Question 106

Recent economic data suggest an increasing likelihood that the economy will soon enter a recessionary phase. What is the most likely effect on the yields of lower-quality corporate bonds and on credit spreads of lower-quality versus higher-quality corporate bonds?

       Yields   Credit Spreads

A)    Increase       Increase

B)   Increase       Decrease

C)   Decrease     Increase

D)   Decrease     Decrease

Which of the following statements regarding floating-rate securities is most accurate?

A)    The longer the time until the next reset for a floating-rate security, the less interest rate risk it has.

B)   A floating-rate security’s price will always equal par at its coupon reset date.

C)   Prices of floating-rate securities are less sensitive to changes in market yields than the prices of fixed-rate securities.

D)   Interest rate risk increases as a floating-rate security’s reset date approaches.

Which of the following statements is most accurate concerning the differences between modified convexity and effective convexity?

A)    Modified convexity is not appropriate for option-free bonds.

B)   Modified convexity takes into account changes in cash flows due to embedded options, while effective convexity does not.

C)   For an option-free bond, modified convexity is slightly greater than effective convexity.

D)   Effective convexity is most appropriate for bonds with embedded options.

A decrease in mortgage interest rates will most likely have what effects on the values of interest-only and principal-only strips?

Interest-only      Principal-only

A)    Decrease     Increase

B)   Increase           Increase

C)   Increase           Decrease

D)   Decrease     Decrease

Question 110

The risk that an investor is unable to sell a security quickly and at a fair price is best described as:

A)    default risk.

B)   reinvestment risk.

C)   call risk.

D)   liquidity risk.

[此贴子已经被作者于2008-11-7 17:17:51编辑过]

答案和详解如下！

Question 106

Recent economic data suggest an increasing likelihood that the economy will soon enter a recessionary phase. What is the most likely effect on the yields of lower-quality corporate bonds and on credit spreads of lower-quality versus higher-quality corporate bonds?

       Yields   Credit Spreads

A)    Increase       Increase

B)   Increase       Decrease

C)   Decrease     Increase

D)   Decrease     Decrease

The correct answer was A) Increase Increase

During economic contractions, the probability of default increases for lower-quality issues and their yields increase. When investors anticipate an economic downturn, they tend to sell low-quality issues and buy high-quality issues, causing credit spreads to widen.

This question tested from Session 15, Reading 65, LOS f

Question 107

Which of the following statements regarding floating-rate securities is most accurate?

A)    The longer the time until the next reset for a floating-rate security, the less interest rate risk it has.

B)   A floating-rate security’s price will always equal par at its coupon reset date.

C)   Prices of floating-rate securities are less sensitive to changes in market yields than the prices of fixed-rate securities.

D)   Interest rate risk increases as a floating-rate security’s reset date approaches.

The correct answer was C) Prices of floating-rate securities are less sensitive to changes in market yields than the prices of fixed-rate securities.

Floating-rate securities have a coupon rate that resets periodically. The objective of this floating mechanism is to bring the coupon rate in line with the current market yield so that the bond sells at or near its par value, reducing interest rate risk compared to that of a fixed-rate security.

In general, the longer the time until the next reset, the greater the interest rate risk of the floating-rate security. The interest rate risk of a floating-rate security decreases as the reset date approaches because the coupon reset will return the price to par, as long as the margin above the reference rate accurately reflects the bond’s risk. If this fixed margin does not reflect changes in the issuer’s creditworthiness, the bond’s price may differ from par at its reset date.

This question tested from Session 15, Reading 63, LOS e

Question 108

Which of the following statements is most accurate concerning the differences between modified convexity and effective convexity?

A)    Modified convexity is not appropriate for option-free bonds.

B)   Modified convexity takes into account changes in cash flows due to embedded options, while effective convexity does not.

C)   For an option-free bond, modified convexity is slightly greater than effective convexity.

D)   Effective convexity is most appropriate for bonds with embedded options.

The correct answer was D) Effective convexity is most appropriate for bonds with embedded options.

Effective convexity is most appropriate for bonds with embedded options because it takes into account changes in cash flows due to changes in yield, while modified convexity does not. For an option-free bond, modified convexity and effective convexity should be very nearly equal.

This question tested from Session 16, Reading 69, LOS h

Question 109

A decrease in mortgage interest rates will most likely have what effects on the values of interest-only and principal-only strips?

Interest-only      Principal-only

A)    Decrease     Increase

B)   Increase           Increase

C)   Increase           Decrease

D)   Decrease     Decrease

The correct answer was A)  Decrease     Increase

If mortgage rates decrease, prepayments will accelerate. Prepayments affect the values of interest-only and principal-only strips differently. A principal-only strip will increase in value from prepayments because the face value of the security will be received sooner. An interest-only strip will receive a smaller amount of total payments because interest will be paid on a smaller amount of outstanding principal.

This question tested from Session 15, Reading 64, LOS e, (Part 2)

Question 110

The risk that an investor is unable to sell a security quickly and at a fair price is best described as:

A)    default risk.

B)   reinvestment risk.

C)   call risk.

D)   liquidity risk.

The correct answer was D) liquidity risk.

Liquidity risk is the risk related to the ability of an investor to sell securities quickly and at a few price, and is measured by the bid-ask spread.

This question tested from Session 15, Reading 63, LOS a

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