Chapter 08 - Fixed-Income Securities - Analysis

Dirk is considering purchasing a 6-year bond that is selling for $1,150. What is the YTM for this bond if it has a 9% coupon, paid semiannually? A)5.99%. B)5.95%. C)5.91%. D)5.87%.

A)5.99%. RationalePV -$1,150.00N 12Pmt $45 FV $1,000.00i 2.994%x 2 = 5.99%

Holly bought a 7-year bond, with a 3% coupon paid semi annually. It was priced to yield 3% when she bought it. What is the effective duration assuming a 100-basis point change in interest rates? A)6.2775. B)6.0561. C)5.9827. D)5.7598.

A)6.2775. RationaleThe calculated YTM = 3% since the bond was purchased at par. FV $1,000.00 $1,000.00 $1,000.00 N 14 14 14 i 1.50% 2.00% 1.00% Pmt $15.00 $15.00 $15.00 PV $1,000.00 $939.47 $1,065.02

Brandy is considering purchasing an 8-year bond that is selling for $700. What is the current yield for this bond if it has a 6% coupon, paid semiannually? A)8.57%. B)9.32%. C)10.17%. D)11.92%.

A)8.57%. Rationale $60/$700 = 8.57%

The Anderson bond is a 5% coupon bond with semiannual coupon payments that matures in 10 years. If the YTM for this bond is 4%, what is the value of the bond? A)$1,081.11. B)$1,081.76. C)$1,124.35. D)$1,125.03.

B)$1,081.76. RationaleFV $1,000.00N 20i 2.0%Pmt $25.00PV $1,081.76

The Ignite bond is a 20-year zero-coupon bond. If the YTM for this bond is 6%, what is the value of the bond? Assume semiannual compounding. A)$311.80. B)$306.56. C)$302.15. D)$293.10.

B)$306.56. Rationale FV $1,000.00 N 40i 3.00%P mt $0.00 PV $306.56

Anderson bought a bond with a modified duration of 11.20. By approximately what percentage will the bond price change assuming interest rates increase by 90 basis points? A)-11.20%. B)-10.08%. C)+10.08%. D)+11.20%.

B)-10.08%. Rationale -11.20 x 0.0090 x 100 = -10.08%Since the yield has increased, the price of the bond will fall by 10.08%.

Laramie bought a 20-year zero-coupon bond for $672.93. Using the formula for modified duration, approximately what percentage will the bond price change assuming interest rates increase by 120 basis points? A)-24.00%. B)-23.53%. C)+23.53%. D)+24.00%.

B)-23.53%. Rationale

Jack is considering purchasing a 6-year bond that is selling for $1,150. The bond can be called in 3 years at 104. What is the YTC for this bond if it has a 9% coupon, paid semiannually? A)4.63%. B)4.82%. C)4.79%. D)5.99%.

B)4.82%. Rationale PV -$1,150.00N 6FV $1,040.00Pmt $45 i 2.412x 2 = 4.82

James is considering purchasing an 11-year bond that is selling for $1,250. What is the current yield for this bond if it has a 6.5% coupon, paid semiannually? A)6.5%. B)5.2%. C)4.3%. D)3.7%.

B)5.2%. Rationale$65/$1250 = 5.2%

What is the duration of a 10-year bond with a coupon rate of 6%, paid annually, and a yield to maturity of 11%? A)6.89. B)7.32. C)8.11. D)10.00.

B)7.32. Rationale

Based on Malkiel's theorems, bond prices move _____ to bond yields and for a given change in yield, _______ term bond price changes are greater than changes for _______ term bond prices. A)Directly; longer; shorter. B)Inversely; longer; shorter. C)Directly; shorter; longer. D)Inversely; shorter; longer.

B)Inversely; longer; shorter. Rationale Bond prices move inversely with bond yields.For a given change in yield, longer-term bond price changes are greater than changes for shorter-term bond prices.

Caroline is investing her funds for the next five years, when she will need the money for one of her goals. She is considering two high quality bonds: an 8-year bond with a duration of 5 years and a 5-year zero coupon bond. Which bonds should she use if she wants to attempt to immunize the portfolio and minimize reinvestment risk? A)She should pick the 8-year bond because the duration is closest to her time horizon. B)She should pick the 5-year bond because the bond will be fully immunized if held to maturity. C)She should put half in each bond to diversify. D)She should put 3/5ths in the 8-year bond and 2/5ths in the 5-year bond.

B)She should pick the 5-year bond because the bond will be fully immunized if held to maturity. Rationale Caroline wants to immunize her portfolio, which means that the duration of the portfolio should equal the time horizon of five years. The zero-coupon bond provides the easiest way to immunize the portfolio, not only initially, but until maturity.

