FIN 402 Exam 1
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 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.
In the event of default, the recovery rate of which of the following bonds would most likely be the highest? A First mortgage debt B Senior unsecured debt C Junior subordinate debt
A is correct. First mortgage debt is senior secured debt and has the highest priority of claims. First mortgage debt also has the highest expected recovery rate. First mortgage debt refers to the pledge of specific property. Neither senior unsecured nor junior subordinate debt has any claims on specific assets.
During bankruptcy proceedings of a firm, the priority of claims was not strictly adhered to. Which of the following is the least likely explanation for this outcome? A Senior creditors compromised. B The value of secured assets was less than the amount of the claims. C A judge's order resulted in actual claims not adhering to strict priority of claims
B is correct. Whether or not secured assets are sufficient for the claims against them does not influence priority of claims. Any deficiency between pledged assets and the claims against them becomes senior unsecured debt and still adheres to the guidelines of priority of claims
For the issuer, a sinking fund arrangement is most similar to a: A term maturity structure. B serial maturity structure. C bondholder put provision
B is correct. 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
Loss severity is best described as the: A default probability multiplied by the loss given default. B portion of a bond's value recovered by bondholders in the event of default. C portion of a bond's value, including unpaid interest, an investor loses in the event of default.
C is correct. Loss severity is the portion of a bond's value (including unpaid interest) an investor loses in the event of default.
The risk that the price at which investors can actually transact differs from the quoted price in the market is called: A spread risk. B credit migration risk. C market liquidity risk
C is correct. Market liquidity risk is the risk that the price at which investors can actually transact—buying or selling—may differ from the price indicated in the market.
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 is correct. A put provision provides bondholders the right to sell the bond back to the issuer at a predetermined price prior to the bond's maturity date. B is incorrect because a make-whole call provision is a form of call provision; i.e., a provision that provides the issuer the right to redeem all or part of the bond before its maturity date. A make-whole call provision requires the issuer to make a lump sum payment to the bondholders based on the present value of the future coupon payments and principal repayments not paid because of the bond being redeemed early by the issuer. C is incorrect because an original issue discount provision is a tax provision relating to bonds issued at a discount to par value. The original issue discount tax provision typically requires the bondholders to include a prorated portion of the original issue discount (i.e., the difference between the par value and the original issue price) in their tax-able income every tax year until the bond's maturity date.
Bond Price Coupon Time-to-Maturity A 101.886 5% 2 years B 100 6% 2 years C 97.327 5% 3 Years Which bond offers the lowest yield-to-maturity? A Bond A B Bond B C Bond C
A is correct. Bond A offers the lowest yield-to-maturity. When a bond is priced at a premium above par value the yield-to-maturity (YTM), or market discount rate is less than the coupon rate. Bond A is priced at a premium, so its YTM is below its 5% coupon rate. Bond B is priced at par value so its YTM is equal to its 6% coupon rate. Bond C is priced at a discount below par value, so its YTM is above its 5% coupon rate
Bond Coupon Rate Maturity A 6% 10 years B 6% 5 years C 8% 5 years Which bond will most likely experience the greatest percentage change in price if the market discount rates for all three bonds increase by 100 basis points? A Bond A B Bond B C Bond C
A is correct. Bond A will likely experience the greatest percent 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 both offer the same lower coupon rate of 6%; however, Bond A has a longer time-to-maturity than Bond B. Therefore, Bond A will likely experience the greater percentage change in price if the market discount rates for all three bonds increase by 100 basis points.
The variability of the coupon rate on a Libor-based floating-rate bond is most likely due to: A periodic resets of the reference rate. B market-based reassessments of the issuer's creditworthiness. C changing estimates by the Libor administrator of borrowing capacity
A is correct. Changes in the coupon rate of interest on a floating-rate bond that uses a Libor reference rate are due to changes in the reference rate (for example, 90-day Libor), which resets periodically. "Therefore, the coupon rate adjusts to the level of market interest rates (plus the spread) each time the reference rate is reset."
The risk that a bond's creditworthiness declines is best described by: A credit migration risk. B market liquidity risk. C spread widening risk
A is correct. Credit migration risk or downgrade risk refers to the risk that a bond issuer's creditworthiness may deteriorate or migrate lower. The result is that investors view the risk of default to be higher, causing the spread on the issuer's bonds to widen
A bond issued internationally, outside the jurisdiction of the country in whose currency the bond is denominated, is best described as a: A Eurobond. B foreign bond. C municipal bond
A is correct. Eurobonds are issued internationally, outside the jurisdiction of any single country. B is incorrect because foreign bonds are considered inter-national 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.
