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标题: Fixed Income【Reading 56】Sample [打印本页]
作者: Gypsy    时间: 2012-3-31 12:58     标题: [2012 L1] Fixed Income【Session 15 - Reading 56】Sample

If the Federal Reserve wishes to lower market interest rates without changing the discount rate, it can:
A)
buy Treasury securities.
B)
raise the yield on Treasury securities.
C)
increase bank reserve requirements.


Buying Treasury securities pumps money into the economy, lowering interest rates. Higher reserve requirements will restrict the money supply, causing rates to rise. The Federal Reserve has no direct control over the yield on existing Treasury securities.
作者: Gypsy    时间: 2012-3-31 13:00

Which of the following policy tools is the least likely to be available to the U.S. Federal Reserve Board?
A)
Buying and selling Treasury securities in the open market.
B)
Setting the discount rate at which banks can borrow from the Federal Reserve.
C)
Requiring the banking system to tighten or loosen its credit policies.


The U.S. Federal Reserve can encourage or persuade banks as a whole to tighten or loosen their credit policies, but it cannot compel them to do so.
作者: Gypsy    时间: 2012-3-31 13:00

Which of the following are the two most important tools available to the Federal Reserve?
A)
Changing the discount rate and open market operations.
B)
Changing the discount rate and changing bank reserve requirements.
C)
Open market operations and changing bank reserve requirements.


The two most important tools available to the Fed are changing the discount rate, the rate at which banks can borrow from the Fed’s discount window, and open market operations, the Fed’s activity of buying and selling Treasury securities.
作者: Gypsy    时间: 2012-3-31 13:01

The concept of spot and forward rates is most closely associated with which of the following explanations of the term structure of interest rates?
A)
Segmented market theory.
B)
Expectations hypothesis.
C)
Liquidity premium theory.


The pure expectations theory purports that forward rates are solely a function of expected future spot rates. In other words, long-term interest rates equal the mean of future expected short-term rates. This implies that an investor could earn the same return by investing in a 1-year bond or by sequentially investing in two 6-month bonds. The implications for the shape of the yield curve under the pure expectations theory are:
作者: Gypsy    时间: 2012-3-31 13:01

If investors expect future rates will be higher than current rates, the yield curve should be:
A)
vertical.
B)
downward sweeping.
C)
upward sweeping.


When interest rates are expected to go up in the future the yield curve will be upward sweeping because time is on the x-axis and rates are on the y-axis, thus forming an upward sweeping curve.
作者: Gypsy    时间: 2012-3-31 13:01

A downward sloping yield curve generally implies:
A)
interest rates are expected to decline in the future.
B)
shorter-term bonds are less risky than longer-term bonds.
C)
interest rates are expected to increase in the future.


Since a yield curve has time on the x-axis and rates on the y-axis, when the yield curve is downward sloping it means that rates are expected to decline.  
作者: Gypsy    时间: 2012-3-31 13:01

Which of the following yield curves represents a situation where long-term rates are less than short-term rates?
A)
Normal yield curve.
B)
Inverted yield curve.
C)
Humped yield curve.


A normal yield curve is one in which long-term rates are greater than short-term rates. A humped yield curve represents a situation where rates in the middle of the maturity spectrum are higher or lower than those for both bonds with a short and long-term maturity.
作者: Gypsy    时间: 2012-3-31 13:02

Which of the following is the shape of an inverted yield curve or term structure?
A)
Downward sloping.
B)
Flat.
C)
Upward sloping.


An inverted yield curve reflects the condition where long-term rates are less than short-term rates, giving it a downward (negative) slope.
作者: Gypsy    时间: 2012-3-31 13:02

Which of the following best explains the slope of the yield curve?
A)
The term spread between the yields of two maturities.
B)
The nominal spread between two securities with different maturities.
C)
The credit spread between two securities with different maturities.


Since the yield curve depicts the yield on securities with different maturities, the slope of the curve between two maturities is a function of the maturity spread.
作者: Gypsy    时间: 2012-3-31 13:04

A normally sloped yield curve has a:
A)
zero slope.
B)
negative slope.
C)
positive slope.


A normally shaped yield curve is one in which long-term rates are greater than short-term rates, thus the curve exhibits a positive slope.
作者: Gypsy    时间: 2012-3-31 13:04

Suppose the term structure of interest rates makes an instantaneous parallel upward shift of 100 basis points. Which of the following securities experiences the largest change in value? A five-year:
A)
zero-coupon bond.
B)
floating rate bond.
C)
coupon bond with a coupon rate of 5%.

