TRY 2_CFA Institute_Fixed Income
B. No, Bond B's nominal yield spread should be less than Bond C's Bond B's embedded put option benefits the investor and the yield spread will therefore be less than the yield spread of Bond C, which does not contain this option or benefit.
A bond portfolio manager is considering three bonds—A, B, and C—for his portfolio. Bond A allows the issuer to call the bond before the stated maturity, Bond B allows the investor to put the bond back to the issuer before the stated maturity, and Bond C contains no embedded options. The bonds are otherwise identical. The manager tells his assistant, "Bond A and Bond B should have larger nominal yield spreads to a US Treasury than Bond C to compensate for their embedded options." Is the manager most likely correct? A. Yes B. No, Bond B's nominal yield spread should be less than Bond C's C. No, Bond A's nominal yield spread should be less than Bond C's
B. 7.48. (weighted average) The duration of a portfolio is the weighted average of the bonds' durations in which the weight for each bond is its contribution to the portfolio's value, or wbond= Valuebond/Valueportfolio and Durationportfolio= Σwbond× Durationbond. In this case, value of the portfolio is 1.2 + 3.4 + 2.9 + 1.6 = 9.1 million, and the portfolio duration equals (1.2/9.1 × 3.2) + (3.4/9.1 × 7.6) + (2.9/9.1 × 12.4) + (1.6/9.1 × 1.5) = 0.4220 + 2.8396 + 3.9516 + 0.2637 = 7.48.
A portfolio consists of four bonds with the following characteristics: Bond Market Value Duration A $1.2 million 3.2 B $3.4 million 7.6 C $2.9 million 12.4 D $1.6 million 1.5 The duration of the portfolio is closest to: A. 6.18. B. 7.48. C. 5.40.
C. floating-rate note. A floating-rate note pays a floating interest rate equal to a reference rate plus a spread.
ANZ Corporation has issued a three-year bond that makes semiannual interest payments in March and September at the coupon rate of six-month Libor + 250 bps. This bond is most likely referred to as a: A. plain vanilla bond. B. pure discount bond. C. floating-rate note.
A. 4.21%. All spot rates are given on a BEY basis and must be divided by 2 in this calculation, or f = (1+(.028/2))^3 / (1+(.021/2))^2 -1 = .021036 On a BEY basis, the forward rate is 0.021036 × 2=4.21%.
The semiannual bond equivalent yield spot rates for US Treasury yields are provided below. Period Years Spot Rate 1 0.5 1.20% 2 1.0 2.10% 3 1.5 2.80% 4 2.0 3.30% On a semiannual bond equivalent yield (BEY) basis, the six-month forward rate one year from now is closest to: A. 4.21%. B. 3.64%. C. 2.10%.
A. European Investment Bank. Supranational bonds are bonds issued by such supranational agencies as the European Investment Bank and the International Monetary Fund.
Which of the following are most likely a kind of supranational bonds? Bonds issued by the: A. European Investment Bank. B. Government of Malaysia. C. Federal Farm Agency of the United States.
C. The bond is held to maturity. The realized horizon yield will equal the original yield to maturity if the coupon payments are reinvested at the original yield to maturity and the bond is sold at a price on the constant-yield price trajectory. The latter condition ensures that the investor does not have any capital gains or losses when the bond is sold.
Which of the following conditions is not required for the realized horizon yield to equal the original yield to maturity on an option-free, fixed-coupon bond? A. The coupon payments are reinvested at the same interest rate as the original yield to maturity. B. The bond is sold at a price on the constant-yield price trajectory. C. The bond is held to maturity.
A. Central bank engaging in expansionary monetary policy A central bank engaging in expansionary monetary policy might cause the yield curve to steepen by reducing short-term interest rates and thus cause greater volatility in short-term bond yields to maturity than in longer-term bonds.
Which of the following events will most likely increase the short-term bond yield volatility? A. Central bank engaging in expansionary monetary policy B. Slow economic growth expectation C. High inflation expectation
C. Shorter supply of the collateral If the collateral is in short supply or if there is a high demand for it, repo margins are lower. Repo margin is the difference between the market value of the security used as collateral and the value of the loan.
Which of the following factors will most likely drive the repo margin lower? A. Lower quality of the collateral B. Lower credit quality of the counterparty C. Shorter supply of the collateral
B. Floating-rate notes An floating-rate note will be less affected when market interest rates increase because the coupon rate varies directly with market interest rates and is reset at regular intervals.
