Question #4 of 43 Question ID: 1206315As compared to an equivalent nonputable bond, a putable bond's yield should be: Study Session 14, Module 42.2, LOS 42.f Which of the following embed
Trang 1Question #1 of 43 Question ID: 1206317The indenture of a callable bond states that the bond may be called on the rst business day of any monthafter the rst call date The call option embedded in this bond is a(n):
A) European style call option.
B) American style call option.
C) Bermuda style call option.
Explanation
A bond with a Bermuda style embedded call option may be called on prespeci ed dates after the rst calldate A European style embedded call option speci es a single date on which a bond may be called With
an American style embedded call option, a bond may be called any time after its rst call date
(Study Session 14, Module 42.2, LOS 42.f)
A bond has a par value of $5,000 and a coupon rate of 8.5% payable semi-annually The bond is currentlytrading at 112.16 What is the dollar amount of the semi-annual coupon payment?
(Study Session 14, Module 42.2, LOS 42.e)
Which of the following is least likely an example of external credit enhancement?
(Study Session 14, Module 42.1, LOS 42.d)
RRReadinggg 42::: FFFixed -IIIncome SSSecurities::: Defininggg
Elements
Trang 2Question #4 of 43 Question ID: 1206315
As compared to an equivalent nonputable bond, a putable bond's yield should be:
(Study Session 14, Module 42.2, LOS 42.f)
Which of the following embedded bond options tends to bene t the borrower?
A) Interest rate cap.
(Study Session 14, Module 42.2, LOS 42.f)
Which of the following statements with regard to oating rate notes that have caps and oors is mostaccurate?
A) A cap is a disadvantage to the bondholder while a oor is a disadvantage to the issuer.
B) A cap is an advantage to the bondholder while a oor is an advantage to the issuer.
C) A oor is a disadvantage to both the issuer and the bondholder while a cap is an advantage to
both the issuer and the bondholder
Explanation
A cap limits the upside potential of the coupon rate paid on the oating rate bond and is therefore adisadvantage to the bondholder A oor limits the downside potential of the coupon rate and is therefore
a disadvantage to the bond issuer
(Study Session 14, Module 42.2, LOS 42.e)
Trang 3Question #7 of 43 Question ID: 1206312
Which of the following statements about oating-rate notes is most accurate?
A) Floating-rate notes have built-in oors, while inverse oating-rate notes have built-in caps.
B) Inverse oating-rate notes are attractive to investors who expect interest rates to rise, while
oating-rate notes are attractive to investors who expect interest rates to fall
C) The coupon payment on a oating-rate note at each reset date is typically based on LIBOR as of
that date
Explanation
The lowest possible reference rate is zero If this occurs, the coupon on a oating-rate note cannot golower than its quoted margin Hence, the quoted margin is a oor coupon for a oating-rate note Thecoupon on an inverse oater is determined by a formula such as "15% – 1.5 × reference rate." If thereference rate goes to zero, the coupon on this inverse oater can go no higher than 15%
(Study Session 14, Module 42.2, LOS 42.e)
Every six months a bond pays coupon interest equal to 3% of its par value This bond is a:
A) 6% annual coupon bond.
B) 6% semiannual coupon bond.
C) 3% semiannual coupon bond.
Explanation
The coupon rate on a bond is the percentage of its par value that it pays in interest each year The couponfrequency states how often the bond will pay interest A 6% semiannual coupon bond pays interest twiceper year with each coupon equaling half of 6%, or 3%, of par value
(Study Session 14, Module 42.1, LOS 42.a)
Securitized bonds are most likely to be issued by:
A) special purpose entities.
B) supranational entities.
C) banking institutions.
Explanation
Trang 4The issuer of a securitized bond is typically a special purpose entity (SPE), also known as a special purposevehicle (SPV) or special purpose company (SPC) An SPE is formed speci cally to purchase and administerassets that will provide the cash ows to pay interest and principal on bonds the entity issues Thesebonds are called securitized bonds.
(Study Session 14, Module 42.1, LOS 42.d)
Which of the following bond covenants is considered negative?
(Study Session 14, Module 42.1, LOS 42.c)
Features speci ed in a bond indenture least likely include the bond's:
A) coupon rate and maturity date.
B) issuer and rating.
C) par value and currency.
Explanation
Bond ratings are assigned by third-party credit rating agencies and may change during the life of a bond.Features that are speci ed in the indenture for a xed income security include its issuer, maturity date,par value, coupon rate and frequency, and currency
(Study Session 14, Module 42.1, LOS 42.b)
Which of the following statements about zero-coupon bonds is least accurate?
A) All interest is earned at maturity.
B) A zero coupon bond may sell at a premium to par when interest rates decline.
C) The lower the price, the greater the return for a given maturity.
Explanation
Trang 5Zero coupon bonds always sell below their par value, or at a discount prior to maturity The amount of thediscount may change as interest rates change, but a zero coupon bond will always be priced less than par.(Study Session 14, Module 42.1, LOS 42.a)
Which of the following is least likely a form of internal credit enhancement for a bond issue?
A) Covering the bond issue via a surety bond.
B) Structuring the asset pool such that it has an excess spread.
C) Including a tranche system to identify priority of claims.
