Deck 3: Introduction to Fixed-Income Valuation

Question 1

A zero-coupon bond matures in 15 years. At a market discount rate of 4.5% per year and assuming annual compounding, the price of the bond per 100 of par value is closest to:

A) 51.30.
B) 51.67.
C) 71.62.

Answer 1

B

Question 2

A bond offers an annual coupon rate of 4%, with interest paid semi-annually. The bond matures in two years. At a market discount rate of 6%, the price of this bond per 100 of
Par value is closest to:

A) 93.07.
B) 96.28.
C) 96.33.

Answer 2

B

Question 3

$\begin{array}{l}\text { The following information relates to Questions } 15 - 17\\\begin{array} { l c c c c } \hline \text { Bond } & \text { Coupon Rate } & \text { Time-to-Maturity } & \text { Time-to-Maturity } & \text { Spot Rates } \\\hline \mathrm { X } & 8 \% & 3 \text { years } & 1 \text { year } & 8 \% \\\mathrm { Y } & 7 \% & 3 \text { years } & 2 \text { years } & 9 \% \\\mathrm { Z } & 6 \% & 3 \text { years } & 3 \text { years } & 10 \% \\\hline\end{array}\end{array}$
All three bonds pay interest annually.

-based upon the given sequence of spot rates, the price of bond Y is closest to:

A) 87.50.
B) 92.54.
C) 92.76.

Answer 3

92.76.

Question 4

$\begin{array}{l}\text { The following information relates to Questions } 15 - 17\\\begin{array} { l c c c c } \hline \text { Bond } & \text { Coupon Rate } & \text { Time-to-Maturity } & \text { Time-to-Maturity } & \text { Spot Rates } \\\hline \mathrm { X } & 8 \% & 3 \text { years } & 1 \text { year } & 8 \% \\\mathrm { Y } & 7 \% & 3 \text { years } & 2 \text { years } & 9 \% \\\mathrm { Z } & 6 \% & 3 \text { years } & 3 \text { years } & 10 \% \\\hline\end{array}\end{array}$
All three bonds pay interest annually.

-based upon the given sequence of spot rates, the price of bond x is closest to:

A) 95.02.
B) 95.28.
C) 97.63.

Question 5

The following information relates to Questions
bond G, described in the exhibit below, is sold for settlement on 16 June 2020.
$\begin{array} { l l } \text { Annual Coupon } & 5 \% \\\text { Coupon Payment Frequency } & \text { Semi-annual } \\\text { Interest Payment Dates } & 10 \text { April and } 10 \text { October } \\\text { Maturity Date } & 10 \text { October } 2022 \\\text { Day Count Convention } & 30 / 360 \\\text { Annual Yield-to-Maturity } & 4 \%\end{array}$

-The full price that bond G settles at on 16 June 2020 is closest to:

A) 102.36.
B) 103.10.
C) 103.65.

Question 6

Relative to bond C, for a 200 basis point decrease in the required rate of return, bond b will most likely exhibit a(n):

A) equal percentage price change.
B) greater percentage price change.
C) smaller percentage price change.

Question 7

An investor considers the purchase of a 2-year bond with a 5% coupon rate, with interest paid annually. Assuming the sequence of spot rates shown below, the price of the bond is Closest to:
$\begin{array} { l c } \hline \text { Time-to-Maturity } & \text { Spot Rates } \\\hline 1 \text { year } & 3 \% \\2 \text { years } & 4 \% \\\hline\end{array}$

A) 101.93.
B) 102.85.
C) 105.81.

Question 8

Which bond offers the lowest yield-to-maturity?

A) bond A
B) bond b
C) bond C

Question 9

Question 10

A bond with two years remaining until maturity offers a 3% coupon rate with interest paid annually. At a market discount rate of 4%, the price of this bond per 100 of par value
Is closest to:

A) 95.34.
B) 98.00.
C) 98.11.

