[ 2009 Mock Exam (PM) ] Fixed Income Investments .Questions 97-108 face, otherwise, decrease, interest, investor

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97. If market interest rates rise, the price of a callable bond, compared to an otherwise identical option-free bond, will most likely decrease by:

A. less than the option-free bond.
B. more than the option-free bond.
C. the same amount as the option-free bond.

98. A U.S. investor who purchases an option-free bond with a 7 percent coupon rate, maturing in 20 years, and issued by a U.S.-based company is most likely exposed to:

A. volatility risk and credit risk.
B. event risk and interest rate risk.
C. volatility risk and yield curve risk.

99. All else equal, an increase in expected yield volatility is most likely to result in an increase in the price of a(n):

A. putable bond.
B. callable bond.
C. option-free bond.

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106. A U.S. investor has purchased a tax-exempt 5-year municipal bond at a yield of 3.86 percent which is 100 basis points less than the yield on a 5-year option-free U.S. Treasury. If the investor’s marginal tax rate is 32 percent, then the yield ratio are closest to:

A. 0.79
B. 1.26
C. 5.68

Answer: A
“Understanding Yield Spread,” Frank J. Fabozzi
2009 Modular Level I, Volume 5, pp. 335-336
Study Session 16-63-e, i
Compute, compare, and contrast the various yield spread measures.
Compute the after-tax yield of a taxable security and the tax-equivalent yield of a tax-exempt security.
Yield ratio = (yield on tax-exempt bond) / (yield of US Treasury) = 3.86 / (3.86 + 100bp) = 3.86 / 4.86 = 0.79

107. An analyst has gathered the following information provided in the table below:

eriod	Years	U.S. Treasury Spot Rate (%)	Credit Spread (%)
1 2 3 4 5	1 2 3 4 5	3.00 3.50 4.00 4.50 5.00	0.20 0.30 0.40 0.50 0.60

Based on the information provided in the table, the current market price of a $1,000 par value, option-free, 0 percent coupon corporate bond maturing in 5 years is closest to:

A. $758.70.
B. $781.20.
C. $804.44.

Answer: A
“Introduction to the Valuation of Debt Securities,” Frank J. Fabozzi
2009 Modular Level I, Volume 5, pp. 366-371
Study Session 16-64-e
Compute the value of a zero-coupon bond.
The appropriate discount rate is 5.6% = 5% + 0.6%. The semiannual discount rate is 2.8%. The price of the bond using semiannual discounting is:


108. An analyst gathered the following information about a portfolio comprised of
three bonds:

Bond	rice ($)	ar Amount Owned	Duration
A	102.000	$7 million	1.89
B	94.356	$5 million	7.70
C	88.688	$3 million	11.55

Assuming there is no accrued interest, then the portfolio duration is closest to:

A. 5.55 years.
B. 5.76 years.
C. 6.82 years.

Answer: A
“Introduction to the Measurement of the Interest Rate Risk,” Frank J. Fabozzi
2009 Modular Level I, Volume 5, pp. 468
Study Session 16-66-f
Compute the duration of a portfolio, given the duration of the bonds comprising the portfolio, and explain the limitations of portfolio duration.
Portfolio value = (1.02 × 7 mil) + (0.94356 × 5 mil) + (0.88688 × 3 mil) =14,518,440
Weight, Bond A = 7,140,000 / 14,518,440 = 0.492
Weight, Bond B = 4,717,800 / 14,518,440 = 0.325
Weight, Bond C = 2,660,640 / 14,518,440 = 0.183
Portfolio duration = (0.492 × 1.89) + (0.325 × 7.70) + (0.183 × 11.55) = 5.55

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106. A U.S. investor has purchased a tax-exempt 5-year municipal bond at a yield of 3.86 percent which is 100 basis points less than the yield on a 5-year option-free U.S. Treasury. If the investor’s marginal tax rate is 32 percent, then the yield ratio are closest to:

A. 0.79
B. 1.26
C. 5.68

107. An analyst has gathered the following information provided in the table below:

eriod	Years	U.S. Treasury Spot Rate (%)	Credit Spread (%)
1 2 3 4 5	1 2 3 4 5	3.00 3.50 4.00 4.50 5.00	0.20 0.30 0.40 0.50 0.60

Based on the information provided in the table, the current market price of a $1,000 par value, option-free, 0 percent coupon corporate bond maturing in 5 years is closest to:

A. $758.70.
B. $781.20.
C. $804.44.

108. An analyst gathered the following information about a portfolio comprised of
three bonds:

Bond	rice ($)	ar Amount Owned	Duration
A	102.000	$7 million	1.89
B	94.356	$5 million	7.70
C	88.688	$3 million	11.55

Assuming there is no accrued interest, then the portfolio duration is closest to:

A. 5.55 years.
B. 5.76 years.
C. 6.82 years.