Fixed income tutorial question

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  • 1. ©Pristine-Neev Knowledge Management Pvt Ltd Mangalayatan UniversityPGCFRFixed Income-Tutorial1. If the bond is selling at discount which of the following relations hold true:A. Coupon rate = Current Yield = Yield to MaturityB. Coupon rate > Current Yield = Yield to MaturityC. Coupon rate < Current Yield < Yield to Maturity2. 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 Rate1 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 periodof 3 years, the current market value based on arbitrage free valuation is equal toA. $100.27B. $100.72C. $102.274. For a bond the last coupon date was 1st January 2010 and Mr. X purchases that bond on 1stApril 2010. The coupon rate is 12% per annum with par value of $1000.If the fair value of thebond is $ 1050 then the clean price for the bond will beA. 1000B. 1050C. 10205. Which of the following bond is similar to zero coupon bonds in the sense that they do not makeany periodic interest?A. Accrual bondsB. Step-up notesC. Deferred –coupon bonds6. For an inverse floater security the coupon rateA. Is zero as it doesn’t pay any interestB. Increases as the reference rate increasesC. Increases as the reference rate decreases
  • 2. ©Pristine-Neev Knowledge Management Pvt Ltd Mangalayatan University7. A Treasury security is quoted at 98-25 and has a par value of $100,000.Its quoted dollar priceis closest to:A. $98,250B. $98,780C. $98,5208. Which of the following is least likely a characteristic of Commercial paper?A. It is issued as a pure discount securityB. It is issued with maturities of 270 days or lessC. It complies with SEC regulation9. The call provision has the following characteristic:A. It can enforced at any point during the life of callable bondB. The call option value declines over the life of a callable bondC. 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 calledB. If a lower coupon issue is sold to provide the funds to call the bonds, the bonds are said tobe 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. FloorsB. Conversion OptionC. Accelerated sinking fund provision.12. All of the following are used for early retirement of debt by the issuer except.A. A conversion optionB. A prepayment optionC. A call option13. Which of the following is correct with respect to a bond’s indenture?A. Indenture is same as debentureB. It is used as collateralC. It contain covenant14. For a coupon bond and a zero coupon bond of same maturity and par value, which of thefollowing statements hold true:
  • 3. ©Pristine-Neev Knowledge Management Pvt Ltd Mangalayatan UniversityA. A coupon bond has more price risk as compared to a zero coupon bondB. A coupon bond has more investment risk as compared to a zero coupon bondC. A coupon bond has the same investment and price risk as a zero coupon bond15. Which of the following statements is true?A. Duration increases when time to maturity increases and coupon rate decreasesB. Duration increases when time to maturity decreases and coupon rate increasesC. Duration is independent of time to maturity and coupon rate16. Treasury spot rates (expressed as semi-annual-pay yields to maturity) are given as follows 6months: 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 bondB. Selling the bond and buying the pieces thus earning $7.45 per bondC. Buying the bond and selling the pieces thus earning $7.85 per bond17. A 5 year Treasury STRIP is priced at $800. thenA. 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 bankruptcyB. To increase the leverage of the firmC. To reduce the required yield on the ABS debt19. 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 yieldsB. Compared to an option free bond, a putable bond will have less price volatility at lower yieldsC. Compared to an option free bond, a putable bond will have more price volatility at higher yields21. 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 canpurchase.C. In step up notes coupon rate decreases over time on a present schedule.
  • 4. ©Pristine-Neev Knowledge Management Pvt Ltd Mangalayatan University22. Off the run Treasury Securities as compared to On the run Treasury Securities:A. Is less liquidB. Provide better information about current market yieldsC. Is more actively traded23. The debt instrument where the collateral for the promise to pay is an underlying pool of otherdebt obligation is best known as:A. Collateralized debt obligationB. Collateralized mortgage obligationC. Asset Backed Securities24. Which of the following bond is least likely to be affected by the Volatility risk?A. Bond with put optionsB. Bonds with prepayment optionsC. Option free bonds.25. For an option free bond of 5 years with par value of $100 paying semiannual coupons of 6% iscurrently priced at $ 98. If Market interest rate increases by 100 basis points then the pricedecreases by 5% .If the market interest decreases by 100 basis points then which of thefollowing 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 maximumvalue 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 privateplacement?A. It can be tailored to the need of the buyersB. It does not require registration under SECC. It is highly liquid28. Which of the following statement is least accurate?A. A Conventional mortgage is an example of an amortizing loanB. Call provisions give the issuer the right and the obligation to retire all or a part of an issueprior to maturityC. Sinking fund provisions provide for the repayment of principal through a series of paymentsover the life of the issue.
