Fixed Income【Reading 57】Sample 2012, investor

hinsafdar

By purchasing a noncallable, nonputable, U.S. Government 30-year bond, an investor is entitled to:

A) full recovery of face value at maturity or when the bond is retired.

B) annuity of coupon payments.

C) annuity of coupon payments plus recovery of principal at maturity.

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Bond investors are entitled to two distinct types of cash flows: (1) the periodic receipt of coupon income over the life of the bond, and (2) the recovery of principal (or face value) at the end of the bond’s life.

mrcon

thanks for sharing  

不过R57这一节整个8页的习题质量都很一般  非常基础

prashantsahni

Assume that there are no transaction costs and that securities are infinitely divisible. If an 8% coupon paying Treasury bond that has six months left to maturity trades at 97.54, and there is a Treasury bill with six months remaining to maturity that is correctly priced using a discount rate of 9%, is there an arbitrage opportunity?

A) The coupon bond is not correctly priced but no arbitrage trade can be set up using the T-bill.

B) Yes, the coupon bond price is too high.

C) Yes, the coupon bond price is too low.

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The coupon bond has a cash flow at maturity of 104, which discounted at 9% results in a bond price of 99.52. Therefore, the bond is underpriced. An arbitrage trade can be set up by short-selling 1.04 units of the T-bill at 99.52 and then using the proceeds to buy 1.02 units of the coupon bond.

prashantsahni

A 2-year option-free bond (par value of $10,000) has an annual coupon of 15%. An investor determines that the spot rate of year 1 is 16% and the year 2 spot rate is 17%. Using the arbitrage-free valuation approach, the bond price is closest to:

A) $8,401.

B) $11,122.

C) $9,694.

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We can calculate the price of the bond by discounting each of the annual payments by the appropriate spot rate and finding the sum of the present values. Price = [1,500/(1.16)] + [11,500/(1.17)2] = $9,694. Or, in keeping with the notion that each cash flow is a separate bond, sum the following transactions on your financial calculator:N=1, I/Y=16.0, PMT=0, FV=1,500, CPT PV=1,293
N=2, I/Y=17.0, PMT=0, FV=11,500, CPT PV=8,401
Price = 1,293 + 8,401 = $9,694.

prashantsahni

Current spot rates are as follows:

1-Year: 6.5%
2-Year: 7.0%
3-Year: 9.2%

Which of the following is CORRECT

A) For a 3-year annual pay coupon bond, all cash flows can be discounted at 9.2% to find the bond's arbitrage-free value.

B) For a 3-year annual pay coupon bond, the first coupon can be discounted at 6.5%, the second coupon can be discounted at 7.0%, and the third coupon plus maturity value can be discounted at 9.2% to find the bond's arbitrage-free value.

C) The yield to maturity for 3-year annual pay coupon bond can be found by taking the geometric average of the 3 spot rates.

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Spot interest rates can be used to price coupon bonds by taking each individual cash flow and discounting it at the appropriate spot rate for that year’s payment. Note that the yield to maturity is the bond’s internal rate of return that equates all cash flows to the bond’s price. Current spot rates have nothing to do with the bond’s yield to maturity.

prashantsahni

Which of the following statements concerning arbitrage-free bond prices is NOT correct?

A) It is not possible to strip coupons from U.S. Treasuries and resell them.

B) Credit spreads are affected by time to maturity.

C) The determination of spot rates is usually done using risk-free securities.

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It is possible to both strip coupons from U.S. Treasuries and resell them, as well as to aggregate stripped coupons and reconstitute them into U.S. Treasury coupon bonds. Therefore, arbitrage arguments ensure that U.S. Treasury securities sell at or very near their arbitrage free values. For valuing non-Treasury securities, a credit spread is added to each treasury spot yields. The credit spread is a function of default risk and the term to maturity.

prashantsahni

Which of the following packages of securities is equivalent to a three-year 8% coupon bond with semi-annual coupon payments and a par value of 100? A three-year zero-coupon bond:

A) with a par of 100 and six zero-coupon bonds with a par value of 8 and maturities equal to the time to each coupon payment of the coupon bond.

B) with a par value of 150 and six 8% coupon bonds with a maturity equal to the time to each coupon payment of the above bond.

C) with a par of 100 and six zero-coupon bonds with a par value of 4 and maturities equal to the time to each coupon payment of the coupon bond.

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This combination of zero-coupon bonds has exactly the same cash flows as the above coupon bond and therefore it is equivalent to it.

prashantsahni

You are considering the purchase of a three-year annual coupon bond with a par value of $1,000 and a coupon rate of 5.5%. You have determined that the spot rate for year 1 is 5.2%, the spot rate for year two is 5.5%, and the spot rate for year three is 5.7%. What would you be willing to pay for the bond now?

A) $937.66.

B) $995.06.

C) $1,000.00.

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You need the find the present value of each cash flow using the spot rate that coincides with each cash flow.
The present value of cash flow 1 is: FV = $55; PMT = 0; I/Y = 5.2%; N = 1; CPT → PV = -$52.28.
The present value of cash flow 2 is: FV = $55; PMT = 0; I/Y = 5.5%; N = 2; CPT → PV = –$49.42.
The present value of cash flow 3 is: FV = $1,055; PMT = 0; I/Y = 5.7%; N = 3; CPT → PV = –$893.36.
The most you pay for the bond is the sum of: $52.28 + $49.42 + $893.36 = $995.06.

prashantsahni

Which of the following statements concerning the arbitrage-free valuation of non-Treasury securities is CORRECT? The credit spread is:

A) only a function of the bond's term to maturity.

B) a function of default risk and the term to maturity.

C) only a function of the bond's default risk.

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For valuing non-Treasury securities, a credit spread is added to each treasury spot yields. The credit spread is a function of default risk and the term to maturity.

prashantsahni

The arbitrage-free bond valuation approach can best be described as the:

A) use of a series of spot interest rates that reflect the current term structure.

B) use of a single discount factor.

C) geometric average of the spot interest rates.

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The use of multiple discount rates (i.e., a series of spot rates that reflect the current term structure) will result in more accurate bond pricing and in so doing, will eliminate any meaningful arbitrage opportunities. That is why the use of a series of spot rates to discount bond cash flows is considered to be an arbitrage-free valuation procedure.