CFA Fixed Income Practice Question

******************* Time Period Forward Rate "0y1y" 0.80% "1y1y" 1.12% "2y1y" 3.94% "3y1y" 3.28% "4y1y" 3.14% The three-year implied spot rate is closest to: 1.18%. 1.94%. 2.28%.

1.94%. Ans: (1 + x)^3 = 1.008 * 1.012 * 1.0394 Solve for X, we get 1.94% [As I said in my quiz-let note, it's basically the opposite of forward rate with law of one price along with a small twist. Also, don't get confused with forward rate and implied spot rate on the test]

*** 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: 98.65. 101.36. 106.43.

101.36. You should be fine with just using a calculator

*** An investor considers the purchase of a two-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: Time-to-Maturity Spot Rates 1 year 3% 2 years 4% 101.93. 102.85. 105.81 [I got it wrong, silly me. You remembered it wrong]

101.93. PV= [5 / (1+0.03)1] + [(5+100) / (1+0.04)^2.] PV = 4.85 + 97.08 = 101.93.

************* Bond G, described in the exhibit below, is sold for settlement on 16 June 2020. Annual Coupon 5% Coupon Payment Frequency. Semiannual Interest Payment Dates. 10 April and 10 October Maturity Date. 10 October 2022 Day-Count Convention 30/360 Annual Yield-to-Maturity 4% The full price that Bond G settles at on 16 June 2020 is closest to: 102.36. 103.10. 103.65. [I got it wrong] ----- *** The accrued interest per 100 of par value for Bond G on the settlement date of 16 June 2020 is closest to: A.0.46. B.0.73. C.0.92. ----- *** The flat price for Bond G on the settlement date of 16 June 2020 is closest to: A.102.18. B.103.10. C.104.02.

103.10. Step 1: Find out the dates. We use 4/10/2020 - 10/10/2022 = 2.5 years. We use the coupon date prior to settlement date. We have 66 days for accrued interest. Step 2: FV = 100, N = 5, I/Y = 2, PMT = 2.5, CPT PV= 102.356 Step 3: Change it to Full price: 102.356 * 1.02 ^66/180 = 103.102 --------- C.0.92. Step 4: (From prior question Step 3) Accrued Interest: 2.5 * 66/180 = 0.916 --------- A. 102.18. Step 5: PVFlat = 103.10 - 0.92 = 102.18.

******************* Time Period Forward Rate "0y1y" 0.80% "1y1y" 1.12% "2y1y" 3.94% "3y1y" 3.28% "4y1y" 3.14% The value per 100 of par value of a two-year, 3.5% coupon bond with interest payments paid annually is closest to: 101.58. 105.01. 105.82.

105.01. = 3.5 / 1.0080 + 103.5/ (1.0080×1.0112) = 3.47 + 101.54 = 105.01.

************ A Canadian pension fund manager seeks to measure the sensitivity of her pension liabilities to market interest rate changes. The manager determines the present value of the liabilities under three interest rate scenarios: a base rate of 7%, a 100 basis point increase in rates up to 8%, and a 100 basis point drop in rates down to 6%. The results of the manager's analysis are presented below: Interest Rate Assumption Present Value of Liabilities 6% CAD510.1 million 7% CAD455.4 million 8% CAD373.6 million The effective duration of the pension fund's liabilities is closest to: 1.49. 14.99. 29.97.

14.99. My own note: So, effDur is bascailly ModDur but using benchmark yield. In this question, they didn't specify and tell us the base rate which we assume to be benchmark yield. Now, usually we calculate 'high price" and "low price", but they're given. = (510.1 - 373.6) / 2* 455.4*0.01 = 14.99

**************** An investor buys a three-year bond with a 5% coupon rate paid annually. The bond, with a yield-to-maturity of 3%, is purchased at a price of 105.657223 per 100 of par value. Assuming a 5-basis point change in yield-to-maturity, the bond's approximate modified duration is closest to: 2.78. 2.86. 5.56.

2.78. Formula: (High Price PV_ - Low price PV+ ) / 2 * price * change of rates = (105.80423 - 105.51044) / 2*105.657*0.0005 = 2.779

A two-year floating-rate note pays six-month Libor plus 80 bps. The floater is priced at 97 per 100 of par value. The current six-month MRR is 1.00%. Assume a 30/360 day-count convention and evenly spaced periods. The discount margin for the floater in basis points is closest to: 180 bps. 236 bps. 420 bps. (Whatever way the answer explanation gave me I had trouble using it, so I'm doing the google way)(I guess it won't be a great practice now since we'er using a different way)

236 bps. Coupon = 0.0080 + 0.01 = 0.018 or 1.8%, 1.8%/2 = 0.9% FV = 100, PV = 97, N = 2*2, PMT = 0.9 CPT I/Y = 3.36 Discount margin = 336bps - 100bps = 236bps

*** Bond Coupon Rate Time-to-Maturity Price UK Government Benchmark Bond 2% 3 years 100.25 UK Corporate Bond 5% 3 years 100.65 The G-spread in basis points on the UK corporate bond is closest to: 264 bps. 285 bps. 300 bps.

285 bps. B is correct. The G-spread is closest to 285 bps. Explaination: Calculator: .... CPT I/Y = 1.913 -> government bond Calculator:.... CPT I/Y = 4.76 -> coporate bonds 4.176 - 1.913 = 2.84.. -> 284bps

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: 3.70. 3.77. 4.00.

3.77. You literally just find the PV of the 2 bonds and compare them. There's no trick question as you originally thoguht.

*** 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: 2.09%. 4.18%. 4.50%. [I got it wrong with a silly mistake]

4.18%. Calculator: ..... CPT I/Y= 2.09 2.09 * 2 = 4.18 Your mistake was you forgot to *2

*************** 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: 4.31%. 4.34%. 4.40%.

4.40%. step 1: PV = FV * [1 - (days/ years) * discount rate] = 100 * [1 - (180/360)*4.25% = 97.875 Step 2: AOR = years/days * (FV-PV)/PV = 365/180*(100-97.875)/97.875 = 4.4%

********** An investor purchases a nine-year, 7% annual coupon payment bond at a price equal to par value. After the bond is purchased and before the first coupon is received, interest rates increase to 8%. The investor sells the bond after five years. Assume that interest rates remain unchanged at 8% over the five-year holding period. Question Per 100 of par value, the future value of the reinvested coupon payments at the end of the holding period is closest to: 35.00. 40.26. 41.07. [Pay attention to the explanation]

41.07. Following our notes in other quizlet: Step 1: We find the YTM. But, YTM in here is already given. Step 2: Find Investment: PV= 0, PMT = 7, N = 5, I/Y = 8, CPT FV = 41.0662 Now, this is the total coupon payment including the reinvestment gain. Step 3: (Question didn't ask but we can do it) To find the net reinvestment gain: 7 * 5 - 35 41.0662 - 35 = 6.0662. This is the net reinvestment gains.

