CFA Level 1 - HW 13 Part 4

In connection with his bond valuation, an analyst determines that the spot rates for 0.5-year, 1-year, 1.5-year, 2-year, 2.5-year, and 3-year period are 3%, 3.5%, 4%, 4.5%, 5%, and 5.5%, respectively. Given these spot rates, calculate the value of a 3-year 6% semiannual coupon bond with $1,000 face value.

$1,016.04

The following information is provided concerning a $1,000 par value bond: Coupon rate8%Coupon payment datesFebruary 15 and August 15Date of settlement of purchaseMarch 15, 2018Yield-to-maturity6%Bond maturityFebruary 15, 2021 Using actual days, what is the flat price of the bond?

$1,052.82

An 8% bond makes semiannual coupon payments. There are two further coupons to be paid, and the bond matures at $100 in 273 days (there are 182 days in a coupon period). If the yield to maturity is 6%, then the full price of the bond is closest to:

$103.42.

A 7% U.S. corporate bond is priced for settlement on June 25, 2015. The bond makes semiannual coupon payments on March 11 and September 11 of each year and matures on September 11, 2026. The bond uses the 30/360 day-count convention for accrued interest. Given that stated annual yield-to-maturity is 6.3%, the flat price per 100 of par value of the bond is closest to:

$105.555

Kim Jones, CFA, considers investing in a 3-year bond with a 7% annual coupon payment and a yield-to-maturity of 4.91%. The one-year spot rate is 3%, the two-year spot rate is 4%, and the three-year spot rate is 5%. The price of the bond is closest to:

$105.70.

An investor has the opportunity to purchase a two-year, $100 par value bond with a 5.0 percent coupon that is paid annually. If the one-year spot rate is 1.0 percent and the two-year spot rate is 2.0 percent, the price of the bond will be closest to:

$106

A 7% U.S. corporate bond is priced for settlement on June 25, 2015. The bond makes semiannual coupon payments on March 11 and September 11 of each year and matures on September 11, 2026. The bond uses the 30/360 day-count convention for accrued interest. Given that stated annual yield-to-maturity is 6.3%, the full price of the bond on June 25 is closest to:

$107.5771

A portfolio manager is considering the purchase of a bond with a 13 percent annual-pay coupon that matures in 10 years. If the required rate of return is 10 percent and the bond's par value is $100, the bond price is closest to:

$119

A 7% U.S. corporate bond is priced for settlement on June 25, 2015. The bond makes semiannual coupon payments on March 11 and September 11 of each year and matures on September 11, 2026. The bond uses the 30/360 day-count convention for accrued interest. Given that stated annual yield-to-maturity is 6.3%, the accrued interest of the bond is closest to:

$2.0222

A zero-coupon bond with face value $100, matures in 25 years and has a market discount rate of 4.5 percent. Assuming semiannual compounding, the market price of the bond is closest to:

$32.87

An investor who requires a return of 10% (semiannual bond basis) will value an 8-year zero-coupon bond with a redemption value of $10,000 at a price closest to:

$4,580.

Stanley-Hayes, Inc. has five-year bonds with a face value of $1,000 and a 4.0 percent coupon paid annually. If the market discount rate is 12.0 percent, then the price of one of these bonds is closest to:

$712

An investor has the opportunity to purchase a three-year, $100 par value bond with a 5.0 percent coupon that is paid annually. If the one-year spot rate is 3.0 percent, the two-year spot rate is 5.0 percent, and the three-year spot rate is 7.0 percent, then the price of the bond will be closest to:

$95

An analyst is trying to estimate the value of a relatively illiquid 5-year, 4.5% annual-pay coupon bond. She identifies two corporate bonds that have similar credit quality: Bond A is a 3-year, 4% annual-pay bond priced at 101 per 100 of par value. Bond B is a 6-year, 6% annual-pay bond priced at 98 per 100 of par value. The price of the illiquid bond (assuming no premium for lack of liquidity) per 100 par value is closest to:

$95.78

Richard Gill, an investor, is planning to invest in a 5%, four-year corporate bond. The bond makes semiannual coupon payments, and the market discount rate is 6%.The corporate bond uses 30/360 day-count convention for accrued interest. The first coupon payment is expected in 60 days. The flat price is closest to:

$96.61.

