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fixed income analysis
Fixed Income Analysis 3rd Edition Barbara S. Petitt, Jerald E. Pinto, Wendy L. Pirie, Bob Kopprasch - Solutions
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 bond at a price above par value. Two years later, the investor sells the bond. Th e resulting capital gain or loss is measured by comparing the price at which the bond is sold to the:A . carrying value.B . original purchase price.C . original purchase price value plus the
A “buy-and-hold” investor purchases a fi xed-rate bond at a discount and holds the security until it matures. Which of the following sources of return is least likely to contribute to the investor’s total return over the investment horizon, assuming all payments are made as scheduled?A .
An option-adjusted spread (OAS) on a callable bond is the Z-spread:A . over the benchmark spot curve.B . minus the standard swap rate in that currency of the same tenor.C . minus the value of the embedded call option expressed in basis points per year
A corporate bond off ers a 5% coupon rate and has exactly 3 years remaining to maturity.Interest is paid annually. Th e following rates are from the benchmark spot curve:Time-to-Maturity Spot Rate 1 year 4.86%2 years 4.95%3 years 5.65%Th e bond is currently trading at a Z-spread of 234 bps. Th e
Th e G-spread in basis points on the UK corporate bond is closest to:A . 264 bps.B . 285 bps.C . 300 bps.
Th e yield spread of a specifi c bond over the standard swap rate in that currency of the same tenor is best described as the:A . I-spread.B . Z-spread.C . G-spread.Th e following information relates to Question 42 Bond Coupon Rate Time-to-Maturity Price UK Government Benchmark Bond 2% 3 years
Th e value per 100 of par value of a two-year, 3.5% coupon bond, with interest payments paid annually, is closest to:A . 101.58.B . 105.01.C . 105.82.
Th e rate, interpreted to be the incremental return for extending the time-to-maturity of an investment for an additional time period, is the:A . add-on rate.B . forward rate.C . yield-to-maturity.Th e following information relates to Questions 38 and 39 Time Period Forward Rate“0y1y”
A 365-day year bank certifi cate of deposit has an initial principal amount of USD 96.5 million and a redemption amount due at maturity of USD 100 million. Th e number of days between settlement and maturity is Th e bond equivalent yield is closest to:A . 3.48%.B . 3.65%.C . 3.78%.
An analyst evaluates the following information relating to fl oating rate notes (FRNs) issued at par value that have 3-month Libor as a reference rate:Floating Rate Note Quoted Margin Discount Margin X 0.40% 0.32%Y 0.45% 0.45%Z 0.55% 0.72%Based only on the information provided, the FRN that will be
A two-year fl oating-rate note pays 6-month Libor plus 80 bps. Th e fl oater is priced at 97 per 100 of par value. Current 6-month Libor is 1.00%. Assume a 30/360 day-count convention and evenly spaced periods. Th e discount margin for the fl oater in basis points is closest to:A . 180 bps.B . 236
Th e bond’s yield-to-worst is closest to:A . 2.88%.B . 5.77%.C . 6.25%.
Th e bond’s annual yield-to-second-call is closest to:A . 2.97%.B . 5.72%.C . 5.94%.
Th e bond’s annual yield-to-fi rst-call is closest to:A . 3.12%.B . 6.11%.C . 6.25%.
Th e bond’s annual yield-to-maturity is closest to:A . 2.88%.B . 5.77%.C . 5.94%.
A 5-year, 5% semiannual coupon payment corporate bond is priced at 104.967 per 100 of par value. Th e bond’s yield-to-maturity, quoted on a semiannual bond basis, is 3.897%.An analyst has been asked to convert to a monthly periodicity. Under this conversion, the yield-to-maturity is closest to:A
Th e annual yield-to-maturity, stated for with a periodicity of 12, for a 4-year, zero-coupon bond priced at 75 per 100 of par value is closest to:A . 6.25%.B . 7.21%.C . 7.46%.
Th e fl at price for Bond G on the settlement date of 16 June 2014 is closest to:A . 102.18.B . 103.10.C . 104.02.
Th e 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.
Th e full price that Bond G will settle at on 16 June 2014 is closest to:A . 102.36.B . 103.10.C . 103.65.