A coupon bond that pays interest semi-annually has a par value of $1,000, matures in 7 years and has a yield to maturity of 7.5%. If the annual coupon rate is 9%, what is the approximate value of the bond today? A)$856. B)$1,000. C)$1,081. D)$1,083.

C)$1,081. Rationale To adjust for semi-annual compounding, the number of years is multiplied by 2, and the YTM and coupon payment are divided by 2.N = 14i = 3.75PMT = $45FV = $1,000PV = $1,080.55

The Echo bond is a 6% coupon bond with semiannual coupon payments that matures in 15 years. If the YTM for this bond is 4%, what is the value of the bond? A)$1,272.92. B)$1,271.26. C)$1,223.96. D)$1,222.37.

C)$1,223.96. Rationale FV $1,000.00N 30i 2.00%Pmt $30.00PV $1,223.96

The Gecko bond is a 10% coupon bond with semiannual coupon payments that matures in 20 years. If the YTM for this bond is 4%, what is the value of the bond? A)$1,742.80. B)$1,815.42. C)$1,820.66. D)$1,893.49.

C)$1,820.66. Rationale FV $1,000.00N 40i 2.00%Pmt $50.00PV $1,820.66

Linda just purchased a Louisiana general obligation bond with a yield of 3%. She is in the 25% federal bracket and 4% state bracket. If Linda lives in Louisiana, what is the equivalent yield on a corporate bond? A)3%. B)4%. C)4.23%. D)10.34%.

C)4.23%. Rationale Corporate bonds are subject to federal and state income tax. Treasury bonds are subject to federal income tax only.Municipal bonds are not subject to federal income tax, but are subject to state income tax if they are not issued by the taxpayer's state of residence.3% / (1 - 0.29) = 4.23%

Carla is considering purchasing a 35-year bond that is selling for $500. What is the YTM for this bond if it has a 2% coupon, paid semiannually? A)5.00%. B)5.03%. C)5.06%.

C)5.06%. Rationale PV -$500.00N 70Pmt $10 FV $1,000.00i 2.532%x2 = 5.06%

Sam has a $3 million fixed-income portfolio that consists of Bond A, Bond B, Bond C, and Bond D. The bonds have durations of 2, 3, 8, and 10, respectively. If Sam has 20% invested in Bond A, 30% in Bond B, and 25% invested in each of the other two bonds, what is the duration for the portfolio? Assume that the correlation among the bonds is 0.5. A)5.50. B)5.75. C)5.80. D)6.20.

C)5.80. Rationale The duration of a portfolio of bonds is the weighted duration.0.2(2) +0.3(3) +0.25(8) + 0.25(10) = 0.4 + 0.9 + 2.0 + 2.5 = 5.8

Dr. David decides to invest $3 million in short-term fixed-income securities with an average duration of 3 years and $3 million in longer-term fixed-income securities with an average duration of 7 years. What type of strategy is Dr. David using? A)Intermarket spread strategy. B)Bullet strategy. C)Barbell strategy. D)Long-short strategy.

C)Barbell strategy. Rationale This is a classic barbell strategy with an equal portion of long and short duration bonds.

Donna is considering purchasing a bond. She is in the 30% tax bracket. Which one should she purchase if she is only concerned about YTM? A)Acme 10-year bond, paying 5% semi-annually, priced at $1,171.69 B)State Street 10-year bond, paying 2% semi-annually, priced at $897.99 C)California 10-year bond, paying 4% semi-annually, priced at $1,131.99 D)Florida general obligation 10-year bond, paying 3% semi-annually, priced at $1,071.46

C)California 10-year bond, paying 4% semi-annually, priced at $1,131.99 Rationale YTM is calculated using the current price as PV (enter as a negative number), $1,000 as the FV, the semi-annual coupon amount as PMT, and the number of years to maturity x 2 (for semi-annual) as N, then solving for i. This will calculate the semi-annual yield. Multiply by 2 to get the annual YTM.Acme is yielding 3%State Street is yielding 3.2%CA is yielding 2.5%, which equates to a 3.57% taxable rate [2.5 / (1 - 0.30) = 3.57%].FL is yielding 2.2, which equates to a 3.14% taxable rate [2.2 / (1 - 0.30) = 3.14%].

Lisa, who lives in Georgia, is in the 30% federal tax bracket and 5% state income tax bracket. Which of the following bonds that she is considering purchasing has the highest after-tax yield: A)Treasury bond paying 3.3%. B)Corporate bond paying 3.7%. C)Louisiana Municipal bond paying 2.6%. D)California Municipal bond paying 2.4%.