Which of the following instruments is most likely to offer investors some protection against increases in the market interest rate? A. Inverse floating-rate notes B. Floating-rate notes C. Fixed-rate bonds
A. Amortizing collateral A credit card receivable ABS is an example of an ABS with a non-amortizing collateral.
Which of the following is least likely a feature of a credit card receivable ABS? A. Amortizing collateral B. An early amortization provision C. A lockout period
C. A requirement to pay withholding taxes to foreign governments in a timely manner Requiring compliance with the existing rules and regulations of foreign governments is administrative in nature and thus an affirmative covenant.
Which of the following is least likely to be a negative covenant associated with a coupon-paying corporate bond issue? A. A requirement to hedge at least 50% of the firm's revenues generated from foreign sales B. A prohibition from investing in long-term projects in emerging market countries C. A requirement to pay withholding taxes to foreign governments in a timely manner
B. An Australian borrower issuing Canadian dollar-denominated bonds in the UK market. A eurobond is an international bond issued outside the jurisdiction of any one country and not denominated in the currency of the country where it is issued.
Which of the following is most likely an example of a eurobond? A. A Canadian borrower issuing British pound-denominated bonds in the UK market. B. An Australian borrower issuing Canadian dollar-denominated bonds in the UK market. C. A Japanese borrower issuing US dollar-denominated bonds in the US market.
C. Secured debt Secured debt is backed by assets or financial guarantees pledged to ensure repayment in the event of default. Therefore, secured debt has a priority claim over unsecured debt and subordinated debt.
Which of the following most likely has the highest priority claim in the event of default? A. Subordinated debt B. Unsecured debt C. Secured debt
C. price sensitivity to yield changes. Bond investors are concerned about interest rate risk, and duration is a good measure of interest rate risk.
Which of these definitions of duration is most relevant to a bond investor? A bond's duration is its: A. first derivative of value with respect to its yield. B. half-life. C. price sensitivity to yield changes.
B. A U.K.-based company issuing Japanese yen-denominated bonds to investors domiciled in Japan It is an example of a foreign bond-that is, a bond issued by a foreign company in the domestic market of the country in whose currency the bond is denominated.
Which one of the following is least likely to be an example of a Eurobond? A. A Japanese company issuing euro-denominated bonds to investors domiciled in the United Kingdom B. A U.K.-based company issuing Japanese yen-denominated bonds to investors domiciled in Japan C. An Australian company issuing U.S. dollar-denominated bonds to investors domiciled in Japan
B. A floored floating-rate note A floored floating-rate note prevents the coupon rate from falling below the specified minimum rate. In a falling interest rate environment, this feature will benefit investors because it guarantees that the coupon rate will not fall below the specified minimum rate.
Which type of bond is most likely to be preferred by investors in a falling interest rate environment? A. A capped floating-rate note B. A floored floating-rate note C. A floating-rate note with no cap or floor
C. reverse repo. A reverse repo (repurchase agreement) is collateralized cash lending by purchasing an underlying security now and selling it back in the future.
Zet Bank has entered into a contract with Louly Corporation in which Zet agrees to buy a 2.5% U.S. Treasury bond maturing in 10 years and promises to sell it back next month at an agreed-on price. From Zet Bank's perspective, this contract is best described as a: A. collateralized loan. B. repo. C. reverse repo.
A. high-yield bond. High-yield bonds are bonds with credit ratings below investment-grade levels, also known as speculative or junk bonds.
A "junk" bond is most likely a: A. high-yield bond. B. bond with credit rating above BBB-. C. supranational bond.
B. 7.32%. solve for int on this using the tvm function The yield to maturity is the discount rate that equates the price of the bond ($850.00) with its cash flows (49 semiannual cash flows of $30 and a 50th cash flow of $1,030),
A 6% 25-year bond with semiannual payments has a market price of $850.00. The yield to maturity of this bond is closest to: A. 7.91%. B. 7.32%. C. 5.72%.
B. 3.31%. The expected percentage price change for a bond can be is estimated as follows: %ΔPFull ≈ (-AnnModDur × ΔYield) + (0.5 × AnnConvexity × (ΔYield)2) %ΔPFull ≈ (-6.5 × -0.005) + [0.5 × 50.25 × (-0.005)2] = 3.313%.