Explanation
A surety bond is issued by a third party and hence is an external form of credit enhancement
(Study Session 14, Module 42.1, LOS 42.d)
Consider a oating rate issue that has a coupon rate that is reset on January 1 of each year The coupon rate
is de ned as one-year London Interbank O ered Rate (LIBOR) + 125 basis points and the coupons are paidsemi-annually If the one-year LIBOR is 6.5% on January 1, which of the following is the semi-annual couponpayment received by the holder of the issue in that year?
A) 3.875%.
B) 7.750%.
C) 3.250%.
Explanation
This value is computed as follows:
Semi-annual coupon = (LIBOR + 125 basis points) / 2 = 3.875%
(Study Session 14, Module 42.2, LOS 42.e)
Which of the following contains the overall rights of the bondholders?
A) Indenture.
B) Rights o ering.
C) Covenant.
Explanation
Trang 6An indenture speci es the rights of bondholders and the obligations of the issuer Covenants are speci cprovisions within the indenture A rights o ering is typically associated with an equity security.
(Study Session 14, Module 42.1, LOS 42.b)
Which of the following issues is most accurately described as a eurobond?
A) South Korean rm’s euro-denominated bonds sold to investors in the European Union.
B) Brazilian rm’s U.S dollar-denominated bonds sold to investors in Canada.
C) European Union rm’s Japanese yen-denominated bonds sold to investors in Japan.
Explanation
Eurobonds are denominated in a currency other than that of the countries in which they are issued Thename "eurobond" does not imply that a bond is sold in Europe or by a European issuer, or denominated inthe euro currency A U.S dollar-denominated bond sold to investors outside the United States is called a
"eurodollar bond."
(Study Session 14, Module 42.1, LOS 42.d)
A covenant that requires the issuer not to let the insurance coverage lapse on assets pledged as collateral is
In most countries including the United States, debenture is de ned as:
A) a short-term debt instrument.
B) a bond secured by speci c assets.
C) an unsecured bond.
Trang 7In most countries a debenture is de ned as unsecured debt
(Study Session 14, Module 42.1, LOS 42.d)
Which of the following statements regarding a sinking fund provision is most accurate?
A) It requires that the issuer retire a portion of the principal through a series of principal payments
over the life of the bond
B) It requires that the issuer set aside money based on a prede ned schedule to accumulate the
cash to retire the bonds at maturity
C) It permits the issuer to retire more than the stipulated amount if they choose.
Explanation
A sinking fund actually retires the bonds based on a schedule This can be accomplished through eitherpayment of cash or through the delivery of securities A sinking fund provision may allow the issuer toretire more than is stipulated in the indenture, but not all sinking fund provisions allow this
(Study Session 14, Module 42.2, LOS 42.e)
Which of the following is a general problem associated with external credit enhancements? External creditenhancements:
A) are subject to the credit risk of the third-party guarantor.
B) are very long-term agreements and are therefore relatively expensive.
C) are only available on a short-term basis.
Explanation
If the guarantor is downgraded, the issue itself could be subject to downgrade even if the structure isperforming as expected
(Study Session 14, Module 42.1, LOS 42.d)
To reduce the cost of long-term borrowing, a corporation with a below average credit rating could:
A) decrease credit enhancement.
B) issue commercial paper.
Trang 8C) issue securitized bonds.
Explanation
Commercial paper is only issued by corporations with top credit ratings Decreasing credit enhancementsincrease the cost of borrowing
(Study Session 14, Module 42.1, LOS 42.d)
Treasury In ation Protected Securities, which provide investors with protection against in ation by adjustingthe par value and keeping the coupon rate xed, are best described as:
(Study Session 14, Module 42.2, LOS 42.e)
Which of the following is least likely an example of external credit enhancements?
A) Letters of credit.
B) Bank guarantees.
C) Excess spread.
Explanation
Excess spread is an example of internal, not external credit enhancement
(Study Session 14, Module 42.1, LOS 42.d)
A bond initially does not make periodic payments but instead accrues them over a pre-determined periodand then pays a lump sum at the end of that period The bond subsequently makes regular periodic
payments until maturity Such a bond is best described as a:
A) step-up note.
Trang 9(Study Session 14, Module 42.2, LOS 42.e)
PRC International just completed a $234 million oating rate convertible bond o ering As stated in theindenture, the interest rate on the bond is the lesser of 90-day LIBOR or 10% The indenture also requiresPRC to retire $5.6 million per year with the option to retire as much as $10 million Which of the followingembedded options is most likely to bene t the investor? The:
A) 10% cap on the oating interest rate.
B) sinking fund provision for principal repayment.
C) conversion option on the convertible bonds.
Explanation
The conversion privilege is an option granted to the bondholder The cap bene ts the issuer A sinkingfund is not an embedded option; it is an obligation of the issuer
(Study Session 14, Module 42.2, LOS 42.f)
An analyst observes a 5-year, 10% coupon bond with semiannual payments The face value is £1,000 Howmuch is each coupon payment?
(Study Session 14, Module 42.1, LOS 42.a)
Trang 10Question #27 of 43 Question ID: 1206314
As compared to an equivalent noncallable bond, a callable bond's yield should be:
(Study Session 14, Module 42.2, LOS 42.f)
Which of the following securities is least likely classi ed as a eurobond? A bond that is denominated in:
A) U.S dollars and issued in Japan.
