Question 106
Which of the following statements about duration is most accurate?
A) Modified duration is the most appropriate measure of interest rate sensitivity for bonds with embedded options.
B) Effective duration is calculated from past price changes in response to changes in yield. C) Effective duration accounts for changes in a bond’s cash flows resulting from interest rate changes. D) Macaulay duration provides a better measure of interest rate risk than modified duration because it takes the yield to maturity into account.
The correct answer was C) Effective duration accounts for changes in a bond’s cash flows resulting from interest rate changes. Neither Macaulay nor modified duration is an appropriate measure of interest rate risk for bonds with embedded options. Macaulay duration does not take the current YTM into account as modified duration does. Effective duration, however, explicitly takes into account changes in a bond’s cash flows due to interest rate changes and is calculated from expected price changes in response to a given increase or decrease in yield. This question tested from Session 16, Reading 69, LOS e, (Part 2)
Question 107
Bond A has a yield of 7.25% while bond B has a yield of 7.65%. What is the relative yield spread for the pair of bonds?
A) 0.052.
B) 0.400. C) 0.055. D) -0.400.
The correct answer was C) 0.055. The absolute yield is 0.40% or 40 basis points. The relative yield spread is the absolute yield spread divided by the yield of the lower yielding bond, or (7.65 – 7.25)/7.25 = 0.05517. This question tested from Session 15, Reading 65, LOS e
Question 108
Which of the following statements about refunding and redemption is most accurate?
A) A sinking fund is an example of refunding.
B) An investor concerned about premature redemption is indifferent between a noncallable bond and a nonrefundable bond. C) A nonrefundable bond can be redeemed with funds from operations, from a new equity issue, or from a lower coupon issue. D) Bonds redeemed at the special redemption price are typically redeemed at par.
The correct answer was D) Bonds redeemed at the special redemption price are typically redeemed at par. This statement is accurate. When bonds are redeemed to comply with a sinking fund provision or because of a property sale mandated by government authority, the redemption prices (typically par value) are referred to as "special redemption prices." When bonds are redeemed under the call provisions specified in the bond indenture, these are known as a regular redemptions and the call prices are referred to as "regular redemption prices." The other statements are false. A sinking fund is a type of redemption, which refers to the retirement of bonds. An investor concerned about premature redemption would prefer a noncallable bond because a noncallable bond cannot be called for any reason. A bond that is callable but nonrefundable can be called for any reason other than refunding. The term refunding specifically means redeeming a bond with funds raised from a new bond issued at a lower coupon rate. A nonrefundable bond can be redeemed with funds from operations or a new equity issue. This question tested from Session 15, Reading 62, LOS d
Question 109
Of the following four otherwise identical bonds, which is likely to exhibit the greatest price volatility?
A) 10% coupon bond with 20 years to maturity.
B) 5% coupon bond with 10 years to maturity. C) 5% coupon bond with 20 years to maturity. D) 10% coupon bond with 10 years to maturity.
The correct answer was C) 5% coupon bond with 20 years to maturity. This question is asking: given a change in yield, which of the bonds will exhibit the greatest price change? Of the four choices, the bond with the longest maturity and lowest coupon will have the greatest price volatility. All else equal, the bond with the longer term to maturity is more sensitive to changes in interest rates. Cash flows that are further into the future are discounted more than near-term cash flows. Here, this means that one of the 20-year bonds will have the highest volatility. Similar reasoning applies to the coupon rate. A lower coupon bond delivers more of its total cash flow (the bond's par value) at maturity than a higher coupon bond. All else equal, a bond with a lower coupon than another will exhibit greater price volatility. Here, this means that of the 20-year bonds, the one with the 5% coupon rate will exhibit greater price volatility than the bond with the 10% coupon. This question tested from Session 15, Reading 63, LOS c
Question 110
Which of the following statements regarding collateralized debt obligations (CDOs) is least accurate?
A) An arbitrage CDO may be created by a sponsor seeking to profit from the spread between the rate earned on the underlying debt obligations and the rate promised to the CDO holders.
B) CDOs are often issued in tranches based on the seniority of claims to the cash flows of the underlying debt obligations. C) CDOs typically have a higher credit rating than the debt obligations in the underlying pool. D) A balance sheet CDO may be created by a bank or insurance company seeking to reduce its loan exposure. The correct answer was C) Each tranche of a CDO has a separate credit rating that depends on the seniority of the claim, as well as the credit characteristics of the underlying pool of debt obligations. The other statements are characteristics of CDOs.
This question tested from Session 15, Reading 64, LOS j | 
发表于 2008-5-26 13:46
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