Stankley Corporation's bonds have a face value of $1,000 and a 5.0% coupon paid semiannually; the bonds mature in two years. What is the price of the bond if the market discount rate is 6.0%?

$981.41

The 0y1y forward rate is 0.90%; the 1y1y rate is 1.12 percent; and the 2y1y rate is 3.04%. The two-year implied spot rate is closest to:

1.00%.

For a periodicity of one, the stated annual yield-to-maturity for a two-year zero-coupon bond priced at 97 per 100 of par value is closest to:

1.535%.

If the semiannual yield-to-maturity of a bond is 5%, the semiannual bond-equivalent yield is closest to:

10.0%.

A bond with 5 years' remaining term to maturity and a 10% coupon payable annually is trading at $95. The current yield is closest to:

10.5%.

Bricks and Blocks Inc., a construction company, plans to issue bonds to raise needed capital for an upcoming project. The zero rates for the following maturities are given below: MaturitiesZero rates1-year3.60%2-years4.10%3-years4.30%4-years4.70%5-years4.90% If Bricks and Blocks decides to issue a five-year 5% annual coupon bond, what is the value of a $100 face value bond on the date of issuance?

100.67

Suppose the one-year, two-year, three-year, and four-year spot rates are determined to be 1%, 2%, 3%, and 4%, respectively. What is the price of a four-year, 5% annual coupon paying bond?

104.09

The one-year spot rate is 3% and the forward rates stated with an annual periodicity of 1 for years 1, 2, and 3 one year from now are 3.82017%, 5.55162%, and 5.78901%, respectively. Using this information, calculate the price of a bond that pays an annual coupon of 7% and has a remaining term of three years.

108.1403

A bond with 12% quarterly coupon payments and a time to maturity of two years is currently priced at 101. Compute for the bond's current yield and yield-to-maturity, respectively:

11.881%; 11.434%

The following information is given: IssueYield10-year on-the-run Treasury 6% coupon6.15%10-year ABG Corporation Series J 5% coupon7.85%10-year IBN Limited 8% coupon8.00% The yield spread between IBN Limited and ABG Corporation bonds is:

15 basis points.

An investor collects the following information on U.S. zero-coupon government bonds. The yields-to-maturity are stated on a semiannual bond basis. MaturityYTMPrice (per 100 of Par)1 year1.872%98.1543 year2.058%94.0425 year2.645%87.688 The 2-year forward rate 1 year from today (or 1y2y, as the curriculum would put it) is closest to:

2.151%

Consider the following table of market yields of U.S. Treasury bonds and A-rated corporate bonds: Time to MaturityU.S. Treasury BondA-Rated Corporate BondFive years1.53%2.78%Six years1.82%?Seven years2.30%3.69% Estimate the required yield on a newly issued, six-year A-rated corporate bond.

3.14%

A 5-year, 5.0 percent, semiannual coupon corporate bond is priced at 104.967 per $100 of par value. The yield-to-maturity is 3.897% for the bond. If the periodicity is converted to quarterly, the yield-to-maturity would be closest to:

3.878%.

The one-year spot rate is 3% and the forward rates stated with an annual periodicity of 1 for years 1, 2, and 3 one year from now are 3.82017%, 5.55162%, and 5.78901%, respectively. Using this information, calculate the yield-to-maturity of a bond that pays an annual coupon of 7% and has a remaining term of three years.

4.06%

Consider the following quoted rates on four 180-day money market instruments: Money Market InstrumentQuotation BasisAssumed Number of Days in the YearQuoted RateADiscount Rate3604.15%BDiscount Rate3654.30%CAdd-On Rate3604.45%DAdd-On Rate3654.50% The bond equivalent yield for Bond A is closest to:

4.297%

Consider the following quoted rates on four 180-day money market instruments: Money Market InstrumentQuotation BasisAssumed Number of Days in the YearQuoted RateADiscount Rate3604.15%BDiscount Rate3654.30%CAdd-On Rate3604.45%DAdd-On Rate3654.50% The bond equivalent yield for Bond B is closest to:

4.39%

A zero-coupon bond matures in 10 years and a par value of 100. At a market discount rate of 8 percent and assuming annual compounding, the price of the bond is closest to:

46.32

If the semiannual bond-equivalent yield on a bond that pays semiannual coupons is 5%, the annual yield to maturity for comparison with bonds that make annual coupon payments is closest to:

5.06%.