The duration of a zero-coupon bond is equal to its time to maturity since the only cash flows made is the principal payment at maturity of the bond. Therefore, it has the highest interest rate sensitivity among the four securities. A floating rate bond is incorrect because the duration, which is the interest rate sensitivity, is equal to the time until the next coupon is paid. So this bond has a very low interest rate sensitivity.
A coupon bond with a coupon rate of 5% is incorrect because the duration of a coupon paying bond is lower than a zero-coupon bond since cash flows are made before maturity of the bond. Therefore, its interest rate sensitivity is lower.
作者: Gypsy    时间: 2012-3-31 13:04

An analyst forecasts that spot interest rates will increase more than the increase implied by the current forward interest rates. Under these circumstances:
A)
the analyst should establish a bullish bond portfolio.
B)
the analyst should establish a bearish bond portfolio.
C)
all bond positions earn the same return.


Bond prices fall with a rise in interest rates. If realized rates rise more than the associated forward rate implied, then a bearish bond position will be the most beneficial.
作者: Gypsy    时间: 2012-3-31 13:05

Which of the following is a correct interpretation of forward rates under the pure expectations hypothesis? Forward rates are equal to the expected future:
A)
rate differences between short and long-term bonds.
B)
spot rates.
C)
risk premiums on short-term bills.


The pure expectations theory purports that forward rates are solely a function of expected future spot rates.
作者: Gypsy    时间: 2012-3-31 13:05

Which theory of the term structure of interest rates concludes that the shape of the yield curve is determined by the supply and demand for securities in particular maturity ranges, and what shape of the yield curve is implied by this theory?
TheoryYield curve
A)
market segmentation   no specific shape
B)
market segmentationupward sloping
C)
liquidity preference  upward sloping


The shape of the yield curve under market segmentation is determined by the supply and demand for securities within a given maturity range. No specific shape of the yield curve is implied by this theory.
作者: Gypsy    时间: 2012-3-31 13:05

According to the pure expectations theory an upward-sloping yield curve implies:
A)
longer-term bonds are riskier than short-term bonds.
B)
interest rates are expected to increase in the future.
C)
interest rates are expected to decline in the future.

According to the expectations hypothesis, the shape of the yield curve results from the interest rate expectations of market participants. More specifically, it holds that any long-term interest rate simply represents the geometric mean of current and future 1-year interest rates expected to prevail over the maturity of the issue. The expectations theory can explain any shape of yield curve.
Expectations for rising short-term rates in the future cause a rising (upward-sloping) yield curve; expectations for falling short-term rates in the future will cause long-term rates to lie below current short-term rates, and the yield curve will decline (or slope downward).
Thus, an upward-sloping yield curve implies that interest rates are expected to increase in the future.
作者: Gypsy    时间: 2012-3-31 13:06

Which of the following statements regarding the different theories of the term structure of interest rates is least accurate?
A)
The market segmentation theory, pure expectations theory, preferred habitat theory, and liquidity preference theory are all consistent with any shape of the yield curve.
B)
An upward sloping yield curve can be consistent with the liquidity preference theory even with expectations of declining short term interest rates.
C)
The preferred habitat theory suggests that investors prefer to stay within a particular maturity range of the yield curve regardless of yields in other maturity ranges.


The preferred habitat theory states that investors prefer to stay within a particular maturity range but will move from their preferred range to another area on the curve to achieve higher yields. With the liquidity preference theory the yield curve can remain upward sloping even if short term rates are predicted to decline as long as the liquidity premium is sufficiently large.
作者: Gypsy    时间: 2012-3-31 13:06

The term structure theory that rests on the interaction of supply and demand forces in the debt market is the:
A)
expectation hypothesis.
B)
market segmentation theory.
C)
GIC inverse term structure theory.


The market segmentation theory holds that the market is segmented into different parts based on the maturity preferences of investors. The theory also holds that the supply and demand forces at work within each segment determine the prevailing level of interest rates for that part of the market.
作者: Gypsy    时间: 2012-3-31 13:06

The liquidity preference theory holds that:
A)
because they are so marketable, there is a liquidity premium that normally has to be paid to invest in short-term debt securities.
B)
cash should be preferred to Treasury securities because it is more liquid.
C)
the yield curve has an upward-sloping bias.


