Reading 61: Features of Debt Securities-LOS b 习题精选 2011, represents, following, structure, features

1215

Session 15: Fixed Income: Basic Concepts
Reading 61: Features of Debt Securities

LOS b: Describe the basic features of a bond, the various coupon rate structures, and the structure of floating-rate securities.

 

 

Which one of the following alternatives represents the correct series of payments made by a typical 6% U.S. Treasury note with a par value of $100,000 issued today with five years to maturity?

Number and size of each intermediate payment

Payment made at maturity

A) 9 semiannual payments of $3,000 $103,000

B) 4 annual payments of $6,000 $106,000

C) 9 semiannual payments of $3,000 $100,000

---

 

Payments for U.S. Treasury bonds and notes are semiannual and are fixed for the life of each bond or note. The coupon rate is quoted on an annual basis but each payment is made on the basis of one half the annual rate multiplied by the maturity or par value.

luqian55

thanks a lot

1215

Which of the following statements regarding zero-coupon bonds and spot interest rates is CORRECT?

A) If the yield to maturity on a 2-year zero coupon bond is 6%, then the 2-year spot rate is 3%.

B) Spot interest rates will never vary across the term structure.

C) Price appreciation creates all of the zero-coupon bond's return.

---

Zero-coupon bonds are quite special. Because zero-coupon bonds have no coupons (all of the bond’s return comes from price appreciation), investors have no uncertainty about the rate at which coupons will be invested. Spot rates are defined as interest rates used to discount a single cash flow to be received in the future. If the yield to maturity on a 2-year zero is 6%, we can say that the 2-year spot rate is 6%.

1215

Which of the following statements regarding spot rates and zero-coupon bonds is least accurate?

A) The graph of current corporate bond yields is called the spot yield curve.

B) With zero coupon bonds, investors have no reinvestment risk.

C) The yield to maturity on a zero coupon bond is called the spot interest rate.

---

The graph of yields on zero-coupon bonds (spot rates) is called the spot yield curve. Note that the return on zero-coupon bonds is based entirely on price appreciation. An investor in a default-free zero-coupon bond will not have to worry about reinvesting coupons to realize the yield to maturity.

1215

Which of the following statements regarding zero-coupon bonds and spot interest rates is most accurate?

A) A coupon bond can be viewed as a collection of zero-coupon bonds.

B) Price appreciation creates only some of the zero-coupon bond's return.

C) Spot interest rates will never vary across time.

---

Zero-coupon bonds are quite special. Because zero-coupon bonds have no coupons (all of the bond’s return comes from price appreciation), investors have no uncertainty about the rate at which coupons will be invested. Spot rates are defined as interest rates used to discount a single cash flow to be received in the future. Any bond can be viewed as the sum of the present value of its individual cash flows where each of those cash flows are discounted at the appropriate zero-coupon bond spot rate.

1215

Allcans, an aluminum producer, needs to issue some debt to finance expansion plans, but wants to hedge its bond interest payments against fluctuations in aluminum prices. Jerrod Price, the company’s investment banker, suggests a non-interest rate index floater. This type of bond will provide all the following advantages EXCEPT:

A) the bond agreement allows Allcans to set coupon payments based on business results.

B) the bond's coupon rate is linked to the price of aluminum.

C) the payment structure helps protect Allcan's credit rating.

---

The coupon rate is set in the bond agreement (indenture) and cannot be changed unilaterally. Non-interest rate indexed floaters are indexed to a commodity price such as oil or aluminum. Business results could be impacted by numerous factors other than aluminum prices.

Both of the other choices are true. By linking the coupon payments directly to the price of aluminum (meaning that when aluminum prices increase, the coupon rate increases and vice versa), the non-interest index floater allows Allcans to protect its credit rating during adverse circumstances.

1215

Sometimes floating rate issues have caps and/or floors, which limit the maximum or minimum coupon rate that the issue will pay. Which of the following statements is CORRECT with regard to floating rate issues that have caps and floors?

A) A floor is a disadvantage to both the issuer and the bondholder while a cap is an advantage to both the issuer and the bondholder.

B) A cap is an advantage to the bondholder while a floor is an advantage to the issuer.

C) A cap is a disadvantage to the bondholder while a floor is a disadvantage to the issuer.

---

A cap limits the upside potential of the coupon rate paid on the floating rate bond and is therefore a disadvantage to the bondholder. A floor limits the downside potential of the coupon rate and is therefore a disadvantage to the bond issuer.

1215

Consider a floating rate issue that has a coupon rate that is reset on January 1 of each year. The coupon rate is defined as one-year London Interbank Offered Rate (LIBOR) + 125 basis points and the coupons are paid semi-annually. If the one-year LIBOR is 6.5% on January 1, which of the following is the semi-annual coupon payment received by the holder of the issue in that year?

A) 3.250%.

B) 7.750%.

C) 3.875%.

---

This value is computed as follows:

Semi-annual coupon = (LIBOR + 125 basis points) / 2 = 3.875%

1215

Which of the following statements concerning coupon rate structures is least accurate?

A) Accrual bonds have only one cash inflow at maturity.

B) Zero-coupon bonds have only one cash inflow at maturity.

C) Accrual bonds, like zero-coupon bonds, always sell at a discount to face value.

---

Accrual bonds, unlike zero-coupon bonds, do not always sell at a discount to face value. The interest accrues forward and thus the bonds are likely to sell for more than face value.

1215

Which of the following statements about zero-coupon bonds is NOT correct?

A) The lower the price, the greater the return for a given maturity.

B) All interest is earned at maturity.

C) A zero coupon bond may sell at a premium to par when interest rates decline.

---

Zero coupon bonds always sell below their par value, or at a discount prior to maturity. The amount of the discount may change as interest rates change, but a zero coupon bond will always be priced less than par.