Questions and Answers of Fixed Income Analysis

Calculate the estimated convexity-adjusted percentage price change resulting from a 100 bp increase in the yield-to-maturityA Dutch bank holds a large position in a zero-coupon Federal Republic of
Compare the estimated percentage price change with the actual change, assuming the yield-to-maturity jumps 100 bps to 0.28% on that settlement date.A Dutch bank holds a large position in a
Per 100 of par value, the future value of the reinvested coupon payments at the end of the holding period is closest to:A. 35.00.B. 40.26.C. 41.07.An investor purchases a nine-year, 7% annual coupon
The capital gain/loss per 100 of par value resulting from the sale of the bond at the end of the five-year holding period is closest to a:A. Loss of 8.45.B. Loss of 3.31.C. Gain of 2.75.An investor
Assuming that all coupons are reinvested over the holding period, the investor’s five-year horizon yield is closest to:A. 5.66%.B. 6.62%.C. 7.12%.An investor purchases a nine-year, 7% annual coupon
An investor buys a three-year bond with a 5% coupon rate paid annually. The bond, with a yield-to-maturity of 3%, is purchased at a price of 105.657223 per 100 of par value. Assuming a 5-basis point
Which of the following statements about duration is correct? A bond’s:A. Effective duration is a measure of yield duration.B. Modified duration is a measure of curve duration.C. Modified duration
An investor buys a 6% annual payment bond with three years to maturity. The bond has a yield-to-maturity of 8% and is currently priced at 94.845806 per 100 of par. The bond’s Macaulay duration is
The interest rate risk of a fixed-rate bond with an embedded call option is best measured by:A. Effective duration.B. Modified duration.C. Macaulay duration.
Which of the following is most appropriate for measuring a bond’s sensitivity to shaping risk?A. Key rate durationB. Effective durationC. Modified duration
A Canadian pension fund manager seeks to measure the sensitivity of her pension liabilities to market interest rate changes. The manager determines the present value of the liabilities under three
Which of the following statements about Macaulay duration is correct?A. A bond’s coupon rate and Macaulay duration are positively related.B. A bond’s Macaulay duration is inversely related to its
A bond portfolio consists of the following three fixed-rate bonds. Assume annual coupon payments and no accrued interest on the bonds. Prices are per 100 of par value.The bond portfolio’s modified
Assuming no change in the credit risk of a bond, the presence of an embedded put option:A. Reduces the effective duration of the bond.B. Increases the effective duration of the bond.C. Does not
Using the information below, which bond has the greatest money duration per 100 of par value assuming annual coupon payments and no accrued interest?A. Bond AB. Bond BC. Bond C
A limitation of calculating a bond portfolio’s duration as the weighted average of the yield durations of the individual bonds that compose the portfolio is that it:A. Assumes a parallel shift to
A bond with exactly nine years remaining until maturity offers a 3% coupon rate with annual coupons. The bond, with a yield-to-maturity of 5%, is priced at 85.784357 per 100 of par value. The
The “second-order” effect on a bond’s percentage price change given a change in yield-to-maturity can be best described as:A. Duration.B. Convexity.C. Yield volatility.
A bond is currently trading for 98.722 per 100 of par value. If the bond’s yield-to-maturity (YTM) rises by 10 basis points, the bond’s full price is expected to fall to 98.669. If the bond’s
A bond has an annual modified duration of 7.020 and annual convexity of 65.180. If the bond’s yield-to-maturity decreases by 25 basis points, the expected percentage price change is closest to:A.
A bond has an annual modified duration of 7.140 and annual convexity of 66.200. The bond’s yield-to-maturity is expected to increase by 50 basis points. The expected percentage price change is
Which of the following statements relating to yield volatility is most accurate? If the term structure of yield volatility is downward sloping, then:A. Short-term rates are higher than long-term
The holding period for a bond at which the coupon reinvestment risk offsets the market price risk is best approximated by:A. Duration gap.B. Modified duration.C. Macaulay duration.
When the investor’s investment horizon is less than the Macaulay duration of the bond she owns:A. The investor is hedged against interest rate risk.B. Reinvestment risk dominates, and the investor
An investor purchases an annual coupon bond with a 6% coupon rate and exactly 20 years remaining until maturity at a price equal to par value. The investor’s investment horizon is eight years. The
A manufacturing company receives a ratings upgrade and the price increases on its fixedrate bond. The price increase was most likely caused by a(n):A. Decrease in the bond’s credit spread.B.
