53. intro to fixed income valuation (Sch Note, CFA)

The yield spread of a specific bond over the standard swap rate in that currency of the same tenor is best described as the: A. I-spread. B. Z-spread. C. G-spread.

A is correct The I-spread, or interpolated spread, is the yield spread of a specific bond over the standard swap rate in that currency of the same tenor. The yield spread in basis points over an actual or interpolated government bond is known as the G-spread. The Z-spread (zero-volatility spread) is the constant spread such that is added to each spot rate such that the present value of the cash flows matches the price of the bond

18. Bond dealers most often quote the: A. flat price. B. full price. C. full price plus accrued interest.

A is correct. Bond dealers usually quote the flat price. When a trade takes place, the accrued interest is added to the flat price to obtain the full price paid by the buyer and received by the seller on the settlement date. The reason for using the flat price for quotation is to avoid misleading investors about the market price trend for the bond. If the full price were to be quoted by dealers, investors would see the price rise day after day even if the yield-to-maturity did not change. That is because the amount of accrued interest increases each day. Then after the coupon payment is made the quoted price would drop dramatically. Using the flat price for quotation avoids that misrepresentation. The full price, flat price plus accrued interest, is not usually quoted by bond dealers. Accrued interest is included in not added to the full price and bond dealers do not generally quote the full price.

An analyst evaluates the following information relating to floating rate notes (FRNs) issued at par value that have 3-month Libor as a reference rate: FRN ====Quoted Margin ====Discount Margin X ======0.40% ============0.32% Y ======0.45% ============0.45% Z ======0.55% ============0.72% Based only on the information provided, the FRN that will be priced at a premium on the next reset date is: A. FRN X. B. FRN Y. C. FRN Z.

A is correct. FRN X will be priced at a premium on the next reset date because the quoted margin of 0.40% is greater than the discount or required margin of0.32%. The premium amount is the present value of the extra or "excess" interest payments of 0.08% each quarter (0.40%- 0.32%). FRN Y will be priced at par value on the next reset date since there is no difference between the quoted and discount margins. FRN Z will be priced at a discount since the quoted margin is less than the required margin

When underwriting new corporate bonds, matrix pricing is used to get an estimate of the: A. required yield spread over the benchmark rate. B. market discount rate of other comparable corporate bonds. C. yield-to-maturity on a government bond having a similar time-to-maturity.

A is correct. Matrix pricing is used in underwriting new bonds to get an estimate of the required yield spread over the benchmark rate. The benchmark rate is typically the yield-to-maturity on a government bond having the same, or close to the same, time-to-maturity. The spread is the difference between the yield-to-maturity on the new bond and the benchmark rate. The yield spread is the additional compensation required by investors for the difference in the credit risk, liquidity' risk, and tax status of the bond relative to the government bond. In matrix pricing, the market discount rates of comparable bonds and the yield-to-maturity on a government bond having a similar time-to-maturity are not estimated. Rather they are known and used to estimate the required yield spread of a new bond.

Bond ===Price ====Coupon Rate ====Time-to-Maturity A ======101.886 ===5% ===========2 years B ======100.000== =6% ===========2 years C ======97.327 ===5% ===========3 years 1. Which bond offers the lowest yield-to-maturity? A. Bond A B. Bond B C. Bond C 2. Which bond will most likely experience the smallest percent change in price if the market discount rates for all three bonds increase by 100 basis points? A. Bond A B. Bond B C. Bond C

1. A is correct. Bond A offers the lowest yield-to-maturity. When a bond is priced at a premium above par value the yield-to-maturity (YTM), or market discount rate is less than the coupon rate. Bond A is priced at a premium, so its YTM is below its 5% coupon rate. Bond B is priced at par value so its YTM is equal to its 6% coupon rate. Bond C is priced at a discount below par value, so its YTM is above its 5% coupon rate. 2. B is correct. Bond B will most likely experience tire smallest percent change in price if market discount rates increase by 100 basis points. A higher-coupon bond has a smaller percentage price change than a lower-coupon bond when their market discount rates change by the same amount (the coupon effect). Also, a shorter-term bond generally has a smaller percentage price change than a longer-term bond when their market discount rates change by tire same amount (the maturity effect). Bond B will experience a smaller percent change in price than Bond A because of the coupon effect Bond B will also experience a smaller percent change in price than Bond C because of the coupon effect and the maturity effect.