The yield-to-maturity (YTM) of a 20-year, U.S. zero-coupon bond currently selling at $350, quoted on a semi-annual bond basis, is closest to:

5.32%

Given: PeriodYearsAnnual Yield-to-Maturity (semiannual BEY basis)PriceSpot Rate (semiannual BEY basis)10.54.00%4.0000%21.04.30%4.3000%31.54.65%1004.6606% The 6-month forward rate, one year from now is closest to:

5.3837%.

A 6-year, 5% semiannual-pay government bond is priced at 97 per 100 of par value. The annual yield-to-maturity (stated annual yield) based on quarterly compounding is closest to:

5.557%

Jeff Evans, a candidate in the CFA program, is having a hard time converting interest rates. He determines that a semiannual coupon bond has an annual yield-to-maturity of 5.74%. However, he is trying to convert this rate to an annual rate that can be directly compared to quarterly coupon-paying bonds. The correct annual rate that he should get is:

5.70%

Assume that all rates provided are effective annual rates. The 4-year spot rate equals 6.4%, and the 13-year spot rate is 6.25%. The 9-year forward rate after 4 years is closest to:

6.18%

A 365-day year bank certificate of deposit has an original price of $95 million and a face value at maturity of $100 million. If the number of days between settlement and redemption is 300, then the bond-equivalent yield is closest to:

6.4 percent.

A bond without any embedded options has a remaining life of 3 years, carries an 8% coupon rate payable annually, and has a yield-to-maturity of 7%. If the 1- and 3-year spot rates are 8.0% and 7.0% (annual basis), respectively, then the 2-year spot rate is closest to:

6.5%.

MVP Company issued a callable bond. The bond is a 7% semiannual coupon bond currently priced at 102 that has a remaining time to maturity of seven years. The bond is callable beginning the end of year 4 at 103 and can also be called at the end of years 5 and 6 at 102 and 101, respectively. What is the bond's yield-to-worst call?

6.638%

The following data is collected: Years to MaturitySpot rate (semiannual bond basis)1.05.75%2.06.25%3.07.00% Based on the above data, the 1-year implied forward rate 1 year from now is closest to:

6.75%.

Consider the following information: Bond ABond BAnnual coupon rate8%11%Coupon payment frequencySemiannuallyQuarterlyYears to maturity44Price (per 100 of par value)96.00104.00YTM9.22%9.78% The analyst believes that Bond B has a little more risk than Bond A. When yields are annualized for quarterly compounding, the compensation for the additional risk Bond B offers relative to Bond A is closest to:

66.4 bps

A zero-coupon bond with a periodicity of 12, four-year maturity, and price of 75 to a par of 100 has an annual yield-to-maturity closest to:

7.21%.

The following information is provided about a U.S. Treasury bill portfolio: Par value equal to USD 10 million 104 days from the settlement date to the maturity date Quoted at discount rate of 2.75% Assuming a 360-day year, the price of the T-bill is closest to:

9,920,555.56

The semiannual bond basis yield of a 10-year, $1,000 par, semiannual-pay bond with an 8% coupon rate that trades at $925 is closest to:

9.16%

An option-free bond has a remaining life of 3 years and carries an 8% annual coupon rate payable annually and has a yield to maturity of 9%. If the 1- and 2-year spot rates are 6.0% and 6.5% (annual basis), respectively, then the 3-year spot rate is closest to:

9.2%.

A zero-coupon bond with 2 years remaining to maturity is currently trading at $82.65. If the par value is $100, the yield-to-maturity (semiannual bond basis) is closest to:

9.8%.

To raise funding necessary for its upcoming expansion project, Notes Corporation issued bonds with a 10-year term that pay an annual coupon of 7%. Assuming the market discount rate is currently at 8%, what is the price of a $100 par value Notes Corporation bond?

