1．Which of the following statements is TRUE?

A)   When a rating agency downgrades a security, the bond's price usually falls.

B)   Technical default usually refers to the issuer's failure to make interest or principal payments as scheduled in the indenture.

C)   Default risk is important because if a bond issuer defaults, the bondholder likely loses his entire investment.

D)   Bond ratings are determined by the market.

2．When determining credit risk spread, the benchmark security is most likely a(n):

A)   high-yield corporate bond.

B)   Treasury bond.

C)   low-yield corporate bond.

D)   AA rated bond.

3．Benjamin Zoeller and Tara McGonigal are preparing for the Level I CFA examination. Zoeller is studying credit spread risk. McGonigal is farther along in her studies, but has forgotten how to determine the default free rate if given the yield on a bond rated BBB+ of 9.50 percent and a risk premium of 3.00 percent. What does Zoeller tell her to use for the default free rate?

A)   12.50%.

B)   4.50%.

C)   6.50%.

D)   9.50%.

4．Suppose that a corporate bond and a government bond have equivalent characteristics. They both have a coupon rate of 6 percent paid annually and have two years remaining to maturity. Assuming a flat government term structure of 7 percent which of the following is a possible price of the corporate bond?

A)   97.76.

B)   98.19.

C)   98.78.

D)   101.35.

5．Which of the following will most likely have the least impact on a corporate bond rating? The:

A)   issuing company's debt burden.

B)   issuing company's liquidity provision.

C)   issue's indenture provisions.

D)   issuing company's volume of sales.

答案和详解如下：

1．Which of the following statements is TRUE?

A)   When a rating agency downgrades a security, the bond's price usually falls.

B)   Technical default usually refers to the issuer's failure to make interest or principal payments as scheduled in the indenture.

C)   Default risk is important because if a bond issuer defaults, the bondholder likely loses his entire investment.

D)   Bond ratings are determined by the market.

The correct answer was A)

The market will likely demand a higher yield from the downgraded bond (the risk premium has increased) and thus the price will likely fall. Technical default usually refers to an issuer’s violation of bond covenants, such as debt ratios, rather than the failure to pay interest or principal. In the event of default, the holder (lender) may recover some or all of the investment through legal action or negotiation. The percentage recovered is known as the recovery rate. Rating agencies such as Moody’s and Standard and Poor’s assign bond ratings. The market reflects these ratings through a higher or lower market yield.

2．When determining credit risk spread, the benchmark security is most likely a(n):

A)   high-yield corporate bond.

B)   Treasury bond.

C)   low-yield corporate bond.

D)   AA rated bond.

The correct answer was B)

The credit risk spread is measured in relation to a default-free security. Of the choices above, the security with the least chance of default is the Treasury bond. The AA rated bond is high quality, but not the highest quality (which would have an AAA rating). The high-yield corporate bond is an unlikely candidate for the benchmark security because high yield usually denotes high risk. The low-yield corporate bond is a possibility, but it is not likely that this bond is as default-free as the Treasury security.

3．Benjamin Zoeller and Tara McGonigal are preparing for the Level I CFA examination. Zoeller is studying credit spread risk. McGonigal is farther along in her studies, but has forgotten how to determine the default free rate if given the yield on a bond rated BBB+ of 9.50 percent and a risk premium of 3.00 percent. What does Zoeller tell her to use for the default free rate?

A)   12.50%.

B)   4.50%.

C)   6.50%.

D)   9.50%.

The correct answer was C)

The formula for credit spread risk (or the yield on a risky asset) is:

         Yield_Risky = Yield_RF + Risk Premium, where RF = default -free rate.

Rearranging this formula results in: Yield_RF = Yield_Risky – Risk Premium, or Yield_RF = 9.50% – 3.00% = 6.50%.

4．Suppose that a corporate bond and a government bond have equivalent characteristics. They both have a coupon rate of 6 percent paid annually and have two years remaining to maturity. Assuming a flat government term structure of 7 percent which of the following is a possible price of the corporate bond?

A)   97.76.

B)   98.19.

C)   98.78.

D)   101.35.

The correct answer was A)

Since the corporate bond involves credit risk and the government bond doesn't. The corporate bond price has to be less than the government bond price which is computed as follows:

Government Bond Price = 6/1.07 + 106/1.07² = 98.19

5．Which of the following will most likely have the least impact on a corporate bond rating? The:

A)   issuing company's debt burden.

B)   issuing company's liquidity provision.

C)   issue's indenture provisions.

D)   issuing company's volume of sales.

The correct answer was D)

The size of the issuing firm, represented by the amount of sales, will play a role in the financial stability of the firm. However, the other choices, liquidity, leverage and indenture provisions are more directly related to the bond’s rating. Smaller firms are not likely to issue bonds and issuers are typically larger firms overall.