CFA Level I：Fixed Income - Features of debts securities 习题精选

cityboy

1. The table below provides a history of a fixed income security’s coupon rate and the risk free rate over a five-year period: Year Risk Free Rate Coupon Rate 1 3.00% 6.00% 2 3.50% 5.00% 3 4.25% 3.50% 4 3.70% 4.60% 5 3.25% 5.50% The security is most likely a(n): A. step-up note. B. inverse floater. C. deferred coupon bond.

Ans: B; B is correct because an inverse floater is a floating-rate security with a coupon formula that actually increases the coupon rate when a reference interest rate decreases, and vice versa. An example coupon formula: coupon rate = 12% - reference rate. Here the security’s coupon rate moves in the opposite direction (inversely) with the risk free rate. (Specifically: Coupon rate = 12.00% – 2 × Risk free rate.)

cityboy

2. A 10-year bond is issued on January 1, 2010. Its contract requires that its coupon rate change over time as shown in the following table: Coupon Payment Date Range Coupon Rate 1/1/2010-12/31/2011 2.0% 1/1/2012-12/31/2013 5.0% 1/1/2014-12/31/2015 7.5% 1/1/2016-12/31/2019 9.0% This security is best described as an example of a: A. step-up note. B. inverse floater. C. deferred coupon bond.

Ans: A; A is correct step-up notes have coupon rates that increase over time at a specified rate. The increase may take place one or more times during the life of the issue.

cityboy

3. An analyst reviews a corporate bond indenture that contains these two covenants: 1) The borrower will pay interest semi-annually and principal at maturity. 2) The borrower will not incur additional debt if its debt/capital ratio is more than 50%. What types of covenants are these? A. Both are affirmative covenants. B. Covenant 1 is negative and Covenant 2 is affirmative. C. Covenant 2 is negative and Covenant 1 is affirmative.

Ans: C; Affirmative covenants include 1) the timely payment of principal and interest. 2) the maintenance of certain financial ratios (for example, the borrower might promise to maintain the company’s current ratio at a value of two or higher. If this value of the current ratio is not maintained, then the bonds could be considered to be in (technical) default.) Negative covenants include 1) restrictions on asset sales (the company can't sell assets that have been pledged as collateral), 2) negative pledge of collateral (the company can't claim that the same assets back several debt issues simultaneously), 3) restrictions on additional borrowings (the company can't borrow additional money unless certain financial conditions are met). Therefore Covenant 1 is affirmative and Covenant 2 is negative.

cityboy

3. An investor sells a bond at the quoted price of $98.00. In addition he receives accrued interest of $4.40. The clean price of the bond is: A. Par value plus accrued interest. B. accrued interest plus agreed upon bond price. C. agreed upon bond price excluding accrued interest.

Ans: C; Accrued interest: when a bond trades between coupon dates, the seller is entitled to receive any interest earned from the previous coupon date through the date of the sale. This is known as accrued interest. The total amount that the buyer pays to the seller of the bond (full price) is the clean price plus any accrued interest: Full price = Clean price + Accrued interest Therefore C is the correct choice because the agreed upon price without the accrued interest is the clean price.

cityboy

4. Which of these embedded options most likely benefits the investor? A. The floor in a floating-rate security B. An accelerated sinking fund provision C. The call option in a fixed-rate security

Ans: A; A is correct because the floor guarantees a minimum rate the investor will earn. Embedded options that favor the bondholders/investors: (1) conversion provisions; (2) a floor that guarantees a minimum interest payment to the bondholder; (3) a put option. Embedded options that favor the issuer/borrower: (1) the right to call the issue; (2) an accelerated sinking fund provision; (3) a prepayment option; (4) a cap on the floating coupon rate that limits the amount of interest payable by the borrower/issuer.

cityboy

5. Which embedded option is most beneficial to a bond issuer? A. A conversion privilege. B. A floor on a floating rate bond. C. An accelerated sinking fund provision.

Ans: C; C is the correct choice because an accelerated fund provision gives the issuer an option to retire more than the sinking fund requirement. Neither A nor B is correct because they both benefit the bondholders.

cityboy

6. A 5-year floating-rate security was issued on January 1, 2006. The coupon rate formula was 1-year LIBOR + 300 bps with a cap of 10% and a floor of 5% and annual reset. The 1-year LIBOR rate on January 1st of each year of the security’s life is provided in the following table: Year 1-Year LIBOR 2008 3.5% 2009 4.0% 2010 3.0% 2011 2.0% 2012 1.5% During 2012, the payments owed by the issuer were based on a coupon rate closest to: A. 6.5% B. 5.0% C. 4.5%

Ans: B; B is correct because LIBOR + 300 bps at the reset date equals 1.5% + 3.00% = 4.5%, which is below the floor of 5.00% so the coupon rate will be equal to the floor.

cityboy

7. Which of the following provides the most flexibility for the bond issuer? A. Put provision B. Call provision C. Sinking fund provision

Ans: B; B is the correct choice. A call provision allows the issuer to repurchase the bond for any reason, assuming the call deferral period has ended and upon payment of any call premium. Call features give the issuer the opportunity to replace higher-than-market coupon bonds with lower-coupon issues. A is not the correct choice. A put provision allows the bondholder to sell the bond to the issuer at a specified price prior to maturity. Therefore, it provides flexibility for the bondholder. C is not the correct choice. An accelerated sinking fund provision rather than just a sinking fund provision provides flexibility for the bond issuer.

cityboy

8. Which of the following provides the most protection to a bondholder? A. Call protection. B. Refunding protection. C. Sinking fund protection.

Ans: A; A is the correct choice because call protection means the bond cannot be called from the bondholder by the issuer for any reason. B is not correct because a bond with the refunding protection can still be called. Just that a bond with the refunding protection prohibits the call using the proceeds from a lower coupon issue. C is not correct because it is not relevant.

cityboy

9. Which statement regarding sinking funds is least likely correct? A. Sinking fund provisions require the retirement of a portion of a bond issue in specified amounts prior to the maturity date. B. Sinking fund redemptions can be accomplished by making cash payment to the trustee who will then retire the required proportion of the bonds. C. If rates have declined since the bond was issued, companies are likely to choose to retire a proportion of the debt through the delivery of securities.

Ans: C; C is least likely correct. Companies would retire through the delivery of securities of rates have gone up, not down.