[ 2009 Mock Exam (AM) ] Fixed Income Investments .Questions ..97-108

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发表于 2009-6-29 16:10 | 只看该作者

97. The spread between the yields on a Ginnie Mae passthrough security and a comparable Treasury security is best explained by:

A. credit risk.
B. prepayment risk.
C, reinvestment risk.

Answer: B
“Understanding Yield Spreads,” Frank J. Fabozzi 2009 Modular Level I, Volume 5, pp. 333-334
Study Session 15-63-g
Identify how embedded options affect yield spreads.
Mortgage-backed securities expose an investor to prepayment risk.

98. Which of the following provides the most flexibility for the bond issuer?

A. Put provision.
B. Call provision.
C. Sinking fund provision.

Answer: B
“Features of debt securities,” Frank J. Fabozzi, CFA, 2009 Modular Level I, Volume 5, pp. 223-228 Study Session 15-60-d,e Explain the provisions for redemption and retirement of bonds; Identify the common options embedded in a bond issue, explain the importance of embedded options, and state whether such options benefit the issuer or bondholder. 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.

99. An annual-pay bond has a yield to maturity of 5.00 percent. The bond-equivalent yield of the annual-pay bond is closest to:

A. 4.94%.
B. 5.00%.
C. 5.06%.

Answer: A
“Yield Measures, Spot Rates, and Forward Rates,” Frank J. Fabozzi 2009 Modular Level I, Volume 5, p. 399
Study Session 16-65-d Compute and interpret the bond equivalent yield of an annual-pay bond and the annual-pay yield of a semiannual-pay bond The bond-equivalent yield of an annual-pay bond = 2 × [(1 + yield on annual-pay bond)0.5 – 1] = 2 × [(1 + 0.05)0.5– 1] = 0.0494 = 4.94%

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发表于 2009-6-29 16:16 | 只看该作者

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100. An analyst gathered the following information:
Periods     Years     Annual Par Yield to Maturity       Theoretical Spot rate   Six-month Forward Rates
                                          BEY (%)                             BEY (%)                        BEY (%)
   1            0.5                      3.00                                  3.00                              3.00
   2            1.0                      3.30                                  3.30                              3.61
   3            1.5                      3.50                                  3.51                              3.91
   4            2.0                      3.90                                  3.92                              5.15
The value of a single, default-free cash flow of $50,000 at the end of Period 4 is closest to:

A. $46,265.
B. $46,299.
C. $46,316.

Answer: A
“Yield Measures, Spot Rates, and Forward Rates,” Frank J. Fabozzi 2009 Modular Level I, Volume 5, pp. 408
Study Session 16-65-e Describe the methodology for computing the theoretical Treasury spot rate curve, and compute the value of a bond using spot rates
The theoretical spot rates for Treasury securities represent the appropriate set of interest rates that should be used to value default-free cash flows. Therefore:
$50,000 / (1 + 0.0392/2)4= $46,264.80 ≈ $46,265.

101. The zero-volatility spread (Z-spread) is a measure of the spread off:
A. all points on the spot curve.
B. all points on the Treasury yield curve.
C. one point on the Treasury yield curve.

Answer: A
“Yield Measures, Spot Rates, and Forward Rates,” Frank J. Fabozzi 2009 Modular Level I, Volume 5, pp. 414
Study Session 16-65-f Differentiate between the nominal spread, the zero-volatility spread, and the option-adjusted spread.
The zero-volatility spread is a measure of the spread that the investor would realize over the entire Treasury spot rate curve if the bond is held to maturity.

102. If an institutional investor wants to borrow money for 30 days to finance a bond purchase, which of these is most likely to be the lowest loan rate available?

A. Term repo rate
B. Call money rate
C. Broker loan rate

Answer: A
“Features of debt securities,” Frank J. Fabozzi, CFA 2009 Modular Level I, Volume 5, pp. 230-231
Study Session 15-60-f Describe methods used by institutional investors in the bond market to finance the purchase of a security (i.e., margin buying and repurchase agreements).
For institutional investors the term repo rate is less than the cost of bank financing (i.e., broker loan rate or call money rate.)

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发表于 2009-6-29 16:19 | 只看该作者

103. The option adjusted spread (OAS) is best described as the:

A. Z-spread minus the option cost.
B. Z-spread plus the cost of the option.
C. value of the security’s embedded option.

104. If interest rates are expected to decline, an investor can earn a higher coupon interest rate by purchasing a(n):

A. callable bond.
B. inverse floater.
C. floater with a floor.

105. The duration of a fixed-income portfolio is best interpreted as the:

A. first derivative of the price function for the bonds in the portfolio.
B. percentage change in the portfolio’s value if interest rates change by 100 basis points.
C. weighted average number of years to receive the present value of the portfolio’s cash flows.

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103. The option adjusted spread (OAS) is best described as the:

A. Z-spread minus the option cost.
B. Z-spread plus the cost of the option.
C. value of the security’s embedded option.

Answer: A
“Yield Measures, Spot Rates, and Forward Rates,” Frank J. Fabozzi 2009 Modular Level I, Volume 5, p. 419
Study Session 16-65-g
Describe how the option-adjusted spread accounts for the option cost in a bond with an embedded option The Z-spread is the sum of the OAS and the option cost.

104. If interest rates are expected to decline, an investor can earn a higher coupon interest rate by purchasing a(n):

A. callable bond.
B. inverse floater.
C. floater with a floor.

Answer: B
“Features of Debt Securities,” Frank J. Fabozzi 2009 Modular Level I, Volume 5, p. 220
Study Session 15-60-b, e Describe the basic features of a bond, the various coupon rate structures, and the structure of floating-rate securities.
Identify the common options embedded in a bond issue, explain the importance of embedded options, and state whether such options benefit the issuer or the bondholder. Inverse floaters have a coupon formula such that the coupon rate increases when
the reference rate decreases and decreases when reference rate increases. The coupon rate moves in the opposite direction from the change in the reference rate.

105. The duration of a fixed-income portfolio is best interpreted as the:

A. first derivative of the price function for the bonds in the portfolio.
B. percentage change in the portfolio’s value if interest rates change by 100 basis points.
C. weighted average number of years to receive the present value of the portfolio’s cash flows.

Answer: B
“Introduction to the Measurement of the Interest Rate Risk,” Frank J. Fabozzi 2009 Modular Level I, Volume 5, pp. 466-467
Study Session 16-66-e Distinguish among the alternative definitions of duration, and explain why effective duration is the most appropriate measure of interest rate risk for bonds with embedded options.
Users of this interest rate risk measure are interested in what it tells them about the price sensitivity of a bond or a portfolio to change in interest rates, therefore B is correct.