Question 11

The following information relates to Questions
bond G, described in the exhibit below, is sold for settlement on 16 June 2020.
$\begin{array} { l l } \text { Annual Coupon } & 5 \% \\\text { Coupon Payment Frequency } & \text { Semi-annual } \\\text { Interest Payment Dates } & 10 \text { April and } 10 \text { October } \\\text { Maturity Date } & 10 \text { October } 2022 \\\text { Day Count Convention } & 30 / 360 \\\text { Annual Yield-to-Maturity } & 4 \%\end{array}$

-The accrued interest per 100 of par value for bond G on the settlement date of 16 June 2020 is closest to:

A) 0.46.
B) 0.73.
C) 0.92.

Question 12

bond dealers most often quote the:

A) flat price.
B) full price.
C) full price plus accrued interest.

Question 13

A portfolio manager is considering the purchase of a bond with a 5.5% coupon rate that pays interest annually and matures in three years. If the required rate of return on the
Bond is 5%, the price of the bond per 100 of par value is closest to:

A) 98.65.
B) 101.36.
C) 106.43.

Question 14

A bond offers an annual coupon rate of 5%, with interest paid semi-annually. The bond matures in seven years. At a market discount rate of 3%, the price of this bond per 100 of
Par value is closest to:

A) 106.60.
B) 112.54.
C) 143.90.

Question 15

Which bond will most likely experience the greatest percentage change in price if the mar- ket discount rates for all three bonds increase by 100 basis points?

A) bond A
B) bond b
C) bond C

Question 16

An investor who owns a bond with a 9% coupon rate that pays interest semi-annually and matures in three years is considering its sale. If the required rate of return on the bond is
11%, the price of the bond per 100 of par value is closest to:

A) 95.00.
B) 95.11.
C) 105.15.

Question 17

The following information relates to Questions 11 and 12 All three bonds are currently trading at par value.

Question 18

A 3-year bond offers a 10% coupon rate with interest paid annually. Assuming the follow- ing sequence of spot rates, the price of the bond is closest to: $\begin{array} { l c } \text { Time-to-Maturity } & \text { Spot Rates } \\\hline 1 \text { year } & 8.0 \% \\2 \text { years } & 9.0 \% \\3 \text { years } & 9.5 \% \\\hline\end{array}$

A) 96.98.
B) 101.46.
C) 102.95.

Question 19

Consider the following two bonds that pay interest annually: $\begin{array} { l c c } \hline \text { Bond } & \text { Coupon Rate } & \text { Time-to-Maturity } \\\hline \text { A } & 5 \% & 2 \text { years } \\\text { B } & 3 \% & 2 \text { years } \\\hline\end{array}$ At a market discount rate of 4%, the price difference between bond A and bond b per 100 of par value is closest to:

A) 3.70.
B) 3.77.
C) 4.00.

Question 20

$\begin{array}{l}\text { The following information relates to Questions } 15 - 17\\\begin{array} { l c c c c } \hline \text { Bond } & \text { Coupon Rate } & \text { Time-to-Maturity } & \text { Time-to-Maturity } & \text { Spot Rates } \\\hline \mathrm { X } & 8 \% & 3 \text { years } & 1 \text { year } & 8 \% \\\mathrm { Y } & 7 \% & 3 \text { years } & 2 \text { years } & 9 \% \\\mathrm { Z } & 6 \% & 3 \text { years } & 3 \text { years } & 10 \% \\\hline\end{array}\end{array}$
All three bonds pay interest annually.

-based upon the given sequence of spot rates, the yield-to-maturity of bond Z is closest to:

A) 9.00%.
B) 9.92%.
C) 11.93%

Question 21

A yield curve constructed from a sequence of yields-to-maturity on zero-coupon bonds is the:

A) par curve.
B) spot curve.
C) forward curve.

Question 22

A 365-day year bank certificate of deposit has an initial principal amount of uSd 96.5 million and a redemption amount due at maturity of uSd 100 million. The number of
Days between settlement and maturity is 350. The bond equivalent yield is closest to:

A) 3.48%.
B) 3.65%.
C) 3.78%.

