Fixed income tutorial question
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1. A bond selling at a discount will have its coupon rate less than its current yield and yield to maturity. The coupon rate will be the lowest of the three. 2. Reinvestment risk is not higher for callable bonds than option-free bonds. Longer maturity bonds have lower reinvestment risk than shorter maturity bonds. 3. For the bond described, with a face value of $100 paying 8% annual coupons over 3 years, the current market value based on arbitrage-free valuation is $100.72.
Fixed income tutorial question
- 1. ©Pristine-Neev Knowledge Management Pvt Ltd Mangalayatan University PGCFR Fixed Income-Tutorial 1. If the bond is selling at discount which of the following relations hold true: A. Coupon rate = Current Yield = Yield to Maturity B. Coupon rate > Current Yield = Yield to Maturity C. Coupon rate < Current Yield < Yield to Maturity 2. Which of the following statements is least correct regarding reinvestment risk? A. Reinvestment risk is higher for callable bonds than option free bonds. B. Higher the coupon rate, higher the reinvestment risks. C. Longer the maturity, lower the reinvestment risks. 3. Consider the following situation. Year 3 year Treasury Rate Treasury Spot Rate 1 7.50% 6% 2 7.50% 7% 3 7.50% 8% For a bond with the face value of $100 and which pays 8% annual coupon with maturity period of 3 years, the current market value based on arbitrage free valuation is equal to A. $100.27 B. $100.72 C. $102.27 4. For a bond the last coupon date was 1st January 2010 and Mr. X purchases that bond on 1st April 2010. The coupon rate is 12% per annum with par value of $1000.If the fair value of the bond is $ 1050 then the clean price for the bond will be A. 1000 B. 1050 C. 1020 5. Which of the following bond is similar to zero coupon bonds in the sense that they do not make any periodic interest? A. Accrual bonds B. Step-up notes C. Deferred –coupon bonds 6. For an inverse floater security the coupon rate A. Is zero as it doesn’t pay any interest B. Increases as the reference rate increases C. Increases as the reference rate decreases
- 2. ©Pristine-Neev Knowledge Management Pvt Ltd Mangalayatan University 7. A Treasury security is quoted at 98-25 and has a par value of $100,000.Its quoted dollar price is closest to: A. $98,250 B. $98,780 C. $98,520 8. Which of the following is least likely a characteristic of Commercial paper? A. It is issued as a pure discount security B. It is issued with maturities of 270 days or less C. It complies with SEC regulation 9. The call provision has the following characteristic: A. It can enforced at any point during the life of callable bond B. The call option value declines over the life of a callable bond C. It can be exercised when market interest rate is greater than the coupon rate. 10. Which of the following statements is false? A. A non refundable bond cannot be called B. If a lower coupon issue is sold to provide the funds to call the bonds, the bonds are said to be refunded. C. If a bond is called through the provision of a sinking fund then it said to be redeemed. 11. Which of the following is not an embedded option in favour of bondholders? A. Floors B. Conversion Option C. Accelerated sinking fund provision. 12. All of the following are used for early retirement of debt by the issuer except. A. A conversion option B. A prepayment option C. A call option 13. Which of the following is correct with respect to a bond’s indenture? A. Indenture is same as debenture B. It is used as collateral C. It contain covenant 14. For a coupon bond and a zero coupon bond of same maturity and par value, which of the following statements hold true:
- 3. ©Pristine-Neev Knowledge Management Pvt Ltd Mangalayatan University A. A coupon bond has more price risk as compared to a zero coupon bond B. A coupon bond has more investment risk as compared to a zero coupon bond C. A coupon bond has the same investment and price risk as a zero coupon bond 15. Which of the following statements is true? A. Duration increases when time to maturity increases and coupon rate decreases B. Duration increases when time to maturity decreases and coupon rate increases C. Duration is independent of time to maturity and coupon rate 16. Treasury spot rates (expressed as semi-annual-pay yields to maturity) are given as follows 6 months: 5 %, 1 year = 6%, 1.5 years = 7%. A 1.5 year, 5% Treasury bond is trading at $965. An investor can earn profit by. A. Buying the bond and selling the pieces thus earning $7.45 per bond B. Selling the bond and buying the pieces thus earning $7.45 per bond C. Buying the bond and selling the pieces thus earning $7.85 per bond 17. A 5 year Treasury STRIP is priced at $800. then A. Semi-annual –pay YTM = 4.51% and annual –pay YTM = 4.56% B. Semi-annual –pay YTM = 4.56% and annual –pay YTM = 4.51% C. Semi-annual –pay YTM = 4.41% and annual –pay YTM = 4.46% 18. The reason behind the creation of special purpose vehicle (SPV) in asset-backed securities (ABS) transaction by a firm is most likely: A. To avoid bankruptcy B. To increase the leverage of the firm C. To reduce the required yield on the ABS debt 19. Which of the following statements is correct in case of callable bond? A. At higher yield duration for a callable bond is higher than a similar option free bond. B. At higher yield duration for a callable bond is lower than a similar option free bond. C. At lower yield the duration for a callable bond is less than a similar option free bond. 20. Which of the following statements is correct in case of a Putable Bonds? A. Compared to an option free bond, a putable bond will have less price volatility at higher yields B. Compared to an option free bond, a putable bond will have less price volatility at lower yields C. Compared to an option free bond, a putable bond will have more price volatility at higher yields 21. Which of the following is not a characteristic of Structured Notes? A. It equivalent to issuing a debt security and combining it with an equity swap. B. It allows institutional investors to avoid restriction on the type of securities they can purchase. C. In step up notes coupon rate decreases over time on a present schedule.
- 4. ©Pristine-Neev Knowledge Management Pvt Ltd Mangalayatan University 22. Off the run Treasury Securities as compared to On the run Treasury Securities: A. Is less liquid B. Provide better information about current market yields C. Is more actively traded 23. The debt instrument where the collateral for the promise to pay is an underlying pool of other debt obligation is best known as: A. Collateralized debt obligation B. Collateralized mortgage obligation C. Asset Backed Securities 24. Which of the following bond is least likely to be affected by the Volatility risk? A. Bond with put options B. Bonds with prepayment options C. Option free bonds. 25. For an option free bond of 5 years with par value of $100 paying semiannual coupons of 6% is currently priced at $ 98. If Market interest rate increases by 100 basis points then the price decreases by 5% .If the market interest decreases by 100 basis points then which of the following could be the percentage change in the bond’s price? A. Increase of 7.2% B. Increase of 4.5% C. Decrease of 4.5% 26. Which of the following is not a characteristic of Range notes? A. Coupon rate equals the reference rate if the reference rate falls within the specified range. B. If the reference rate is above the specified range then the coupon rate attains the maximum value of the specified range. C. If the reference rate is below the specified range then the coupon rate is zero.. 27. Which one of the following is least likely a characteristic of bonds issued under private placement? A. It can be tailored to the need of the buyers B. It does not require registration under SEC C. It is highly liquid 28. Which of the following statement is least accurate? A. A Conventional mortgage is an example of an amortizing loan B. Call provisions give the issuer the right and the obligation to retire all or a part of an issue prior to maturity C. Sinking fund provisions provide for the repayment of principal through a series of payments over the life of the issue.