Bond ======Coupon Rate ======Time-to-Maturity X ==========8% =============3 years Y ==========7% =============3 years Z ==========6% =============3 years Time-to-Maturity ========Spot Rates 1 year =================8% 2 year =================9% 3 year =================10% All three bonds pay interest annually 1. Based upon the given sequence of spot rates, the price of Bond X is closest to: A. 95.02. B. 95.28. C. 97.63. 2. Based upon the given sequence of spot rates, the price of Bond Y is closest to: A. 87.50. B. 92.54. C. 92.76. 3. Based upon the given sequence of spot rates, the yield-to-maturity of Bond Z is closest to: A. 9.00%. B. 9.92%. C. 11.93%

1. B 8 / (1.08) + 8 / (1.09)^2 + 108 / (1.1)^3 = 95.28 2. C 7 / (1.08) + 7 / (1.09)^2 + 107 / (1.1)^3 = 92.76 3. B 6 / (1.08) + 6 / (1.09)^2 + 106 / (1.1)^3 = 90.25 Then, use calc to get YTM of 9.92%

Bond G, described in the exhibit below, is sold for settlement on 16 June 2014. Annual Coupon =================5% Coupon Payment Frequency ======Semiannual Interest Payment Dates ==========10 April and 10 Oct Maturity Date==================10 Oct 2016 Day Count Convention===========30/360 Annual Yield-to-Maturity =========4% 1. The full price that Bond G will settle at on 16 June 2014 is closest to: A. 102.36. B. 103.10. C. 103.65. 2. The accrued interest per 100 of par value for Bond G on the settlement date of 16 June 2014 is closest to: A. 0.46. B. 0.73. C. 0.92 3. The flat price for Bond G on the settlement date of 16 June 2014 is closest to: A. 102.18. B. 103.10. C. 104.02.

1. B use bond WS, PRI + AI 2. C use Bond WS, its AI = 3. A use Bond WS, its PRI =

A bond with 5 years remaining until maturity is currently trading for 101 per 100 of par value. The bond offers a 6% coupon rate with interest paid semiannually. The bond is first callable in 3 years, and is callable after that date on coupon dates according to the following schedule: End of Year =================Call Price 3 ==========================102 4 ==========================101 5 ==========================100 1. The bond's annual yield-to-maturity is closest to: A. 2.88%. B. 5.77%. C. 5.94%. 2. The bond's annual yield-to-first-call is closest to: A. 3.12%. B. 6.11%. C. 6.25%. 3. The bond's annual yield-to-second-call is closest to: A. 2.97%. B. 5.72%. C. 5.94%. 4. The bond's yield-to-worst is closest to: A. 2.88%. B. 5.77%. C. 6.25%.

1. B use calc, x2 2. C use calc, x2 3. C use calc, x2 4. B thats the lowest yield to call.

Time Period ========Forward Rate "0y1y" =============0.80% "1y1y" =============1.12% "2y1y" =============3.94% "3y1y" =============3.28% "4y1y" =============3.14% All rates are annual rates stated for a periodicity of one (effective annual rates). 1. The 3-year implied spot rate is closest to: A 1.18%. B. 1.94%. C. 2.28%. 2. The value per 100 of par value of a two-year, 3.5% coupon bond, with interest payments paid annually, is closest to: A. 101.58. B. 105.01. C. 105.82

1. B use geometric avg: (1.008*1.0112*1.0394)^(1/3) = .01944 2. B 3.5 / (1.008) + 103.5 / (1.008*1.0112) = 105.01 or just use calc for proximation.

