.4%

Maturity of zero coupon bond = 7.5, what is the Macaulay Duration

= 7.5

Modified Duration =

= Macaulay Duration / (1+YTM/n)

Which of the following most accurately describes the relationship between liquidity and yield spreads relative to benchmark government bond rates? All else being equal, bonds with: a. less liquidity have lower yield spreads b. greater liquidity have higher yield spreads c. less liquidity have higher yield spreads

A

FI6- If spot rates are 3.2% for one year, 3.4$ for two years, and 3.5% for three years, the price of a $100,000 face value, 3-year, annual-pay bond with a coupon rate of 4% is closest to A. $101,420 B. $101,790 C. $108,230

A. $101,420

What is the price of a 5-year bond, if the coupon rate is 5%, the 5-year T-note is 3%, and based on the bonds credit rating the yield spread is 200 basis points?

ANSWER: $1,000 (no calculation is need due to the fact that the required rate of return (rd) is equal to the coupon interest rate).

What is the price of a 10-year, 6% coupon paying bond (paid semiannually), if the YTM (rd) of the bond is 8%.

ANSWER:Nx2= 10x2 = 20N rd/2 = 8/2= 4 I/YPMT/2= 60/2= 30PMT= 1000FVCPTPV = $864QUESTION:

Junk Bond Threshold

Baa3/BBB-

If productivity numbers come out better than expected, what will happen to bonds?

Because the increase in productivity is deflationary, bonds prices will go up once that information is released.

Clean Price- Dirty Price-

Clean -Quoted Price Dirty - Clean + Accrued Interest

GDP worse than expected- would you rather have higher or lower duration?

Higher

If GDP comes out and it is a lot worse than expected (that is, the economy is slowing down). What will happen to the bond market (ceteris paribus - keeping all else equal)?

If this happened, interest rates would go down - bond prices would go up.

If the unemployment numbers come out and they are a lot better (less people unemployed) than expected, what will happen to the bond market (ceteris paribus)?

If this happened, this would spark inflation fears, interest rates would go up - bond prices would go down.

Implicit Price Deflator =

Nominal GDP - Real GDP

FI4- A $1,000, 5%, 20-year-annual-pay bond has a YTM of 6.5%. If the YTM remains unchanged, how much will the bond value increase over the next three years? a. $13.62 b. $13.78 c. $13.96

a. $13.62

FI2- An analyst observes a 5-year, 10% semiannual-pay bond. The face amount is $1,000. The analyst believes that the YTM on a semiannual bond basis should be 15%. Based on this yield estimate, the price of this bond would be. a. $828.40 b. $1,189.53 c. $1,193.04

a. $828.40

Duration and Risk

The higher the duration, the more interest rate risk Longer the maturity, higher duration Lower the coupon, higher the duration Higher the YTM, lower the duration

FI15- A corporate bond is quoted at a spread of +235 basis points over an interpolarize 12-year U.S. Treasury bond yield. The spread is a(n): a. G-spread b. I-spread c. Z-spread

a. G-spread

Approximate Modified Duration

V- - V+ / 2xVoXchangeYTM

Bad Economic Times

Yield Spreads Increase -> Recession Wider

Unemployment #s supposed to be better would you rather have higher or lower duration?

You

R7 - Portfolio duration has limited usefulness as a measure of interest rate risk for a portfolio because it: a. assumes yield changes uniformly across all maturities b. cannot be applied if the portfolio includes bonds embedded with options c. is accurate only if the portfolio's internal rate of return is equal to its cash flow yield

a. assumes yield changes uniformly across all maturities

FI3- An analyst observes a 20-year, 8% option free-bond with semi annual coupons. The required YTM on a semiannual bond basis was 8%, but suddenly t decreased to 7.25%. As a result, the price of this bond: a. increased b. decreased c. stayed the same

a. increased

R2 - An investor buys a 10-year bond with 6.5% annual coupon and a YTM of 6%. Before the first coupon payment is made, the YTM for the bond decreases to 5.5%. Assuming coupon payments are reinvest at the YTM, the investor's return when the bond is held to maturity is: a. less than 6% b. equal to 6% c. greater than 6%