Question 23

Question 24

The following information relates to Questions
A bond with 5 years remaining until maturity is currently trading for 101 per 100 of par value. The bond offers a 6% coupon rate with interest paid semi-annually. The bond is first callable in 3 years, and is callable after that date on coupon dates according to the following schedule: $\begin{array}{lc}\text { End of Year } & \text { Call Price } \\\hline 3 & 102 \\4 & 101 \\5 & 100 \\\hline\end{array}$


-The bond's annual yield-to-first-call is closest to:

A) 3.12%.
B) 6.11%.
C) 6.25%.

Question 25

When underwriting new corporate bonds, matrix pricing is used to get an estimate of the:

A) required yield spread over the benchmark rate.
B) market discount rate of other comparable corporate bonds.
C) yield-to-maturity on a government bond having a similar time-to-maturity.

Question 26

The following information relates to Questions
A bond with 5 years remaining until maturity is currently trading for 101 per 100 of par value. The bond offers a 6% coupon rate with interest paid semi-annually. The bond is first callable in 3 years, and is callable after that date on coupon dates according to the following schedule: $\begin{array}{lc}\text { End of Year } & \text { Call Price } \\\hline 3 & 102 \\4 & 101 \\5 & 100 \\\hline\end{array}$


-The bond's annual yield-to-maturity is closest to:

A) 2.88%.
B) 5.77%.
C) 5.94%.

Question 27

The following information relates to Questions
A bond with 5 years remaining until maturity is currently trading for 101 per 100 of par value. The bond offers a 6% coupon rate with interest paid semi-annually. The bond is first callable in 3 years, and is callable after that date on coupon dates according to the following schedule: $\begin{array}{lc}\text { End of Year } & \text { Call Price } \\\hline 3 & 102 \\4 & 101 \\5 & 100 \\\hline\end{array}$


-The bond's annual yield-to-second-call is closest to:

A) 2.97%.
B) 5.72%.
C) 5.94%.

Question 28

A bond with 20 years remaining until maturity is currently trading for 111 per 100 of par value. The bond offers a 5% coupon rate with interest paid semi-annually. The bond's
Annual yield-to-maturity is closest to:

A) 2.09%.
B) 4.18%.
C) 4.50%.

Question 29

The spread component of a specific bond's yield-to-maturity is least likely impacted by changes in:

A) its tax status.
B) its quality rating.
C) inflation in its currency of denomination.

Question 30

The bond equivalent yield of a 180-day banker's acceptance quoted at a discount rate of4.25% for a 360-day year is closest to:

A) 4.31%.
B) 4.34%.
C) 4.40%.

Question 31

Matrix pricing allows investors to estimate market discount rates and prices for bonds:

A) with different coupon rates.
B) that are not actively traded.
C) with different credit quality.

Question 32

A 5-year, 5% semi-annual coupon payment corporate bond is priced at 104.967 per 100 of par value. The bond's yield-to-maturity, quoted on a semi-annual bond basis, is3.897%. An analyst has been asked to convert to a monthly periodicity. under this con-
Version, the yield-to-maturity is closest to:

Question 33

Which of the following statements describing a par curve is incorrect?

A) A par curve is obtained from a spot curve.
B) All bonds on a par curve are assumed to have different credit risk.
C) A par curve is a sequence of yields-to-maturity such that each bond is priced at par value.

Question 34

An analyst evaluates the following information relating to floating rate notes (FRns) is- sued at par value that have 3-month libor as a reference rate: $\begin{array} { l c c } \hline \text { Floating Rate Note } & \text { Quoted Margin } & \text { Discount Margin } \\\hline \mathrm { X } & 0.40 \% & 0.32 \% \\\mathrm { Y } & 0.45 \% & 0.45 \% \\\mathrm { Z } & 0.55 \% & 0.72 \% \\\hline\end{array}$ based only on the information provided, the FRn that will be priced at a premium on the next reset date is:

A) FRn x.
B) FRn Y.
C) FRn Z.

Question 35

The following information relates to Questions
$\begin{array} { l c } \text { Time Period } & \text { Forward Rate } \\\hline \text { "0y1y" } & 0.80 \% \\\text { "1y1y" } & 1.12 \% \\\text { "2y1y" } & 3.94 \% \\\text { "3yly" } & 3.28 \% \\\text { "4yly" } & 3.14 \% \\\hline\end{array}$
All rates are annual rates stated for a periodicity of one (effective annual rates).