Bond ======Coupon Rate ======Maturity (years) A =========6% ==============10 B =========6% ==============5 C =========8% ==============5 1. Relative to Bond C, fora 200 basis point decrease in the required rate of return, Bond B will most likely exhibit a(n): A. equal percentage price change. B. greater percentage price change. C. smaller percentage price change. 2. Which bond will most likely experience the greatest percentage change in price if the market discount rates for all three bonds increase by 100 basis points? A. Bond A B. Bond B C. Bond C

1. B is correct. Generally, for two bonds with the same time-to-maturity, a lower coupon bond will experience a greater percentage price change than a higher coupon bond when their market discount rates change by the same amount Bond B and Bond C have the same time-to-maturity (5 years); however, Bond B offers a lower coupon rate. Therefore, Bond B will likely experience a greater percentage change in price in comparison to Bond C. 2. A is correct. Bond A will likely experience the greatest percent change in price due to die coupon effect and the maturity effect For two bonds with the same time-to-maturity, a lower-coupon bond has a greater percentage price change than a higher-coupon bond when their market discount rates change by the same amount. Generally, for die same coupon rate, a longer-term bond has a greater percentage price change than a shorter-term bond when their market discount rates change by the same amount. Relative to Bond C, Bond A and Bond B both offer the same lower coupon rate of 6%; however, Bond A has a longer time-to-maturity than Bond B. Therefore, Bond A will likely experience the greater percentage change in price if the market discount rates for all three bonds increase by 100 basis points.

The 4-year spot rate is 9.45%, and the 3-year spot rate is 9.85%. What is the 1-year forward rate three years from today? A. 8.258%. B. 9.850%. C. 11.059%.

A (1.0945)^4 = (1.0985)^3 x (1 + 3y1y) Approximate forward rate = 4(9.45%) - 3(9.85%) = 8.25%.

A corporate bond offers a 5% coupon rate and has exactly 3 years remaining to maturity. Interest is paid annually. The following rates are from the benchmark spot curve: Time-to-Maturity =====Spot Rate 1 year============== 4.86% 2 years =============4.95% 3 years =============5.65% The bond is currently trading at a Z-spread of 234 basis points. The value of the bond is closest to: A. 92.38. B. 98.35. C. 106.56

A 5 / (1+.0486+.0234) + 5 / (1+.0495+.0234)^2 + 105 / (1+.0565+.0234)^3 = 92.38

Time-to-Maturity ==========Spot Rates 1 year ===================3% 2 years ==================4% An investor considers the purchase of a 2-year bond with a 5% coupon rate, with interest paid annually. Assuming the sequence of spot rates shown below, the price of the bond is closest to: A. 101.93. B. 102.85. C. 105.81.

A 5 / (1.03) + 105 / (1.04)^2 = 101.93

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 A With 20 years to maturity, the value of the bond with an annual-pay yield of 6.5% is N = 20, PMT = 50, FV = 1,000, I/Y = 6.5, CPT PV = -834.72 With N = 17, PV = -848.34, so the value will increase $13.62.

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 A spot rate is a discount rate for a single future payment. Simple yield is a measure of a bond's yield that accounts for coupon interest and assumes straight-line amortization of a discount or premium. A forward rate is an interest rate for a future period, such as a 3-month rate six months from today.

DMT Corp. issued a five-year floating-rate note (FRN) that pays a quarterly coupon of three-month LIBOR plus 125 bps. The FRN is priced at 96 per 100 of par value. Assuming a 30/360 day-count convention, evenly spaced periods, and constant three-month LIBOR of 5%, the discount margin for the FRN is closest to: 221 bps. 400 bps. 180 bps.