*** 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: 51.30. 51.67. 71.62.

51.67. Same thing as regular TVM. The only difference is this is zero coupon bond. You should be fine with just using a calculator

**************** An investor purchases a nine-year, 7% annual coupon payment bond at a price equal to par value. After the bond is purchased and before the first coupon is received, interest rates increase to 8%. The investor sells the bond after five years. Assume that interest rates remain unchanged at 8% over the five-year holding period. Assuming that all coupons are reinvested over the holding period, the investor's five-year horizon yield is closest to: 5.66%. 6.62%. 7.12%.

6.62%. My notes: Calculator: N = 4, I/Y = 8, FV = 100, PMT = 7, CPT PV = 96.68 Calculator: N = 5, I/Y = 8, PMT = 7, PV - 0, CPT FV = 41.066 (96.68 + 41.066) / (1 + x)^5 = 100 => 137.68 / (1 + x)^5 = 100 => 137.68 = 100 * (1 + x)^5 => 137.68 / 100 = (1 + x)^5 => (1.3768)^1/5 = 1 + x => 1.0661 = 1 + x => x = 6.61% B is correct. The investor's five-year horizon yield is closest to 6.62%. After five years, the sale price of the bond is 96.69 (from problem 5) and the future value of reinvested cash flows at 8% is 41.0662 (from problem 4) per 100 of par value. The total return is 137.76 (= 41.07 + 96.69), resulting in a realized five-year horizon yield of 6.62%:100.00=137.76(1+r)5, r=0.0662

The annual yield-to-maturity, stated for with a periodicity of 12, for a four-year, zero-coupon bond priced at 75 per 100 of par value is closest to: 6.25%. 7.21%. 7.46%.

7.21%. Calculator: ..... CPT I/Y = 0.6... 0.6*12 = 7.2

****************** A bond portfolio consists of the following three fixed-rate bonds. Assume annual coupon payments and no accrued interest on the bonds. Prices are per 100 of par value: Bond. Maturity. Market Value. Price. Coupon. Yield-to-Maturity. Modified Duration A 6 years 170,000. 85.0000 2.00% 4.95% 5.42 B 10 years 120,000. 80.0000 2.40% 4.99% 8.44 C 15 years 100,000. 100.0000 5.00% 5.00% 10.38 The bond portfolio's modified duration is closest to: 7.62. 8.08. 8.20.

7.62. Bascially, you just find the weighted ModDur 170000 + 120000 + 100000 = 390,000 W = 0.435, 0.3076, 0.2564 = (5.42*0.435 + 8.44*0.3076 + 10.38*0.2564) = 2.357 + 2.5961 + 2.6614 = 7.62

******** A corporate bond offers a 5% coupon rate and has exactly three 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 bps. The value of the bond is closest to: 92.38. 98.35. 106.56. [I got it right, with a small mistake in the calculation]

92.38. Ans: = 5 /(1.0486 + 0.0234) + 5 / (1.0495 + 0.0234) + 105 / (1. 0565 + 0.0234) = 92.38 My mistake was I used the forward rate valuing bond method.

*** 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 the required rate of return on the bond is 11%, the price of the bond per 100 of par value is closest to: 95.00. 95.11. 105.15. ------ 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: 93.07. 96.28. 96.33.

95.00. Your past mistake is you forgot to switch either N, I/Y, or PMT in the calculator You should be fine with just using a calculator ------- 96.28. You should be fine with just using a calculator

*** 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: 95.34. 98.00. 98.11.

98.11. You should be fine with just using a calculator

*** Which of the following statements about Macaulay duration is correct? A bond's coupon rate and Macaulay duration are positively related. A bond's Macaulay duration is inversely related to its yield-to-maturity. The Macaulay duration of a zero-coupon bond is less than its time-to-maturity.

A bond's Macaulay duration is inversely related to its yield-to-maturity. B is correct. A bond's yield-to-maturity is inversely related to its Macaulay duration: The higher the yield-to-maturity, the lower its Macaulay duration and the lower the interest rate risk. A higher yield-to-maturity decreases the weighted average of the times to the receipt of cash flow, and thus decreases the Macaulay duration. A bond's coupon rate is inversely related to its Macaulay duration: The lower the coupon, the greater the weight of the payment of principal at maturity. This results in a higher Macaulay duration. Zero-coupon bonds do not pay periodic coupon payments; therefore, the Macaulay duration of a zero-coupon bond is its time-to-maturity.

********* David Smith purchased a mortgage-backed security with a coupon rate of 8% and a par value of $1,000 for $960. Coupon payments are made monthly. The monthly interest payment is closest to: A. $6.67. B. $6.40. C. $6.94. (I got it wrong because I forgot)

A is correct. The annual coupon is 8% × $1,000 = $80. The coupon payments are made monthly, and therefore $80/12 = $6.67 is paid twelve times a year.

Which of the following is least likely to be a negative covenant associated with a coupon-paying corporate bond issue? A. A requirement to pay withholding taxes to foreign governments in a timely manner B. A prohibition from investing in long-term projects in emerging market countries C. A requirement to hedge at least 50% of the firm's revenues generated from foreign sales

A. A requirement to pay withholding taxes to foreign governments in a timely manner

********* An analyst reviews a corporate bond indenture that contains these two covenants: The borrower will pay interest semiannually and principal at maturity. The borrower will not incur additional debt if its debt-to-capital ratio is more than 50%. What types of covenants are these? A. Covenant 1 is affirmative, and Covenant 2 is negative. B. Both are affirmative covenants. C. Covenant 1 is negative, and Covenant 2 is affirmative. (I got it wrong)

A. Covenant 1 is affirmative, and Covenant 2 is negative. A is correct. Paying interest and principal is one of the most common affirmative covenants. Negative covenants set forth certain limitations and restrictions on the borrower's activities. The more common restrictive covenants are those that impose limitations on the borrower's ability to incur additional debt, such as specifying a debt-to-capital ratio, unless certain tests are satisfied. B is incorrect because Covenant 2 is a negative covenant . C is incorrect because the types of covenants has been reversed.