-The 3-year implied spot rate is closest to:

A) 1.18%.
B) 1.94%.
C) 2.28%.

Question 36

The following information relates to Questions
bond G, described in the exhibit below, is sold for settlement on 16 June 2020.
$\begin{array} { l l } \text { Annual Coupon } & 5 \% \\\text { Coupon Payment Frequency } & \text { Semi-annual } \\\text { Interest Payment Dates } & 10 \text { April and } 10 \text { October } \\\text { Maturity Date } & 10 \text { October } 2022 \\\text { Day Count Convention } & 30 / 360 \\\text { Annual Yield-to-Maturity } & 4 \%\end{array}$

-The flat price for bond G on the settlement date of 16 June 2020 is closest to:

A) 102.18.
B) 103.10.
C) 104.02.

Question 37

The following information relates to Questions
A bond with 5 years remaining until maturity is currently trading for 101 per 100 of par value. The bond offers a 6% coupon rate with interest paid semi-annually. The bond is first callable in 3 years, and is callable after that date on coupon dates according to the following schedule: $\begin{array}{lc}\text { End of Year } & \text { Call Price } \\\hline 3 & 102 \\4 & 101 \\5 & 100 \\\hline\end{array}$


-The bond's yield-to-worst is closest to:

A) 2.88%.
B) 5.77%.
C) 6.25%.

Question 38

The annual yield-to-maturity, stated for with a periodicity of 12, for a 4-year, zero-coupon bond priced at 75 per 100 of par value is closest to:

A) 6.25%.
B) 7.21%.
C) 7.46%.

Question 39

The following information relates to Questions
$\begin{array} { l c } \text { Time Period } & \text { Forward Rate } \\\hline \text { "0y1y" } & 0.80 \% \\\text { "1y1y" } & 1.12 \% \\\text { "2y1y" } & 3.94 \% \\\text { "3yly" } & 3.28 \% \\\text { "4yly" } & 3.14 \% \\\hline\end{array}$
All rates are annual rates stated for a periodicity of one (effective annual rates).

-The value per 100 of par value of a two-year, 3.5% coupon bond, with interest payments paid annually, is closest to:

A) 101.58.
B) 105.01.
C) 105.82.

Question 40

The rate, interpreted to be the incremental return for extending the time-to-maturity of an investment for an additional time period, is the:

A) add-on rate.
B) forward rate.
C) yield-to-maturity.

Question 41

The following information relates to Question 42
$\begin{array} { l c c r } \text { Bond } & \text { Coupon Rate } & \text { Time-to-Maturity } & \text { Price } \\\hline \text { UK Government Benchmark Bond } & 2 \% & 3 \text { years } & 100.25 \\\text { UK Corporate Bond } & 5 \% & 3 \text { years } & 100.65 \\\hline\end{array}$
both bonds pay interest annually. The current three-year EuR interest rate swap benchmark is 2.12%.

-The G-spread in basis points (bps) on the uK corporate bond is closest to:

A) 264 bps.
B) 285 bps.
C) 300 bps.

Question 42

An option-adjusted spread (oAS) on a callable bond is the Z-spread:

A) over the benchmark spot curve.
B) minus the standard swap rate in that currency of the same tenor.
C) minus the value of the embedded call option expressed in basis points per year.

Question 43

A corporate bond offers a 5% coupon rate and has exactly 3 years remaining to maturity. Interest is paid annually. The following rates are from the benchmark spot curve: $\begin{array} { l c } \text { Time-to-Maturity } & \text { Spot Rate } \\\hline 1 \text { year } & 4.86 \% \\2 \text { years } & 4.95 \% \\3 \text { years } & 5.65 \% \\\hline\end{array}$ The bond is currently trading at a Z-spread of 234 basis points. The value of the bond is
closest to:

A) 92.38.
B) 98.35.
C) 106.56.

Question 44

The yield spread of a specific bond over the standard swap rate in that currency of the same tenor is best described as the:

A) I-spread.
B) Z-spread.
C) G-spread.