karoliukas

All else being equal, which of the following bond characteristics will lead to higher levels of coupon reinvestment risk?

A) Longer maturities and lower coupon levels.

B) Longer maturities and higher coupon levels.

C) Shorter maturities and higher coupon levels.

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Other things being equal, the amount of reinvestment risk embedded in a bond will increase with higher coupons because there is a greater dollar amount to reinvest, and with longer maturities because the reinvestment period is longer.

karoliukas

An investor purchases a 4-year, 6%, semiannual-pay Treasury note for $9,485. The security has a par value of $10,000. To realize a total dollar return equal to 7.515% (its yield to maturity), all payments must be reinvested at a return of:

A) more than 7.515%.

B) 7.515%.

C) less than 7.515%.

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The reinvestment assumption that is embedded in any present value-based yield measure implies that all coupons and principal payments must be reinvested at the specific rate of return, in this case, the yield to maturity. Thus, to obtain a 7.515% total dollar return, the investor must reinvest all the coupons at a 7.515% rate of return. Total dollar return is made up of three sources, coupons, principal, and reinvestment income.

karoliukas

In which of the following cases is the bond selling at a discount? The coupon rate is:

A) greater than current yield and current yield is greater than yield-to-maturity.

B) smaller than current yield and current yield is smaller than yield-to-maturity.

C) smaller than current yield and current yield is greater than yield-to-maturity.

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When a bond is selling at a discount the nominal yield, coupon payment divided by face value, will be less than current yield and current yield will be less than YTM.

karoliukas

Regarding the computation of the cash flow yield for an agency security, which of the following is the best reason why the assumption that the projected cash flows are actually realized is very restrictive?

A) Interest rate risk.

B) Prepayments.

C) Default risk.

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Prepayments instill uncertainty into the assumed cash flows used to compute cash flow yield.

karoliukas

Which of the following is a limitation of the cash flow yield measure? The cash flow yield measure:

A) assumes that interest rates do not change over the life of the security.

B) assumes that the projected cash flows are reinvested at the cash flow yield.

C) assumes a flat yield curve.

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Cash flow yield has two major deficiencies: (i) it is implicitly assumed that the cash flows will be reinvested at the cash flow yield prevailing when the MBS or ABS is priced, and (ii) it is assumed that the MBS or ABS will be held until maturity.

karoliukas

The yield to maturity (YTM) is:

A) the discount rate that will set the present value of the payments equal to the bond price.

B) neither of these answers are correct.

C) below the coupon rate when the bond sells at a discount, and about the coupon rate when the bond sells at a premium.

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The YTM is a measure that will take into account present value, future value, periodic payments, and periods until maturity to find the rate of return that is being earned.  If the YTM is given, the result will be finding the present value of the future value and periodic cash flows.

karoliukas

Which of the following statements concerning the yield-to-maturity on a bond is CORRECT? Yield to maturity (YTM) is:

A) based on the assumption that any payments received are reinvested at the current yield.

B) the discount rate that will set the present value of the payments equal to the bond price.

C) below the current yield minus capital gain when the bond sells at a discount, and above the current yield plus capital loss when the bond sells at a premium.

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Reinvestments occur at the YTM. The YTM will find the present value of a future value and associated payments.

karoliukas

A bond will sell at a discount when the coupon rate is:

A) less than the current yield and the current yield is less than the yield to maturity.

B) greater than the current yield and the current yield is greater than the yield to maturity.

C) less than the current yield and the current yield is greater than the yield to maturity.

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When a bond sells at a discount the nominal yield, coupon yield divided by the face value, will be less than current yield and current yield will be less than YTM.

karoliukas

In which of the following conditions is the bond selling at a premium? The coupon rate:

A) current rate and yield-to-maturity are all the same.

B) is greater than current yield, which is greater than yield-to-maturity.

C) is less than current yield, which is less than yield-to-maturity.

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When a bond is selling at a premium the nominal yield, coupon payment divided by face value, will be greater than current yield and current yield will be greater than YTM.

karoliukas

When computing the yield to maturity, the implicit reinvestment assumption is that the interest payments are reinvested at the:

A) prevailing yield to maturity at the time interest payments are received.

B) coupon rate.

C) yield to maturity at the time of the investment.

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The reinvestment assumption states that reinvestment must occur at the YTM in order for an investor to earn the YTM.  The assumption also states that payments are received in a prompt and timely fashion resulting in immediate reinvestment of those funds.