Fixed Income Analysis Workbook 2nd Edition Frank J. Fabozzi - Solutions

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2. The Macaulay duration, in years, for Bond One is closest to:A. 3.54.B. 3.59.C. 3.78.
1. True or false: Curve duration is a type of yield duration.A. True B. False
explain how a bond’s maturity, coupon, and yield level affect its interest rate risk
define, calculate, and interpret modified duration, money duration, and the price value of a basis point (PVBP)
8. Hightest Capital purchases a seven-year, 6.4% coupon bond and has an intended investment horizon of four years. The Macaulay duration of the bond is 5.86 years. If interest rates increase by 50 bps immediately after buying the bond, Hightest Capital faces:A. negative price risk.B. negative
7. Consider a bond that has three years remaining to maturity, a coupon of 4% paid semiannually, and a yield-to-maturity of 4.60%. Assuming it is 12 days into the first coupon period and a 30/360 basis, the bond’s annualized Macaulay duration is closest to:A. 1.8764 years.B. 2.8386 years.C.
6. An investor purchases a 12-year, 5.8% annual bond and intends to sell it after 10 years. The Macaulay duration of the bond is 8.97 years. If interest rates fall by 75 bps immediately after the purchase of the bond, the investor faces:A. negative reinvestment risk.B. no reinvestment risk.C.
5. When an investor’s investment horizon is less than a bond’s Macaulay duration, the investor faces downside risk if, after the purchase of the bond, interest rates:A. decrease.B. increase.C. either decrease or increase.
4. The duration gap at which reinvestment risk and price risk are equal is:A. less than zero.B. equal to zero.C. greater than zero.
3. The carrying value of a bond purchased at a price below par is equal to the original purchase price:A. minus the accumulated premium amortization.B. minus the accumulated discount amortization.C. plus the accumulated discount amortization.
2. An investor purchases an eight-year, 6.4% annual coupon eurobond priced at par (settlement: 15 June 2031; maturity: 15 December 2039) and sells it after six years. Assuming interest rates rise by 100 bps immediately after purchase, the investor’s rate of return at the end of six years is:A.
1. Assuming no capital gain or loss when the bond is sold, an investor’s horizon yield is equal to a bond’s yield-to-maturity at the time of investment if coupons are reinvested at a rate:A. lower than the bond’s yield-to-maturity at investment.B. equal to the bond’s yield-to-maturity at
define, calculate, and interpret Macaulay duration.
describe the relationships among a bond’s holding period return, its Macaulay duration, and the investment horizon;
calculate and interpret the sources of return from investing in a fixed-rate bond;
9. Match the following statements about par rate curves with corresponding state- ments about spot rate curves.1. The par rate curve lies above the spot rate curve.A. The spot rate curve is upward sloping (i.e., normal), and spot rates are negative.2. The par rate curve lies below the spot rate
8. Match the following statements about forward rate curves with corresponding statements about spot rate curves.1. The forward rate curve lies above the spot rate curve.A. The spot rate curve is downward sloping(i.e., inverted).2. The forward rate curve lies below the spot rate curve.B. The spot
7. Which of the following statements about yield curves is true?A. Spot curves are derived from par rates.B. Par curves are derived from forward rates.C. Forward curves are derived from spot rates.
6. Match the sequence of forward rates and the corresponding spot rate that the forward rates will calculate.Forward rates Spot rate calculation 1. 0y1y x 1y1y x 2y1y A. Four-year spot rate 2. 0y1y x 1y2y x 3y3y B. Three-year spot rate 3. 0y1y x 1y1y x 2y1y x 3y1y C. Six-year spot rate
5. Which of the following choices is the closest to the implied five-year forward rate in two years for Swiss government bonds?A. –0.191%B. –0.001%C. –0.317%
4. Match the spot rates needed to calculate the corresponding implied forward rates.1. Two-year and five-year spot rates A. Two-year implied forward rate in five years 2. Two-year and seven-year spot rates B. Three-year implied forward rate in two years 3. Five-year and seven-year spot rates C.
3. Suppose the one-year and two-year spot rates in Canada move upward by 20 bps but the three-year Canadian spot rate remains unchanged. Which of the following best reflects the updated three-year Canadian par rate?A. Increases by approximately 13 bps B. Increases by approximately 7 bps C.
2. The Australian government is considering issuing three-year bonds with a 3.0%coupon with annual payments. Given the spot rates in Australia, the price is closest to:A. 108.05.B. 108.07.C. 108.69.
