Q7. Assume that an option-free 5% coupon bond with annual coupon payments has two years to maturity. A callable bond that is the same in every respect as the option-free bond is priced at 91.76. With the term structure flat at 6% what is the value of the embedded call option?

A)   -8.24.

B)   6.41.

C)   4.58.

Q8. Using the following spot rates for pricing the bond, what is the present value of a three-year security that pays a fixed annual coupon of 6%?

• Year 1: 5.0%
• Year 2: 5.5%
• Year 3: 6.0%

A)   95.07.

B)   102.46.

C)   100.10.

Q9. If an investor purchases a 8 1/2s 2001 Feb. $10,000 par Treasury Note at 105:16 and holds it for exactly one year, what is the rate of return if the selling price is 105:16?

A)   8.06%.

B)   8.50%.

C)   8.00%.

Q10. An investor has the following options available to them:

• They can buy a 10% semi annual coupon, 10-year bond for $1,000.
• The coupons can be reinvested at 12%.
• They estimate the bond will be sold in 3 years $1,050.

Based on this information, what would be the average annual rate of return over the 3 years?

A)   11.5%.

B)   13.5%.

C)   9.5%.

Q11. What is the present value of a three-year security that pays a fixed annual coupon of 6% using a discount rate of 7%?

A)   92.48.

B)   100.00.

C)   97.38.

Q12. Assume an option-free 5% coupon bond with annual coupon payments has two years remaining to maturity. A putable bond that is the same in every respect as the option-free bond is priced at 101.76. With the term structure flat at 6% what is the value of the embedded put option?

A)   3.59.

B)   1.76.

C)   -3.59.

Q13. James Walters, CFA, has collected data on the three year term structure of interest rates, shown in the table below as bond equivalent yields.

Walters would like to compute the price of a Treasury note with a coupon rate of 5.375% paid semi-annually and 1.5 years left to maturity. The price of this note is closest to:

A)   98.65.

B)   99.76.

C)   99.64.

BCBBCAB

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