The following table provides a history of a fixed-income security's coupon rate and the risk-free rate over a five-year period. Year Risk-Free Rate Coupon Rate 1 3.00% 6.00% 2 3.50% 5.00% 3 4.25% 3.50% 4 3.70% 4.60% 5 3.25% 5.50% The security is most likely a(n): A. inverse floater. B. deferred coupon bond. C. step-up note.

A. inverse floater.

The provision that provides bondholders the right to sell the bond back to the issuer at a predetermined price prior to the bond's maturity date is referred to as: A.a put provision. B.a make-whole call provision. C.an original issue discount provision.

A. a put provision.

Relative to domestic and foreign bonds, Eurobonds are most likely to be: A.bearer bonds. B.registered bonds. C.subject to greater regulation.

A. bearer bonds.

******* Contrary to positive bond covenants, negative covenants are most likely: A.costlier. B.legally enforceable. C.enacted at time of issue.

A. costlier. A is correct. Affirmative covenants typically do not impose additional costs to the issuer, while negative covenants are frequently costly. B is incorrect because all bond covenants are legally enforceable rules, so there is no difference in this regard between positive and negative bond covenants. C is incorrect because borrowers and lenders agree on all bond covenants at the time of a new bond issue, so there is no difference in this regard between positive and negative bond covenants.

********* A five-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%. [I have questions on this question, just wait!] [Update: Google had enlightened me]

A.3.87%. You were right for the most part, but you use 3.897% as semiannual rate. This is an annual rate. We misread the question. Step 1: 3.897% /2 = 1.9485 Step 2: EAR = (1 + 0.019485)^2 = 1.03934 => (1.03934)^1/12 - 1 = 1.00322 - 1 = 0.00322 -> SAR 0.00322 * 12 = 0.38647

****** Which of the following type of debt obligation most likely protects bondholders when the assets serving as collateral are non-performing? A.Covered bonds B.Collateral trust bonds C.Mortgage-backed securities

A.Covered bonds A is correct. A covered bond is a debt obligation backed by a segregated pool of assets called a "cover pool." When the assets that are included in the cover pool become non-performing (i.e., the assets are not generating the promised cash flows), the issuer must replace them with performing assets.

*** An analyst evaluates the following information relating to floating-rate notes (FRNs) issued at par value that have three-month MRR as a reference rate: Floating-Rate Note. 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.FRN X. Quoted Margin + MRR = Coupon Rate Discount Margin + MRR = Discount rate

********* An investor in a country with an original issue discount tax provision purchases a 20-year zero-coupon bond at a deep discount to par value. The investor plans to hold the bond until the maturity date. The investor will most likely report: A.a capital gain at maturity. B.a tax deduction in the year the bond is purchased. C.taxable income from the bond every year until maturity.

A.a capital gain at maturity. C is correct. The original issue discount tax provision requires the investor to include a prorated portion of the original issue discount in his taxable income every tax year until maturity. The original issue discount is equal to the difference between the bond's par value and its original issue price. A is incorrect because the original issue discount tax provision allows the investor to increase his cost basis in the bond so that when the bond matures, he faces no capital gain or loss. B is incorrect because the original issue discount tax provision does not require any tax deduction in the year the bond is purchased or afterwards

************ A 365-day year bank certificate of deposit has an initial principal amount of USD96.5 million and a redemption amount due at maturity of USD100 million. The number of days between settlement and maturity is 350. The bond equivalent yield is closest to: 3.48%. 3.65%. 3.78%.

AOR=(365 / 350)×(100 − 96.5 / 96.5) AOR = 1.04286 × 0.03627. AOR = 0.03783, or approximately 3.78%.

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

All bonds on a par curve are assumed to have different credit risk. B is correct. All 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. --- spot 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-maturity 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.

Ted Nguyen is an investor domiciled in a country with an original issue discount tax provision. He purchases a zero-coupon bond at a deep discount to par value with the intention of holding the bond until maturity. At maturity, he will most likely face: A. a capital gain. B. neither a capital loss nor gain. C. a capital loss.

B. neither a capital loss nor gain. B is correct. An original issue discount tax provision allows the investor to increase the cost basis of the bond, so when the bond matures, the investor faces no capital gain or loss. A is incorrect because the investor will face neither a capital gain nor a loss as the original issue discount tax provision allows the investor to increase the cost basis of the bond. C is incorrect because the investor will face neither a capital gain nor a loss as the original issue discount tax provision allows the investor to increase the cost basis of the bond.

*** A three-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: Time-to-Maturity Spot Rates 1 year 8.0% 2 years 9.0% 3 years 9.5% A.96.98. B.101.46. C.102.95.

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

Which of the following is a type of external credit enhancement? A.Covenants B.A surety bond C.Overcollateralization

B. A surety bond A surety bond is an external credit enhancement (i.e., a guarantee received from a third party). If the issuer defaults, the guarantor who provided the surety bond will reimburse investors for any losses, usually up to a maximum amount called the penal sum. A is incorrect because covenants are legally enforceable rules that borrowers and lenders agree upon when the bond is issued. C is incorrect because overcollateralization is an internal, not external, credit enhancement. Collateral is a guarantee underlying the debt above and beyond the issuer's promise to pay, and overcollateralization refers to the process of posting more collateral than is needed to obtain or secure financing. Collateral, such as assets or securities pledged to ensure debt payments, is not provided by a third party. Thus, overcollateralization is not an external credit enhancement.

The benefit to the issuer of a deferred coupon bond is most likely related to: A.tax management. B.cash flow management. C.original issue discount price.

B. cash flow management. B is correct. Deferred coupon bonds pay no coupon for their first few years but then pay higher coupons than they otherwise normally would for the remainder of their life. Deferred coupon bonds are common in project financing when the assets being developed may not generate any income during the development phase, thus not providing cash flows to make interest payments. A deferred coupon bond allows the issuer to delay interest payments until the project is completed and the cash flows generated by the assets can be used to service the debt.

Investors seeking some general protection against a poor economy are most likely to select a: A.deferred coupon bond. B.credit-linked coupon bond. C.payment-in-kind coupon bond.

