Đang tải... (xem toàn văn)
Đây là tài liệu trong bộ tài liệu Question bank thi CFA level 1 năm 2018 được mua trên trang web của CFA Institute. Có tổng cộng 10 file pdf của bộ này tương ứng cho mỗi chương ôn thi CFA Bộ tài liệu 10 file này có: + Các câu hỏi thực hành dựa trên lý thuyết của toàn bộ giáo trình của CFA level 1 theo cách có hệ thống được sắp xếp từ các câu hỏi Đơn giản, Trung bình, Khó và Chuyên môn cho thực hành khó. + Bao gồm 1800 câu hỏi để thực hành Hardcore hoàn chỉnh. + Khoảng 1000 trang sách với đầy đủ đáp án giải thích cho từng câu hỏi
Fixed-Income Securities: Defining Elements and Issuance, Trading, Funding Test ID: 7711672 Question #1 of 67 Question ID: 415479 The principal value of a sovereign bond is $1,000 at issuance and $1,055 two years after issuance This bond most likely: غA) trades at a premium غB) has been upgraded ضC) is indexed for inflation Explanation Inflation-indexed bonds often have a capital-indexed structure in which the principal value is adjusted periodically by the inflation rate Credit rating upgrades or downgrades not affect the principal value of bonds A bond is trading at a premium when its market price is greater than its principal value Question #2 of 67 Question ID: 415474 Which of the following least likely represents a primary market offering? When bonds are sold: غA) in a private placement ضB) from a dealer's inventory غC) on a best-efforts basis Explanation When bonds are sold from a dealer's inventory, the bonds have already been sold once and the transaction takes place on the secondary market The other transactions in the responses take place in the primary market When bonds are sold on a best-efforts basis, the investment banker does not take ownership of the securities and agrees to sell all she can In a private placement, the bonds are sold privately to a small number of investors Question #3 of 67 Question ID: 415477 A bond is quoted at 96.25 bid and 96.75 ask Based only on this information, this bond is most likely: غA) a corporate bond غB) non-investment grade ضC) relatively illiquid Explanation The spread between the bid and ask prices is one-half percent of par, which most likely reflects an illiquid market for this bond Bonds with liquid secondary markets typically have bid-ask spreads of approximately 10 to 12 basis points of 20 Question #4 of 67 Question ID: 415452 To reduce the cost of long-term borrowing, a corporation with a below average credit rating could: ضA) issue securitized bonds غB) issue commercial paper غC) decrease credit enhancement Explanation Commercial paper is only issued by corporations with top credit ratings Decreasing credit enhancements increase the cost of borrowing Question #5 of 67 Question ID: 415441 An analyst observes a 5-year, 10% coupon bond with semiannual payments The face value is £1,000 How much is each coupon payment? غA) £25 ضB) £50 غC) £100 Explanation The coupon rate is the percentage of par value paid annually With semiannual coupons, half of the annual coupon rate is paid every six months For a 5-year, 10% coupon bond with semiannual payments and a face value of £1,000, each coupon payment is half of 10% times £1,000, or £50 Question #6 of 67 Question ID: 415450 Which of the following is least likely an example of external credit enhancements? غA) Letters of credit ضB) Excess spread غC) Bank guarantees Explanation Excess spread is an example of internal, not external credit enhancement Question #7 of 67 Question ID: 415466 As compared to an equivalent noncallable bond, a callable bond's yield should be: غA) the same غB) lower ضC) higher Explanation of 20 A callable bond favors the issuer Hence, the value of the bond is discounted by the value of the option, which means the yield will be higher Question #8 of 67 Question ID: 415462 The coupon rate of a fixed income security is stated as 90-day LIBOR plus 125 basis points This security is most accurately described as a(n): ضA) floating-rate note غB) reference-rate note غC) variable-rate note Explanation A floating-rate note has a coupon rate based on a market-determined reference rate such as 90-day LIBOR Typically the coupon rate will be stated as a margin above the reference rate A variable-rate note has a margin above the reference rate that is not fixed over the life of the note An index-linked bond has a coupon payment or principal amount that adjusts based on the value of a published index such as an equity market, commodity, or inflation index Question #9 of 67 Question ID: 415460 Which of the following statements about U.S Treasury Inflation Protection Securities (TIPS) is most accurate? غA) Adjustments to principal values are made annually غB) The inflation-adjusted principal value cannot be less than par ضC) The coupon rate is fixed for the life of the issue Explanation The coupon rate is set at a fixed rate determined via auction This is called the real rate The principal that serves as the basis of the coupon payment and the maturity value is adjusted semiannually Because of the possibility of deflation, the adjusted principal value may be less than par (however, at maturity the Treasury redeems the bonds at the greater of the inflation-adjusted principal and the initial par value) Question #10 of 67 Question ID: 415475 A purchase of a new bond issue by a single investor is most accurately described as a(n): ضA) private placement غB) grey market transaction غC) underwritten offering Explanation In a private placement, an entire bond issue is sold to a single investor or a small group of investors, rather than being offered to the public of 20 Question #11 of 67 