Relative to domestic and foreign bonds, Eurobonds are most likely to be A bearer bonds. B registered bonds. C subject to greater regulation.
A is correct. Eurobonds are typically issued as bearer bonds, i.e., bonds for which the trustee does not keep records of ownership. In contrast, domes-tic and foreign bonds are typically registered bonds for which ownership is recorded by either name or serial number.
An investment bank that underwrites a bond issue most likely: A buys and resells the newly issued bonds to investors or dealers. B acts as a broker and receives a commission for selling the bonds to investors. C incurs less risk associated with selling the bonds than in a best efforts offering
A is correct. In an underwritten offering (also called firm commitment offer-ing), the investment bank (called the underwriter) guarantees the sale of the bond issue at an offering price that is negotiated with the issuer. Thus, the underwriter takes the risk of buying the newly issued bonds from the issuer, and then reselling them to investors or to dealers who then sell them to investors. B and C are incorrect because the bond issuing mechanism where an investment bank acts as a broker and receives a commission for selling the bonds to investors, and incurs less risk associated with selling the bonds, is a best efforts offering (not an underwritten offering).
In major developed bond markets, newly issued sovereign bonds are most often sold to the public via a(n): A auction. B private placement. C best efforts offering.
A is correct. In major developed bond markets, newly issued sovereign bonds are sold to the public via an auction. B and C are incorrect because sovereign bonds are rarely issued via private placements or best effort offerings.
Holding all other factors constant, the most likely effect of low demand and heavy new issue supply on bond yield spreads is that yield spreads will: A widen. B tighten. C not be affected.
A is correct. Low demand implies wider yield spreads, while heavy supply will widen spreads even further
The process of moving credit ratings of different issues up or down from the issuer rating in response to different payment priorities is best described as: A notching. B structural subordination. C cross-default provisions.
A is correct. Notching is the process for moving ratings up or down relative to the issuer rating when rating agencies consider secondary factors, such as priority of claims in the event of a default and the potential loss severity
Which of the following describes privately placed bonds? A They are non-underwritten and unregistered. B They usually have active secondary markets. C They are less customized than publicly offered bonds.
A is correct. Private placements are typically non-underwritten, unregistered bond offerings that are sold only to a single investor or a small group of investors.
The repo margin is: A negotiated between counter parties. B established independently of market-related conditions. C structured on an agreement assuming equal credit risks to all counter parties
A is correct. Repo margins vary by transaction and are negotiated bilaterally between the counter parties.
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: A 95.00. B 95.11. C 105.15.
A is correct. The bond price is closest to 95.00. The bond has six semiannual periods. Half of the annual coupon is paid in each period with the required rate of return also being halved. The price is determined in the following manner
The flat price for Bond G on the settlement date of 16 June 2014 is closest to: A 102.18. B 103.10. C 104.02.
A is correct. The flat price of 102.18 is determined by subtracting the accrued interest (from question 20) from the full price (from question 19). PVFlat = PVFull - Accrued Interest PVFlat = 103.10 - 0.92 = 102.18
The repo margin on a repurchase agreement is most likely to be lower when: A the underlying collateral is in short supply. B the maturity of the repurchase agreement is long. C the credit risk associated with the underlying collateral is high
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
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: A tenor is six years. B nominal rate is 5%. C redemption value is 102% of the par value.
A is correct. The tenor of the bond is the time remaining until the bond's matu-rity date. Although the bond had a maturity of 10 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.
A five-year bond has the following cash flows: A bullet bond. B fully amortized bond. C partially amortized bond.
B is correct. A bond that is fully amortized is characterized by a fixed periodic payment schedule that reduces the bond's outstanding principal amount to zero by the maturity date. The stream of £230.97 payments reflects the cash flows of a fully amortized bond with a coupon rate of 5% and annual interest payments.
Which of the following provisions is a benefit to the issuer A Put provision B Call provision C Conversion provision
B is correct. A call provision (callable bond) gives the issuer the right to redeem all or part of the bond before the specified maturity date. If market interest rates decline or the issuer's credit quality improves, the issuer of a callable bond can redeem it and replace it by a cheaper bond. Thus, the call provision is bene-ficial to the issuer. A is incorrect because a put provision (putable bond) is beneficial to the bond-holders. If interest rates rise, thus lowering the bond's price, the bondholders have the right to sell the bond back to the issuer at a predetermined price on specified dates. C is incorrect because a conversion provision (convertible bond) is beneficial to the bondholders. If the issuing company's share price increases, the bondholders have the right to exchange the bond for a specified number of common shares in the issuing company.