A N=5*4 = 20 I/Y = ? PV = -96 PMT = (1.25+5) / 4 = 1.56 FV = 100 I/Y = 1.802 * 2 = 7.210 7.210 - 5 = 2.21 (some rounding here)

An analyst observes a 20-year, 8% option-free bond with semiannual coupons. The required yield-to-maturity on a semiannual bond basis was 8%, but suddenly it decreased to 7.25%. As a result, the price of this bond: A. increased. B. decreased. C. stayed the same.

A The price-yield relationship is inverse. If the required yield decreases, the bond's price will increase, and vice versa.

An analyst observes a 5-year, 10% semiannual-pay bond. The face amount is £1,000. The analyst believes that the yield-to-maturity 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 Use calc

A 5-year, 5% semiannual coupon payment corporate bond is priced at 104.967 per 100 of par value. The bond's yield-to maturity, quoted on a semiannual bond basis, is 3.897%. An analyst has been asked to convert to a monthly periodicity. Under this conversion, the yield-to-maturity is closest to: A. 3.87%. B. 4.95%. C. 7.67%

A use calc, remember to x12 since its monthly

Which of the following money market yields is a bond-equivalent yield? A. Add-on yield based on a 365-day year. B. Discount yield based on a 360-day year. C. Discount yield based on a 365-day year.

A An add-on yield based on a 365-day year is a bond-equivalent yield.

A corporate bond is quoted at a spread of +235 basis points over an interpolated 12-year U.S. Treasury bond yield. This spread is a(n): A. G-spread. B. I-spread. C. Z-spread.

A G-spreads are quoted relative to an actual or interpolated government bond yield. I-spreads are quoted relative to swap rates. Z-spreads are calculated based on the shape of the benchmark yield curve.

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 bond value = 4,000/1.032 + 4,000/(1.034)^2 + 104,000/ (1.035)^3 = $101,419.28

An investor who owns a bond with a 9% coupon rate that pays interest semiannually and matures in three years is considering its sale. If tire required rate of return on the bond is 11%, the price of the bond per 100 of par value is closest to: A. 95.00. B. 95.11. C. 105.15.

A use calc

Time-to-Maturity =============Spot Rates 1 year ======================8.0% 2 years =====================9.0% 3 years =====================9.5% A 3-year bond offers a 10% coupon rate with interest paid annually. Assuming the following sequence of spot rates, the price of the bond is closest to: A. 96.98. B. 101.46. C. 102.95.

B 10 / (1.08) + 10 / (1.09)^2 + 110 / (1.095)^3 = 101.46

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 100 / 1.055 + 100 / (1.055)(1.0763) + 100 / (1.055)(1.0763)(1.1218) + 1100 / (1.055)(1.0763)(1.1218)(1.155) = 1,009.03

A floating-rate note has a quoted margin of +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 If the required margin is greater than the quoted margin, the credit quality of the issue has decreased and the price on the reset date will be less than par value.

A two-year floating-rate note pays 6-month Libor plus 80 basis points. The floater is priced at 97 per 100 of par value. Current 6-month Libor is 1.00%. Assume a 30/360 day-count convention and evenly spaced periods. The discount margin for the floater in basis points (bps) is closest to: A. 180 bps. B. 236 bps. C. 420 bps.

B N=2*2 = 4 I/Y = ? PV = -97 PMT = (.8+1)/2 = .9 FV = 100 I/Y = 1.682 * 2 = 3.364 3.364 - 1 = 2.36

Which of the following yield curves is least likely to consist of observed yields in the market? A. Forward yield curve. B. Par bond yield curve. C. Coupon bond yield curve.

B Par bond yield curves are based on the theoretical yields that would cause bonds at each maturity to be priced at par. Coupon bond yields and forward interest rates can be observed directly from market transactions.

An investor paid a full price of $1,059.04 each for 100 bonds. The purchase was between coupon dates, and accrued interest was $23.54 per bond. What is each bond's flat price? A. $1,000.00. B. $1,035.50. C. $1,082.58.