93.29

The yield on a 180-day commercial paper offering is quoted at a discount rate of 4.5 percent. Assuming a 360-day convention, the value per 100 of face value is closest to:

97.75.

Consider the following table of interpolated spot rates from yields of government securities: Maturities (years)Spot Rates0.5 (180 days)3.55%13.74%1.53.89%24.04%2.54.11%34.18% Assuming that these yields are expressed with annual periodicity of two and the appropriate Z-spread is 325 bps, what is the price of a three-year bond that pays semiannual interest of 7% per annum?

98.9128

A short-term forward rate curve is plotted on the same chart as the Treasury yield curve. If the yield curve is upward sloping, then we can conclude that the forward rate curve will be:

Above the yield curve.

Which of the following statements is most likely?

All other factors constant, a bond with a lower coupon rate has higher interest rate risk and lower reinvestment risk than a bond with a higher coupon rate.

An analyst has gathered the following information on three bonds, each of which pays its coupon annually: BondCouponMaturityA5 percent10 yearsB5 percent4 yearsC7 percent4 years Which bond will most likely exhibit the greatest percentage price change if the market discount rate for all three bonds increased by 500 bps?

Bond A.

Bond A and Bond B both have the same maturity date and same market discount rate. If Bond A's coupon is higher than Bond B's coupon, then which bond, if either, will trade at a premium to the other?

Bond A.

Peter Glover, an investor, considers purchasing one of the following three bonds. Based on yield-to-maturity, which bond will he most likely purchase? Bond A: 5%, 18-year bond selling for $90. Bond B: 6%, 15-year bond selling for $100. Bond C: 6%, 3-year bond selling for $95.

Bond C

Which of the following bonds will have the highest yield-to-maturity? Current Market PriceCoupon RateTime-to-MaturityBond A$1055%4 yearsBond B$1005%5 yearsBond C$955%3 years

Bond C.

Consider the following statements: Statement 1: A money market discount rate understates the rate of return to the investor. Statement 2: A money market add-on yield accurately represents the return to the investor. Which of the following is most likely?

Both statements are correct.

Consider the following statements: Statement 1: For floating-rate bonds, a discount arises when the quoted margin is lower than the required margin. Statement 2: For fixed-rate bonds, a discount arises when the fixed-coupon rate is lower than the required return. Which of the following is most likely?

Both statements are correct.

Neptune Services Inc. plans to issue 8%, 20-year bonds in 2015 when the market interest rate is 7.8%. The company's financial consultant, Murray Wilkins, CFA, predicts that the market interest rate will decline to 5.25% by 2021. Based on the information, which of the following is the best recommended type of bonds for Neptune?

Callable bonds.

The interest rate sensitivity of a bond's price is most likely higher if:

Current market yields are relatively low.

Henry Bucker, CFA, is researching some bonds he plans to suggest to his client as part of his portfolio. He has narrowed down his options to six bonds, namely A, B, C, D, E, and F, seen in the following table. BondCoupon RateYiled to MaturityTime to Maturity (years)A0%5%3B4%5%3C9%5%3D0%5%6E4%5%6F9%5%6 The yield-to-maturity for all bonds is 5%. Which among these bonds will have its price go up the most on a percentage basis if the yield of all the bonds decreases by 15 basis points?

D

Which of the following will most likely include the accrued interest on a bond?

Dirty price.

The price-yield profile on an option-free bond is most likely:

Downward sloping and convex in shape.

Which of the following is most likely a spread on top of a standard swap rate?

I-spread

Matrix pricing is usually used to estimate the prices of:

Illiquid bonds.

An analyst is given the following effective annual rates: 3-year spot rate = 4% 5-year spot rate = 5% 4-year forward rate 3 years from today = 6% 3-year forward rate 7 years from today = 7% Which of the following is most likely regarding the 2-year forward rate 5 years from today?

It equals 5.48%.

Which of the following is most likely regarding the bond equivalent yield?

It is stated on a 365-day year and on an add-on yield basis.