A repurchase agreement is most comparable to a(n): A interbank deposit. B collateralized loan. C negotiable certificate of deposit
B is correct. A repurchase agreement (repo) can be viewed as a collateralized loan where the security sold and subsequently repurchased represents the col-lateral 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
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: A the grey market. B a shelf registration. C a private placement.
B is correct. A shelf registration allows certain authorized issuers to offer additional bonds to the general public without having to prepare a new and separate offering circular. The issuer can offer multiple bond issuances under the same master prospectus, and only has to prepare a short document when additional bonds are issued. A is incorrect because the grey market is a forward market for bonds about to be issued. C is incorrect because a private placement is a non-underwritten, unregistered offering of bonds that are not sold to the general public but directly to an investor or a small group of investors.
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.
B is correct. Affirmative (or positive) covenants enumerate what issuers are required to do and are typically administrative in nature. A common affirmative covenant describes what the issuer intends to do with the proceeds from the bond issue. A and C are incorrect because imposing a limit on the issuer's leverage ratio or on the percentage of the issuer's gross assets that can be sold are negative covenants. Negative covenants prevent the issuer from taking actions that could reduce its ability to make interest payments and repay the principal.
When classified by type of issuer, asset-backed securities are part of the: A corporate sector. B structured finance sector. C government and government-related sector
B is correct. Asset-backed securities (ABS) 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).
Bond Price Coupon Time-to-Maturity A 101.886 5% 2 years B 100 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 basis points? A Bond A B Bond B C Bond C
B is correct. Bond B will most likely experience the smallest percent change in price if market discount rates increase by 100 basis points. A higher-coupon bond has a smaller percentage price change than a lower-coupon bond when their market discount rates change by the same amount (the coupon effect). Also, a shorter-term bond generally has a smaller percentage price change than a longer-term bond when their market discount rates change by the same amount (the maturity effect). Bond B will experience a smaller percent change in price than Bond A because of the coupon effect. Bond B will also experience a smaller percent change in price than Bond C because of the coupon effect and the maturity effect.
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 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.
Matrix pricing allows investors to estimate market discount rates and prices for bonds: A with different coupon rates. B that are not actively traded. C with different credit quality
B is correct. For bonds not actively traded or not yet issued, matrix pricing is a price estimation process that uses market discount rates based on the quoted prices of similar bonds (similar times-to-maturity, coupon rates, and credit quality)
Bond Coupon Rate Maturity A 6% 10 years B 6% 5 years C 8% 5 years Relative to Bond C, for a 200 basis point decrease in the required rate of return, Bond B will most likely exhibit a(n): A equal percentage price change. B greater percentage price change. C smaller percentage price change
B is correct. Generally, for two bonds with the same time-to-maturity, a lower coupon bond will experience a greater percentage price change than a higher coupon bond when their market discount rates change by the same amount. Bond B and Bond C have the same time-to-maturity (5 years); however, Bond B offers a lower coupon rate. Therefore, Bond B will likely experience a greater percentage change in price in comparison to Bond C
The following information is from the annual report of Adidas AG for December 2010: ● Depreciation and amortization: €249 million ● Total assets: €10,618 million ● Total debt: €1,613 million ● Shareholders' equity: €4,616 million The debt/capital ratio of Adidas AG is closest to: A 15.19%. B 25.90%. C 34.94%
B is correct. Total debt is €1,613 million with Total capital = Total debt + Shareholders' equity = €1,613 + 4,616 = €6,229 million. The Debt/Capital ratio = 1,613/6,229 = 25.90%
Compared with developed markets bonds, emerging markets bonds most likely: A offer lower yields. B exhibit higher risk. C benefit from lower growth prospects
B is correct. 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 markets bonds. A is incorrect because emerging markets bonds typically offer higher (not lower) yields than developed markets bonds to compensate investors for the higher risk. C is incorrect because emerging markets bonds usually benefit from higher (not lower) growth prospects than developed markets bonds.
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.
B is correct. Prohibiting the issuer from investing in risky projects restricts the issuer's potential business decisions. These restrictions are referred to as nega-tive bond covenants. A and C are incorrect because paying taxes as they come due and maintaining the current lines of business are positive covenants.