  • 5. ©Pristine-Neev Knowledge Management Pvt Ltd Mangalayatan University29. Which of the following statement is incorrect?A. Accrued interest is the interest earned since the last coupon payment date and is paid by abond buyer to a bond seller.B. Clean price is the quoted price of the bond without accrued interestC. Full price refers to the quoted price without any accrued interest30. 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 adecrease in interest rates of 10 basis points? Assume the annual yield is 7%.A. A zero-coupon bond maturing in 5 yearsB. A coupon-paying bond, with Macaulay Duration of 3.81 years and convexity of 16.39 yearssquaredC. A bond with a coupon of 10% maturing in 10 years that is immediately callable32. Institutional users use a number of methods for borrowing money for the purchase of bonds,the least likely method of borrowing is…A. Margin buyingB. Repurchase agreementC. Loan against property33. 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 20Treasury strips. The 20th treasury strip is the final coupon and principal strip and has a maturityvalue of $104mn. Karen disagrees with both the points. She is most likely correct regarding:Number of Treasury Strips Maturity valueA Incorrect IncorrectB Correct CorrectC Incorrect Correct34. Bart wants to invest in a municipal bond. Which of the following is he least likely to invest in…A. Tax backed bondsB. Revenue bondsC. Bankruptcy bonds35. 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 specifiedamount of securities with a certain coupon rate and maturity. Statement 2: In a bought deal the underwriting firm usually has presold most of thesecurities and has hedged its interest rate risk.Which of the above statements is most likely to be correct?Statement 1 Statement 2A Correct IncorrectB Correct CorrectC Incorrect Incorrect36. Carl is discussing valuation models with Karen. Carl states that all valuation models arecalibrated using on-the-run Treasury securities. Karen states that volatility of interest rates canvary from period to period; all models make some critical assumptions regarding the volatility ofshort term interest rates. The two statements are most likely…Carl’s Statement Karen’s StatementA Incorrect IncorrectB Correct CorrectC Correct Incorrect37. A straight 7% bond with two years to maturity is priced at $97.65. A putable bond which issimilar to straight bond in all aspects except for the put feature is priced at $98.45 and acallable 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 valuea. $0.75 $0.75b. $0.8 $0.7c. $0.7 $0.838. A buyer of a bond pays the seller $105 2/5 for a at par bond. The bond is cum-coupon. The fullprice and the clean price is closest to:Full Price Clean PriceA 5 2/5 $100B 3 3/8 $105C 2 1/2 $100
  • 7. ©Pristine-Neev Knowledge Management Pvt Ltd Mangalayatan University39. 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 paymentsB. Servicer costsC. Scheduled principal payments.40. Sally makes the following statement regarding corporate debts, “CPs is a long term note thatcan have maturity of up to 15 years or more. In an IAN the maturity increases when interestrate increases”. Sally is most likely correct regardingCommercial Papers IANA Correct IncorrectB Incorrect CorrectC Incorrect Incorrect41. Smith is comparing the yields that he gets from investing in two securities. The first one is ataxable 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 toinvest.A. Security A; since the yield is higherB. Security B; since the tax-equivalent yield is higherC. Both the securities provide the same yield42. Carl says that treasury strips offered by his bank are guaranteed by the full faith and credit ofthe US Government. He also says that strips provide better yield as compared to an on-the-runTreasury security of the same maturity. Carl is most likely…A. Correct regarding both the statementsB. Incorrect regarding one of the statements and Correct regarding the otherC. Incorrect regarding both the statements43. A callable bond will have a higher yield spread than a comparable putable bond. The statementis most likely…A. Correct; the call option is favorable to the issuer hence the bond should have a higher yieldB. Correct; the put option is favorable to the issuer hence the bond can have a lower yieldC. Incorrect; the call option embedded in the bond is favorable to the investor hence the yieldshould be lower.44. For an 8% 10-year semi-annual coupon bond the discount rate is 6.5% p.a. The fair value isclosest to…
  • 8. ©Pristine-Neev Knowledge Management Pvt Ltd Mangalayatan UniversityA. 110.9B. 112.9C. 102.945. A bond is likely to get matured in next three years has a par value of $500 and a coupon rate of7.75% payable semiannually. Which of the following is closest amount of semiannual couponpayment?A. Rs. 38.75B. Rs. 19.375C. Rs. 19.7546. 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. $942.53B. $1,000C. $1,059.71