Question ID: 415482 If two banks fund a loan to a corporation, the loan is most accurately described as a: غA) bilateral loan غB) backup line of credit ضC) syndicated loan Explanation Syndicated loans are funded by more than one bank A bilateral loan involves only one bank ("bilateral" refers to the lender and the borrower) A backup line of credit is an agreement to provide funds if needed and may be used, for example, to provide credit enhancement for a commercial paper issue Question #12 of 67 Question ID: 460678 A bond initially does not make periodic payments but instead accrues them over a pre-determined period and then pays a lump sum at the end of that period The bond subsequently makes regular periodic payments until maturity Such a bond is best described as a: غA) step-up note ضB) deferred-coupon bond غC) zero-coupon bond Explanation Deferred-coupon bonds carry coupons, but the initial coupon payments are deferred for some period The coupon payments accrue, at a compound rate, over the deferral period and are paid as a lump sum at the end of that period After the initial deferment period has passed, these bonds pay regular coupon interest for the rest of the life of the issue (i.e., until the maturity date) Zero coupon bonds not pay periodic interest A step-up note has a coupon rate that increases on one or more specified dates during the note's life Question #13 of 67 Question ID: 434401 Which of the following is least likely a form of internal credit enhancement for a bond issue? ضA) Covering the bond issue via a surety bond غB) Structuring the asset pool such that it has an excess spread غC) Including a tranche system to identify priority of claims Explanation A surety bond is issued by a third party and hence is an external form of credit enhancement Question #14 of 67 Question ID: 434403 Treasury Inflation Protected Securities, which provide investors with protection against inflation by adjusting the par value and of 20 keeping the coupon rate fixed, are best described as: غA) interest-indexed bonds غB) indexed-annuity bonds ضC) capital-indexed bonds Explanation Indexed bonds that adjust the principal value while keeping the coupon rate fixed are best described as capital-indexed bonds Interest-indexed bonds adjust the coupon rate Indexed-annuity bonds are fully amortizing with the payments adjusted Question #15 of 67 Question ID: 441029 An investor holds $100,000 (par value) worth of TIPS currently trading at par The coupon rate of 4% is paid semiannually, and the annual inflation rate is 2.5% What coupon payment will the investor receive at the end of the first six months? غA) $2,000 ضB) $2,025 غC) $2,050 Explanation This coupon payment is computed as follows: Question #16 of 67 Question ID: 415453 Which of the following issues is most accurately described as a eurobond? غA) South Korean firm's euro-denominated bonds sold to investors in the European Union ضB) Brazilian firm's U.S dollar-denominated bonds sold to investors in Canada غC) European Union firm's Japanese yen-denominated bonds sold to investors in Japan Explanation Eurobonds are denominated in a currency other than that of the countries in which they are issued The name "eurobond" does not imply that a bond is sold in Europe or by a European issuer, or denominated in the euro currency A U.S dollar-denominated bond sold to investors outside the United States is called a "eurodollar bond." Question #17 of 67 Question ID: 415437 Which of the following statements about zero-coupon bonds is least accurate? ضA) A zero coupon bond may sell at a premium to par when interest rates decline غB) The lower the price, the greater the return for a given maturity غC) All interest is earned at maturity of 20 Explanation Zero coupon bonds always sell below their par value, or at a discount prior to maturity The amount of the discount may change as interest rates change, but a zero coupon bond will always be priced less than par Question #18 of 67 Question ID: 415469 The indenture of a callable bond states that the bond may be called on the first business day of any month after the first call date The call option embedded in this bond is a(n): غA) European style call option ضB) Bermuda style call option غC) American style call option Explanation A bond with a Bermuda style embedded call option may be called on prespecified dates after the first call date A European style embedded call option specifies a single date on which a bond may be called With an American style embedded call option, a bond may be called any time after its first call date Question #19 of 67 Question ID: 460679 PRC International just completed a $234 million floating rate convertible bond offering As stated in the indenture, the interest rate on the bond is the lesser of 90-day LIBOR or 10% The indenture also requires PRC to retire $5.6 million per year with the option to retire as much as $10 million Which of the following embedded options is most likely to benefit the investor? The: غA) accelerated sinking fund provision for principal repayment ضB) conversion option on the convertible bonds غC) 10% cap on the floating interest rate Explanation The conversion privilege is an option granted to the bondholder The cap benefits the issuer The accelerated sinking fund might reduce the investor's default risk, but the conversion option is the most likely benefit to the investor Question #20 of 67 Question ID: 415476 Settlement for a government bond trade most often occurs on the: غA) same day as the trade غB) third trading day after the trade ضC) next trading day after the trade Explanation Government bond trades