Question 101

Consider the following two statements about putable bonds:

Statement #1: As yields rise, the price of putable bonds will fall less quickly than similar option-free bonds (beyond a critical point) due to the increase in value of the embedded put option.

Statement #2: As yields fall, the price of putable bonds will rise more quickly than similar option-free bonds (beyond a critical point) due to the increase in value of the embedded put option.

Are these statements correct or incorrect?

       Statement 1      Statement 2

A)    Correct                Incorrect

B)   Correct                Correct

C)   Incorrect          Incorrect

D)   Incorrect          Correct

Jane Walker has set a 7% yield as the goal for the bond portion of her portfolio. To achieve this goal, she has purchased a 7%, 15-year corporate bond at a discount price of 93.50. What amount of reinvestment income will she need to earn over this 15-year period to achieve a compound return of 7% on a semiannual basis?

A)    $624.

B)   $724.

C)   $459.

D)   $574.

Question 103

Pam Williams is evaluating whether she should purchase a particular bond. She is primarily concerned with the effective duration of the measure. The bond is a 15-year semiannual pay bond with a 9% coupon that is currently priced at $1,076.50 to yield 8.11%. If the yield changes by 25 basis points, the effective duration of this bond is closest to:

A)    12.25.

B)   8.41.

C)   7.42.

D)   9.53.

The term structure of interest rate theory that says long-term maturities have greater market risk than shorter maturities is called the:

A)    market segmentation theory.

B)   preferred habitat theory.

C)   liquidity preference theory.

D)   pure expectations theory.

Question 105

An $850 bond has a modified duration of 8. If interest rates fall 50 basis points, the bond's price will:

A)    increase by 22.5%.

B)   increase by $4.00.

C)   decrease by $22.50.

D)   increase by $34.00.

[此贴子已经被作者于2008-11-8 9:45:15编辑过]

答案和详解如下！

Question 101

Consider the following two statements about putable bonds:

Statement #1: As yields rise, the price of putable bonds will fall less quickly than similar option-free bonds (beyond a critical point) due to the increase in value of the embedded put option.

Statement #2: As yields fall, the price of putable bonds will rise more quickly than similar option-free bonds (beyond a critical point) due to the increase in value of the embedded put option.

Are these statements correct or incorrect?

       Statement 1      Statement 2

A)    Correct                Incorrect

B)   Correct                Correct

C)   Incorrect          Incorrect

D)   Incorrect          Correct

The correct answer was A) Correct Incorrect

Only statement #1 is true. As yields rise, the value of the embedded put option in a putable bond increases and (beyond a critical point) reduces the decline in the value of the bond compared to a similar option-free bond. As yields fall, the value of the embedded put option decreases and (beyond a critical point) the putable bond behaves much the same as a similar option-free bond since the embedded put option has little or no value.

This question tested from Session 16, Reading 69, LOS b

Question 102

Jane Walker has set a 7% yield as the goal for the bond portion of her portfolio. To achieve this goal, she has purchased a 7%, 15-year corporate bond at a discount price of 93.50. What amount of reinvestment income will she need to earn over this 15-year period to achieve a compound return of 7% on a semiannual basis?

A)    $624.

B)   $724.

C)   $459.

D)   $574.

The correct answer was D) $574.

935(1.035)³⁰ = $2,624

Bond coupons: 30 × 35 = $1,050

Principal repayment: $1,000

2,624 − 1,000 – 1050 = $574 required reinvestment income

This question tested from Session 16, Reading 68, LOS c, (Part 1)

Question 103

Pam Williams is evaluating whether she should purchase a particular bond. She is primarily concerned with the effective duration of the measure. The bond is a 15-year semiannual pay bond with a 9% coupon that is currently priced at $1,076.50 to yield 8.11%. If the yield changes by 25 basis points, the effective duration of this bond is closest to:

A)    12.25.

B)   8.41.

C)   7.42.

D)   9.53.

The correct answer was B) 8.41.

Price change for 25 basis point increase :
N = 30; PMT = 45; FV = 1,000; I/Y = 8.36/2 = 4.18; CPT → PV = 1,054.14

Price change for 25 basis point decrease:
N = 30; PMT = 45; FV = 1,000; I/Y = 7.86/2 = 3.93; CPT → PV = 1,099.41

This question tested from Session 16, Reading 69, LOS d, (Part 1)

Question 104

The term structure of interest rate theory that says long-term maturities have greater market risk than shorter maturities is called the:

A)    market segmentation theory.

B)   preferred habitat theory.

C)   liquidity preference theory.

D)   pure expectations theory.

The correct answer was C) liquidity preference theory.

According to the liquidity preference hypothesis, the yield curve should slope upward. It holds that long-term securities should provide higher returns than short-term obligations because investors are willing to sacrifice some yields to invest in short-maturity obligations to avoid the higher price volatility of longer-maturity bonds. 

Explanation for other choices:

According to the pure expectations hypothesis, the shape of the yield curve results from the interest rate expectations of market participants. More specifically, it holds that any long-term interest rate simply represents the geometric mean of current and future 1-year interest rates expected to prevail over the maturity of the issue. The expectations theory can explain any shape of yield curve.

The segmented market hypothesis contends that borrowers and lenders prefer particular segments of the yield curve. Preferred habitat is another name for the segmented market theory.

This question tested from Session 15, Reading 65, LOS c, (Part 1)

Question 105

An $850 bond has a modified duration of 8. If interest rates fall 50 basis points, the bond's price will:

A)    increase by 22.5%.

B)   increase by $4.00.

C)   decrease by $22.50.

D)   increase by $34.00.

The correct answer was D) increase by $34.00.

ΔP/P = (-)(MD)(Δi)

ΔP = (-)(P)(MD)(Δi)

ΔP = (-)(8)(850)(-0.005) = +$34

This question tested from Session 16, Reading 69, LOS d, (Part 2)

ThanQ

yea

thx

good

thx

3ks

THANKS!

thx