B) euros and issued in the United States.
C) euros and issued in Germany.
Explanation
Bonds denominated in the currency of the country or region where they are issued are domestic bonds.Eurobonds are denominated in a currency other than those of the countries in which they are sold.(Study Session 14, Module 42.1, LOS 42.d)
The coupon rate of a xed income security is stated as 90-day LIBOR plus 125 basis points This security ismost accurately described as a(n):
a coupon payment or principal amount that adjusts based on the value of a published index such as anequity market, commodity, or in ation index
(Study Session 14, Module 42.2, LOS 42.e)
Trang 11Question #30 of 43 Question ID: 1206280
Which of the following xed income securities is classi ed as a money market security?
A) Security issued 18 months ago that will mature in six months.
B) Security issued six months ago that will mature in one year.
C) Newly issued security that will mature in one year.
Explanation
Money market securities have original maturities of one year or less Fixed income securities originallyissued with maturities longer than one year are classi ed as capital market securities
(Study Session 14, Module 42.1, LOS 42.a)
A bond whose periodic payments are all equal is said to have a(n):
(Study Session 14, Module 42.2, LOS 42.e)
Restrictions on asset sales and borrowings most accurately describe:
A) negative covenants.
B) a rmative covenants.
C) neutral covenants.
Explanation
Negative covenants are restrictions on a borrower's actions A rmative covenants are actions a borrower
is required to take There is no category known as neutral covenants
(Study Session 14, Module 42.1, LOS 42.c)
Trang 12Question #33 of 43 Question ID: 1206305
Which of the following statements about U.S Treasury In ation Protection Securities (TIPS) is most accurate?
A) The coupon rate is xed for the life of the issue.
B) The in ation-adjusted principal value cannot be less than par.
C) Adjustments to principal values are made annually.
Explanation
The coupon rate is set at a xed rate determined via auction This is called the real rate The principal thatserves as the basis of the coupon payment and the maturity value is adjusted semiannually Because ofthe possibility of de ation, the adjusted principal value may be less than par (however, at maturity theTreasury redeems the bonds at the greater of the in ation-adjusted principal and the initial par value).(Study Session 14, Module 42.2, LOS 42.e)
Which of the following entities play a critical role in the ability to create a securitized bond with a highercredit rating than the corporation?
A bond is trading at a premium if its:
A) yield is greater than its coupon rate.
B) price is greater than its par value.
C) redemption value is greater than its face value.
Explanation
If a bond's price is greater than its par value, the bond is trading at a premium If a bond's yield is greaterthan its coupon rate, its price is less than par value and the bond is trading at a discount Face value andredemption value both refer to par value
(Study Session 14, Module 42.1, LOS 42.a)
Trang 13Question #36 of 43 Question ID: 1206296
Which of the following statements regarding Eurobonds is least accurate? Eurobonds are:
A) issued simultaneously to investors in many countries.
B) typically registered rather than bearer bonds.
C) issued in a currency other than the issuer’s domestic currency.
Explanation
Eurobonds are typically bearer bonds rather than registered because they are issued outside the
jurisdiction of any single country
(Study Session 14, Module 42.1, LOS 42.d)
Consider $1,000,000 par value, 10-year, 6.5% coupon bonds issued on January 1, 20X5 The market rate forsimilar bonds is currently 5.7% A sinking fund provision requires the company to redeem $100,000 of theprincipal each year Bonds called under the terms of the sinking fund provision will be redeemed at par Abondholder would:
A) prefer not to have her bonds called under the sinking fund provision.
B) prefer to have her bonds called under the sinking fund provision.
C) be indi erent between having her bonds called under the sinking fund provision or not called Explanation
With the market rate currently below the coupon rate, the bonds will be trading at a premium to par value.Thus, a bondholder would prefer not to have her bonds called under the sinking fund provision
(Study Session 14, Module 42.2, LOS 42.e)
A company desiring to issue a xed-income security has placed $10 million worth of loan receivables in aspecial purpose entity (SPE) that is independent of the issuer The credit rating agencies suggest the
company secure a third-party guarantee in order to have the security rated AAA After completing thetransfer of assets to the SPE and obtaining a letter of credit from a national bank, the company issues theAAA rated security The securities are most likely:
A) asset-backed securities.
B) global bonds.
C) commercial paper.
Explanation
Trang 14Special purpose entities relate to asset-backed securities.
(Study Session 14, Module 42.1, LOS 42.d)
An investor holds $100,000 (par value) worth of TIPS currently trading at par The coupon rate of 4% is paidsemiannually, and the annual in ation rate is 2.5% What coupon payment will the investor receive at theend of the rst six months?
A) $2,025.
B) $2,050.
C) $2,000.
Explanation
This coupon payment is computed as follows:
(Study Session 14, Module 42.2, LOS 42.e)
Which of the following statements about the call feature of a bond is most accurate? An embedded calloption:
A) stipulates whether and under what circumstances the issuer can redeem the bond prior to
maturity
B) stipulates whether and under what circumstances the bondholders can request an earlier
repayment of the principal amount prior to maturity
C) describes the maturity date of the bond.