a. less than 6%

FI5- A market rate of discount for a single payment to be made in the future is a: a. spot rate b. simple yield c. forward rate

a. spot rate

Given the following spot and forward rates: -Current 1-year spot rate is 5.5% -One-year forward rate one year from today is 7.63% -One-year forward rate two years from today is 12.18% -One-year forward rate three years from today is 15.5% The value of a 4-year, 10% annual-pay, $1,000 par value bond is closest to: a. $996 b. $1,009 c. $1,086

b. $1,009

FI7- An investor paid a full price of $1,059.04 each for 100 bonds. The purchase was between coupon dates, an accrued interest was $23.54 per bond. What is each bond's flat price? a. $1,000 b. $1,035.50 c. $1,082.58

b. $1,035.50

FI16- Assuming coupon interest is reinvested at a bond's YTM, what is the interest portion of an 18-year, $1,000 par, 5% annual coupon bond's return if it purchased at par and held to maturity? a. $576.96 b. $1,406.62 c. $1,476.95

b. $1,406.62

FI1- A 20-year, 10% annual-pay bond has a par value of $1,000. What is the price of the bond if it has a YTM of 15% a. $685.14 b. $687.03 c. $828.39

b. $687.03

R3 - A 14% annual-pay coupon bond has six years to maturity. The bond is currently trading at par. Using a 25 basis point change in yield, the approximate modified duration of the bond is closest to: a. 0.392 b. 3.888 c. 3.970

b. 3.888

FI10- An analyst observes a Widget & Co. 7.125%, 4-year, semiannual-pay bond trading at 102.347% of par (where par is $1,000). The bond is callable at 101 in two years. What is the bond's yield to call? a. 3.167% b. 5.664% c. 6.334%

b. 5.664%

R1 - The largest component of returns for a 7 year zero coupon bond yielding 8% and held to maturity is: a. capital gains b. interest income c. reinvestment income

b. interest income

FI11- A floating rate note has a quoted margin of a +50 basis points and a required margin of +75 basis points. On its next reset date, the price of the note will be: a. equal to par value b. less than par value c. greater than par value

b. less than par value

R11- The modified duration of a bond is a 7.87. The approximate percentage change in price using duration only for a yield decrease of 110 basis points is closest to: a. -8.657% b. +7.155% c. +8.657%

c. +8.657%

R6 -Which of the following three bonds has the least Macaulay duration? A bond with: a. 5% yield and 10-year maturity b. 5% yield and 20-year maturity c. 6% yield and 10-year maturity

c. 6% yield and 10-year maturity

FI9- Based on a semiannual compounding, what would the YTM be on a 15-year, zero-coupon, $1,000 par value bond that's currently trading at $331.40? a. 3.750% b. 5.151% c. 7.500%

c. 7.500%

FI8- Cathy Moran, is estimating a value for an infrequently traded bond with 6 years to maturity, an annual coupon of 7%, and single- B credit rating, Moran obtains YTM for more liquid bonds with the same credit rating: - 5% coupon, 8 years to maturity, yielding 7.20% -6.5% coupon, 5 years to maturity, yielding 6.40% The infrequently traded bond is most likely trading at: a. par value b. a discount to par value c. a premium to par value

c. a premium to par value

What is the price of a 6-year bond, if the coupon rate is 8%, the real rate of return is 2%, the inflation premium is 2.5%, the maturity risk premium is 1.5%, the default risk premium is 3%, and the liquidity risk premium is 0.5%?

d = r*+ IP + MRP + DRP + LRP2%+2.5%+1.5%+3%+0.5% = 9.5%$933.70

Deflationary - what duration would you want

high

Productivity - what duration would you want

high

Longer the maturity what happens to duration?

higher duration

Lower the coupon what happens to duration?

higher the duration

The higher the duration what happens to interest risk?

the more interest rate risk

Higher the YTM

what happens to duration?