Bond dealers most often quote the:A . fl at price.B . full price.C . full price plus accrued interest.Th e following information relates to Questions 19–21 Bond G, described in the exhibit below, is sold for settlement on 16 June 2014.Annual Coupon 5%Coupon Payment Frequency Semiannual Interest
Based upon the given sequence of spot rates, the yield-to-maturity of Bond Z is closest to:A . 9.00%.B . 9.92%.C . 11.93%
Based upon the given sequence of spot rates, the price of Bond Y is closest to:A . 87.50.B . 92.54.C . 92.76.
Based upon the given sequence of spot rates, the price of Bond X is closest to:A . 95.02.B . 95.28.C . 97.63.
A 3-year bond off ers a 10% coupon rate with interest paid annually. Assuming the following sequence of spot rates, the price of the bond is closest to:Time-to-Maturity Spot Rates 1 year 8.0%2 years 9.0%3 years 9.5%A . 96.98.B . 101.46.C . 102.95.Th e following information relates to Questions
An investor considers the purchase of a 2-year bond with a 5% coupon rate, with interest paid annually. Assuming the sequence of spot rates shown below, the price of the bond is closest to:Time-to-Maturity Spot Rates 1 year 3%2 years 4%A . 101.93.B . 102.85.C . 105.81.
Which bond will most likely experience the greatest percentage change in price if the market discount rates for all three bonds increase by 100 bps?A . Bond A B . Bond B C . Bond C
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.
Suppose a bond’s price is expected to increase by 5% if its market discount rate decreases by 100 bps. If the bond’s market discount rate increases by 100 bps, the bond price is most likely to change by:A . 5%.B . less than 5%.C . more than 5%.Th e following information relates to Questions 11
Which bond will most likely experience the smallest percent change in price if the market discount rates for all three bonds increase by 100 bps?A . Bond A B . Bond B C . Bond C
Which bond off ers the lowest yield-to-maturity?A . Bond A B . Bond B C . Bond C
Consider the following two bonds that pay interest annually:Bond Coupon Rate Time-to-Maturity A 5% 2 years B 3% 2 years At a market discount rate of 4%, the price diff erence between Bond A and Bond B per 100 of par value is closest to:A . 3.70.B . 3.77.C . 4.00.Th e following information relates
Eurocommerical paper is most likely :A . negotiable.B . denominated in euro.C . issued on a discount basis.
With respect to fl oating-rate bonds, a reference rate such as the London interbank off ered rate (Libor) is most likely used to determine the bond’s:A . spread.B . coupon rate.C . frequency of coupon payments.
Compared with developed markets bonds, emerging markets bonds most likely :A . off er lower yields.B . exhibit higher risk.C . benefi t from lower growth prospects.
A 10-year, capital-indexed bond linked to the Consumer Price Index (CPI) is issued with a coupon rate of 6% and a par value of 1,000. Th e bond pays interest semi-annually.During the fi rst six months after the bond’s issuance, the CPI increases by 2%. On the fi rst coupon payment date, the
Which of the following is a type of external credit enhancement?A . Covenants B . A surety bond C . Overcollaterization
A company has issued a fl oating-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. Th e coupon rate
discuss corporate bond portfolio strategies that are based on relative value.
discuss common rationales for secondary market trading;
explain the infl uence of investors’ short- and long-term liquidity needs on portfolio management decisions;
discuss the implications of cyclical supply and demand changes in the primary corporate bond market and the impact of secular changes in the market’s dominant product structures;
explain classic relative-value analysis, based on top-down and bottom-up approaches to credit bond portfolio management;
discuss the criteria for selecting a fi xed-income manager.