typically settle on the next trading day (T + 1) Money market instruments typically have cash settlement (settle on the same day) Settlement for corporate bond trades is typically on the third trading day after the trade (T + 3) of 20 Question #21 of 67 Question ID: 415456 Allcans, an aluminum producer, needs to issue some debt to finance expansion plans, but wants to hedge its bond interest payments against fluctuations in aluminum prices Jerrod Price, the company's investment banker, suggests a commodity index floater This type of bond is least likely to provide which of the following advantages? ضA) Allows Allcans to set coupon payments based on business results غB) The bond's coupon rate is linked to the price of aluminum غC) Payment structure helps protect Allcan's credit rating Explanation The coupon rate is set in the bond agreement (indenture) and cannot be changed unilaterally Non-interest rate indexed floaters are indexed to a commodity price such as oil or aluminum Business results could be impacted by numerous factors other than aluminum prices Both of the other choices are true By linking the coupon payments directly to the price of aluminum (meaning that when aluminum prices increase, the coupon rate increases and vice versa), the non-interest index floater allows Allcans to protect its credit rating during adverse circumstances Question #22 of 67 Question ID: 460680 Which of the following embedded bond options tends to benefit the borrower? ضA) Interest rate cap غB) Conversion option غC) Put option Explanation The interest rate cap benefits the borrower who issues a floating rate bond The cap places a restriction on how high the coupon rate can become during a rising interest rate environment Therefore, the floating rate borrower is protected against ever-rising interest rates Question #23 of 67 Question ID: 415485 The interbank funds market is most accurately described as: غA) trading of negotiable certificates of deposit غB) banks' borrowing of reserves from the central bank ضC) unsecured short-term loans from one bank to another Explanation The interbank funds market refers to short-term unsecured loans between banks It does not refer to trading of negotiable certificates of deposit Borrowing from the central bank is said to occur in the central bank funds market of 20 Question #24 of 67 Question ID: 415457 Consider a floating rate issue that has a coupon rate that is reset on January of each year The coupon rate is defined as one-year London Interbank Offered Rate (LIBOR) + 125 basis points and the coupons are paid semi-annually If the one-year LIBOR is 6.5% on January 1, which of the following is the semi-annual coupon payment received by the holder of the issue in that year? ضA) 3.875% غB) 3.250% غC) 7.750% Explanation This value is computed as follows: Semi-annual coupon = (LIBOR + 125 basis points) / = 3.875% Question #25 of 67 Question ID: 415458 A bond has a par value of $5,000 and a coupon rate of 8.5% payable semi-annually The bond is currently trading at 112.16 What is the dollar amount of the semi-annual coupon payment? ضA) $212.50 غB) $238.33 غC) $425.00 Explanation The dollar amount of the coupon payment is computed as follows: Coupon in $ = $5,000 × 0.085 / = $212.50 Question #26 of 67 Question ID: 485805 Which of the following statements about floating-rate notes is most accurate? ضA) Floating-rate notes have built-in floors, while inverse floating-rate notes have built-in caps غB) The coupon payment on a floating-rate note at each reset date is typically based on LIBOR as of that date غC) Inverse floating-rate notes are attractive to investors who expect interest rates to rise, while floating-rate notes are attractive to investors who expect interest rates to fall Explanation The lowest possible reference rate is zero If this occurs, the coupon on a floating-rate note cannot go lower than its quoted margin Hence, the quoted margin is a floor coupon for a floating-rate note The coupon on an inverse floater is determined by a formula such as "15% - 1.5 × reference rate." If the reference rate goes to zero, the coupon on this inverse floater can go no higher than 15% of 20 Question #27 of 67 Question ID: 415446 A covenant that requires the issuer not to let the insurance coverage lapse on assets pledged as collateral is an example of a(n): غA) negative covenant ضB) affirmative covenant غC) inhibiting covenant Explanation Covenants are classified as negative or affirmative Affirmative covenants specify administrative actions a bond issuer is required to take, such as maintaining insurance coverage on assets pledged as collateral Negative covenants are restrictions on a bond issuer's actions, such as preventing an issuer from selling any assets that have been pledged as collateral or pledging them again as collateral for additional debt Question #28 of 67 Question ID: 415440 Which of the following fixed income securities is classified as a money market security? غA) Security issued 18 months ago that will mature in six months ضB) Newly issued security that will mature in one year غC) Security issued six months ago that will mature in one year Explanation Money market securities have original maturities of one year or less Fixed income securities originally issued with maturities longer than one year are classified as capital market securities Question #29 of 67 Question ID: 415486 Compared to a term repurchase agreement, an overnight repurchase agreement is most likely to have a: غA) lower repo rate and higher repo margin غB) higher repo rate and repo margin ضC) lower repo rate and repo margin Explanation