Which of the following statements related to secondary bond markets is most accurate? A Newly issued corporate bonds are issued in secondary bond markets. B Secondary bond markets are where bonds are traded between investors. C The major participants in secondary bond markets globally are retail investors
B is correct. Secondary bond markets are where bonds are traded between investors. A is incorrect because newly issued bonds (whether from corporate issuers or other types of issuers) are issued in primary (not secondary) bond markets. C is incorrect because the major participants in secondary bond markets globally are large institutional investors and central banks (not retail investors).
A portfolio manager is considering the purchase of a bond with a 5.5% coupon rate that pays interest annually and matures in three years. If the required rate of return on the bond is 5%, the price of the bond per 100 of par value is closest to: A 98.65. B 101.36. C 106.43.
B is correct. The bond price is closest to 101.36. The price is determined in the following manner
A bond offers an annual coupon rate of 5%, with interest paid semiannually. The bond matures in seven years. At a market discount rate of 3%, the price of this bond per 100 of par value is closest to: A 106.60. B 112.54. C 143.90
B is correct. The bond price is closest to 112.54.The formula for calculating this bond price is
A bond offers an annual coupon rate of 4%, with interest paid semiannually. The bond matures in two years. At a market discount rate of 6%, the price of this bond per 100 of par value is closest to: A 93.07. B 96.28. C 96.33
B is correct. The bond price is closest to 96.28. The formula for calculating this bond price is:
Suppose a bond's price is expected to increase by 5% if its market discount rate decreases by 100 basis points. If the bond's market discount rate increases by 100 basis points, the bond price is most likely to change by: A 5%. B less than 5%. C more than 5%
B is correct. The bond price is most likely to change by less than 5%. The relationship between bond prices and market discount rate is not linear. The percentage price change is greater in absolute value when the market discount rate goes down than when it goes up by the same amount (the convexity effect). If a 100 basis point decrease in the market discount rate will cause the price of the bond to increase by 5%, then a 100 basis point increase in the market discount rate will cause the price of the bond to decline by an amount less than 5%
Bond G, described in the exhibit below, is sold for settlement on 16 June 2014. Annual Coupon 5% Coupon Payment Frequency semiannual Interest Payment Dates 10 April and 10 October Maturity Date 10 October 2016 Day Count Convention 30/360 Annual Yield-to-Maturity 4% The full price that Bond G will settle at on 16 June 2014 is closest to: A 102.36. B 103.10 C103.65
B is correct. The bond's full price is 103.10. The price is determined in the following manner: As of the beginning of the coupon period on 10 April 2014, there are 2.5 years (5 semiannual periods) to maturity. These five semiannual periods occur on 10 October 2014, 10 April 2015, 10 October 2015, 10 April 2016 and 10 October 2016.
The distinction between investment grade debt and non-investment grade debt is best described by differences in: A tax status. B credit quality. C maturity dates.
B is correct. The distinction between investment grade and non-investment grade debt relates to differences in credit quality, not tax status or maturity dates. Debt markets are classified based on the issuer's creditworthiness as judged by the credit ratings agencies. Ratings of Baa3 or above by Moody's Investors Service or BBB-or above by Standard & Poor's and Fitch Ratings are considered investment grade, whereas ratings below these levels are referred to as non-investment grade (also called high yield, speculative, or junk).
The legal contract that describes the form of the bond, the obligations of the issuer, and the rights of the bondholders can be best described as a bond's: A covenant. B indenture. C debenture.
B is correct. The indenture, also referred to as trust deed, is the legal contract that describes the form of the bond, the obligations of the issuer, and the rights of the bondholders.
Consider the following two bonds that pay interest annually: Bond. Coupon. Time-to-Maturity A. 5% 2 years B 3% 2 years
B is correct. The price difference between Bonds A and B is closest to 3.77. One method for calculating the price difference between two bonds with an identical term to maturity is to use the following formula
A zero-coupon bond matures in 15 years. At a market discount rate of 4.5% per year and assuming annual compounding, the price of the bond per 100 of par value is closest to: A 51.30. B 51.67. C 71.62.
B is correct. The price of the zero-coupon bond is closest to 51.67. The price is determined in the following manner:
The two components of credit risk are default probability and: A spread risk. B loss severity. C market liquidity risk.