B The full price includes accrued interest, while the flat price does not. Therefore, the flat (or clean) price is 1,059.04- 23.54 = $1,035.50.

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 yield-to-maturity of 15%? A. $685.14. B. $687.03. C. $828.39.

B Use calc

A bond offers an annual coupon rate of 4%, with interest paid semiannually. The bond matures in two years. At a market discount rate of 6%, the price of this bond per 100 of par value is closest to: A. 93.07. B. 96.28. C. 96.33.

B use calc

A bond offers an annual coupon rate of 5%, with interest paid semiannually. The bond matures in seven years. At a market discount rate of 3%, the price of this bond per 100 of par value is closest to: A. 106.60. B. 112.54. C. 143.90.

B use calc

A portfolio manager is considering the purchase of a bond with a 5.5% coupon rate that pays interest annually and matures in three years. If the required rate of return on the bond is 5%, the price of the bond per 100 of par value is closest to: A. 98.65. B. 101.36. C. 106.43.

B use calc

A zero-coupon bond matures in 15 years. At a market discount rate of 4.5% per year and assuming annual compounding, the price of the bond per 100 of par value is closest to: A. 51.30. B. 51.67. C. 71.62.

B use calc

Consider the following two bonds that pay interest annually: Bond === Coupon Rate ==== Time-to-Maturity A ==== 5% ==== 2 years B ===== 3% ===== 2 years At a market discount rate of 4%, the price difference between Bond A and Bond B per 100 of par value is closest to: A. 3.70. B. 3.77. C. 4.00.

B use calc

A bond with 20 years remaining until maturity is currently trading for 111 per 100 of par value. The bond offers a 5% coupon rate with interest paid semiannually. The bond's annual yield-to-maturity is closest to: A. 2.09%. B. 4.18%. C. 4.50%.

B use calc, remember double after CPT since its semi annual

The annual yield-to-maturity, stated for with a periodicity of 12, for a 4-year, zero-coupon bond priced at 75 per 100 of par value is closest to: A. 625%. B. 7.21%. C. 7.46%.

B use calc, remember to x3

Bond========= Coupon Rate ==Time-to-Maturity Price UK Govt Benchmark==2% =====3 years =======100.25 UK Corp ============ 5% =====3 years ======100.65 Both bonds pay interest annually. The current three-year EUR interest rate swap benchmark is 2.12% The G-spread in basis points (bps) on the UK corporate bond is closest to: A. 264 bps. B. 285 bps. C. 300 bps

B using calc, UK Govt I/Y = 1.91 and UK Corp I/Y = 4.76 4.76-1.91 = 2.85

Which of the following statements describing a par curve is incorrect? A. A par curve is obtained from a spot curve. B. All bonds on a par curve are assumed to have different credit risk. C. A par curve is a sequence of yields-to-maturity such that each bond is priced at par value.

B is correct. AH bonds on a par curve are assumed to have similar, not different, credit risk. Par curves are obtained from spot curves and all bonds used to derive the par curve are assumed to have the same credit risk, as well as the same periodicity, currency, liquidity, tax status, and annual yields. A par curve is a sequence of yields-to-maturity such that each bond is priced at par value.

Matrix pricing allows investors to estimate market discount rates and prices for bonds: A. with different coupon rates. B. that are not actively traded. C. with different credit quality

B is correct. For bonds not actively traded or not yet issued, matrix pricing is a price estimation process that uses market discount rates based on the quoted prices of similar bonds (similar times-to-maturity, coupon rates, and credit quality).

Suppose a bond's price is expected to increase by 5% if its market discount rate decreases by 100 basis points. If the bond's market discount rate increases by 100 basis points, the bond price is most likely to change by: A. 5%. B. less than 5%. C. more than 5%.