1. Which level of coupon would the Swiss government choose if its goal is to minimize the premium over par value for a five-year debt issue?A. 1.0%B. 0.5%C. 0.0%
compare the spot curve, par curve, and forward curve
define par and forward rates, and calculate par rates, forward rates from spot rates, spot rates from forward rates, and the price of a bond using forward rates
define spot rates and the spot curve, and calculate the price of a bond using spot rates
7. Explain why a money market discount rate greater than zero understates the rate of return to an investor and understates the cost of borrowed funds for the issuer.
6. A 91-day UK gilt (Treasury bill) has a face value of GBP2 million, a discount rate of 0.25%, and a price of GBP1.9 million. If a year has 366 days, the discount rate for the UK gilt is closest to:A. 0.1821.B. 0.2011.C. 0.2134.
5. The bond equivalent yield of a 90-day European bank certificate of deposit quoted at a discount rate of 0.55% for a 360-day year is closest to:A. 0.21%.B. 0.24%.C. 0.28%.
4. The price of the FRN is closest to:A. 98.804.B. 99.804.C. 100.804.
3. Without doing any calculation, this floating-rate note is priced at:A. a premium.B. a discount.C. par.
2. Changes in the required margin for a floater usually come from:A. shifts in the yield curve.B. changes in credit risk.C. increases or decrease in inflation.
1. A two-year floating-rate note issued by a French corporation pays the three-month MRR of –0.55% plus 160 bps. The floater is priced at 101.20 per 100 of par value. Assuming the 30/360 day-count convention and 90 days per period, the discount margin for the floater is closest to:A. 25 bps.B. 50
calculate and interpret yield measures for money market instruments
calculate and interpret yield spread measures for floating-rate instruments
5. An analyst is analyzing a six-year callable bond with a semiannual coupon of 2.50% trading at a price of 98.90 per 100 par value and the following call schedule:Call Schedule Period Call Price 4–5 Years 101.50 5–6 Years 101.00 Match the yields below to the respective yield measures.Yield
4. If the price of the QWE bond is 98.70% of par, its Z-spread (in basis points) is closest to:A. 80.B. 82.C. 87.
3. The I-spread (in basis points) for the QWE bond is closest to:A. 46.B. 80.C. 87.
2. An analyst is analyzing a three-year, 2.25% annual coupon bond issued by QWE Company. Currently, the bond’s yield-to-maturity is 2.707%. The three-year swap rate is 1.840%. The government spot rates are presented in the table.Maturity Government Spot Rate 1Y 0.899%2Y 1.260%3Y 1.904%The
1. A bond issued by RTR pays a quarterly coupon of 3.25%, has three years to maturity, and is currently trading at 97.28. The semiannual bond basis yield is closest to:A. 1.055%.B. 2.121%.C. 4.242%.
compare, calculate, and interpret yield and yield spread measures for fixed-rate bonds
calculate annual yield on a bond for varying compounding periods in a year
7. An analyst is analyzing a bond that will soon be issued by XYZ Company. The new bond will have five years to maturity and a 2.25% coupon, paid semiannually.XYZ has never issued bonds before, so the analyst will use matrix pricing. The analyst has identified four similar bonds with the following
6. A bond is traded in between its coupon payment dates. Which of the following is true?A. The buyer must pay the full price plus the accrued interest.B. The bond’s quoted price is greater than its flat price.C. Accrued interest is not included in the flat price.
5. A four-year, 2.0% semiannual coupon bond that pays coupons semiannually is trading at a price of 102.581. The bond’s annualized yield-to-maturity is closest to:A. 0.67%.B. 1.34%.C. 2.22%.
4. A fixed-income analyst is pricing a bond using the following equation.PV = _ 3 (1 + 0.0275) 1 + _ 3 (1 + 0.0275) 2 + .... + _ __103 ____ (1 + 0.0275) 40 The bond’s price, relative to par, is most likely:A. greater than 100.B. exactly 100.C. less than 100.
3. With a constant market discount rate, as a non-callable, fixed-coupon bond approaches maturity:A. the price–yield relationship will become more convex.B. a low-coupon bond trading at a discount will increase in price.C. a high-coupon bond trading at a premium will increase in price.
2. Exceptions to the maturity effect exist for bonds that have:A. long maturities, make small coupon payments, and trade at a discount.B. short maturities, have high coupon rates, and trade at a discount.C. long maturities, have high coupon rates, and trade at a premium.