B. credit-linked coupon bond.

A bond with five 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 three 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 The bond's annual yield-to-maturity is closest to: A.2.88%. B.5.77%. C.5.94%. ----- *** The bond's annual yield-to-first-call is closest to: 3.12%. 6.11%. 6.25%. ------ *** The bond's yield-to-worst is closest to: A.2.88%. B.5.77%. C.6.25%. (I skipped because we know we're looking for thr worst YTM) ------ The bond's annual yield-to-second-call is closest to: A.2.97%. B.5.72%. C.5.94%. (I skipped because we know we're looking for the 2nd YTM)

B.5.77%. Calculator: .... CPT 1/Y = 2.88 2.88* 2 = 5.76 -------- 6.25%. Calculator: (I'll write it out this time since it's a little different) N = 3*2 PMT = 3, PV = 101, FV = 102, CPT I/Y = 3.12 3.12*2 = 6.25 ---- B.5.77%. Yield-to-first-call: 6.25% Yield-to-second-call: 5.94% Yield-to-maturity: 5.77% Thus, the yield-to-worst is 5.77%. ------ C.5.94%. We just look for the second call YTM

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

B.95.28. (Not going to explain, it's repetitive and it should be easy) ---- 9.92%. Step 1: = 6 / 1.08 + 6 / 1.09^2 + 106 / 1.1^3 = 90.239 Step 2: Calculator, finding I/Y = 9.919

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 Question Which bond offers the lowest yield-to-maturity? Bond A Bond B Bond C

Bond A Pretty easy. A is premium so its discount rate must be x<5 B is par so its discount rate is 6 C is discount so its discount rate is higher than 5 ------ Note: If you want to find who has the highest YTM? Same thing. But, you get B = 6 and C > 5. Now, you just have to find exactly what's C YTM. It's 5.9999999

*************** Using the information below, which bond has the greatest money duration per 100 of par value assuming annual coupon payments and no accrued interest? Bond. Time-to-Maturity. Price Per 100 of Par Value. Coupon Rate. Yield-to-Maturity. Modified Duration A 6 years 85.00 2.00% 4.95% 5.42 B 10 years 80.00 2.40% 4.99% 8.44 C 9 years 85.78 3.00% 5.00%. 7.54 Bond A Bond B Bond C

Bond B B is correct. Bond B has the greatest money duration per 100 of par value. Money duration (MoneyDur) is calculated as the annual modified duration (AnnModDur) times the full price (PVFull) of the bond including accrued interest. Bond B has the highest money duration per 100 of par value. MoneyDur = AnnModDur × PVFull MoneyDur of Bond A = 5.42 × 85.00 = 460.70 MoneyDur of Bond B = 8.44 × 80.00 = 675.20 MoneyDur of Bond C = 7.54 × 85.78 = 646.78

*********************** 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 Which bond will most likely experience the smallest percent change in price if the market discount rates for all three bonds increase by 100 bps? Bond A Bond B Bond C

Bond B Smaller the coupon rate, the more sensitive the bond is toward change. B is correct. Bond B will most likely experience the smallest percentage change in price if market discount rates increase by 100 bps. 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 the same amount (the maturity effect). Bond B will experience a smaller percentage change in price than Bond A because of the coupon effect. Bond B will also experience a smaller percentage change in price than Bond C because of the coupon effect and the maturity effect.

Which of the following best describes a convertible bond's conversion premium? A.Bond price minus conversion value B.Par value divided by conversion price C.Current share price multiplied by conversion ratio

Bond price minus conversion value

********* A 10-year, capital-indexed bond linked to the Consumer Price Index (CPI) is issued with a coupon rate of 6% and a par value of 1,000. The bond pays interest semi-annually. During the first six months after the bond's issuance, the CPI increases by 2%. On the first coupon payment date, the bond's: A.coupon rate increases to 8%. B.coupon payment is equal to 40. C.principal amount increases to 1,020. (important)

C is correct. Capital-indexed bonds pay a fixed coupon rate that is applied to a principal amount that increases in line with increases in the index during the bond's life. If the consumer price index increases by 2%, the coupon rate remains unchanged at 6%, but the principal amount increases by 2% and the coupon payment is based on the inflation-adjusted principal amount. On the first coupon payment date, the inflation-adjusted principal amount is 1,000 × (1 + 0.02) = 1,020 and the semi-annual coupon payment is equal to (0.06 × 1,020) ÷ 2 = 30.60.

*** A company has issued a floating-rate note with a coupon rate equal to the three-month MRR + 65 bps. Interest payments are made quarterly on 31 March, 30 June, 30 September, and 31 December. On 31 March and 30 June, the three-month MRR is 1.55% and 1.35%, respectively. The coupon rate for the interest payment made on 30 June is: 2.00%. 2.10%. 2.20%.

C is correct. The coupon rate that applies to the interest payment due on 30 June is based on the three-month MRR rate prevailing on 31 March. Thus, the coupon rate is 1.55% + 0.65% = 2.20%.

Which of the following is least likely to be a form of internal credit enhancement associated with a corporate bond issue? A. Debt overcollateralization B. Debt subordination C. Letter of credit

C. Letter of credit C is correct. 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. A is incorrect because debt overcollateralization is a form of internal credit enhancement that relates to the process of having more collateral than is needed to obtain debt financing. B is incorrect because debt subordination is a form of internal credit enhancement that refers to the ordering of claim priorities of debt in relation to asset ownership.

*** 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 US dollars. This bond is an example of a: A. global bond. B. currency option bond. C. dual-currency bond.

C. dual-currency bond. C is correct. In a dual-currency bond, coupon payments are denominated in one currency, and the par value is denominated in a different currency. A is incorrect because a global bond is issued simultaneously in the Eurobond market and in at least one domestic bond market. B is incorrect because a currency option bond gives bondholders the right to choose the currency in which they wish to receive coupon payments and principal repayments.

A BBB rated corporation wishes to issue debt to finance its operations at the lowest cost possible. If it decides to sell a pool of receivables into a special purpose vehicle (SPV), its primary motivation is most likely to: receive a guaranty from the SPV to improve the corporation's credit rating. B. allow the corporation to retain a first lien on the assets of the SPV. C. segregate the assets into a bankruptcy-remote entity for bondholders.