Explanation
Call provisions give the issuer the right (but not the obligation) to retire all or a part of an issue prior tomaturity If the bonds are "called," the bondholder has no choice but to turn in his bonds Call featuresgive the issuer the opportunity to get rid of expensive (high coupon) bonds and replace them with lowercoupon issues in the event that market interest rates decline during the life of the issue
Call provisions do not pertain to maturity A put provision gives the bondholders certain rights regardingearly payment of principal
(Study Session 14, Module 42.2, LOS 42.f)
coupon payment = ($100, 000 × 1.0125) ( 0.04 ) = $2, 025
2
Trang 15Which of the following embedded options in a xed income security can be exercised by the issuer?
(Study Session 14, Module 42.2, LOS 42.f)
A bond's indenture least likely speci es the:
A) source of funds for repayment.
B) identity of the lender.
C) covenants that apply to the issuer.
Explanation
The identity of the lender (i.e., the bondholder) is not speci ed in a bond's indenture because a bond may
be traded during its life An indenture or trust deed is a legal contract that speci es a bond issuer'sobligations and restrictions The indenture may include covenants that require the issuer to take or refrainfrom taking certain actions and may specify the source of funds for repayment, such as a project to befunded or the taxing power of a government
(Study Session 14, Module 42.1, LOS 42.b)
Allcans, an aluminum producer, needs to issue some debt to nance expansion plans, but wants to hedge itsbond interest payments against uctuations in aluminum prices Jerrod Price, the company's investmentbanker, suggests a commodity index oater This type of bond is least likely to provide which of the followingadvantages?
A) The bond's coupon rate is linked to the price of aluminum.
B) Payment structure helps protect Allcan's credit rating.
C) Allows Allcans to set coupon payments based on business results.
Explanation
Trang 16The coupon rate is set in the bond agreement (indenture) and cannot be changed unilaterally interest rate indexed oaters are indexed to a commodity price such as oil or aluminum Business resultscould be impacted by numerous factors other than aluminum prices.
Non-Both of the other choices are true By linking the coupon payments directly to the price of aluminum(meaning that when aluminum prices increase, the coupon rate increases and vice versa), the non-interestindex oater allows Allcans to protect its credit rating during adverse circumstances
(Study Session 14, Module 42.2, LOS 42.e)
Trang 17Question #1 of 28 Question ID: 1206328
An indenture is most likely to specify a bond's:
(Study Session 14, Module 43.1, LOS 43.c)
The interbank funds market is most accurately described as:
A) banks’ borrowing of reserves from the central bank.
B) trading of negotiable certi cates of deposit.
C) unsecured short-term loans from one bank to another.
Explanation
The interbank funds market refers to short-term unsecured loans between banks It does not refer totrading of negotiable certi cates of deposit Borrowing from the central bank is said to occur in the centralbank funds market
(Study Session 14, Module 43.2, LOS 43.i)
Which type of issuer is most likely to issue bonds by auction?
A) Sovereign.
B) Corporate.
C) Municipal.
Explanation
Many national governments use auctions to issue sovereign bonds Corporate bonds are typically issued in
an underwriting or private placement process while municipal bonds are typically issued in a negotiated orunderwritten process
(Study Session 14, Module 43.1, LOS 43.c)
R eadinggg 43::: FFFixed -IIIncome Markets::: IIIssuance, Tradinggg,
and FFFundinggg
Trang 18Question #4 of 28 Question ID: 1206338
A structured security is a combination of:
A) commercial paper and a backup line of credit.
B) a medium-term note and a derivative.
C) a corporate bond and a syndicated loan.
Explanation
Medium-term notes (MTNs) that are combined with derivatives to create features desired by an investorare known as structured securities
(Study Session 14, Module 43.2, LOS 43.g)
Which of the following statements regarding repurchase agreements is most accurate?
A) Higher credit rating of the underlying collateral results in a higher repo rate.
B) Lower credit rating of the underlying collateral results in a lower repo margin.
C) Greater demand for the underlying security results in a lower repo margin.
Explanation
Other things equal, the repo margin (percent di erence between the market value of the collateral and theloan amount) is lower if the collateral is in greater demand The repo margin and repo rate (the annualizedpercent di erence between the sale price and repurchase price of the collateral) are inversely related tothe credit quality of the collateral
(Study Session 14, Module 43.2, LOS 43.j)
Fixed income classi cations by geography most likely include:
a classi cation by type of issuer or by taxable status
(Study Session 14, Module 43.1, LOS 43.a)
Trang 19Question #7 of 28 Question ID: 1206331
A bond is quoted at 96.25 bid and 96.75 ask Based only on this information, this bond is most likely:
(Study Session 14, Module 43.1, LOS 43.d)
The principal value of a sovereign bond is $1,000 at issuance and $1,055 two years after issuance This bondmost likely:
A) is indexed for in ation.
(Study Session 14, Module 43.1, LOS 43.e)
Settlement for corporate bond trades is most likely to happen on what basis?
A) Trade date + 3 days.
B) Trade date + 1 day.
C) Cash settlement.