1. A non-callable, fixed-coupon bond has a price of 106.0625 and a YTM of 2.8%. If the YTM were to increase instantaneously by 80 bps, the price of the bond would decrease by 11%. If the YTM were to decrease instantaneously by 80 bps, the price of the bond would increase by:A. less than 11%.B.
describe matrix pricing
identify the relationships among a bond’s price, coupon rate, maturity, and yield-to-maturity
calculate a bond’s price given a yield-to-maturity on or between coupon dates
6. Government agencies issue debt that is:A. at a yield-to-maturity equal to that of its sovereign guarantor.B. primarily repaid by cash flows related to its underlying activities.C. short term, only to meet working capital and capital investment needs.
5. A non-sovereign bond issued to fund public goods and services in the non-sovereign’s limited jurisdiction that is repaid from local tax cash flows is referred to as:A. a GO bond.B. a revenue bond.C. an agency bond.
4. On-the-run sovereign debt securities are:A. used for benchmark yield analyses.B. issued prior to off-the-run securities.C. less liquid than off-the-run securities.
3. Which of the following is correct regarding the single-price auction process?A. Bidders include only dealers and institutional investors.B. Competitive bidders who bid higher than the stop yield are allocated securities.C. All non-competitive bids are accepted, while competitive bids are ranked
2. In practice, which of the following applies as it relates to sovereign government financing?A. Taxpayers smooth consumption over time, saving expected future taxes today for future payment.B. Taxpayers form rational expectations that today’s tax cuts will result in future tax increases and
1. Balance sheets of government entities are unlikely to include:A. FX reserves.B. long-term debt.C. accrual of unfunded liabilities.
contrast the issuance and trading of government and corporate fixed-income instruments
describe funding choices by sovereign and non-sovereign governments, quasi-government entities, and supranational agencies
6. Which of the following statements about high yield is correct?A. High-yield investors benefit from higher bond prices as issuer-specific credit spreads fall, but in the case of callable debt, these gains are capped at the original purchase price.B. Issuers in the high-yield market seek to retain
5. Which of the following is not a reason why issuers elect to issue long-term debt as opposed to short-term debt?A. More stable funding for short-term activities B. Lower interest rates for longer maturities for a given issuer C. More stable funding for long-term needs, such as capital investments
4. A transaction where a hedge fund enters into a repo by taking a short position in a security with a view that its price will decline relative to the price of another security held is best described as:A. a reverse repo.B. a triparty repo.C. financing the ownership of a security.
3. Assume that today (t = 0) the current US five-year Treasury note trades at a price equal to the bond’s face value of USD50,000,000. The security buyer takes delivery of the US Treasury note today and pays the security seller USD50,000,000.Assume a repo term of 45 days (and 360 days in a year)
2. Ewing Corp. is a large corporation that has an existing relationship with Sycamore Bank. Ewing is seeking short-term financing from a committed line of credit; however, Sycamore will offer only an uncommitted line of credit. Which of the following best supports Sycamore’s decision?A. Sycamore
1. Which of the following is a benefit to a bank that makes short-term loans and issues asset-backed commercial paper?A. The bank receives commercial paper when the ABCP is issued.B. Capital costs are reduced by providing undrawn backup liquidity instead of holding the short-term loans to
contrast the long-term funding of investment-grade versus high-yield corporate issuers
describe repurchase agreements (repos), their uses, and their benefits and risks
compare short-term funding alternatives available to corporations and financial institutions
5. The bond issue trading at the highest bid–offer spread is most likely a:A. recently issued sovereign bond.B. seasoned investment-grade corporate bond.C. recently issued investment-grade corporate bond.
4. A firm that increases the size of an existing bond issue with a price significantly different from par is conducting a:A. reopening.B. private placement.C. distressed debt issuance.
3. An index tracking the Bloomberg Barclays Global Aggregate Index would most likely have:A. limited security selection.B. modest turnover due to changes in market values.C. comprehensive exposure to fixed-income markets.
2. An issuer with a AAA credit rating would most likely be a:A. distressed issuer.B. high-yield issuer.C. sovereign issuer.
1. Match the instrument type on the left with its typical investor on the right.A. Commercial paper I. Insurance companies B. Unsecured corporate bonds II. Hedge funds C. Secured corporate bonds III. Money market funds
compare primary and secondary fixed-income markets to equity markets
describe types of fixed-income indexes
describe fixed-income market segments and their issuer and investor participants
5. Which of the following statements best describes the implications of removing the conversion feature from the bond?A. Removal of the conversion feature would likely result in a higher coupon.B. Removal of the conversion feature would likely increase the bond price.C. Removal of the conversion
4. If DILO’s share price on the Frankfurt Stock Exchange were to rise to EUR75, the bond’s conversion value would be:A. EUR1,000.B. EUR15,000.C. EUR75,000.