C. segregate the assets into a bankruptcy-remote entity for bondholders. A key motivation for a corporation to establish a SPV is to separate it as a legal entity. In the case of bankruptcy for the corporation, the SPV is unaffected because it is not a subsidiary of the corporation. Given this arrangement, the SPV can achieve a rating as high as AAA and borrow at lower rates than the corporation. A is incorrect because the SPV does not receive a guaranty. B is incorrect because the corporation does have a lien on those assets.

A bond that is characterized by a fixed periodic payment schedule that reduces the bond's outstanding principal amount to zero by the maturity date is best described as a: A.bullet bond. B.plain vanilla bond. C.fully amortized bond.

C. fully amortized bond.

Which of the following bond types provides the most benefit to a bondholder when bond prices are declining? A.Callable B.Plain vanilla C.Multiple put

C.Multiple put C is correct. A putable bond is beneficial for the bondholder by guaranteeing a prespecified selling price at the redemption date, thus offering protection when interest rates rise and bond prices decline. Relative to a one-time put bond that incorporates a single sellback opportunity, a multiple put bond offers more frequent sellback opportunities, thus providing the most benefit to bondholders.

A "buy-and-hold" investor purchases a fixed-rate bond at a discount and holds the security until it matures. Which of the following sources of return is least likely to contribute to the investor's total return over the investment horizon, assuming all payments are made as scheduled? Capital gain Principal payment Reinvestment of coupon payments ----- *** Which of the following sources of return is most likely exposed to interest rate risk for an investor of a fixed-rate bond who holds the bond until maturity? Capital gain or loss Redemption of principal Reinvestment of coupon payments ---- *** An investor purchases a bond at a price above par value. Two years later, the investor sells the bond. The resulting capital gain or loss is measured by comparing the price at which the bond is sold to the: carrying value. original purchase price. original purchase price value plus the amortized amount of the premium. [I got it wrong, but I wasnt thinkign stragiht. This is easy]

Capital gain --- Reinvestment of coupon payments C is correct. Because the fixed-rate bond is held to maturity (a "buy-and-hold" investor), interest rate risk arises entirely from changes in coupon reinvestment rates. Higher interest rates increase income from reinvestment of coupon payments, and lower rates decrease income from coupon reinvestment. There will not be a capital gain or loss because the bond is held until maturity. The carrying value at the maturity date is par value, the same as the redemption amount. The redemption of principal does not expose the investor to interest rate risk. The risk to a bond's principal is credit risk. ----- carrying value.

Which of the following statements relating to commercial paper is most accurate? There is no secondary market for trading commercial paper. Only the strongest, highly rated companies issue commercial paper. Commercial paper is a source of interim financing for long-term projects. (I got it wrong, silly mistake)

Commercial paper is a source of interim financing for long-term projects. C is correct. Companies use commercial paper not only as a source of funding working capital and seasonal demand for cash but also as a source of interim financing for long-term projects until permanent financing can be arranged.

A bond issued internationally, outside the jurisdiction of the country in whose currency the bond is denominated, is best described as a: Eurobond. foreign bond. municipal bond.

Eurobond. A is correct. Eurobonds are issued internationally, outside the jurisdiction of any single country. B is incorrect because foreign bonds are considered international bonds, but they are issued in a specific country, in the currency of that country, by an issuer domiciled in another country. C is incorrect because municipal bonds are US domestic bonds issued by a state or local government.

Which type of sovereign bond has the lowest interest rate risk for an investor? Floaters Coupon bonds Discount bonds

Floaters

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

I-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 that is added to each spot rate such that the present value of the cash flows matches the price of the bond

Which factor is associated with a more favorable quality sovereign bond credit rating? Issued in local currency, only Strong domestic savings base, only Issued in local currency of country with strong domestic savings base

Issued in local currency of country with strong domestic savings base C is correct. Bonds issued in the sovereign's currency and a strong domestic savings base are both favorable sovereign rating factors. It is common to observe a higher credit rating for sovereign bonds issued in local currency because of the sovereign's ability to tax its citizens and print its own currency. Although there are practical limits to the sovereign's taxing and currency-printing capacities, each tends to support a sovereign's ability to repay debt. A strong domestic savings base is advantageous because it supports the sovereign's ability to issue debt in local currency to domestic investors.

*** Which of the following is most appropriate for measuring a bond's sensitivity to shaping risk? Key rate duration Effective duration Modified duration

Key rate duration A is correct. Key rate duration is used to measure a bond's sensitivity to a shift at one or more maturity segments of the yield curve which result in a change to yield curve shape. Modified and effective duration measure a bond's sensitivity to parallel shifts in the entire curve.

*** An investor buys a 6% annual payment bond with three years to maturity. The bond has a yield-to-maturity of 8% and is currently priced at 94.845806 per 100 of par. The bond's Macaulay duration is closest to: 2.62. 2.78. 2.83. [This question requires the original MacDur formula which I was told not to memorize, but use "approximate Mod" to find MacDur. So I'm not sure how this is going to go]

MacDur= {(1+r / r) − 1 +r + [N×(c−r)] / [c × [ (1+r)* N −1] + r} − (t/T) = 13.50 − 10.67 = 2.83

***** Which of the following is a source of wholesale funds for banks? Demand deposits Money market accounts Negotiable certificates of deposit

Negotiable certificates of deposit Wholesale funds available for banks include central bank funds, interbank funds, and negotiable certificates of deposit. A and B are incorrect because demand deposits (also known as checking accounts) and money market accounts are retail deposits, not wholesale funds.

*** Which type of bond most likely earns interest on an implied basis? A.Floater B.Conventional bond C.Pure discount bond (I got it wrong, I didn't understand by "implied basis")

Pure discount bond A zero-coupon, or pure discount, bond pays no interest; instead, it is issued at a discount to par value and redeemed at par. As a result, the interest earned is implied and equal to the difference between the par value and the purchase price.

Which of the following terms in a bond issue most likely helps to reduce credit risk? Term maturity structure Floating-rate note Sinking fund arrangement

Sinking fund arrangement is correct. A sinking fund arrangement is a way to reduce credit risk by making the issuer set aside funds over time to retire the bond issue. A is incorrect because a term maturity structure is paid off in a lump sum at maturity and therefore carries more credit risk than a serial maturity structure such as sinking fund arrangement. B is incorrect because a floating-rate note is a way to reduce interest rate risk instead of credit risk.

Which of the following describes privately placed bonds? They are non-underwritten and unregistered. They usually have active secondary markets. They are less customized than publicly offered bonds. ------------------------------------------------------ A mechanism by which an issuer may be able to offer additional bonds to the general public without preparing a new and separate offering circular best describes: the grey market. a shelf registration. a private placement.