Both the repo rate and the repo margin tend to be higher for longer repo terms Therefore an overnight repo should have a lower repo rate and a lower repo margin than a term (i.e., longer than overnight) repo Question #30 of 67 Question ID: 415487 A repurchase agreement is described as a "reverse repo" if: ضA) a bond dealer is the lender غB) the repurchase price is lower than the sale price of 20 غC) collateral is delivered to the lender and returned to the borrower Explanation Bond dealers frequently use repurchase agreements as sources of funding When a bond dealer enters a repo as the lender instead of the borrower, the agreement is referred to as a reverse repo Question #31 of 67 Question ID: 415483 A structured security is a combination of: غA) a corporate bond and a syndicated loan ضB) a medium-term note and a derivative غC) commercial paper and a backup line of credit Explanation Medium-term notes (MTNs) that are combined with derivatives to create features desired by an investor are known as structured securities Question #32 of 67 Question ID: 472420 Which of the following statements regarding repurchase agreements is most accurate? غA) Lower credit rating of the underlying collateral results in a lower repo margin ضB) Greater demand for the underlying security results in a lower repo margin غC) Higher credit rating of the underlying collateral results in a higher repo rate Explanation Other things equal, the repo margin (percent difference between the market value of the collateral and the loan amount) is lower if the collateral is in greater demand The repo margin and repo rate (the annualized percent difference between the sale price and repurchase price of the collateral) are inversely related to the credit quality of the collateral Question #33 of 67 Question ID: 415481 On November 15, 20X1, Grinell Construction Company decided to issue bonds to help finance the acquisition of new construction equipment They issued bonds totaling $10,000,000 with a 6% coupon rate due June 15, 20X9 Grinell has agreed to pay the entire amount borrowed in one lump sum payment at the maturity date Grinell is not required to make any principal payments prior to maturity What type of bond structure has Grinell issued? غA) Serial maturity structure ضB) Term maturity structure غC) Amortizing maturity structure Explanation These bonds have a term maturity structure because the issuer has agreed to pay the entire amount borrowed in one lump-sum 10 of 20 incorporate into credit ratings Market prices tend to lead credit ratings Credit ratings can be revised after issuance Question #84 of 126 Question ID: 415678 A non-callable bond with 18 years remaining maturity has an annual coupon of 7% and a $1,000 par value The current yield to maturity on the bond is 8% Using a 50bp change in YTM, the approximate modified duration of the bond is: غA) 8.24 ضB) 9.63 غC) 11.89 Explanation First, compute the current price of the bond as: FV = $1,000; PMT = $70; N = 18; I/Y = 8%; CPT ĺ PV = -$906.28 Next, change the yield by plus-or-minus 50 basis points Compute the price of the bond if rates rise by 50 basis points to 8.5% as: FV = $1,000; PMT = $70; N = 18; I/Y = 8.5%; CPT ĺ PV = -$864.17 Then compute the price of the bond if rates fall by 50 basis points to 7.5% as: FV = $1,000; PMT = $70; N = 18; I/Y = 7.5%; CPT ĺ PV = -$951.47 The formula for approximate modified duration is: (V- - V+) / (2V0ǻYTM) Therefore, approximate modified duration is: ($951.47 - $864.17) / (2 × $906.28 × 0.005) = 9.63 Question #85 of 126 Question ID: 415660 For a given bond, the duration is and the convexity is 100 For a 60 basis point decrease in yield, what is the approximate percentage price change of the bond? ضA) 4.98% غB) 4.62% غC) 2.52% 29 of 43 Explanation The estimated price change is -(duration)(ăYTM) + (ẵ)(convexity) ì (ăYTM)2 = -8 ì (-0.006) + (ẵ)(100) ì (-0.0062) = +0.0498 or 4.98% Question #86 of 126 Question ID: 419144 A 9-year corporate bond with a 3.25% coupon is priced at 103.96 This bond's duration and convexity are 7.8 and 69.8 If the bond's credit spread widens by 100 basis points, the impact on the bondholder's return is closest to: ضA) −7.45% غB) −7.80% غC) +8.15% Explanation Return impact § −(Duration × ǻSpread) + (1/2) × (Convexity × (ǻSpread))2 § −(7.8 × 0.0100) + (1/2) × (69.8) × (0.0100)2 § −0.0780 + 0.0035 § −0.0745 or −7.45% Question #87 of 126 Question ID: 436854 Vantana Inc has a bond outstanding with a modified duration of 5.3 and approximate convexity of 110 If yields increase by 1%, the bond price will: غA) increase by more than 5.3% غB) decrease by more than 5.3% ضC) decrease by less than 5.3% Explanation The positive convexity effect will mean yields will drop by less than 5.3% (the effect of duration alone) Price change = (-5.3 × 0.01) + (0.5 × 110 × 0.012)= -0.0475 = -4.75% Question #88 of 126 Question ID: 415637 Which of the following is a limitation of the portfolio duration measure? Portfolio duration only considers: ضA) a linear approximation of the actual price-yield function for the portfolio غB) the market values of the bonds غC) a nonparallel shift in the yield curve Explanation Duration is a linear approximation of a nonlinear function The use of market values has no direct effect on the inherent limitation of the portfolio duration measure Duration assumes a parallel shift in the yield curve, and this is an additional limitation 30 of 43 Question #89 of 126 Question ID: 415702 Which of the following statements about municipal bonds is least accurate? ضA) Revenue bonds have lower yields than general obligation bonds because there are