Explanation
Corporate bonds typically settle on the second or third trading day after the trade (T + 2 or T + 3), although
in some markets their settlement can be as much as T + 7 Some money market securities are settled onthe trade date (cash settlement) and government bonds typically settle on the trading day following thetrade date (T + 1)
(Study Session 14, Module 43.1, LOS 43.d)
Trang 20Question #10 of 28 Question ID: 1206341
Which of the following coupon payment structures represents a leveraged inverse oater?
A) 8% – 1.5 times 90-day Libor.
(Study Session 14, Module 43.2, LOS 43.h)
Fixed income classi cations by credit quality most likely include:
A) developed market bonds.
B) money market securities.
C) investment grade bonds.
Explanation
Investment grade and non-investment grade are classi cations by credit quality Money market
instruments are a classi cation by maturity Developed market bonds are a classi cation by geography.(Study Session 14, Module 43.1, LOS 43.a)
TBTF Bank issues credit-linked notes (CLNs) that have 5-year debentures of Ossien Company as their
reference asset If Ossien defaults on its debentures, the CLNs will be redeemed:
A) for less than their par value.
B) immediately for their par value.
C) for their par value plus a premium.
Explanation
A credit-linked note (CLN) returns less than the full principal amount at redemption if a credit event on areference asset has occurred A CLN returns its full principal at redemption if a credit event on a referenceasset has not occurred In e ect the CLN buyer takes on the credit risk of the reference asset
(Study Session 14, Module 43.2, LOS 43.h)
Trang 21Question #13 of 28 Question ID: 1206347
Compared to a term repurchase agreement, an overnight repurchase agreement is most likely to have a:
A) lower repo rate and repo margin.
B) lower repo rate and higher repo margin.
C) higher repo rate and repo margin.
Explanation
Both the repo rate and the repo margin tend to be higher for longer repo terms Therefore an overnightrepo should have a lower repo rate and a lower repo margin than a term (i.e., longer than overnight) repo.(Study Session 14, Module 43.2, LOS 43.j)
If two banks fund a loan to a corporation, the loan is most accurately described as a:
(Study Session 14, Module 43.2, LOS 43.g)
The reference rate for a oating-rate note should least likely match the note's:
Trang 22Question #16 of 28 Question ID: 1206344
The interest rate on excess reserves borrowed by one bank from another bank is most accurately described
as a(n):
A) reserve swap rate.
B) central bank funds rate.
C) interbank lending rate.
Explanation
Required reserves are deposits with a country's central bank Banks that deposit more than the requiredamount with the central bank are said to have excess reserves and may lend these to other banks Thislending is said to take place in the central bank funds market and the interest rates on such loans areknown as central bank funds rates
(Study Session 14, Module 43.2, LOS 43.i)
A quoted Libor interest rate is least likely to refer to a speci c:
Which of the following least likely represents a primary market o ering? When bonds are sold:
A) from a dealer’s inventory.
B) in a private placement.
C) on a best-e orts basis.
Explanation
When bonds are sold from a dealer's inventory, the bonds have already been sold once and the
transaction takes place on the secondary market The other transactions in the responses take place in theprimary market When bonds are sold on a best-e orts basis, the investment banker does not takeownership of the securities and agrees to sell all she can In a private placement, the bonds are soldprivately to a small number of investors
(Study Session 14, Module 43.1, LOS 43.c)
Trang 23Question #19 of 28 Question ID: 1206322
Fixed income classi cations by issuer most likely include:
A) Financial sector bonds.
B) Money market securities.
C) Floating-rate bonds.
Explanation
Corporate bonds are frequently classi ed by issuer as nancial or non- nancial Floating-rate bonds are aclassi cation by coupon structure Money market securities are a classi cation by original maturities.(Study Session 14, Module 43.1, LOS 43.a)
An investor pays $100,000 for a security that consists of a zero-coupon bond that will pay $90,000 in threemonths and $11,000 worth of call options on an equity index that expire in three months This security ismost accurately described as a:
A) capital protected instrument.
B) guarantee certi cate.
C) participation instrument.
Explanation
The security described here is a capital-protected instrument, but it is not a guarantee certi cate becausethe capital protection (promised payment at maturity) is less than the initial cost of the security It is not aparticipation instrument because it does not promise payments that are based on the value of the
reference instrument
(Study Session 14, Module 43.2, LOS 43.h)
A purchase of a new bond issue by a single investor is most accurately described as a(n):
A) grey market transaction.
Trang 24Question #22 of 28 Question ID: 1206346
A repurchase agreement is described as a "reverse repo" if:
A) collateral is delivered to the lender and returned to the borrower.
B) a bond dealer is the lender.
C) the repurchase price is lower than the sale price.
Explanation
Bond dealers frequently use repurchase agreements as sources of funding When a bond dealer enters arepo as the lender instead of the borrower, the agreement is referred to as a reverse repo
(Study Session 14, Module 43.2, LOS 43.j)
Bonds issued by the International Monetary Fund (IMF) are most accurately described as:
A) non-sovereign government bonds.
(Study Session 14, Module 43.1, LOS 43.f)
Settlement for a government bond trade most likely occurs on the:
A) third trading day after the trade.
B) second trading day after the trade
C) next trading day after the trade.