B is correct. The two components of credit risk are default probability and loss severity. In the event of default, loss severity is the portion of a bond's value (including unpaid interest) an investor loses. A and C are incorrect because spread and market liquidity risk are credit-related risks, not components of credit risk
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 bullet bond. B plain vanilla bond. C fully amortized bond.
C is correct. A fully amortized bond calls for equal cash payments by the bond's issuer prior to maturity. Each fixed payment includes both an interest payment component and a principal repayment component such that the bond's out-standing principal amount is reduced to zero by the maturity date. A and B are incorrect because a bullet bond or plain vanilla bond only make interest payments prior to maturity. The entire principal repayment occurs at maturity.
Agency bonds are issued by: A local governments. B national governments. C quasi-government entities.
C is correct. Agency bonds are issued by quasi-government entities. These entities are agencies and organizations usually established by national governments to perform various functions for them. A and B are incorrect because local and national governments issue non-sovereign and sovereign bonds, respectively
Which factor is associated with a more favorable quality sovereign bond credit rating? A Issued in local currency, only B Strong domestic savings base, only C Issued in local currency of country with strong domestic savings base
C is correct. Bonds issued in the sovereign's currency and a strong domes-tic 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.
In most countries, the bond market sector with the smallest amount of bonds outstanding is most likely the: A government sector. B financial corporate sector. C non-financial corporate sector
C is correct. In most countries, the largest issuers of bonds are the national and local governments as well as financial institutions. Thus, the bond market sector with the smallest amount of bonds outstanding is the non-financial corporate sector
A bond market in which a communications network matches buy and sell orders initiated from various locations is best described as an: A organized exchange. B open market operation. C 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.
Credit spreads are most likely to widen: A in a strengthening economy. B as the credit cycle improves. C in periods of heavy new issue supply and low borrower demand.
C is correct. In periods of heavy new issue supply, credit spreads will widen if demand is insufficient
A liquid secondary bond market allows an investor to sell a bond at: A the desired price. B a price at least equal to the purchase price. C 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.
Bond G, described in the exhibit below, is sold for settlement on 16 June 2014. Annual Coupon 5% Coupon Payment Frequency semiannual Interest Payment Dates 10 April and 10 October Maturity Date 10 October 2016 Day Count Convention 30/360 Annual Yield-to-Maturity 4% The accrued interest per 100 of par value for Bond G on the settlement date of 16 June 2014 is closest to: A 0.46. B 0.73. C 0.92.
C is correct. The accrued interest per 100 of par value is closest to 0.92. The accrued interest is determined in the following manner: The accrued interest period is identified as 66/180. The number of days between 10 April 2014 and 16 June 2014 is 66 days based on the 30/360 day count convention. (This is 20 days remaining in April + 30 days in May + 16 days in June = 66 days total). The number of days between coupon periods is assumed to be 180 days using the 30/360 day convention Accrued Interest = 1/T * PMT
A bond with two years remaining until maturity offers a 3% coupon rate with interest paid annually. At a market discount rate of 4%, the price of this bond per 100 of par value is closest to: A 95.34. B 98.00. C 98.11
C is correct. The bond price is closest to 98.11. The formula for calculating the price of this bond is
A company has issued a floating-rate note with a coupon rate equal to the three-month Libor + 65 basis points. Interest payments are made quarterly on 31 March, 30 June, 30 September, and 31 December. On 31 March and 30 June, the three-month Libor is 1.55% and 1.35%, respectively. The coupon rate for the interest payment made on 30 June is: A 2.00%. B 2.10%. C 2.20%.
C is correct. The coupon rate that applies to the interest payment due on 30 June is based on the three-month Libor rate prevailing on 31 March. Thus, the coupon rate is 1.55% + 0.65% = 2.20%
A senior unsecured credit instrument holds a higher priority of claims than one ranked as: A mortgage debt. B second lien loan. C senior subordinated
C is correct. The highest-ranked unsecured debt is senior unsecured debt. Lower-ranked debt includes senior subordinated debt. A and B are incorrect because mortgage debt and second lien loans are secured and higher ranked
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.
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 dis-count tax provision does not require any tax deduction in the year the bond is purchased or afterwards.
In order to analyze the collateral of a company a credit analyst should assess the: A cash flows of the company. B soundness of management's strategy. C value of the company's assets in relation to the level of debt
C is correct. The value of assets in relation to the level of debt is important to assess the collateral of the company; that is, the quality and value of the assets that support the debt levels of the company