more revenue bands and they have higher liquidity غB) Bonds with municipal bond guarantees are more liquid in the secondary market and generally have lower required yields غC) A municipal bond guarantee is a form of insurance provided by a third party other than the issuer Explanation General obligation bonds are backed by the full faith, credit, and taxing power of the issuer and thus tend to have lower yields than revenue bonds Question #90 of 126 Question ID: 415679 Senior subordinated bonds have a priority of claims over: غA) first lien debt غB) secured bonds ضC) subordinated bonds Explanation First lien loans and secure bonds are senior to any unsecured debt Senior subordinated debt is senior to subordinated debt Question #91 of 126 Question ID: 415641 The price value of a basis point (PVBP) for a 18 year, 8% annual pay bond with a par value of $1,000 and yield of 9% is closest to: غA) $0.44 ضB) $0.82 غC) $0.80 Explanation PVBP = initial price - price if yield changed by bps Initial price: Price with change: FV = 1000 FV = 1000 PMT = 80 PMT = 80 N = 18 N = 18 I/Y = 9% I/Y = 9.01 CPT PV = 912.44375 CPT PV = 911.6271 PVBP = 912.44375 - 911.6271 = 0.82 31 of 43 Question #92 of 126 Question ID: 415615 An investor finds that for a 1% increase in yield to maturity, a bond's price will decrease by 4.21% compared to a 4.45% increase in value for a 1% decline in YTM If the bond is currently trading at par value, the bond's approximate modified duration is closest to: ضA) 4.33 غB) 43.30 غC) 8.66 Explanation Modified duration is a measure of a bond's sensitivity to changes in interest rates Approximate modified duration = (V- - V+) / [2V0(change in required yield)] where: V- = estimated price if yield decreases by a given amount V+ = estimated price if yield increases by a given amount V0 = initial observed bond price Thus, duration = (104.45 - 95.79)/(2 × 100 × 0.01) = 4.33 Remember that the change in interest rates must be in decimal form Question #93 of 126 Question ID: 415691 Becque Ltd is a European Union company with the following selected financial information: € billions Year Year Year Operating income 262 361 503 Depreciation & amortization 201 212 256 Capital expenditures 78 97 140 Cash flow from operations 303 466 361 Total debt 2,590 2,717 2,650 Dividends 70 70 72 Becque's three-year average debt-to-EBITDA ratio is closest to: ضA) 4.6x غB) 7.6x غC) 3.6x Explanation EBITDA = Operating income + depreciation + amortization Year 1: 262 + 201 = €463 billion Year 2: 361 + 212 = €573 billion Year 3: 503 + 256 = €759 billion Debt/EBITDA ratio: Year 1: 2,590 / 463 = 5.6x 32 of 43 Year 2: 2,717 / 573 = 4.7x Year 3: 2,650 / 759 = 3.5x Three-year average = 4.6x Question #94 of 126 Question ID: 415663 An investor gathered the following information about an option-free U.S corporate bond: Par Value of $10 million Convexity of 90 Duration of If interest rates increase 2% (200 basis points), the bond's percentage price change is closest to: غA) -15.8% غB) -14.0% ضC) -12.2% Explanation Recall that the percentage change in prices = Duration effect + Convexity effect = [-duration ì (change in yields)] + [(ẵ)convexity ì (change in yields)2] = [(-7)(0.02) + (½)(90)(0.02)2 ] = -0.12 = -12.2% Remember that you must use the decimal representation of the change in interest rates when computing the duration and convexity adjustments Question #95 of 126 Question ID: 415673 An investor who buys bonds that have a Macaulay duration less than his investment horizon: غA) will benefit from decreasing interest rates ضB) has a negative duration gap غC) is minimizing reinvestment risk Explanation A duration gap is a difference between a bond's Macaulay duration and the bondholder's investment horizon If Macaulay duration is less than the investment horizon, the bondholder is said to have a negative duration gap and is more exposed to downside risk from decreasing interest rates (reinvestment risk) than from increasing interest rates (market price risk) Question #96 of 126 Question ID: 472430 Assuming the issuer does not default, can capital gains or losses be a component of the holding period return on a zero-coupon bond that is sold prior to maturity? 33 of 43 غA) No, because amortization of the discount is interest income غB) Yes, because the purchase price is less than the bond's value at maturity ضC) Yes, because the bond's yield to maturity may have changed Explanation Prior to maturity, a zero-coupon bond's price may be different than its constant-yield price trajectory and the bondholder may realize a capital gain or loss by selling the bond For a zero-coupon bond that is held to maturity, the increase from the purchase price to face value at maturity is interest income Question #97 of 126 Question ID: 434424 An investor purchases a fixed coupon bond with a Macaulay duration of 5.3 The bond's yield to maturity decreases before the first coupon payment If the YTM then remains constant and the investor sells the bond after three years, the realized yield will be: ضA) higher than the YTM at the date of purchase غB) lower than the YTM at the date of purchase غC) equal to the YTM at the date of purchase Explanation If the investment horizon is shorter than the Macaulay duration, the price impact of a decrease in YTM dominates the loss of reinvestment income and the realized yield will be higher than the YTM at purchase Question #98 of 126 Question ID: 415631 In comparing the price volatility of putable bonds to that of option-free bonds, a putable bond will have: غA) more price volatility at higher yields غB) less price volatility at low yields ضC) less price