Empirical duration is likely the best measure of the impact of yield changes on portfolio value, especially under stressed market conditions, for a portfolio consisting of:A. 100% sovereign bonds of
Which of the following best defines credit risk?A. The probability of default times the severity of loss given defaultB. The loss of principal and interest payments in the event of bankruptcyC. The
The Acme Company has senior unsecured bonds as well as both first and second lien debt in its capital structure. Which ranks higher with respect to priority of claims: senior unsecured bonds or
Under which circumstance is a subordinated bondholder most likely to recover some value in a bankruptcy without a senior creditor getting paid in full? When:A. Absolute priority rules are enforced.B.
Using the S&P rating scale, investment-grade bonds carry which of the following ratings?A. AAA to EEEB. BBB− to CCCC. AAA to BBB−
Mallinckrodt PLC (Mallinckrodt) is an Ireland-incorporated specialty pharmaceutical company. As a credit analyst, you have been asked to assess its creditworthiness—on its own, compared to a
Given a hotel company, a chemical company, and a food retail company, which is most likely to be able to support a high debt load over an economic cycle?A. The hotel company, because people need a
Which of the following would not be a bond covenant?A. The issuer must file financial statements with the bond trustee on a timely basis.B. The company can buy back as much stock as it likes.C. If
Based on Exhibit 1, Rayes would most likely conclude that relative to Bond #1, Bond #2 is:A. Overpriced.B. Fairly priced.C. Underpriced.Rayes Investment Advisers specializes in fixed-income portfolio
Based on Exhibits 1 and 2, the exchange that reflects the arbitrage-free price of the bond is:A. Eurex.B. Frankfurt.C. NYSE Euronext.Katrina Black, a portfolio manager at Coral Bond Management, Ltd.,
Recall from the chapter that each node is represented by both a time element and a rate change component. Which of the following statements about the missing data in Exhibit 3 is correct?A. Node
Based on the information in Exhibits 3 and 4, the bond price in euros at Node 1–2 in Exhibit 4 is closest to:A. 102.7917.B. 104.8640.C. 105.2917.Katrina Black, a portfolio manager at Coral Bond
A benefit of performing Task 1 is that it:A. Enables the model to price bonds with embedded options.B. Identifies benchmark bonds that have been mispriced by the market.C. Allows investors to realize
If the assumed volatility is changed as Black requested in Task 4, the forward rates shown in Exhibit 3 will most likely:A. Spread out.B. Remain unchanged.C. Converge to the spot rates.Katrina Black,
Based on Exhibit 1, which of the following bonds most likely includes an arbitrage opportunity?A. Bond AB. Bond BC. Bond CBetty Tatton is a fixed-income analyst with the hedge fund Sailboat Asset
Based on Exhibits 2 and 3 and using Method 1, the amount (in absolute terms) by which the Hutto-Barkley Inc. corporate bond is mispriced is closest to:A. 0.3368 per 100 of par value.B. 0.4682 per 100
Method 1 would most likely not be an appropriate valuation technique for the bond issued by:A. Hutto-Barkley Inc.B. Luna y Estrellas Intl.C. Peaton Scorpio Motors.Betty Tatton is a fixed-income
Based on Exhibit 4 and using Method 2, the correct price for Bond X is closest to:A. 97.2998.B. 109.0085.C. 115.0085.Betty Tatton is a fixed-income analyst with the hedge fund Sailboat Asset
Based on Exhibit 1, Alvarez finds that an arbitrage opportunity is:A. Not available.B. Available based on the dominance principle.C. Available based on the value additivity principle.Meredith Alvarez
Based on the data in Exhibit 2, the most profitable arbitrage opportunity would be to buy the bond in:A. Mumbai and sell it in Hong Kong.B. Hong Kong and sell it in New York.C. New York and sell it
Based on Exhibits 3 and 4, the value of Bond C at the upper node at Time 1 is closest to:A. 97.1957.B. 99.6255.C. 102.1255.Meredith Alvarez is a junior fixed-income analyst with Canzim Asset
Based on Exhibits 3 and 4, the price for Bond D is closest to:A. 97.4785.B. 103.3230.C. 106.3230.Meredith Alvarez is a junior fixed-income analyst with Canzim Asset Management. Her supervisor,
Which of the various statements regarding binomial interest rate trees is correct?A. Statement 1B. Statement 2C. Statement 3Meredith Alvarez is a junior fixed-income analyst with Canzim Asset
Based on Exhibits 5 and 6, the value of the lower one-period forward rate is closest to:A. 3.5122%.B. 3.5400%.C. 4.8037%.Meredith Alvarez is a junior fixed-income analyst with Canzim Asset
Based on Exhibits 4 and 7, the present value of Bond D’s cash flows following Path 2 i closest to:A. 97.0322.B. 102.8607.C. 105.8607.Meredith Alvarez is a junior fixed-income analyst with Canzim
Which of the statements regarding Monte Carlo simulation is correct?A. Only Statement 4 is correct.B. Only Statement 5 is correct.C. Both Statement 4 and Statement 5 are correct.Meredith Alvarez is a
A fall in interest rates would most likely result in:A. A decrease in the effective duration of Bond #3.B. Bond #3 having more upside potential than Bond #2.C. A change in the effective convexity of
The value of Bond #3 is closest to:A. 102.103% of par.B. 103.688% of par.C. 103.744% of par.Samuel & Sons is a fixed-income specialty firm that offers advisory services to investment management
All else being equal, if Ferguson assumes an interest rate volatility of 15% instead of 10%, the bond that would most likely increase in value is:A. Bond #1.B. Bond #2.C. Bond #3.Samuel & Sons is a
All else being equal, if the shape of the yield curve changes from upward sloping to flattening, the value of the option embedded in Bond #2 will most likely:A. Decrease.B. Remain unchanged.C.