Trang 25Question #25 of 28 Question ID: 1206323
The most appropriate reference rate for a one-year, U.S dollar denominated, oating-rate note that resetsmonthly is:
Settlement for corporate bond trades generally happen on what basis?
A) Trade date + 3 days.
B) Trade date + 1 day.
C) Cash settlement.
Explanation
Corporate bonds typically settle on the third trading day after the trade (T + 3) Some money marketsecurities are settled on the trade date (cash settlement) and government bonds typically settle on thetrading day following the trade date (T + 1)
(Study Session 14, Module 43.1, LOS 43.d)
Which of the following sources of short-term funding is available to banks but typically unavailable to othercorporations?
A) Central bank funds.
(Study Session 14, Module 43.2, LOS 43.i)
Trang 26Question #28 of 28 Question ID: 1206336
On November 15, 20X1, Grinell Construction Company decided to issue bonds to help nance the acquisition
of new construction equipment They issued bonds totaling $10,000,000 with a 6% coupon rate due June 15,20X9 Grinell has agreed to pay the entire amount borrowed in one lump sum payment at the maturity date.Grinell is not required to make any principal payments prior to maturity What type of bond structure hasGrinell issued?
A) Amortizing maturity structure.
B) Serial maturity structure.
C) Term maturity structure.
Trang 27Question #1 of 140 Question ID: 1206471Suppose the 3-year spot rate is 12.1% and the 2-year spot rate is 11.3% Which of the following statementsconcerning forward and spot rates is most accurate? The 1-year:
A) forward rate one year from today is 13.7%.
B) forward rate two years from today is 13.7%.
C) forward rate two years from today is 13.2%.
Explanation
The equation for the three-year spot rate, S3, is (1 + S1)(1 + 1y1y)(1 + 2y1y) = (1 + S3)3 Also, (1 + S1)(1 + 1y1y)
= (1 + S2)2 So, (1 + 2y1y) = (1 + S3)3 / (1 + S2)2, computed as: (1 + 0.121)3 / (1 + 0.113)2 = 1.137 Thus, 2y1y =0.137, or 13.7%
(Study Session 14, Module 44.4, LOS 44.j)
McClintock 8% coupon bonds maturing in 10 years are currently trading at 97.55 These bonds are free and pay coupons semiannually The McClintock bonds have a:
option-A) current yield less than 8.0%.
B) yield to maturity greater than 8.0%.
C) true yield greater than the street convention.
Explanation
A bond trading at a discount will have a YTM greater than its coupon The current yield is 8 / 97.55 = 8.2%.True yield is adjusted for payments delayed by weekends and holidays and is equal to or slightly less thanthe yield on a street convention basis
(Study Session 14, Module 44.3, LOS 44.f)
The one-year spot rate is 6% and the one-year forward rates starting in one, two and three years respectivelyare 6.5%, 6.8%, and 7% What is the four-year spot rate?
Trang 28The four-year spot rate is computed as follows:
Four-year spot rate = [(1 + 0.06)(1 + 0.065)(1 + 0.068)(1 + 0.07) ]1/4 – 1 = 6.57%
(Study Session 14, Module 44.4, LOS 44.j)
Other things equal, for option-free bonds:
A) a bond’s value is more sensitive to yield increases than to yield decreases.
B) the value of a long-term bond is more sensitive to interest rate changes than the value of a
(Study Session 14, Module 44.3, LOS 44.b)
A $1,000 par, semiannual-pay bond is trading for 89.14, has a coupon rate of 8.75%, and accrued interest of
$43.72 The at price of the bond is:
A) $847.69.
B) $891.40.
C) $935.12.
Explanation
The at price of the bond is the quoted price, 89.14% of par value, which is $891.40
(Study Session 14, Module 44.2, LOS 44.d)
An investor buys a 25-year, 10% annual pay bond for $900 and will sell the bond in 5 years when he
estimates its yield will be 9% The price for which the investor expects to sell this bond is closest to:
A) $964.
B) $1,122.
C) $1,091.
Trang 29This is a present value problem 5 years in the future
N = 20, PMT = 100, FV = 1000, I/Y = 9
CPT PV = -1,091.29
The $900 purchase price is not relevant for this problem
(Study Session 14, Module 44.1, LOS 44.a)
A 20-year, $1,000 face value, 10% semi-annual coupon bond is selling for $875 The bond's yield to maturityis:
(Study Session 14, Module 44.3, LOS 44.f)
A yield curve for coupon bonds is composed of yields on bonds with similar:
(Study Session 14, Module 44.4, LOS 44.i)
What is the probable change in price of a 30-year semiannual 6.5% coupon, $1000 par value bond yielding8% if the yield decreases to 7%?
A) $98.83.
Trang 30(Study Session 14, Module 44.1, LOS 44.a)
For an option-free bond, as the yield to maturity increases, the bond price:
A) decreases at an increasing rate.
B) decreases at a decreasing rate.
C) increases at a decreasing rate.
Explanation
The relationship between price and yield for an option-free bond is inverse and convex toward the origin
As the yield increases, the price decreases, but at a decreasing rate
(Study Session 14, Module 44.3, LOS 44.b)
Neuman Company has bonds outstanding with ve years to maturity that trade at a spread of +240 basispoints above the ve-year government bond yield Neuman also has ve-year bonds outstanding that areidentical in all respects except that they are convertible into 30 shares of Neuman common stock At which ofthe following spreads are the convertible bonds most likely to trade?
