Fixed Income【Reading 58】Sample 2012

prashantsahni

A 6-year annual interest coupon bond was purchased one year ago. The coupon rate is 10% and par value is $1,000. At the time the bond was bought, the yield to maturity (YTM) was 8%. If the bond is sold after receiving the first interest payment and the bond's yield to maturity had changed to 7%, the annual total rate of return on holding the bond for that year would have been:

A) 11.95%.

B) 7.00%.

C) 8.00%.

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Price 1 year ago N = 6, PMT = 100, FV = 1,000, I = 8, Compute PV = 1,092 Price now N = 5, PMT = 100, FV = 1,000, I = 7, Compute PV = 1,123
% Return = (1,123.00 + 100 − 1,092.46)/1,092.46 x 100 = 11.95%

Kingpin804

The one-year spot rate is 5% and the two-year spot rate is 6.5%. What is the one-year forward rate starting one year from now?

A) 5.00%.

B) 8.02%.

C) 7.87%.

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The forward rate is computed as follows:
One-year forward rate = 1.0652 / 1.05 – 1 = 8.02%

Kingpin804

Which of the following statements regarding forward rates is NOT correct?

A) Forward rates do not account for the market's tolerance for risk.

B) By the aggregation of forward rates, spot rates can be estimated.

C) Forward rates may be estimated from spot rates.

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Spot interest rates are the result of market participant’s tolerance for risk and their collective view regarding the future path of interest rates. If we assume that these results are purely a function of expectations, we can use spot rates to estimate the market’s consensus on forward interest rates

Kingpin804

Given that the two-year spot rate is 5.89% and the one-year forward rate one-year from now is 6.05%, assuming annual compounding what is the one year spot rate?

A) 5.67%.

B) 5.73%.

C) 5.91%.

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The spot rate is computed as follows:

Kingpin804

Given that the two-year spot rate is 5.89% and the one-year forward rate one-year from now is 6.05%, assuming annual compounding what is the one year spot rate?

A) 5.67%.

B) 5.73%.

C) 5.91%.

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The spot rate is computed as follows:

Kingpin804

If the current two-year spot rate is 6% while the one-year forward rate for one year is 5%, what is the current spot rate for one year?

A) 5.5%.

B) 5.0%.

C) 7.0%.

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(1 + f)(1 + r1) = (1 + r2)2
(1 + 0.05)(1 + r1) = (1 + 0.06)2
(1 + r1) = (1.06)2 / (1 + 0.05)
1 + r1 = 1.1236 / 1.05
1 + r1 = 1.0701
r1 = 0.07 or 7%

Kingpin804

Given the implied forward rates of: R1 = 0.04; 1r1 = 0.04300; 1r2 = 0.05098; 1r3 = 0.051005, what is the theoretical 4-period spot rate?

A) 6.67%.

B) 2.33%.

C) 4.62%.

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[(1.04)(1.043)(1.05098)(1.051005)].25−1

Kingpin804

Given that the one-year spot rate is 6.05% and the two-year spot rate is 7.32%, assuming annual compounding what is the one-year forward rate starting one year from now?

A) 8.61%.

B) 7.87%.

C) 8.34%.

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The forward rate is computed as follows:

Kingpin804

Given that the one-year spot rate is 5.76% and the 1.5-year spot rate is 6.11%, assuming semiannual compounding what is the six-month forward rate starting one year from now?

A) 7.04%.

B) 6.81%.

C) 6.97%.

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The forward rate is computed as follows:

Kingpin804

The one-year spot rate is 6% and the one-year forward rates starting in one, two and three years respectively are 6.5%, 6.8% and 7%. What is the four-year spot rate?

A) 6.51%.

B) 6.58%.

C) 6.57%.

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The four-year spot rate is computed as follows:
Four-year spot rate = [(1 + 0.06)(1 + 0.065)(1 + 0.068)(1 + 0.07) ]1/4 – 1 = 6.57%