The liquidity preference theory suggests an upward-sloping bias with regard to the shape of the yield curve because investors generally prefer the greater liquidity and reduced risk that accompanies short-term securities and, as a result, require a premium (higher yields) to get them to invest in longer-term securities. However, the yield curve can still be downward sloping even with a liquidity premium, for example if short-term interest rates are expected to decrease sharply in the future.
作者: Gypsy    时间: 2012-3-31 13:07

Suppose that the one-year forward rate starting one year from now is 6%. Which of the following statements is most accurate under the pure expectations hypothesis? The expected:
A)
future risk premium for short-term bills is 6%.
B)
one-year forward rate in one year's time is equal to 6%.
C)
future one-year spot rate in one year's time is equal to 6%.


Under the pure expectations hypothesis forward rates are equal to expected future spot rates.
作者: Gypsy    时间: 2012-3-31 13:07

According to the expectations hypothesis, investors’ expectations of decreasing inflation will result in:
A)
a flat yield curve.
B)
a downward-sloping yield curve.
C)
an upward-sloping yield curve.



The expectations hypothesis holds that the shape of the yield curve reflects investor expectations about the future behavior of inflation and market interest rates. Thus, if investors believe inflation will be slowing down in the future, they will require lower long-term rates today and, therefore, the yield curve will be downward-sloping.
作者: Gypsy    时间: 2012-3-31 13:08

The six-month spot rate is 4% and the 1 year annualized spot rate is 9% (4.5% on a semiannual basis). Based on the pure expectations theory of interest rates, the implied six-month rate six months from now is closest to:
A)
5%.
B)
6%.
C)
4%.

1r1 = [(1 + R2)2 / (1 + R1)1] - 1 = [(1.045)2/(1.04)1] - 1
[1.092 / 1.04] - 1 = 0.05
作者: Gypsy    时间: 2012-3-31 13:08

Generally speaking, an upward-sloping yield curve can be expected when:
A)
the supply of long-term funds falls short of demand.
B)
the supply of long-term funds falls short of demand and investors begin to show a preference for more liquid/less risky short-term securities.
C)
inflationary expectations are beginning to subside and investors begin to show a preference for more liquid/less risky short-term securities.


When demand for loanable funds outstrips supply, interest rates can be expected to rise in that (long-term) segment of the market; also, more preference for short-term securities can be expected to drive up long-term rates as the liquidity premium rises. Thus, both circumstances in the answer can be expected to put upward pressure on the long end of the yield curve.
作者: Gypsy    时间: 2012-3-31 13:09

The liquidity preference theory of the term structure of interest rates implies that the shape of the yield curve should be:
A)
variable.
B)
upward-sloping.
C)
flat or humped.


The liquidity preference theory definitely puts upward pressure on the long end of the term structure and, by itself, would lead to an upward-sloping yield curve.
作者: Gypsy    时间: 2012-3-31 13:10

If the slope of the yield curve begins to rise sharply, it is usually an indication that:
A)
stocks are offering abnormally high rates of return.
B)
the Fed has been aggressively driving up short-term interest rates.
C)
the rate of inflation is starting to increase or is expected to do so in the near future.


According to the expectations hypothesis, higher long-term interest rates and, therefore, upward-sloping yield curves will occur if the rate of inflation starts to heat up or is expected to do so in the near future.
作者: Gypsy    时间: 2012-3-31 13:10

James McDonald and Veasna Lu were discussing different ways of valuing a Treasury security. During their discussion Lu made the following statements:
Statement 1: It is inappropriate to discount the cash flows of a Treasury security by a single discount rate because that is implicitly assuming that the yield curve is flat. Therefore, each individual cash flow should be discounted by its corresponding spot rate.
Statement 2: The spot rates used for different time periods that produce a value equal to the market price of a Treasury bond are called forward rates or future expected spot rates.
With regard to the statements made by Lu:
A)
only one is correct.
B)
both are correct.
C)
both are incorrect.


Statement 2 is incorrect because the spot rates used for different time periods that produce a value equal to the market price of a Treasury bond are called arbitrage-free Treasury spot rates. Statement 1 is correct.
作者: Gypsy    时间: 2012-3-31 13:10

The Treasury spot rate yield curve is closest to which of the following curves?
A)
Zero-coupon bond yield curve.
B)
Par bond yield curve.
C)
Forward yield curve rate.


The spot rate yield curve shows the appropriate rates for discounting single cash flows occuring at different times in the future. Conceptually, these rates are equivalent to yields on zero-coupon bonds. The par bond yield curve shows the YTMs on coupon bonds by maturity. Forward rates are expected future short-term rates.
作者: Gypsy    时间: 2012-3-31 13:11

Bond A has a yield of 8.75%. Bond B, the reference bond, has a yield of 7.45%. Assuming both bonds have the same maturity, the relative yield spread is closest to:
A)
13%.
B)
17%.
C)
15%.