They are non-underwritten and unregistered. ------------------------------------------- a shelf registration.

********* An inverse floater will most likely have: a maximum coupon rate. a face value that changes as the reference rate changes. a coupon rate that changes by more than the change in the reference rate. [I got it wong]

a maximum coupon rate. A is correct. The general formula for the coupon rate of an inverse floater is C - (L × R), where C is the maximum coupon rate if the reference rate (R) is equal to zero and L is the coupon leverage, which is greater than zero. B is incorrect. The face value of an inverse floater does not change as the reference rate changes; rather, the coupon rate changes. C is incorrect. Inverse floaters can have leverage less than 1 (deleveraged inverse floaters), so the coupon rate changes by less than the change in the reference rate; leverage greater than 1 (leveraged inverse floaters), so the coupon rate changes by more than the change in the reference rate; or leverage equal to 1, so the coupon rate changes by the same amount as the change in the reference rate.

********** A liquid secondary bond market allows an investor to sell a bond at: the desired price. a price at least equal to the purchase price. a price close to the bond's fair market value.

a price close to the bond's fair market value. C is correct. Liquidity in secondary bond markets refers to the ability to buy or sell bonds quickly at prices close to their fair market value. A and B are incorrect because a liquid secondary bond market does not guarantee that a bond will sell at the price sought by the investor, or that the investor will not face a loss on his or her investment

*** limitation of calculating a bond portfolio's duration as the weighted average of the yield durations of the individual bonds that compose the portfolio is that it: assumes a parallel shift to the yield curve. is less accurate when the yield curve is less steeply sloped. is not applicable to portfolios that have bonds with embedded options.

assumes a parallel shift to the yield curve. A is correct. A limitation of calculating a bond portfolio's duration as the weighted average of the yield durations of the individual bonds is that this measure implicitly assumes a parallel shift to the yield curve (all rates change by the same amount in the same direction). In reality, interest rate changes frequently result in a steeper or flatter yield curve. This approximation of the "theoretically correct" portfolio duration is more accurate when the yield curve is flatter (less steeply sloped). An advantage of this approach is that it can be used with portfolios that include bonds with embedded options. Bonds with embedded options can be included in the weighted average using the effective durations for these securities.

In major developed bond markets, newly issued sovereign bonds are most often sold to the public via a(n): auction. private placement. best-efforts offering.

auction.

*** If interest rates are expected to increase, the coupon payment structure most likely to benefit the issuer is a: A.step-up coupon. B.inflation-linked coupon. C.cap in a floating-rate note. (I got it wrong, again, I didn't read the question carefully)

cap in a floating-rate note. C is correct. A cap in a floating-rate note (capped FRN) prevents the coupon rate from increasing above a specified maximum rate. This feature benefits the issuer in a rising interest rate environment because it sets a limit to the interest rate paid on the debt. A is incorrect because a bond with a step-up coupon is one in which the coupon, which may be fixed or floating, increases by specified margins at specified dates. This feature benefits the bondholders, not the issuer, in a rising interest rate environment because it allows bondholders to receive a higher coupon in line with the higher market interest rates. B is incorrect because inflation-linked bonds have their coupon payments and/or principal repayment linked to an index of consumer prices. If interest rates increase as a result of inflation, this feature is a benefit for the bondholders, not the issuer.

***** A repurchase agreement is most comparable to a(n): interbank deposit. collateralized loan. negotiable certificate of deposit.

collateralized loan. B is correct. A repurchase agreement (repo) can be viewed as a collateralized loan in which the security sold and subsequently repurchased represents the collateral posted. A and C are incorrect because interbank deposits and negotiable certificates of deposit are unsecured deposits—that is, there is no collateral backing the deposit.

** With respect to floating-rate bonds, a reference rate (such as MRR) is most likely used to determine the bond's: spread. coupon rate. frequency of coupon payments. ----------------------------------------------------------------------- The variability of the coupon rate on a Libor-based floating-rate bond is most likely caused by: periodic resets of the reference rate. market-based reassessments of the issuer's creditworthiness. changing estimates by the Libor administrator of borrowing capacity.

coupon rate. The coupon rate of a floating-rate bond is expressed as a reference rate plus a spread. Different reference rates are used depending on where the bond is issued and its currency denomination, but one of the most widely used set of reference rates is Libor. A and C are incorrect because a bond's spread and frequency of coupon payments are typically set when the bond is issued and do not change during the bond's life. ---------------------------------------------- periodic resets of the reference rate.

** Compared with developed market bonds, emerging market bonds most likely: offer lower yields. exhibit higher risk. benefit from lower growth prospects.

exhibit higher risk. Many emerging countries lag developed countries in the areas of political stability, property rights, and contract enforcement. Consequently, emerging market bonds usually exhibit higher risk than developed market bonds. A is incorrect because emerging market bonds typically offer higher (not lower) yields than developed market bonds to compensate investors for the higher risk. C is incorrect because emerging market bonds usually benefit from higher (not lower) growth prospects than developed market bonds.

A South African company issues bonds denominated in pound sterling that are sold to investors in the United Kingdom. These bonds can be best described as: Eurobonds. global bonds. foreign bonds.

foreign bonds. C is correct. Bonds sold in a country and denominated in that country's currency by an entity from another country are referred to as foreign bonds. A is incorrect because Eurobonds are bonds issued outside the jurisdiction of any single country. B is incorrect because global bonds are bonds issued in the Eurobond market and at least one domestic country simultaneously.

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

forward rate. 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 indexes, such as MRR, Libor and Euribor. Yield-to-maturity is the internal rate of return on the bond's cash flows—the uniform interest rate such that when the bond's future cash flows are discounted at that rate, the sum of the present values equals the price of the bond. It is the implied market discount rate.

**************** Bond Coupon Rate Time-to-Maturity A 6% 10 B 6% 5 C 8% 5 All three bonds are currently trading at par value. Question Relative to Bond C, for a 200 bp decrease in the required rate of return, Bond B will most likely exhibit a(n): equal percentage price change. greater percentage price change. smaller percentage price change. ----- **************** Which bond will most likely experience the greatest percentage change in price if the market discount rates for all three bonds increase by 100 bps? Bond A Bond B Bond C

greater percentage price change. 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 (five 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. ------- Bond A A is correct. Bond A will likely experience the greatest percentage change in price due to the 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 the 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 offer a 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 bps.