(Study Session 14, Module 44.5, LOS 44.k)
The margin above or below LIBOR that is used to determine a oating-rate note's coupon payments is mostaccurately described as its:
Trang 31(Study Session 14, Module 44.3, LOS 44.g)
Assume a city issues a $5 million bond to build a new arena The bond pays 8% semiannual interest and willmature in 10 years Current interest rates are 9% What is the present value of this bond and what will thebond's value be in seven years from today?
(Study Session 14, Module 44.1, LOS 44.a)
The one-year spot rate is 7.00% One-year forward rates are 8.15% one year from today, 10.30% two yearsfrom today, and 12.00% three years from today
The value of a 4-year, 11% annual pay, $1,000 per bond is closest to:
A) $984.
B) $1,060.
Trang 32(Study Session 14, Module 44.2, LOS 44.c)
Consider a 6-year $1,000 par bond priced at $1,011 The coupon rate is 7.5% paid semiannually Six-yearbonds with comparable credit quality have a yield to maturity (YTM) of 6% Should an investor purchase thisbond?
A) Yes, the bond is undervalued by $38.
B) Yes, the bond is undervalued by $64.
C) No, the bond is overvalued by $64.
(Study Session 14, Module 44.1, LOS 44.a)
In the context of bonds, accrued interest:
Trang 33A) is discounted along with other cash ows to arrive at the dirty, or full price.
B) equals interest earned from the previous coupon to the sale date.
C) covers the part of the next coupon payment not earned by seller.
Explanation
This is a correct de nition of accrued interest on bonds
The other choices are false Accrued interest is not discounted when calculating the price of the bond Thestatement, "covers the part of the next coupon payment not earned by seller," should read, "…not earned
by buyer."
(Study Session 14, Module 44.2, LOS 44.d)
Consider a bond that pays an annual coupon of 5% and that has three years remaining until maturity.Assume the term structure of interest rates is at at 6% If the term structure of interest rates does notchange over the next twelve-month interval, the bond's price change (as a percentage of par) will be closestto:
A) 0.84.
B) -0.84.
C) 0.00.
Explanation
The bond price change is computed as follows:
Bond Price Change = New Price – Old Price = (5/1.06 + 105/1.062) – (5/1.06 + 5/1.062 + 105/1.063) = 98.17 –97.33 = 0.84
(Study Session 14, Module 44.1, LOS 44.a)
A 30-year, 10% annual coupon bond is sold at par It can be called at the end of 10 years for $1,100 What isthe bond's yield to call (YTC)?
Trang 34Question #19 of 140 Question ID: 1206446
Which of the following describes the yield to worst? The:
A) lowest of all possible yields to call.
B) yield given default on the bond.
C) lowest of all possible prices on the bond.
Explanation
Yield to worst involves the calculation of yield to call for every possible call date, and determining which ofthese results in the lowest expected return
(Study Session 14, Module 44.3, LOS 44.g)
Given a required yield to maturity of 6%, what is the intrinsic value of a semi-annual pay coupon bond with
an 8% coupon and 15 years remaining until maturity?
(Study Session 14, Module 44.1, LOS 44.a)
Austin Traynor is considering buying a $1,000 face value, semi-annual coupon bond with a quoted price of104.75 and accrued interest since the last coupon of $33.50 Ignoring transaction costs, how much will theseller receive at the settlement date?
A) $1,014.00.
B) $1,047.50.
C) $1,081.00.
Explanation
The full price is equal to the at or clean price plus interest accrued from the last coupon date Here, the
at price is 1,000 × 104.75%, or 1,000 × 1.0475 = 1,047.50 Thus, the full price = 1,047.50 + 33.50 = 1,081.00.(Study Session 14, Module 44.2, LOS 44.d)
Trang 35Question #22 of 140 Question ID: 1206373
A zero-coupon bond has a yield to maturity of 9.6% (annual basis) and a par value of $1,000 If the bondmatures in 10 years, today's price of the bond would be:
(Study Session 14, Module 44.1, LOS 44.a)
An investor buys a pure-discount note that matures in 146 days for $971 The bond-equivalent yield is closestto:
(Study Session 14, Module 44.3, LOS 44.h)
If market rates do not change, as time passes the price of a zero-coupon bond will:
(Study Session 14, Module 44.3, LOS 44.b)
Trang 36Question #25 of 140 Question ID: 1206449
A 20 year, 8% semi-annual coupon, $1,000 par value bond is selling for $1,100 The bond is callable in 4 years
at $1,080 What is the bond's yield to call?
(Study Session 14, Module 44.3, LOS 44.g)
Consider a 10%, 10-year bond sold to yield 8% One year passes and interest rates remained unchanged(8%) What will have happened to the bond's price during this period?
A) It will have remained constant.
B) It will have increased.
C) It will have decreased.
Explanation
The bond is sold at a premium, as time passes the bond's price will move toward par Thus it will fall
N = 10; FV = 1,000; PMT = 100; I = 8; CPT → PV = 1,134
N = 9; FV = 1,000; PMT = 100; I = 8; CPT → PV = 1,125
(Study Session 14, Module 44.3, LOS 44.b)
A coupon bond which pays interest $100 annually has a par value of $1,000, matures in 5 years, and is sellingtoday at a $72 discount from par value The yield to maturity on this bond is:
A) 12.00%.