discuss the advantages and risks of investing in emerging market debt;
describe how breakeven spread analysis can be used to evaluate the risk in seeking yield advantages across international bond markets;
recommend and justify whether to hedge or not hedge currency risk in an international bond investment;
evaluate 1) the change in value for a foreign bond when domestic interest rates change and 2) the bond’s contribution to duration in a domestic portfolio, given the duration of the foreign bond and the country beta;
explain the potential sources of excess return for an international bond portfolio;
compare default risk, credit spread risk, and downgrade risk and demonstrate the use of credit derivative instruments to address each risk in the context of a fi xed-income portfolio;
explain the use of interest rate swaps and options to alter portfolio cash fl ows and exposure to interest rate risk;
formulate and evaluate an immunization strategy based on interest rate futures;
demonstrate the advantages of using futures instead of cash market instruments to alter portfolio risk;
critique the use of standard deviation, target semivariance, shortfall risk, and value at risk as measures of fi xed-income portfolio risk;
discuss the use of repurchase agreements (repos) to fi nance bond purchases and the factors that aff ect the repo rate;
evaluate the eff ect of leverage on portfolio duration and investment returns;
demonstrate the use of cash fl ow matching to fund a fi xed set of future liabilities and compare the advantages and disadvantages of cash fl ow matching to those of immunization strategies.
compare risk minimization with return maximization in immunized portfolios;
compare immunization strategies for a single liability, multiple liabilities, and general cash fl ows;
explain the risks associated with managing a portfolio against a liability structure, including interest rate risk, contingent claim risk, and cap risk;
discuss the extensions that have been made to classical immunization theory, including the introduction of contingent immunization;
explain the importance of spread duration;
demonstrate the process of rebalancing a portfolio to reestablish a desired dollar duration;
formulate a bond immunization strategy to ensure funding of a predetermined liability and evaluate the strategy under various interest rate scenarios;
contrast and demonstrate the use of total return analysis and scenario analysis to assess the risk and return characteristics of a proposed trade;
describe and evaluate techniques, such as duration matching and the use of key rate durations, by which an enhanced indexer may seek to align the risk exposures of the portfolio with those of the benchmark bond index;
critique the use of bond market indexes as benchmarks;
discuss the criteria for selecting a benchmark bond index and justify the selection of a specific index when given a description of an investor’s risk aversion, income needs, and liabilities;
compare pure bond indexing, enhanced indexing, and active investing with respect to the objectives, advantages, disadvantages, and management of each;
compare, with respect to investment objectives, the use of liabilities as a benchmark and the use of a bond index as a benchmark;
explain the maturity structure of yield volatilities and their eff ect on price volatility.
explain how a bond’s exposure to each of the factors driving the yield curve can be measured and how these exposures can be used to manage yield curve risks;
describe modern term structure models and how they are used;
explain traditional theories of the term structure of interest rates and describe the implications of each theory for forward rates and the shape of the yield curve;
describe the TED and Libor–OIS spreads;
describe the Z-spread;
calculate and interpret the swap spread for a default-free bond;
explain the swap rate curve, and why and how market participants use it in valuation;
describe the strategy of riding the yield curve;
describe the assumptions concerning the evolution of spot rates in relation to forward rates implicit in active bond portfolio management;
describe the forward pricing and forward rate models and calculate forward and spot prices and rates using those models;
describe relationships among spot rates, forward rates, yield to maturity, expected and realized returns on bonds, and the shape of the yield curve;
compare the risk–return characteristics of a convertible bond with the risk–return characteristics of a straight bond and of the underlying common stock.
describe how a convertible bond is valued in an arbitrage-free framework;
calculate and interpret the components of a convertible bond’s value;
describe defi ning features of a convertible bond;
calculate the value of a capped or fl oored fl oating-rate bond;
compare eff ective convexities of callable, putable, and straight bonds;
describe the use of one-sided durations and key rate durations to evaluate the interest rate sensitivity of bonds with embedded options;
compare eff ective durations of callable, putable, and straight bonds;
calculate and interpret eff ective duration of a callable or putable bond;
explain how interest rate volatility aff ects option-adjusted spreads;
explain the calculation and use of option-adjusted spreads;
calculate the value of a callable or putable bond from an interest rate tree;
explain how changes in the level and shape of the yield curve aff ect the value of a callable or putable bond;
explain how interest rate volatility aff ects the value of a callable or putable bond;
describe how the arbitrage-free framework can be used to value a bond with embedded options;
explain the relationships between the values of a callable or putable bond, the underlying option-free (straight) bond, and the embedded option;
describe fi xed-income securities with embedded options;
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