volatility at higher yields Explanation The only true statement is that putable bonds will have less price volatility at higher yields At higher yields the put becomes more valuable and reduces the decline in price of the putable bond relative to the option-free bond On the other hand, when yields are low, the put option has little or no value and the putable bond will behave much like an option-free bond Therefore at low yields a putable bond will not have more price volatility nor will it have less price volatility than a similar option-free bond Question #99 of 126 Question ID: 415682 One notable difference between an issuer credit rating and an issue credit rating is that an: 34 of 43 غA) issue credit rating applies to the issuer's senior unsecured debt غB) issue credit rating is always notched below the issuer rating ضC) issuer credit rating reflects the borrower's overall creditworthiness Explanation An issuer credit rating reflects the borrower's overall creditworthiness Senior unsecured debt is usually the basis for an issuer credit rating Notching of issue ratings can be upward or downward relative to an issuer credit rating Question #100 of 126 Question ID: 434416 If the yield to maturity on a bond decreases after purchase but before the first coupon date and the bond is held to maturity, reinvestment risk is: غA) less than price risk and the realized yield will be higher than the YTM at purchase غB) less than price risk and the realized yield will be lower than the YTM at purchase ضC) greater than price risk and the realized yield will be lower than the YTM at purchase Explanation If the bond is held to maturity, the investor will receive all coupons and principal and reinvest them at a lower return than the YTM at purchase, resulting in a lower realized yield Question #101 of 126 Question ID: 415622 An investor gathered the following information on two U.S corporate bonds: Bond J is callable with maturity of years Bond J has a par value of $10,000 Bond M is option-free with a maturity of years Bond M has a par value of $1,000 For each bond, which duration calculation should be applied? Bond J Bond M غA) Modified Duration Effective Duration only غB) Effective Duration Effective Duration only ضC) Modified Duration or Effective Duration Effective Duration Explanation Effective duration is that effective duration is used for bonds with embedded options Modified duration assumes that all the cash flows on the bond will not change, while effective duration considers expected cash flow changes that may occur with embedded options 35 of 43 Question #102 of 126 Question ID: 472433 Which of the following duration measures is most appropriate if an analyst expects a non-parallel shift in the yield curve? غA) Modified duration ضB) Key rate duration غC) Effective duration Explanation Price sensitivity to a non-parallel shift in the yield curve can be estimated using key rate durations Modified duration and effective duration measure price sensitivity to a parallel shift in the yield curve Question #103 of 126 Question ID: 434422 The price of a bond is equal to $101.76 if the term structure of interest rates is flat at 5% The following bond prices are given for up and down shifts of the term structure of interest rates Using the following information what is the approximate percentage price change of the bond using effective duration and assuming interest rates decrease by 0.5%? Bond price: $98.46 if term structure of interest rates is flat at 6% Bond price: $105.56 if term structure of interest rates is flat at 4% غA) 0.0087% ضB) 1.74% غC) 0.174% Explanation The effective duration is computed as follows: Using the effective duration, the approximate percentage price change of the bond is computed as follows: Percent price change = -3.49 × (-0.005) × 100 = 1.74% Question #104 of 126 Question ID: 415621 When compared to modified duration, effective duration: غA) places less weight on recent changes in the bond's ratings غB) is equal to modified duration for callable bonds but not putable bonds ضC) factors in how embedded options will change expected cash flows Explanation Effective duration considers expected changes in cash flow from features such as embedded options 36 of 43 Question #105 of 126 Question ID: 415653 For a given change in yields, the difference between the actual change in a bond's price and that predicted using duration alone will be greater for: غA) a short-term bond ضB) a bond with greater convexity غC) a bond with less convexity Explanation Duration is a linear measure of the relationship between a bond's price and yield The true relationship is not linear as measured by the convexity When convexity is higher, duration will be less accurate in predicting a bond's price for a given change in interest rates Short-term bonds generally have low convexity Question #106 of 126 Question ID: 415624 Which of the following statements concerning the price volatility of bonds is most accurate? غA) As the yield on callable bonds approaches the coupon rate, the bond's price will approach a "floor" value ضB) Bonds with higher coupons have lower interest rate risk غC) Bonds with longer maturities have lower interest rate risk Explanation Other things equal, bonds with higher coupons have lower interest rate risk Note that the other statements are false Bonds with longer maturities have higher interest rate risk Callable bonds have a ceiling value as yields decline Question #107 of 126 Question ID: 415646 Which of the following statements best describes the concept of negative convexity in bond prices? As interest rates: ضA) fall, the bond's price increases at a decreasing rate غB) rise, the bond's price decreases at a decreasing rate غC) fall, the bond's price increases at an increasing rate Explanation Negative convexity occurs with bonds that have prepayment/call features As interest rates fall, the borrower/issuer is more likely to repay/call the bond, which causes the bond's price to approach a maximum As such, the bond's price increases at a decreasing rate as interest rates decrease Question #108 of 126 Question ID: 485811 Which of the following is least likely an advantage of estimating the duration of a bond portfolio as a weighted average of the durations of the bonds in the portfolio? 