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97. The spread between the yields on a Ginnie Mae passthrough security and a comparable Treasury security is best explained by:

A. credit risk.
B. prepayment risk.
C, reinvestment risk.

Answer: B
“Understanding Yield Spreads,” Frank J. Fabozzi 2009 Modular Level I, Volume 5, pp. 333-334
Study Session 15-63-g
Identify how embedded options affect yield spreads.
Mortgage-backed securities expose an investor to prepayment risk.

98. Which of the following provides the most flexibility for the bond issuer?

A. Put provision.
B. Call provision.
C. Sinking fund provision.

Answer: B
“Features of debt securities,” Frank J. Fabozzi, CFA, 2009 Modular Level I, Volume 5, pp. 223-228 Study Session 15-60-d,e Explain the provisions for redemption and retirement of bonds; Identify the common options embedded in a bond issue, explain the importance of embedded options, and state whether such options benefit the issuer or bondholder. A call provision allows the issuer to repurchase the bond for any reason, assuming the call deferral period has ended and upon payment of any call premium.

99. An annual-pay bond has a yield to maturity of 5.00 percent. The bond-equivalent yield of the annual-pay bond is closest to:

A. 4.94%.
B. 5.00%.
C. 5.06%.

Answer: A
“Yield Measures, Spot Rates, and Forward Rates,” Frank J. Fabozzi 2009 Modular Level I, Volume 5, p. 399
Study Session 16-65-d Compute and interpret the bond equivalent yield of an annual-pay bond and the annual-pay yield of a semiannual-pay bond The bond-equivalent yield of an annual-pay bond = 2 × [(1 + yield on annual-pay bond)0.5 – 1] = 2 × [(1 + 0.05)0.5– 1] = 0.0494 = 4.94%