CFA Level I：Fixed Income - Understanding Yield Spreads 习题精选

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1. Which of the following is least likely a tool used by the U.S. Federal Reserve Bank to directly influence the level of interest rates? A. Verbal persuasion. B. Open market operations. C. Setting the rate on 30-year bonds.

Ans: C; C is correct because the U.S. Federal Reserve Bank (Fed) uses policy tools to directly influence short-term interest rates. It only indirectly influences long-term interest rates. The market, not the Fed, sets rates on 30-year bonds. The four interest rate tools of the Fed are as follows: The discount rate: the rate at which banks can borrow reserve from the Fed; Open market operations: buying or selling of Treasury securities by the Fed in the open market; Bank reserve requirements: the percentage of deposits that banks must retain; Persuading banks to tighten or loosen their credit policies.

cityboy

16. The yield on a U.S. Treasury STRIPS security is also known as the Treasury: A. spot rate. B. forward rate. C. yield spread.

Ans: A; Spot rates are the appropriate discount rates for cash flows that come at different points in time; while yield to maturity is the single discount rate that makes the present value of a bond’s promised cash flows equal to its market price. Therefore, yield to maturity is flat while spot rate is not flat because the discount rate for a payment that comes one year from now is not necessarily the same discount rate that should be applied to a payment that comes five years from now. Conceptually, spot rates are the discount rates for zero-coupon bonds, securities that have only a single cash flow at a future date. A is correct because a STRIPS security is a zero-coupon bond with no default risk and therefore represents the appropriate discount rate for a cash flow certain to be received at the maturity date for the STRIPS.

cityboy

15. Larger size debt issues normally have: A. greater yield spread. B. the same yield spread with smaller size debt issues. C. lower yield spread.

Ans: C; C is correct because larger issues normally have greater liquidity because they are more actively traded in the secondary market and therefore have lower yield spreads when compared with smaller issues.

cityboy

14. Recent economic trend suggests that the economy is increasingly likely to enter a recession stage. What is the most likely impact on the yields of lower-quality corporate bonds and on credit spreads of lower-quality versus higher-quality corporate bonds? A. One will increase and one will decrease. B. Both will increase. C. Both will decrease.

Ans: B; Yields of lower quality increases: During economic contractions, the probability of default increases for lower- quality issues and their yields increase. Credit spreads increases: when an economic contraction is likely, investors tend to sell low-quality issues and buy high-quality issues, causing credit spreads of lower quality versus higher quality bonds to widen.

cityboy

12. A U.S. investor has purchased a tax-exempt 10-year municipal bond at a yield of 3.75% which is 100 basis points less than the yield on a 10-year option-free U.S. Treasury. If the investor’s marginal tax rate is 33.5%, then taxable equivalent yield and the yield ratio is closest to: Taxable equivalent yield Yield ratio A. 7.14 0.79 B. 5.64 0.79. C. 5.64 1.19.

Ans: B; Taxable equivalent yield =3.75%/ (1-33.5%) =5.64 Yield ratio = (yield on tax-exempt bond) / (yield of US Treasury) =3.75% / (3.75%+ 1%) = 3.75 / 4.75 =0.79

cityboy

12. A U.S. investor has purchased a tax-exempt 10-year municipal bond at a yield of 3.75% which is 100 basis points less than the yield on a 10-year option-free U.S. Treasury. If the investor’s marginal tax rate is 33.5%, then taxable equivalent yield and the yield ratio is closest to: Taxable equivalent yield Yield ratio A. 7.14 0.79 B. 5.64 0.79. C. 5.64 1.19.

Ans: B; Taxable equivalent yield =3.75%/ (1-33.5%) =5.64 Yield ratio = (yield on tax-exempt bond) / (yield of US Treasury) =3.75% / (3.75%+ 1%) = 3.75 / 4.75 =0.79

cityboy

11. An investor whose marginal tax rate is 35% is analyzing a tax-exempt bond offering a yield of 5.40%. The tax-equivalent yield of the bond is closest to: A. 8.31%. B. 3.51%. C. 6.94%.

Ans: A; C is correct because Tax-equivalent yield = Tax-exempt yield/(1 – Marginal tax rate) = 5.40%/(1 – 0.35) = 8.31%

cityboy

10. Consider two ten-year bonds, one that contains no embedded options and the other that gives its owner the right to convert the bond to a fixed number of shares of the issuer’s common stock. The convertibility option in the second bond cannot be exercised for five years. The bonds are otherwise identical. Compared with the yield on the convertible bond, the yield on the bond with the embedded option is most likely: A. lower. B. the same. C. higher.

Ans: A; A is correct because the convertibility option provides a benefit to the investor, who will accept a lower yield on the convertible bond compared with the option-free bond.

cityboy

9. The spread between the yields on a Ginnie Mae passthrough security and a comparable Treasury security is best explained by: A. prepayment risk. B. reinvestment risk. C. credit risk.

Ans: A; Mortgage-backed securities expose an investor to prepayment risk.

cityboy

8. A bond portfolio manager is considering three Bonds – A, B, and C – for his portfolio. Bond A allows the issuer to call the bond before stated maturity, Bond B allows the investor to put the bond back to the issuer before stated maturity, and Bond C contains no embedded options. The bonds are otherwise identical. The manager tells his assistant, “Bond A and Bond B should have larger nominal yield spreads to a U.S. Treasury than Bond C to compensate for their embedded options.” Is the manager most likely correct? A. Yes. B. No, Bond A’s nominal yield spread should be less than Bond C’s. C. No, Bond B’s nominal yield spread should be less than Bond C’s.

Ans: C; A call option benefits the bond issuer so yield spreads will be higher for a callable bond compared to the same bond without a call feature; A put option allows the bond holder to put the bond back when the price of the bond goes lower so the bond holder will require a lower yield spread for a putable bond than an option-free bond. Therefore C is correct because Bond B’s embedded put option benefits the bondholder and the yield spread will therefore be less than the yield spread of Bond C, which does not contain this benefit.