If the market price of Pro Star’s common stock falls from its level on 19 October 20X0, the price of the convertible bond will most likely:A. Fall at the same rate as Pro Star’s stock price.B.
The effective duration of Bond #6 is:A. Close to 1.B. Higher than 1 but lower than 3.C. Higher than 3.Rayes Investment Advisers specializes in fixed-income portfolio management. Meg Rayes, the owner
In Exhibit 2, the bond whose effective duration might lengthen if interest rates rise is:A. Bond #3.B. Bond #4.C. Bond #5.Rayes Investment Advisers specializes in fixed-income portfolio management.
The effective duration of Bond #4 is closest to:A. 0.76.B. 1.88.C. 3.77.Rayes Investment Advisers specializes in fixed-income portfolio management. Meg Rayes, the owner of the firm, would like to add
The value of Bond #7 is closest to:A. 99.697% of par.B. 99.936% of par.C. 101.153% of par.Rayes Investment Advisers specializes in fixed-income portfolio management. Meg Rayes, the owner of the firm,
The value of Bond #8 is closest to:A. 98.116% of par.B. 100.000% of par.C. 100.485% of par.Rayes Investment Advisers specializes in fixed-income portfolio management. Meg Rayes, the owner of the
The value of Bond #9 is equal to the value of Bond #10:A. Plus the value of a put option on Whorton’s common stock.B. Plus the value of a call option on Whorton’s common stock.C. Minus the value
The minimum value of Bond #9 is equal to the greater of:A. The conversion value of Bond #9 and the current value of Bond #10.B. The current value of Bond #10 and a call option on Whorton’s common
The factor that is currently least likely to affect the risk–return characteristics of Bond #9 is:A. Interest rate movements.B. Whorton’s credit spreads.C. Whorton’s common stock price
Based on Exhibit 1, the best action that an investor should take to profit from the arbitrage opportunity is to:A. Buy on Frankfurt, sell on Eurex.B. Buy on NYSE Euronext, sell on Eurex.C. buy on
Based on Exhibit 1, the results of Analysis 1 should show the yield on the 20-year bond decreasing by:A. 0.3015%.B. 0.6030%.C. 0.8946%.Rowan Madison is a junior analyst at Cardinal Capital. Sage
The risk that a bond’s creditworthiness declines is best described by:A. Credit migration risk.B. Market liquidity risk.C. Spread widening risk.
Exhibit 21 shows several key sovereign statistics for Portugal.1. Calculate the government debt/GDP ratio for Portugal for the years 2014−2017 as well as for the years 2006, 2008, 2010, and 2012.2.
Hexion Inc. is a specialty chemical company. It has a complicated, high-yield debt structure, consisting of first lien debt (loans and bonds), secured bonds, second lien bonds, and senior unsecured
Calculate the price impact on a 10-year corporate bond with a 4.75% coupon priced at 100, with an instantaneous 50 bps widening in spread due to the issuer’s announcement that it was adding
Which bonds are likely to exhibit the greatest spread volatility?A. Bonds from issuers rated AAB. Bonds from issuers rated BBC. Bonds from issuers rated A
Using the par curve from Example 2, Example 4, and Example 5, the yield-to-maturity for a one-year annual coupon bond is 2%, for a two-year annual coupon bond is 3%, and for a three-year annual
Replace the interest rate paths from Example 6 with randomly generated paths calibrated to the same initial par and spot curves, as shown in Exhibit 31. EXHIBIT 31 Discount Rates Time
Return to the valuation of the Bermudan-style three-year 4.25% annual coupon bond callable at par one year and two years from now as depicted in Exhibit 12. The one-year, two-year, and three-year par
Based on Exhibit 2, and assuming that the forecast for interest rates and Smith’s outlook for equity returns are validated, which bond’s option is most likely to be exercised?A. Bond 2B. Bond 3C.
