honeycfa

U.S. Treasury securities face several risks to varying degrees. Generally speaking, rank the following risks that an investor in a 5% coupon, 25-year, off-the-run U.S. Treasury bond, issued after 1984, would face. Order them from left to right with the least likely risk first through the most likely risk faced by the investor last.

• 1 = liquidity risk.
• 2 = prepayment risk.
• 3 = default risk.
• 4 = interest rate risk.

A) 1, 2, 3, 4.

B) 2, 3, 1, 4.

C) 3, 4, 2, 1.

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All U.S. Treasuries issued after 1984 are non-callable, so there is no prepayment risk. Treasuries are default risk free although one might argue that a long-term Treasury might have a minute level of default risk. Off-the-run Treasuries face more liquidity risk than on-the-run issues. Finally, given the long-term nature of the bond, the investor is definitely exposed to interest rate risk. Given the available alternatives, we conclude that the answer is prepayment risk, default risk, liquidity risk, and interest rate risk.

honeycfa

Which of the following bond price calculations is INCORRECT?  An investor would pay:

A) $956.25 for a $1,000 corporate bond quoted at 95 20/32.

B) $941.00 for a $1,000 Treasury bond quoted at 94 10/32.

C) $9,684.38 for a $10,000 Treasury note quoted at 96 27/32.

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Bond prices are quoted in 32nds. A quote of 94 10/32 = 94.3125%, for a price of $943.125 for a $1,000 Treasury bond. 

The other calculations are correct. A quote of 96 27/32 = 96.84, for a price of $9,684.38 for a $10,000 bond. A quote of 95 20/32 = 95.625, for a price of $956.25 for a $1,000 bond.