C)Louisiana Municipal bond paying 2.6%. Rationale Corporate bonds are subject to federal and state income tax. Treasury bonds are subject to federal income tax only.Municipal bonds are not subject to federal income tax, but are subject to state income tax if they are not issued by the taxpayer's state of residence.Treasury = 2.310%Corporate = 2.405%LA Bond = 2.470%CA Bond = 2.280%

Deke is considering purchasing a 4-year bond that is pricing such that its YTM is 3%.Which of the following is correct if this bond has a 3.6% coupon, paid semi-annually? A)The current yield < 3%. B)The current yield > 3.6%. C)The current yield is between 3% and 3.6%. D)The current yield = 3.3%.

C)The current yield is between 3% and 3.6%. Rationale For bonds selling at a premium, the relationship between the CR, YTM, and CY is: CR > CY > YTM. In this case the CY is between the YTM and CR, but it does not equal 3.3%.

Jackson owns a twenty-year zero-coupon bond priced at $551. If interest rates increase by 50 basis points, how much will the bond change? A)The price will decrease less than 5%. B)The price will increase less than 5%. C)The price will decrease between 5% and 10%. D)The price will decrease more than 10%.

C)The price will decrease between 5% and 10%. Rationale When interest rates increase, bond prices decrease. Fist, calculate the current YTM = 3.0% YTM 3.0% PV-$551.00 N40PMT -FV$1,000.00 i1.501% x 23.00% By increasing the YTM from 3% to 3.5%, the value of the bond will decrease to about $499.60, (N=40; PMT = 0; FV = 1,000; i = 3.5 / 2; solve fo PV) a drop of 9.3%.Note: The difference between the 9.3% calculated using TVM and 9.7% calculated using the formula is due to the formula producing an estimated change. The formula is very effective for estimating the impact for small changes in interest rates. The margin of error increases with larger changes in interest rates.

The Kraft bond is a 17-year zero-coupon bond. If the YTM for this bond is 3%, what is the value of the bond? Assume semiannual compounding. A)$623.17. B)$620.86. C)$605.02. D)$602.77.

D)$602.77. Rationale FV $1,000.00N 34i 1.50%Pmt $0PV $602.77

A coupon bond that pays interest annually of $100 has a par value of $1,000, matures in 5 years, and is selling today for $894.50. What is the yield to maturity on this bond? A)7.00%. B)9.00%. C)12.00%. D)13.00%.

D)13.00%. RationaleN = 5PV = (894.50)PMT = $100FV = $1,000i = 12.9999

Drake is considering purchasing a 15-year bond that is selling for $1,123. Which of the following is correct if this bond has a 2.5% coupon, paid semiannually? A)The current yield < coupon rate. B)The current yield > YTM. C)The YTM < coupon rate. D)All of the above.

D)All of the above. Rationale For bonds selling at a premium, the relationship between the coupon rate (CR), YTM, and current yield (CY) is: CR > CY > YTM.

Parker is considering purchasing a 5-year bond that is selling for $1,079. Which of the following is correct if this bond has a 5% coupon, paid semiannually? A)The coupon rate > current yield. B)The current yield > YTM. C)The YTM < current yield. D)All of the above.

D)All of the above. Rationale For bonds selling at a premium, the relationship between the coupon rate (CR), YTM, and current yield (CY) is: CR > CY > YTM. CY=4.63%, CR = 5%, YTM=3.27%

If interest rates ______, then the _______ of the bond will _______. A)Increase, par value, decrease. B)Increase, price, increase. C)Decrease, price, decrease. D)Decrease, price, increase.

D)Decrease, price, increase. Rationale This represents the basic inverse relationship between interest rates and bond prices.

Which of the following statements is correct about duration? A)The duration of a bond increases as the coupon rate increases. B)Modified duration measures the change in the value of a bond equally as well when interest rates increase as when interest rates decrease. C)Duration can exceed the maturity for a bond, if the bond has a call feature. D)Effective duration can accommodate bonds with embedded options.

D)Effective duration can accommodate bonds with embedded options. Rationale Choice a is incorrect as duration and coupon payments are inversely related.Choice b is incorrect as the pricing error will be different for increases and decreases in interest rates.Choice c is incorrect as duration cannot exceed the maturity of the bond.

Byron decides to invest $3 million in fixed-income securities by buying $300,000 worth of bonds with 10 different maturities, ranging from 1-year, 2-years, all the way up to 10-years. What type of strategy is Byron using? A)Intermarket spread strategy. B)Bullet strategy. C)Barbell strategy. D)Ladder strategy.

D)Ladder strategy. RationaleThe ladder strategy is accomplished with staggered maturities, in this case, over 10 years.

Donna is considering purchasing a 3-year bond that is selling for $1,000. Which of the following is correct if this bond has a 4% coupon, paid semiannually? A)The coupon rate > current yield. B)The current yield > YTM. C)The YTM > current yield. D)The YTM equals the coupon rate and current yield.

D)The YTM equals the coupon rate and current yield. Rationale Bond priced at par will have a YTM equal to the current yield and coupon rate.