Relative yield spread = absolute yield spread / yield on reference bond
Relative yield spread = (8.75% − 7.45%) / 7.45% = 0.17 = 17%
作者: Gypsy    时间: 2012-3-31 13:11

A Treasury bond due in one-year has a yield of 8.5%. A Treasury bond due in 5 years has a yield of 9.3%. A bond issued by General Motors due in 5 years has a yield of 9.9%. A bond issued by Exxon due in one year has a yield of 9.4%. The default risk premiums on the bonds issued by Exxon and General Motors are:
ExxonGeneral Motors
A)
0.1%0.6%
B)
0.9%0.6%
C)
0.1%1.4%


9.4 − 8.5 = 0.9
9.9 − 9.3 = 0.6
作者: Gypsy    时间: 2012-3-31 13:11

Assume the following corporate yield curve.
One-year rate: 5%
Two-year rate: 6%
Three-year rate: 7%

If a 3-year annual-pay corporate bond has a coupon of 6%, its yield to maturity is closest to:
A)
6.08%.
B)
7.00%.
C)
6.92%.


First determine the current price of the corporate bond:
= 6 / 1.05 + 6 / (1.06)2 + 106 / (1.07)3 = 5.71 + 5.34 + 86.53 = 97.58
Then compute the yield of the bond:
N = 3; PMT = 6; FV = 100; PV = -97.58; CPT → I/Y = 6.92%
作者: Gypsy    时间: 2012-3-31 13:12

A Treasury security carries a yield of 4.2% and a non-Treasury security carries a yield of 6.4%. Using the Treasury rate as the reference rate, which of the following statements is least accurate?
A)
If the Treasury rate rises and the absolute spread stays the same, the yield ratio declines.
B)
The absolute yield spread is 2.2%.
C)
The yield ratio is 1.022.


The yield ratio is (6.4%) / (4.2%) = 1.524, or one plus the relative yield spread.
作者: Gypsy    时间: 2012-3-31 13:12

Which of the following is the most appropriate strategy for a fixed income portfolio manager under the anticipation of an economic expansion?
A)
Sell corporate bonds and purchase Treasury bonds.
B)
Purchase corporate bonds and sell Treasury bonds.
C)
Sell lower-rated corporate bonds and buy higher-rated corporate bonds.


During periods of economic expansion corporate yield spreads generally narrow, reflecting decreased credit risk. If yield spreads narrow, the prices of corporate bonds increase relative to the prices of Treasuries. Selling lower-rated bonds and buying higher-rated bonds is an appropriate strategy if an economic contraction is anticipated.
作者: Gypsy    时间: 2012-3-31 13:13

If investors expect greater uncertainty in the bond markets, you should see yield spreads between AAA and B rates bonds:
A)
slope downward.
B)
narrow.
C)
widen.


With greater uncertainty, investors require a higher return for taking on more risk. Therefore credit spreads will widen.
作者: Gypsy    时间: 2012-3-31 13:13

If a U.S. investor is forecasting that the yield spread between U.S. Treasury bonds and U.S. corporate bonds is going to widen, then which of the following is most likely to be CORRECT?
A)
The economy is going to expand.
B)
The economy is going to contract.
C)
The U.S. dollar will weaken.


If economic conditions are expected to get worse, then the probability that corporations may default increases and causes credit spreads to widen.
作者: Gypsy    时间: 2012-3-31 13:13

Which of the following is the reason why credit spreads between high quality bonds and low quality bonds widen during poor economic conditions?
A)
default risk.
B)
indenture provisions.
C)
interest risk.


During poor economic conditions the probability of default increases and thus credit spreads widen.
作者: Gypsy    时间: 2012-3-31 13:14

As compared to an equivalent noncallable bond, a callable bond’s yield should be:
A)
the same.
B)
higher.
C)
lower.


A callable bond favors the issuer. Hence, the value of the bond is discounted by the value of the option, which means the yield will be higher.
作者: Gypsy    时间: 2012-3-31 13:14

As compared to an equivalent nonputable bond, a putable bond’s yield should be:
A)
the same.
B)
higher.
C)
lower.


A putable bond favors the buyer (investor). Hence, a premium will be paid for the option, which means the yield will be lower.
作者: Gypsy    时间: 2012-3-31 13:14

Relative to a bond sold as part of a large issue, an otherwise equivalent bond that is sold as part of a smaller issue will be sold for a:
A)
lower price and have a higher yield to maturity.
B)
lower price and have a lower yield to maturity.
C)
higher price and have a lower yield to maturity.