An affirmative covenant is most likely to stipulate A. limits on the issuer's leverage ratio. B. how the proceeds of the bond issue will be used. C. the maximum percentage of the issuer's gross assets that can be sold. ---------------------------------------------------------------- Which of the following best describes a negative bond covenant? The issuer is: A. required to pay taxes as they come due. B. prohibited from investing in risky projects. C. required to maintain its current lines of business.

how the proceeds of the bond issue will be used. ----------------------------------------------- B. prohibited from investing in risky projects.

*** The spread component of a specific bond's yield-to-maturity is least likely impacted by changes in: its tax status. its quality rating. inflation in its currency of denomination. [I got this wrong]

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 in 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 microeconomic factors specific to the bond and bond issuer, including tax status and quality rating.

Which of the following statements is most accurate? An interbank offered rate: is a single reference rate. applies to borrowing periods of up to 10 years. is used as a reference rate for interest rate swaps. (I got it wrong)

is used as a reference rate for interest rate swaps. C is correct. Interbank offered rates are used as reference rates not only for floating-rate bonds but also for other debt instruments, including mortgages, derivatives such as interest rate and currency swaps, and many other financial contracts and products. A and B are incorrect because an interbank offered rate such as Libor or Euribor is a set of reference rates (not a single reference rate) for different borrowing periods of up to one year (not 10 years).

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

less 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 than when it goes up by the same amount (the convexity effect). If a 100 bp decrease in the market discount rate will cause the price of the bond to increase by 5%, then a 100 bp increase in the market discount rate will cause the price of the bond to decline by an amount less than 5%.

**************** An investor purchases a nine-year, 7% annual coupon payment bond at a price equal to par value. After the bond is purchased and before the first coupon is received, interest rates increase to 8%. The investor sells the bond after five years. Assume that interest rates remain unchanged at 8% over the five-year holding period. The capital gain/loss per 100 of par value resulting from the sale of the bond at the end of the five-year holding period is closest to a: loss of 8.45. loss of 3.31. gain of 2.75.

loss of 3.31. Step 1 : We find selling price at the end of year 5: N = 4, I/Y = 8, FV = 100, PMT = 7, CPT PV = 96.68 Ans = 100 - 96.68 = 3.32, -> Loss of 3.31 Step 2: (Question didn't ask but we can do it) Reinvestment of Coupon: N = 5, I/Y = 8, PMT = 7, PV - 0, CPT FV = 41.066 41.066 - 35 = 6.066. -> Net reinvestment Total: 96.68 + 41.066 = 137.74

*** Consider two bonds that are identical except for their coupon rates. The bond that will have the highest interest rate risk most likely has the: lowest coupon rate. coupon rate closest to its market yield. highest coupon rate.

lowest coupon rate. A is correct. A lower coupon rate means that more of the bond's value comes from repayment of face value, which occurs at the end of the bond's life. B is incorrect because the relationship between the coupon rate and the yield of a bond affect the relationship between the price and face value of the bond, not its interest rate risk. C is incorrect because a higher coupon rate means that more of the bond's value comes from coupon payments, which occur earlier in a bond's life. I personally use the "Coupon Effect" from convexity and duration.

******* Which of the following best describes a negative bond covenant? The requirement to: A.insure and maintain assets. B.comply with all laws and regulations. C.maintain a minimum interest coverage ratio.

maintain a minimum interest coverage ratio C is correct. Negative covenants enumerate what issuers are prohibited from doing. Restrictions on debt, including maintaining a minimum interest coverage ratio or a maximum debt usage ratio, are typical examples of negative covenants.

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

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 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.

*** Which of the following statements about duration is correct? A bond's: effective duration is a measure of yield duration. modified duration is a measure of curve duration. modified duration cannot be larger than its Macaulay duration (assuming a positive yield-to-maturity).

modified duration cannot be larger than its Macaulay duration (assuming a positive yield-to-maturity). C is correct. A bond's modified duration cannot be larger than its Macaulay duration assuming a positive yield-to-maturity. The formula for modified duration is ModDur = MacDur * (1+r), where r is the bond's yield-to-maturity per period. Therefore, ModDur will typically be less than MacDur. Effective duration is a measure of curve duration. Modified duration is a measure of yield duration.

Eurocommercial paper is most likely: negotiable. denominated in euros. issued on a discount basis.

negotiable. A is correct. Commercial paper, whether US commercial paper or Eurocommercial paper, is negotiable—that is, investors can buy and sell commercial paper on secondary markets. B is incorrect because Eurocommercial paper can be denominated in any currency. C is incorrect because Eurocommercial paper may be issued on an interest-bearing (or yield) basis or a discount basis.

A bond issued by a local government authority, typically without an explicit funding commitment from the national government, is most likely classified as a: sovereign bond. quasi-government bond non-sovereign government bond.

non-sovereign government bond.

Corporate bond secondary market trading most often occurs: on a book-entry basis. on organized exchanges. prior to settlement at T + 1. (I got it wrong)

on a book-entry basis. The vast majority of corporate bonds are traded in over-the-counter (OTC) markets that use electronic trading platforms through which users submit buy and sell orders. Settlement of trades in the OTC markets occurs by means of a simultaneous exchange of bonds for cash on the books of the clearing system "on a paperless, computerized book-entry basis."

A bond market in which a communications network matches buy and sell orders initiated from various locations is best described as an: organized exchange. open market operation. over-the-counter market.

over-the-counter market. C is correct. In over-the-counter (OTC) markets, buy and sell orders are initiated from various locations and then matched through a communications network. Most bonds are traded in OTC markets. A is incorrect because on organized exchanges, buy and sell orders may come from anywhere, but the transactions must take place at the exchange according to the rules imposed by the exchange. B is incorrect because open market operations refer to central bank activities in secondary bond markets. Central banks buy and sell bonds, usually sovereign bonds issued by the national government, as a means to implement monetary policy.

*** Assuming no change in the credit risk of a bond, the presence of an embedded put option: reduces the effective duration of the bond. increases the effective duration of the bond. does not change the effective duration of the bond.

reduces the effective duration of the bond. A is correct. The presence of an embedded put option reduces the effective duration of the bond, especially when rates are rising. If interest rates are low compared with the coupon rate, the value of the put option is low and the impact of the change in the benchmark yield on the bond's price is very similar to the impact on the price of a non-putable bond. But when benchmark interest rates rise, the put option becomes more valuable to the investor. The ability to sell the bond at par value limits the price depreciation as rates rise. The presence of an embedded put option reduces the sensitivity of the bond price to changes in the benchmark yield, assuming no change in credit risk.