Larry Wilson, an investor, analyzes available investment opportunities and observes that Bond A is trading at a premium. The coupon payment per period for the bond is $3.50, and the number of periods to maturity is four. Which of the following is the least likely inference from the given information?

Its coupon rate is less than the current yield.

The current yield of a bond is:

Lower than the yield to maturity, if the bond is trading at a discount to maturity value.

The yield-to-worst for a callable bond is the:

Lowest of the yield-to-maturity and yields-to-call, calculated using all possible call dates.

Jacob Hudson buys a bond that trades at a premium. Based on this, which of the following is a true statement?

PV of future cash inflows ﹥ its par value.

The day-count convention most commonly used for government bonds and corporate bonds, respectively, is Government bondsCorporate bondsa.Actual/actual30/actualb.30/360Actual/actualc.Actual/actual30/360

Row C

Consider the following table of fixed-income securities: SecurityTypeQuoted PriceInterest Payment Terms1Corporate Bond102.80072 (clean price)Semiannually at 5% per annum2Zero-coupon bond88.89964 (discounted price)N/A3Time DepositN/AQuarterly at 3.95% per annum All securities have a term of three years. If an investor is considering to invest in any of these securities, which of the following investments will provide him the best yield?

Security 1

The Z-spread is the:

Spread earned on a bond over the Treasury spot rate curve if it is held to maturity.

Which of the following statements incorrectly states an underlying assumption of a bond's yield-to-maturity? Statement I: The investor holds on to the bond until maturity. Statement II: The investor is able to reinvest all coupon payments received during the term of the bond at the current yield until the bond's maturity date. Statement III: The issuer is free to make all the coupon payments at any time during the life of the bond.

Statements II and III.

The interpolated spread (I-spread) measures the yield spread of a bond over the appropriate:

Swap rate.

Which of the following statements will most likely be true of the annual yield-to-maturity of the following two bonds? Bond A: 4% semiannual bond. Bond B: 4% quarterly compounding bond.

The 4% semiannual bond will have a higher annual yield-to-maturity compared to a 4% quarterly compounding bond.

Accrued interest on bonds is most accurately described as:

The amount representing the interest covering the part of the next coupon payment not earned by the buyer.

All of the following are inaccurate with respect to G-spread, except:

The benchmark for a fixed-rate bond for countries like the United States, the United Kingdom, and Japan is a government bond yield, which is used to calculate a spread over a particular government bond known as the G-spread.

If the yield spread of a bond has widened, it means that:

The bond price has declined relative to that of an equivalent Treasury bond issue.

Which of the following most closely describes an implied forward rate?

The breakeven reinvestment rate between zero-coupon bonds of differing maturities.

Which of the following factors is least likely to affect the yield spread of a bond?

The coupon rate of the bond.

The following financial information is provided by a bond issued by a firm: $1,000 face value 9% semiannual coupon rate Five-year time to maturity $970 quoted price Which of the following statements can be inferred about this bond?

The current market required rate is greater than the coupon rate of the bond.

All other factors constant, the longer a coupon-paying bond's term to maturity:

The greater its price sensitivity to changes in interest rates.

William Caldwell, an analyst, analyzed the price of the bonds available in the market. The price of 20% bonds issued by Company A was $104 on the day of issuance. On the second day of issuance of bonds, the bond price decreased to $99. Based solely on the information provided, which of the following is the most likely conclusion?

The market discount rate has increased.

A bond will most likely trade at a discount when:

The market yield is higher than its coupon rate.

Stephen Matthews, CFA, is analyzing three newly issued bonds. All of these bonds have an annual coupon rate of 7%; however, the first bond is priced at 110 per 100 par value bond using a market discount rate of 5%, the second bond is priced at par value using a market discount rate of 6%, and the third bond is priced at 97 per 100 par value bond with an appropriate market discount rate of 8%. Which among the three bonds is most likely mispriced?

The second bond

Which of the following yield measures is most likely based on actual coupon payment dates?

True yield.

The flat or clean price of a bond is the agreed bond price:

Without accrued interest.