B) 8.33%.
C) 7.00%.
Explanation
Trang 37(Study Session 14, Module 44.3, LOS 44.f)
The one-year spot rate is 5% and the two-year spot rate is 6.5% What is the one-year forward rate startingone year from now?
A) 8.02%.
B) 7.87%.
C) 5.00%.
Explanation
The forward rate is computed as follows:
One-year forward rate = 1.0652 / 1.05 – 1 = 8.02%
(Study Session 14, Module 44.4, LOS 44.j)
A three-year annual coupon bond has a par value of $1,000 and a coupon rate of 5.5% The spot rate for year
1 is 5.2%, the spot rate for year two is 5.5%, and the spot rate for year three is 5.7% The value of the couponbond is closest to:
The present value of cash ow 1 is: FV = $55; PMT = 0; I/Y = 5.2%; N = 1; CPT → PV = -$52.28
The present value of cash ow 2 is: FV = $55; PMT = 0; I/Y = 5.5%; N = 2; CPT → PV = –$49.42
The present value of cash ow 3 is: FV = $1,055; PMT = 0; I/Y = 5.7%; N = 3; CPT → PV = –$893.36
The most you pay for the bond is the sum of: $52.28 + $49.42 + $893.36 = $995.06
(Study Session 14, Module 44.2, LOS 44.c)
Trang 38Question #30 of 140 Question ID: 1206413
To determine the full price of a corporate bond, a dealer is most likely to calculate accrued interest based on:
A) 30-day months and 360-day years.
B) 30-day months and 365-day years.
C) Actual day counts.
Explanation
Accrued interest for corporate bonds is typically calculated using the 30/360 method For governmentbonds, accrued interest is typically calculated using the actual/actual method
(Study Session 14, Module 44.2, LOS 44.d)
What is the yield to call on a bond that has an 8% coupon paid annually, $1,000 face value, 10 years tomaturity and is rst callable in 6 years? The current market price is $1,100 The call price is the face valueplus 1-year's interest
(Study Session 14, Module 44.3, LOS 44.g)
A $1,000 bond with an annual coupon rate of 10% has 10 years to maturity and is currently priced at $800.What is the bond's approximate yield-to-maturity?
Trang 39Question #33 of 140 Question ID: 1206377
Consider a 10-year, 6% coupon, $1,000 par value bond, paying annual coupons, with a 10% yield to maturity.The change in the bond price resulting from a 400 basis point increase in yield is closest to:
Therefore, the price is expected to change from $754.22 to $582.71, a decrease of $171.51
(Study Session 14, Module 44.1, LOS 44.a)
Accrued interest on a bond that is sold between coupon dates is:
A) paid to the buyer.
B) paid to the seller.
C) split between the buyer and seller.
Explanation
Accrued interest from the most recent coupon payment date to the settlement date is owed to the seller
of a bond and is included in the full price
(Study Session 14, Module 44.2, LOS 44.d)
A coupon bond pays annual interest, has a par value of $1,000, matures in 4 years, has a coupon rate of
$100, and a yield to maturity of 12% The current yield on this bond is:
A) 11.25%.
B) 9.50%.
C) 10.65%.
Explanation
Trang 40FV = 1,000; N = 4; PMT = 100; I = 12; CPT → PV = 939.25.
Current yield = coupon / current price
100 / 939.25 × 100 = 10.65
(Study Session 14, Module 44.3, LOS 44.g)
A year ago a company issued a bond with a face value of $1,000 with an 8% coupon Now the prevailingmarket yield is 10% What happens to the bond? The bond:
A) is traded at a market price higher than $1,000.
B) is traded at a market price of less than $1,000.
C) price is not a ected by the change in market yield, and will continue to trade at $1,000.
Explanation
A bonds price/value has an inverse relationship with interest rates. Since interest rates are increasing(from 8% when issued to 10% now) the bond will be selling at a discount. This happens so an investor will
be able to purchase the bond and still earn the same yield that the market currently o ers
(Study Session 14, Module 44.3, LOS 44.b)
Bond X is a noncallable corporate bond maturing in ten years Bond Y is also a corporate bond maturing inten years, but Bond Y is callable at any time beginning three years from now Both bonds carry a credit rating
of AA Based on this information:
A) The option adjusted spread of Bond Y will be greater than its zero-volatility spread.
B) Bond Y will have a higher zero-volatility spread than Bond X.
C) The zero-volatility spread of Bond X will be greater than its option-adjusted spread.
Explanation
Bond Y will have the higher Z-spread due to the call option embedded in the bond This option bene ts theissuer, and investors will demand a higher yield to compensate for this feature The option-adjustedspread removes the value of the option from the spread calculation, and would always be less than the Z-spread for a callable bond Since Bond X is noncallable, the Z-spread and the OAS will be the same.(Study Session 14, Module 44.5, LOS 44.k)
Assume a bond's quoted price is 105.22 and the accrued interest is $3.54 The bond has a par value of $100.What is the bond's clean price?