3. Which of the following is the best contingency feature Digistrype could add to mitigate its own concerns regarding lower interest rates?A. Add a call provision to the proposed new debt.B. Add a put provision to the proposed new debt.C. Add a step-up coupon to the proposed new debt.
2. Which of the following modifications could Digistrype incorporate to best mitigate the investors’ credit concerns?A. Digistrype could consider deferred debt coupons and/or principal payments.B. Digistrype could consider adding a call provision to its new debt.C. Digistrype could consider
1. Which of the following statements best describes the type of bonds to be issued given the issuer’s country and where the bonds will be issued and traded?A. Since Digistrype is planning to issue and sell euro-denominated bonds, its bonds would be considered Eurobonds.B. Since Digistrype is
5. Antelas decides to raise new secured, unsubordinated debt. Which of the following best describes the priority of payments between the issuer’s new debt and its existing debt?A. Because the Antelas AG notes have a pari passu (or “equal footing”) clause, this debt obligation will be treated
4. Calculate the value of Antelas’s payment to bondholders on the maturity date if the MRR is 0.25% p.a. for the final interest period.A. EUR1,718,750 B. EUR251,718,750 C. EUR256,875,000
3. Antelas AG’s issuer-specific credit spread rises by 25 bps p.a. one year after the FRN issuance. Which of the following best describes how Antelas AG’s FRN cou-pon would change as a result?A. Antelas AG’s FRN coupon payment to investors will immediately increase by 25 bps p.a.B. Antelas
2. Which of the following statements best describes the source(s) of repayment for the Antelas AG floating-rate notes?A. Since the notes are secured (or backed) by Antelas AG’s assets, the floating-rate notes would be considered asset-backed securities.B. The Antelas AG notes rely on the
1. “Four years” and “MRR plus 250 bps p.a.” refer, respectively, to which bond features as of the settlement date?A. Time to maturity and coupon rate B. Coupon frequency and current yield C. Time to maturity and contingency provision
24.a. What is an interest rate cap or floor equivalent to?b. What is a caplet and a floorlet?
23. What counterparty risk is the seller of an interest rate floor exposed to?
22. Suppose that a 1-year floor has a floor rate of 4% and a notional amount of $20 million.The frequency of settlement is quarterly and the reference rate is 3-month LIBOR.Assume that 3-month LIBOR for the next four quarters is as shown below. What is the payoff for each quarter?Period 3-month
21. Suppose that a 1-year cap has a cap rate of 8% and a notional amount of $10 million. The frequency of settlement is quarterly and the reference rate is 3-month LIBOR. Assume that 3-month LIBOR for the next four quarters is as shown below.What is the payoff for each quarter?Period 3-month LIBOR
20. Why is the fixed-rate payer in an interest rate swap said to be ‘‘short the bond market’’?
19. Suppose that interest rates decrease subsequent to the inception of an interest rate swap.a. What is the effect on the value of the swap from the perspective of the fixed-rate payer?b. What is the effect on the value of the swap from the perspective of the fixed-rate receiver?
18. Give two interpretations of an interest rate swap and explain why an interest rate swap can be interpreted in each way.
17. Suppose that Ted Munson, a portfolio manager, enters into a 3-year interest rate swap with a commercial bank that is a swap dealer. The notional amount for the swap is $40 million and the reference rate is 3-month LIBOR. Suppose that the payments are made quarterly. The swap rate that Mr.
16. In an interest rate swap what is meant by the swap rate and the swap spread?
15.a. What is the motivation for the purchase of an over-the-counter option by an institutional investor?b. Does it make sense for an investor who wants to speculate on interest rate movements to purchase an over-the-counter option versus exchange-traded options?
14. Suppose an investor purchases a put option on a Treasury bond futures contract with a strike price of $97.a. If at the expiration date the price of the Treasury bond futures contract is $99, will the investor exercise the put option and, if so, what will the investor and the writer of the put
13. Suppose an investor purchases a call option on a Treasury bond futures contract with a strike price of $91.a. If at the expiration date the price of the Treasury bond futures contract is $96, will the investor exercise the call option and, if so, what will the investor and the writer of the

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Fixed Income Analysis Workbook 2nd Edition Frank J. Fabozzi - Solutions

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