Quasi-governmental bonds are most likely: issued by a national government in a foreign currency. issued by a governmental body below the national level. repaid from cash flows generated by the issuer or from the project being financed.

repaid from cash flows generated by the issuer or from the project being financed.

***** For the issuer, a sinking fund arrangement is most similar to a: term maturity structure. serial maturity structure. bondholder put provision. (I got it wrong, silly mistake) ---------------------------------------- When issuing debt, a company may use a sinking fund arrangement as a means of reducing: credit risk. inflation risk. interest rate risk.

serial maturity structure. With a serial maturity structure, a stated number of bonds mature and are paid off on a pre-determined schedule before final maturity. With a sinking fund arrangement, the issuer is required to set aside funds over time to retire the bond issue. Both result in a pre-determined portion of the issue being paid off according to a pre-determined schedule. --------------------------------------------------- credit risk.

In primary bond markets, the method of allowing certain authorized issuers to offer additional bonds to the general public by preparing a single, all-encompassing offering circular is most likely known as a(n): private placement. shelf registration. underwritten offering.

shelf registration. B is correct. Under a shelf registration, the issuer prepares a single, all-encompassing offering circular that describes a range of future bond issuances, all under the same document. This master prospectus can be in place for years before it is replaced or updated, and it can be used to cover multiple bond issuances in the meantime. A is incorrect because a private placement is a non-underwritten, unregistered offering of bonds that are sold only to an investor or a small group of investors. C is incorrect because an underwritten offering guarantees the sale of the bond issue at an offering price that is negotiated with the issuer.

******* When classified by type of issuer, asset-backed securities are part of the: corporate sector. structured finance sector. government and government-related sector.

structured finance sector B is correct. Asset-backed securities are securitized debt instruments created by securitization, a process that involves transferring ownership of assets from the original owners to a special legal entity. The special legal entity then issues securities backed by the transferred assets. The assets' cash flows are used to pay interest and repay the principal owed to the holders of the securities. Assets that are typically used to create securitized debt instruments include loans (such as mortgage loans) and receivables (such as credit card receivables). The structured finance sector includes such securitized debt instruments (also called asset-backed securities).

A 10-year bond was issued four years ago. The bond is denominated in US dollars, offers a coupon rate of 10% with interest paid semi-annually, and is currently priced at 102% of par. The bond's: tenor is six years. nominal rate is 5%. redemption value is 102% of the par value.

tenor is six years. A is correct. The tenor of the bond is the time remaining until the bond's maturity date. Although the bond had a maturity of ten years at issuance (original maturity), it was issued four years ago. Thus, there are six years remaining until the maturity date. B is incorrect because the nominal rate is the coupon rate (i.e., the interest rate that the issuer agrees to pay each year until the maturity date). Although interest is paid semi-annually, the nominal rate is 10%, not 5%. C is incorrect because it is the bond's price, not its redemption value (also called principal amount, principal value, par value, face value, nominal value, or maturity value), that is equal to 102% of the par value.

*** Matrix pricing allows investors to estimate market discount rates and prices for bonds: with different coupon rates. that are not actively traded. with different credit quality. -------- *** When underwriting new corporate bonds, matrix pricing is used to get an estimate of the: required yield spread over the benchmark rate. market discount rate of other comparable corporate bonds. yield-to-maturity on a government bond having a similar time-to-maturity.

that are not actively traded. 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). --------- required yield spread over the benchmark rate. 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 are used to estimate the required yield spread of a new bond.

***** The repo margin on a repurchase agreement is most likely to be lower when: the underlying collateral is in short supply. the maturity of the repurchase agreement is long. the credit risk associated with the underlying collateral is high. ------------------------------------------ In a repurchase agreement, the repo margin will be lower the: higher the supply of the collateral. higher the quality of the collateral. lower the demand for the collateral.

the underlying collateral is in short supply. A is correct. The repo margin (the difference between the market value of the underlying collateral and the value of the loan) is a function of the supply and demand conditions of the collateral. The repo margin is typically lower if the underlying collateral is in short supply or if there is a high demand for it. B and C are incorrect because the repo margin is usually higher (not lower) when the maturity of the repurchase agreement is long and when the credit risk associated with the underlying collateral is high. --------------------------------------------------------- higher the quality of the collateral.

A characteristic of negotiable certificates of deposit is: they are mostly available in small denominations. they can be sold in the open market prior to maturity. a penalty is imposed if the depositor withdraws funds prior to maturity.

they can be sold in the open market prior to maturity. A negotiable certificate of deposit (CD) allows any depositor (initial or subsequent) to sell the CD in the open market prior to maturity. A is incorrect because negotiable CDs are mostly available in large (not small) denominations. Large-denomination negotiable CDs are an important source of wholesale funds for banks, whereas small-denomination CDs are not. C is incorrect because a penalty is imposed if the depositor withdraws funds prior to maturity for non-negotiable (instead of negotiable) CDs.

******** In the secondary market for corporate bonds, settlement typically occurs: the day after the trade. on the day of the trade. two or more days after the trade. (I got it wrong)

two or more days after the trade. C is correct. In secondary markets, corporate bonds usually settle on a T + 2 or T + 3 basis—that is, two to three days after the trade. Government and quasi-government bonds settle in cash (on the day of the trade) or on a T + 1 basis.

*** A two-year spot rate of 5% is most likely the: yield to maturity on a zero-coupon bond maturing at the end of Year 2. coupon rate in Year 2 on a coupon-paying bond maturing at the end of Year 4. yield to maturity on a coupon-paying bond maturing at the end of Year 2. [I got it wrong]

yield to maturity on a zero-coupon bond maturing at the end of Year 2. A is correct. A spot rate is defined as the yield to maturity on a zero-coupon bond maturing at the date of that cash flow. B is incorrect because the spot rate is the yield to maturity on a zero-coupon bond maturing at that point in time and not the coupon rate on a coupon-paying bond. C is incorrect because the spot rate is the yield to maturity on a zero-coupon bond maturing at that point in time and not the yield to maturity on a coupon-paying bond.