Reading 68: Yield Measures, Spot Rates, and Forward Rates

答案和详解如下：

1．garding the computation of the cash flow yield for an agency security, which of the following is the best reason why the assumption that the projected cash flows are actually realized is very restrictive?

A)   Spread risk.

B)   Default risk.

C)   Interest rate risk.

D)   Prepayments.

The correct answer was D)

Prepayments instill uncertainty into the assumed cash flows used to compute cash flow yield.

2．ich of the following is a limitation of the cash flow yield measure? The cash flow yield measure:

A)   uses a 360-day year.

B)   assumes that the projected cash flows are reinvested at the cash flow yield.

C)   assumes a flat yield curve.

D)   assumes that interest rates do not change over the life of the security.

The correct answer was B)

Cash flow yield has two major deficiencies: (i) it is implicitly assumed that the cash flows will be reinvested at the cash flow yield prevailing when the MBS or ABS is priced, and (ii) it is assumed that the MBS or ABS will be held until maturity.

3．e yield to maturity is:

A)   below the coupon rate when the bond sells at a discount, and about the coupon rate when the bond sells at a premium.

B)   the discount rate that will set the present value of the payments equal to the bond price.

C)   based on the assumption that any payments recieved are reinvested at the coupon rate.

D)   none of these answers are correct.

The correct answer was B)

The YTM is a measure that will take into account present value, future value, periodic payments, and periods until maturity to find the rate of return that is being earned.  If the YTM is given, the result will be finding the present value of the future value and periodic cash flows. 

4．en computing the yield to maturity, the implicit reinvestment assumption is that the interest payments are reinvested at the:

A)   coupon rate.

B)   yield to maturity at the time of the investment.

C)   current yield.

D)   prevailing yield to maturity at the time interest payments are received.

The correct answer was B)

The reinvestment assumption states that reinvestment must occur at the YTM in order for an investor to earn the YTM.  The assumption also states that payments are received in a prompt and timely fashion resulting in immediate reinvestment of those funds.  

5．ich of the following statements concerning the yield-to-maturity on a bond is CORRECT? Yield to maturity (YTM) is:

A)   always larger than current yield of the bond.

B)   the discount rate that will set the present value of the payments equal to the bond price.

C)   based on the assumption that any payments received are reinvested at the current yield.

D)   below the current yield minus capital gain when the bond sells at a discount, and above the current yield plus capital loss when the bond sells at a premium.

The correct answer was B)

When a bond is selling at a premium, the current yield will be larger than the YTM.   Reinvestments occur at the YTM. The YTM will find the present value of a future value and associated payments.