B is correct. The bond price is most likely to change by less than 5%. The relationship between bond prices and market discount rate is not linear. The percentage price change is greater in absolute value when the market discount rate goes down them when it goes up by the same amount (the convexity effect). If a 100 basis point decrease in the market discount rate will cause the price of the bond to increase by 5%, then a 100 basis point increase in die market discount rate will cause die price of the bond to decline by an amount less than 5%.

The rate, interpreted to be the incremental return for extending the time-to-maturity of an investment for an additional time period, is the: A. add-on rate. B. forward rate. C. yield-to-maturity.

B is correct. The forward rate can be interpreted to be the incremental or marginal return for extending the time-to maturity of an investment for an additional time period. The add-on rate (bond equivalent yield) is a rate quoted for money market instruments such as bank certificates of deposit and indices such as Libor and Euribor. Yield-to-maturity is the internal rate of return on tire bond's cash flows—the uniform interest rate such that when the bond's future cash flows are discounted at that rate, tire sum of the present values equals the price of the bond. It is the implied market discount rate

A yield curve constructed from a sequence of yields-to-maturity on zero-coupon bonds is the: A. par curve. B. spot curve. C. forward curve.

B is correct. The spot curve, also known as the strip or zero curve, is the yield curve constructed from a sequence of yields-to-maturities on zero-coupon bonds. The par curve is a sequence of yields-to-maturity such that each bond is priced at par value. The forward curve is constructed using a series of forward rates, each having the same time frame.

A 365-day year bank certificate of deposit has an initial principal amount of USD 96.5 million and a redemption amount due at maturity of USD 100 million. The number of days between settlement and maturity is 350. The bond equivalent yield is closest to: A. 3.48%. R 3.65%. C. 3.78%.

C (FV - PV ) / PV * ( 365 / day ) (100 - 96.5) / 96.5 * (365/350) = .0378

The bond equivalent yield of a 180-day banker's acceptance quoted at a discount rate of 4.25% for a 360-day year is closest to: A. 4.31%. R 4.34%. C. 4.40%.

C PV = (1 - (day/year) * DR ) * 100 PV = (1 - (180/360) * .0425) * 100 = 97.875 (FV - PV ) / PV * ( 365 / day ) (100 - 97.875 ) / 97.875 * (365/180) = .044

Based on 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 Use calc

Cathy Moran, CFA, is estimating a value for an infrequently traded bond with 6 years to maturity, an annual coupon of 7%, and a single-B credit rating. Moran obtains yields-to-maturity 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 Using linear interpolation, the yield on a bond with six years to maturity should be 6.40% + (1 / 3) (7.20% - 6.40%) = 6.67%. A bond with a 7% coupon and a yield of 6.67% is at a premium to par value

A bond with two years remaining until maturity offers a 3% coupon rate with interest paid annually. At a market discount rate of 4%, the price of this bond per 100 of par value is closest to: A. 95.34. B. 98.00. C. 98.11.

C use calc

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%.

C Use calc

An option-adjusted spread (OAS) on a callable bond is the Z-spread: A. over the benchmark spot curve. B. minus the standard swap rate in that currency of the same tenor. C. minus the value of the embedded call option expressed in basis points per year.

C is correct The option value in basis points per year is subtracted from the Z-spread to calculate the option-adjusted spread (OAS). The Z-spread is the constant yield spread over the benchmark spot curve. The I-spread is the yield spread of a specific bond over the standard swap rate in that currency of the same tenor.

The spread component of a specific bond's yield-to-maturity is least likely impacted by changes in: A its tax status. B. its quality rating. C. inflation in its currency of denomination

C is correct The spread component of a specific bond's yield-to-maturity is least likely impacted by changes in inflation of its currency of denomination. The effect of changes in macroeconomic factors, such as the expected rate of inflation in the currency of denomination, is seen mostly in changes in the benchmark yield. The spread or risk premium component is impacted by microeconomics factors specific to the bond and bond issuer including tax status and quality rating.