An analyst was able to gather the following financial information concerning bonds he has been observing as part of a research report: BondCoupon RateTerm to MaturityYield-to-MaturityX5%5 years7%Y7%5 years9%Z10%5 years12% If the market discount rate decreases by 150 bps, which bond will experience the biggest rise in price?

X

The yield-to-maturity calculation assumes that coupon payments can be reinvested at the:

Yield-to-maturity.

Which of the following is most likely a spread on top of a government spot rate curve?

Z-spread

Which one of the following spreads is based on the entire benchmark spot curve?

Z-spread.

A broker offers the opportunity to buy a bond with coupon payments of $50 per year and a face value of $1,000. If the yield-to-maturity on similar bonds is 8 percent, this bond should sell at:

a discount.

A broker offers the opportunity to buy a bond with coupon payments of $90 per year and a face value of $1,000. If the yield-to-maturity on similar bonds is 8.0 percent, then this bond should sell at:

a premium.

Current yield is a crude measure of the rate of return for an investor because it neglects:

accrued interest.

James Davidson, an investor, is considering investing in Curium Energy Inc.'s bonds. The company issued the bonds two years back, and the bonds have three years remaining to maturity. Davidson's expected rate of return on the bond is 12%, the coupon rate is 9%, and the current market price of the bond is $88.79. Based on the above information, the best recommendation for James is that he should:

buy it, as it is underpriced by $4.

Evan Corporation issued 14%, 10-year bonds at par, three years ago. The current price of the bond is $119.47. Based on the information, the required rate of return would have most likely:

decreased resulting in a high present value of cash flows.

The spread relative to a benchmark on a domestic bond is least likely impacted by changes in:

domestic inflation rate.

Bond B has a 6.0 percent coupon, while Bond C has a 7.0 percent coupon. Both bonds mature in 10 years and pay annual coupon payments. Due to a severe recession, the required rate of return decreased 100 basis points for each bond. Relative to Bond C price change, the price change for Bond B price change will most likely be:

greater.

Warren Grant analyzes the yield on the following three bonds: Bond A: 8%, 10-year bond selling for $95. Bond B: 8%, 5-year bond selling for $100. Bond C: 8%, 15-year bond selling for $105. As compared to the coupon rate of the respective bond, the current yield is most likely:

higher for Bond A, as it is selling at a discount.

A bond with a face value of $1,000 has annual coupon payments of $100 and was issued 10 years ago. The bond currently sells for $1,000 and has seven years remaining to maturity. For this bond, which of the following must be 10 percent? Yield-to-maturity. Premium to par. Coupon rate.

i and iii only.

Matrix pricing allows investors to determine the price of bonds that are:

illiquid.

Oliver Harris buys a bond that trades at a discount. All else being equal, as the maturity date nears, the price of the bond will most likely:

increase.

The debt securities on the yield curve will most likely have different:

maturities.

Ryan Fraser observes that there is a convex relationship between the market discount rate and the price of a 10-year, 10% annual coupon payment bond. For the same maturity period, as compared to the percentage change in price when discount rate goes up, the percentage change in price when discount rate goes down will most likely be:

more.

Usage of spot rates will most likely result in:

no-arbitrage value.

A 9.0 percent coupon bond with a maturity of three years and a par value of 100 has a required return of 6.8 percent. Relative to its par value, the bond price will be trading at:

premium.

When an underwriter is looking to price a new issue, matrix pricing can assist in determining the:

required spread over the benchmark.

An investor considers the following two bonds. Bond A: 7%, 10-year bond selling for $100. Bond B: 7%, 5-year bond selling for $100. As compared to the yield-to-maturity (YTM) for Bond A, the YTM for Bond B is:

the same.

On March 1, 2009, Marie Johnson, CFA, is an investment manager who intends to purchase 30,000 bonds each with €100 face value for settlement today. The following information pertaining to the terms of the agreement in the bond prospectus are as follows: The bond will pay a semiannual coupon interest of 6%. The coupon interest payment dates are June 30 and December 31. A 30-/360-day count convention is to be followed. Assuming a similar bond maturing on December 31, 2013 is selling at yield-to-maturity of 7.25%, how much will Marie be paying for the bonds?

€2,879,581.47