- 5. ©Pristine-Neev Knowledge Management Pvt Ltd Mangalayatan University 29. Which of the following statement is incorrect? A. Accrued interest is the interest earned since the last coupon payment date and is paid by a bond buyer to a bond seller. B. Clean price is the quoted price of the bond without accrued interest C. Full price refers to the quoted price without any accrued interest 30. Which of the following five year bonds has the lowest interest rate sensitivity? A. Floating rate bond. B. Option-free 5% coupon bond. C. Zero-coupon bond. 31. Of the following bonds, which one will suffer the largest proportional price increase after a decrease in interest rates of 10 basis points? Assume the annual yield is 7%. A. A zero-coupon bond maturing in 5 years B. A coupon-paying bond, with Macaulay Duration of 3.81 years and convexity of 16.39 years squared C. A bond with a coupon of 10% maturing in 10 years that is immediately callable 32. Institutional users use a number of methods for borrowing money for the purchase of bonds, the least likely method of borrowing is… A. Margin buying B. Repurchase agreement C. Loan against property 33. Carl a fixed income analyst is discussing investment strategies with Karen. He says that a $100mn 8% 10-year semi-annual T-note issued by the US government can be stripped into 20 Treasury strips. The 20th treasury strip is the final coupon and principal strip and has a maturity value of $104mn. Karen disagrees with both the points. She is most likely correct regarding: Number of Treasury Strips Maturity value A Incorrect Incorrect B Correct Correct C Incorrect Correct 34. Bart wants to invest in a municipal bond. Which of the following is he least likely to invest in… A. Tax backed bonds B. Revenue bonds C. Bankruptcy bonds 35. Ted makes the following statements:
- 6. ©Pristine-Neev Knowledge Management Pvt Ltd Mangalayatan University Statement 1: In a bought deal the underwriting firm offers the issuer to buy a specified amount of securities with a certain coupon rate and maturity. Statement 2: In a bought deal the underwriting firm usually has presold most of the securities and has hedged its interest rate risk. Which of the above statements is most likely to be correct? Statement 1 Statement 2 A Correct Incorrect B Correct Correct C Incorrect Incorrect 36. Carl is discussing valuation models with Karen. Carl states that all valuation models are calibrated using on-the-run Treasury securities. Karen states that volatility of interest rates can vary from period to period; all models make some critical assumptions regarding the volatility of short term interest rates. The two statements are most likely… Carl’s Statement Karen’s Statement A Incorrect Incorrect B Correct Correct C Correct Incorrect 37. A straight 7% bond with two years to maturity is priced at $97.65. A putable bond which is similar to straight bond in all aspects except for the put feature is priced at $98.45 and a callable bond that is same as the straight bond except for the call feature is priced at $96.95. Which of the following will be the closest value of the call option and put option? Call option value Put option value a. $0.75 $0.75 b. $0.8 $0.7 c. $0.7 $0.8 38. A buyer of a bond pays the seller $105 2/5 for a at par bond. The bond is cum-coupon. The full price and the clean price is closest to: Full Price Clean Price A 5 2/5 $100 B 3 3/8 $105 C 2 1/2 $100
- 7. ©Pristine-Neev Knowledge Management Pvt Ltd Mangalayatan University 39. GNB has a portfolio of mortgage loans. These amortizing loans have three distinct cash flows. Which of the following is least likely to be considered as a cash flow for the mortgages? A. Interest payments B. Servicer costs C. Scheduled principal payments. 40. Sally makes the following statement regarding corporate debts, “CPs is a long term note that can have maturity of up to 15 years or more. In an IAN the maturity increases when interest rate increases”. Sally is most likely correct regarding Commercial Papers IAN A Correct Incorrect B Incorrect Correct C Incorrect Incorrect 41. Smith is comparing the yields that he gets from investing in two securities. The first one is a taxable issue A with a yield of 8.75%, the other is a tax-exempt issue B with a yield of 6.25%. Smith is in the 40% marginal tax bracket. In which of the securities is Smith most likely to invest. A. Security A; since the yield is higher B. Security B; since the tax-equivalent yield is higher C. Both the securities provide the same yield 42. Carl says that treasury strips offered by his bank are guaranteed by the full faith and credit of the US Government. He also says that strips provide better yield as compared to an on-the-run Treasury security of the same maturity. Carl is most likely… A. Correct regarding both the statements B. Incorrect regarding one of the statements and Correct regarding the other C. Incorrect regarding both the statements 43. A callable bond will have a higher yield spread than a comparable putable bond. The statement is most likely… A. Correct; the call option is favorable to the issuer hence the bond should have a higher yield B. Correct; the put option is favorable to the issuer hence the bond can have a lower yield C. Incorrect; the call option embedded in the bond is favorable to the investor hence the yield should be lower. 44. For an 8% 10-year semi-annual coupon bond the discount rate is 6.5% p.a. The fair value is closest to…
- 8. ©Pristine-Neev Knowledge Management Pvt Ltd Mangalayatan University A. 110.9 B. 112.9 C. 102.9 45. A bond is likely to get matured in next three years has a par value of $500 and a coupon rate of 7.75% payable semiannually. Which of the following is closest amount of semiannual coupon payment? A. Rs. 38.75 B. Rs. 19.375 C. Rs. 19.75 46. If the current yield is 8%, what is the value of a security carrying a annual coupon of 7%, maturing in 8 years, redeemable at par value of $1,000? A. $942.53 B. $1,000 C. $1,059.71