37 of 43 ضA) It is theoretically more sound than the alternative غB) It is easier to calculate than the alternative غC) It can be used when the portfolio contains bonds with embedded options Explanation Compared to portfolio duration based on the cash flow yield of the portfolio, portfolio duration calculated as a weighted average of the durations of the individual bonds in the portfolio is easier to calculate and can be used for bonds with embedded options Portfolio duration calculated using the cash flow yield for the entire portfolio is theoretically more correct Question #109 of 126 Question ID: 415651 How does the price-yield relationship for a callable bond compare to the same relationship for an option-free bond? The price-yield relationship is best described as exhibiting: ضA) negative convexity at low yields for the callable bond and positive convexity for the option-free bond غB) negative convexity for the callable bond and positive convexity for an option-free bond غC) the same convexity for both bond types Explanation Since the issuer of a callable bond has an incentive to call the bond when interest rates are very low in order to get cheaper financing, this puts an upper limit on the bond price for low interest rates and thus introduces negative convexity between yields and prices Question #110 of 126 Question ID: 415656 Given a bond with a modified duration of 1.93, if required yields increase by 50 basis points, the expected percentage price change would be: ضA) -0.965% غB) -1.025% غC) 1.000% Explanation Approximate percentage price change of a bond = (-)(duration)(ǻ YTM) (-1.93)(0.5%) = -0.965% Question #111 of 126 Question ID: 415685 Bond investors should not rely exclusively on credit agency ratings because: غA) market pricing tends to lag changes in credit ratings ضB) credit ratings may change over time غC) default rates are higher for lower-rated bonds 38 of 43 Explanation Credit ratings are not stable over time and bonds may be upgraded or downgraded during their lives Market pricing typically leads changes in credit ratings Default rates should be higher for lower-rated bonds if credit ratings are accurate Question #112 of 126 Question ID: 460705 Which of the following statements regarding the risks inherent in bonds is most accurate? غA) The reinvestment rate assumption in calculating bond yields is generally not significant to the bond's yield غB) Interest rate risk is the risk that the coupon rate will be adjusted downward if market rates decline ضC) Default risk deals with the likelihood that the issuer will fail to meet its obligations as specified in the indenture Explanation Reinvestment is crucial to bond yield, and interest rate risk is the risk of changes in a bondholder's return due to changes in a bond's yield Question #113 of 126 Question ID: 485812 Negative effective convexity will most likely be exhibited by a: غA) callable bond at high yields غB) putable bond at high yields ضC) callable bond at low yields Explanation A callable bond trading at a low yield will most likely exhibit negative effective convexity Question #114 of 126 Question ID: 415707 Compared to corporate bonds with the same credit ratings, municipal general obligation (GO) bonds typically have less credit risk because: غA) GOs are not affected by economic downturns غB) governments can print money to repay debt ضC) default rates on GOs are typically lower for same credit ratings Explanation Municipal bonds usually have lower default rates than corporate bonds of the same credit ratings GO bonds' creditworthiness is affected by economic downturns Sovereigns can print money to repay debt, but municipalities cannot 39 of 43 Question #115 of 126 Question ID: 415649 Which of the following is most accurate about a bond with positive convexity? ضA) Price increases when yields drop are greater than price decreases when yields rise by the same amount غB) Price increases and decreases at a faster rate than the change in yield غC) Positive changes in yield lead to positive changes in price Explanation A convex price/yield graph has a larger increase in price as yield decreases than the decrease in price when yields increase Question #116 of 126 Question ID: 415633 An international bond investor has gathered the following information on a 10-year, annual-pay U.S corporate bond: Currently trading at par value Annual coupon of 10% Estimated price if rates increase 50 basis points is 96.99% Estimated price is rates decrease 50 basis points is 103.14% The bond's modified duration is closest to: غA) 3.14 ضB) 6.15 غC) 6.58 Explanation Duration is a measure of a bond's sensitivity to changes in interest rates Modified duration = (V- − V+) / [2V0(change in required yield)] where: V- = estimated price if yield decreases by a given amount V+ = estimated price if yield increases by a given amount V0 = initial observed bond price Thus, modified duration = (103.14 − 96.99) / (2 × 100 × 0.005) = 