A bond has a Macaulay duration of 6.0, modified duration of 6.5, and convexity of 50.25. If the bond's yield to maturity decreases by 50 bps, the expected percentage price change is closest to: A. 3.25%. B. 3.31%. C. 3.06%.
C. -2.20%. Incorporating both duration and convexity, the percentage change in a bond's price = (-duration × ∆y) + (0.5 × C × (∆y)^2 ) = (-4.50 × 0.005) + (0.5 × 39.20 × 0.0052 ) = -0.0220 or -2.20%
A bond has a duration of 4.50 and convexity of 39.20. If interest rates increase by 0.5%, the percentage change in the bond's price will be closest to: A. -2.25%. B. -2.15%. C. -2.20%.
B. 6.40. The effective duration of a bond is, Eff Durr = (Delta PV) / [2 x Delta Curve x PV] where PV-, PV0, and PV+ are the values of the bond when the yield falls, under the current yield, and when the yield rises, respectively, and ∆Curve is the change in the benchmark yield curve. So, EffDur = (103.74-101.12) / [2 x 102.31 x .002]
A bond is currently selling for 102.31. A valuation model estimates the price will fall to 101.12 if interest rates increase by 20 bps and rise to 103.74 if interest rates decrease by 20 bps. Using these estimates, the effective duration of the bond is closest to: A. 6.48. B. 6.40. C. 6.31.
C. dual-currency bond. In a dual-currency bond, coupon payments are denominated in one currency and the par value is denominated in a different currency.
ABL Ltd. is an Australian company that has financed a joint venture project in Singapore using a 15-year, fixed-rate bond paying semi-annual coupons that are denominated in Singapore dollars. The bond's par value, to be paid at maturity, is denominated in U.S. dollars. This bond is an example of a: A. global bond. B. currency option bond. C. dual-currency bond.
B. dual currency bond. A dual currency bond makes coupon payments in one currency and pays the par value at maturity in another currency.
China Construction Development Corporation needs to finance a three-year construction project in Singapore. The corporation plans to issue a bond with coupon payments to be paid in Chinese yuan and principal to be repaid in Singapore dollars. This bond is most likely an example of a: A. currency option bond. B. dual currency bond. C. foreign currency bond.
B. $1,026.73. PV calculation fv = 1000 pmt = 70 nper = 3 i = 6%
If the annual market discount rate is 6%, the value of a three-year bond that has a 7% coupon rate, has a maturity (par) value of $1,000, and pays interest annually is closest to: A. $1,049.17. B. $1,026.73. C. $973.76.
C. Third lien debt Third lien debt is secured debt. It has a secured interest in the pledged assets and ranks higher than all other unsecured debts.
The Zera Company has borrowed capital by issuing a number of different securities. Which of the following most likely ranks the highest with respect to priority of payments? A. Senior unsecured bond B. Subordinate loan C. Third lien debt
A. convexity effect. It is bond convexity that explains the asymmetrical price change. A fall in interest rates will result in a higher percentage rise in the bond's price compared with the percentage fall in the bond's price when interest rates rise by the same amount.
The option-free bonds of Argus Corporation have a duration of eight years. When interest rates rise by 100 bps, the bond's price declines by 7.9%. When interest rates fall by 100 bps, however, the price rises by 8.2%. The asymmetrical price change is most likely caused by the: A. convexity effect. B. coupon effect. C. maturity effect.
B. Callable A callable bond gives the issuer the right to buy back the bond prior to maturity. This feature increases the reinvestment risk faced by bondholders, causing them to require a higher yield than for a similar non-callable bond.
When compared with an option-free bond, which type of bond most likely offers a higher yield to bondholders? A. Convertible B. Callable C. Putable
A. Non-amortizing collateral An auto loan ABS involves the use of amortizing collateral, that is, the cash flows for an auto loan ABS includes interest payments, scheduled principal repayments and any prepayments, if allowed.
Which of the following is least likely a feature of an auto loan ABS? A. Non-amortizing collateral B. Senior/subordinated tranche structure C. Overcollateralization
C. Letter of credit A letter of credit is a form of external credit enhancement in which a financial institution provides the issuer with a credit line to be used for any cash flow shortfalls related to its debt issue.
Which of the following is least likely to be a form of internal credit enhancement associated with a corporate bond issue? A. Debt subordination B. Debt overcollateralization C. Letter of credit