Based on Exhibit 2, the current price of Bond 1 is most likely greater than the current price of:A. Bond 2.B. Bond 3.C. Bond 4.John Smith, an investment adviser, meets with Lydia Carter to discuss
Assuming the forecast for interest rates is proven accurate, which bond in Exhibit 2 will likely experience the smallest price increase?A. Bond 1B. Bond 3C. Bond 4John Smith, an investment adviser,
Based on the information in Exhibit 1 and Exhibit 2, the value of the embedded option in Bond 4 is closest to:A. Nil.B. 0.1906.C. 0.8789.John Smith, an investment adviser, meets with Lydia Carter to
If Smith’s interest rate volatility forecast turns out to be true, which bond in Exhibit 2 is likely to experience the greatest price increase?A. Bond 2B. Bond 3C. Bond 4John Smith, an investment
If the Brown and Company forecast comes true, which of the following is most likely to occur? The value of the embedded option in:A. Bond 3 decreases.B. Bond 4 decreases.C. both Bond 3 and Bond 4
Based on Exhibit 2 and Exhibit 3, the market price of Bond 4 is closest to:A. 100.0000.B. 100.5123.C. 100.8790.John Smith, an investment adviser, meets with Lydia Carter to discuss her pending
Which of the following conclusions regarding the bonds in Exhibit 4 is correct?A. Bond 5 is relatively cheaper than Bond 6.B. Bond 7 is relatively cheaper than Bond 6.C. Bond 8 is relatively cheaper
Based on Exhibits 1 and 2, the effective duration for the AI bond is closest to:A. 1.98.B. 2.15.C. 2.73.Jules Bianchi is a bond analyst for Maneval Investments, Inc. Bianchi gathers data on three
If benchmark yields were to fall, which bond in Exhibit 1 would most likely experience a decline in effective duration?A. AI bondB. BI bondC. CE bondJules Bianchi is a bond analyst for Maneval
Based on Exhibit 1, for the BI bond, one-sided:A. Up-duration will be greater than one-sided down-duration.B. Down-duration will be greater than one-sided up-duration.C. Up-duration and one-sided
Based on Exhibit 1, which key rate duration is the largest for the BI bond?A. One-year key rate durationB. Two-year key rate durationC. Three-year key rate durationJules Bianchi is a bond analyst for
Which bond in Exhibit 1 most likely has the lowest effective convexity?A. AI bondB. BI bondC. CE bondJules Bianchi is a bond analyst for Maneval Investments, Inc. Bianchi gathers data on three
On 1 January 20X2, Deem Advisors purchased a $10 million six-year senior unsecured bond issued by UNAB Corporation. Six months later (1 July 20X2), concerned about the portfolio’s credit exposure
Alfred Simonsson is assistant treasurer at a Swedish lumber company. The company has sold a large tract of land and now has sufficient cash holdings to retire some of its debt liabilities. The
Jules Bianchi is a bond analyst for Maneval Investments, Inc. Bianchi gathers data on three corporate bonds, as shown in Exhibit 1.To assess the interest rate risk of the three bonds, Bianchi
Jules Bianchi is a bond analyst for Maneval Investments, Inc. Bianchi gathers data on three corporate bonds, as shown in Exhibit 1.To assess the interest rate risk of the three bonds, Bianchi
Jules Bianchi is a bond analyst for Maneval Investments, Inc. Bianchi gathers data on three corporate bonds, as shown in Exhibit 1.To assess the interest rate risk of the three bonds, Bianchi
Jules Bianchi is a bond analyst for Maneval Investments, Inc. Bianchi gathers data on three corporate bonds, as shown in Exhibit 1.To assess the interest rate risk of the three bonds, Bianchi
Daniela Ibarra is a senior analyst in the fixed-income department of a large wealth management firm. Marten Koning is a junior analyst in the same department, and David Lok is a member of the credit
Daniela Ibarra is a senior analyst in the fixed-income department of a large wealth management firm. Marten Koning is a junior analyst in the same department, and David Lok is a member of the credit
Daniela Ibarra is a senior analyst in the fixed-income department of a large wealth management firm. Marten Koning is a junior analyst in the same department, and David Lok is a member of the credit
Daniela Ibarra is a senior analyst in the fixed-income department of a large wealth management firm. Marten Koning is a junior analyst in the same department, and David Lok is a member of the credit
Daniela Ibarra is a senior analyst in the fixed-income department of a large wealth management firm. Marten Koning is a junior analyst in the same department, and David Lok is a member of the credit
Daniela Ibarra is a senior analyst in the fixed-income department of a large wealth management firm. Marten Koning is a junior analyst in the same department, and David Lok is a member of the credit

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