6.15 Remember that the change in interest rates must be in decimal form Question #117 of 126 Question ID: 415684 A firm with a corporate family rating (CFR) of A3/A- issues secured bonds Covenants to these bonds include a limitation on liens and a change of control put If credit rating agencies notch this issue, its credit rating is most likely to be: غA) Baa1/BBB+ غB) Baa2/BBB ضC) A2/A Explanation 40 of 43 Both the priority of claims and the covenants suggest this issue has less credit risk than the issuer and therefore its issue credit rating may be notched upward The issuer's credit rating (corporate family rating) is based on its senior unsecured debt This issue is a secured bond, and therefore has a higher seniority ranking A change of control put protects lenders by requiring the borrower to buy back its debt in the event of an acquisition A limitation on liens limits the amount of secured debt that a borrower can carry Both covenants reduce the credit risk of the issue Question #118 of 126 Question ID: 415694 If investors expect greater uncertainty in the bond markets, yield spreads between AAA and B rated bonds are most likely to: غA) narrow غB) slope downward ضC) widen Explanation With greater uncertainty, investors require a higher return for taking on more risk Therefore credit spreads will widen Question #119 of 126 Question ID: 472432 Key rate duration is best described as a measure of price sensitivity to a: غA) change in a bond's cash flows غB) parallel shift in the benchmark yield curve ضC) change in yield at a single maturity Explanation Key rate duration is the price sensitivity of a bond or portfolio to a change in the interest rate at one specific maturity on the yield curve Question #120 of 126 Question ID: 434428 A corporate bond with a 4.25% coupon is priced at $104.03 This bond's duration and reported convexity are 5.3 and 0.325 If the bond's credit spread widens by 75 basis points due to a credit rating downgrade, the impact on the bondholder's return is closest to: ضA) −3.89% غB) −3.96% غC) +4.05% Explanation Reported convexity of 0.325 needs to be scaled to match the duration squared Because duration is 5.3, duration squared is 28.1, which implies that when scaled correctly, convexity has the value of 32.5 Return impact Đ (Duration ì Spread) + (1/2) ì (Convexity ì (Spread))2 Đ (5.3 ì 0.0075) + (1/2) × 32.5 × (0.0075)2 41 of 43 § −0.0398 + 0.0009 § −0.0389 or 3.89% Question #121 of 126 Question ID: 460707 Structural subordination is most likely to be a credit rating consideration for: غA) general obligation municipal bonds ضB) high-yield corporate bonds غC) emerging market sovereign bonds Explanation Structural subordination is a credit consideration for corporate debt that results when a subsidiary has outstanding debt with a higher priority claim to the subsidiary's cash flows than the parent company's debt Question #122 of 126 Question ID: 434425 The risk of receiving less than market value when selling a bond is referred to as: غA) loss severity risk ضB) market liquidity risk غC) recovery rate risk Explanation Market liquidity risk is the risk of receiving less than market value when selling a bond and is reflected in the size of the bid-ask spreads Market liquidity risk is greater for the bonds of less creditworthy issuers and for the bonds of smaller issuers with relatively little publicly traded debt Loss severity and recovery rate refer to defaults Question #123 of 126 Question ID: 415670 The term structure of yield volatility illustrates the relationship between yield volatility and: غA) yield to maturity ضB) time to maturity غC) Macaulay duration Explanation The term structure of yield volatility refers to the relationship between yield volatility and time to maturity Question #124 of 126 Question ID: 415697 What is the most likely effect on yield spreads when demand for bonds is high and supply of bonds is low? 42 of 43 ضA) Yield spreads are likely to narrow غB) Yield spreads are likely to widen غC) The effect on yield spreads will depend on whether supply or demand is the stronger influence Explanation Credit spreads tend to narrow in times of high demand for bonds and widen in times of low demand for bonds Credit spreads tend to widen under excess supply conditions, such as large issuance in a short period of time, and narrow when supply is low Question #125 of 126 Question ID: 415639 Which of the following is most likely to be the money duration of newly issued 360-day eurocommercial paper? ضA) 25 million غB) 360 days غC) 4.3% Explanation Money duration is expressed in currency units Question #126 of 126 Question ID: 415658 A bond has the following characteristics: Maturity of 30 years Modified duration of 16.9 years Yield to maturity of 6.5% If the yield to maturity decreases by 0.75%, what will be the percentage change in the bond's price? غA) 0.750% غB) -12.675% ضC) +12.675% Explanation Approximate percentage price change of a bond = (-)(modified duration)(ǻYTM) = (-16.9)(-0.75%) = +12.675% 43 of 43 ... deposit, central bank funds, and interbank lending Syndicated loans and commercial paper issuance are funding sources available to other corporations as well as banks Question #42 of 67 Question ID:... ever-rising interest rates Question #23 of 67 Question ID: 415485 The interbank funds market is most accurately described as: غA) trading of negotiable certificates of deposit غB) banks' borrowing... reserves from the central bank ضC) unsecured short-term loans from one bank to another Explanation The interbank funds market refers to short-term unsecured loans between banks It does not refer