Bonds that are sold as part of a smaller issue have higher liquidity risk than bonds that are sold in a large issue. Investors will demand a higher yield to maturity to cover the liquidity risk; therefore, these bonds will be sold for less than bonds from larger issues.
作者: Gypsy    时间: 2012-3-31 13:16

Consider three corporate bonds that are identical in all respects except as noted:
Will the yield spreads to Treasuries of Bond G and Bond H be higher or lower than the yield spread to Treasuries of Bond F?
A)
Higher for both.
B)
Higher for one only.
C)
Lower for both.


Liquidity is attractive to investors, so they will pay a higher price (demand a lower yield) for a more liquid bond than for an identical bond that is less liquid. Bond G is more liquid than Bond F because of its greater size. Bond H is more liquid than Bond F because it trades in greater volume. Therefore both Bond G and Bond H will tend to have lower yield spreads to Treasuries than Bond F.
作者: Gypsy    时间: 2012-3-31 13:16

A municipal bond carries a coupon of 6.75% and is traded at par. To a taxpayer in the 28% tax bracket, this bond provides an equivalent taxable yield of:
A)
6.75%.
B)
8.53%.
C)
9.38%.

ETY = Yield/(1 − Marginal Tax Rate)
0.0675/(1 − 0.28) = 9.38%
作者: Gypsy    时间: 2012-3-31 13:16

A 6% annual coupon paying bond has two years remaining to maturity and is priced at par. Assuming a 40% tax rate, the after-tax yield for this bond is closest to:
A)
4.8%.
B)
3.6%.
C)
2.4%.


Since the bond is trading at par, its yield to maturity is equal to its coupon rate of 6.0%. The after-tax yield is (1 − 0.4)(6.0%) = 3.6%.
作者: hinsafdar    时间: 2012-3-31 13:18

A municipal bond carries a coupon of 6% and is traded at par. To a taxpayer in the 34% tax bracket, this bond provides an equivalent taxable yield of:
A)
9.09%.
B)
8.53%.
C)
6.00%.

ETY = yield/(1 − marginal tax rate)
0.06/(1 − 0.34) = 9.09%
作者: hinsafdar    时间: 2012-3-31 13:18

A municipal bond selling at 12% above par offers a yield of 3.2%. A taxable Treasury note selling at an 8% discount offers a yield of 4.6%. An investor in the 32.5% tax bracket wishes to purchase an equal dollar amount of both bonds. The after-tax yield of the two-bond portfolio is closest to:
A)
4.67%.
B)
2.63%.
C)
3.15%.


The after-tax yield of the Treasury note is the stated yield times one minus the tax rate, or 4.6% times 67.5%, or 3.1%. To calculate the portfolio yield, take the average after-tax yields of both bonds, which is 3.15%.
作者: hinsafdar    时间: 2012-3-31 13:19

What would the marginal tax rate have to be for an investor to be indifferent between a 6% yield on tax exempt municipal bonds and a 10% corporate bond?
A)
60%.
B)
20%.
C)
40%.


10 = 6 / (1 − MTR )
0.10 = 0.06 / (1 – MTR); 0.10 – 0.1MTR = 0.06;
MTR = -0.04 / -0.10 = 0.40 or 40%
作者: hinsafdar    时间: 2012-3-31 13:19

The interest rate paid on negotiable CDs by banks in London is referred to as:
A)
LIBOR.
B)
the Fed Funds rate.
C)
the London rate.


The interest rate paid on negotiable CDs by banks in London is referred to as LIBOR. LIBOR is determined every day by the British Bankers Association. The Fed Funds rate is the rate paid on interbank loans within the U.S. The London rate is a fabricated term in this context.
作者: hinsafdar    时间: 2012-3-31 13:19

The most important LIBOR rate for funded investors is the:
A)
1 year or less rate.
B)
20 year rate.
C)
10 year rate.


A funded investor is one who borrows to invest. These investors typically borrow short-term and the interest rate on their loan is typically short-term LIBOR plus a margin (e.g. LIBOR plus 30 basis points).
作者: hinsafdar    时间: 2012-3-31 13:20

A funded investor has a short-term investment returning a 7% return. The borrowing costs are 20 basis points above the reference rate. If the T-bill rate is 3% and the LIBOR rate is 3.5%, what is the investor’s current profit on this investment?
A)
3.8%.
B)
1.5%.
C)
3.3%.


A funded investor is one who borrows to invest. These investors typically borrow short-term and the interest rate on their loan is typically short-term LIBOR plus a margin, here LIBOR plus 20 basis points. Thus in this example, the investor’s cost of funds is 3.7%. His profit is then 7% − 3.7% = 3.3%.



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