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Homework 1: Practice Problems for Final Exams Part 1

Question 1

0.25 / 0.25 pts

A bond with par value of 100 pays annual coupon of 10%; it is maturing in two years. The 1 year short rate is currently 2%. After one year (T=1), Forward Rate can be 3% or 5%; both scenarios are equally likely.

What is the bond price at time (T=1) (one year from now).

104.76

106.79

105.77

None of this

Question 2

0.25 / 0.25 pts

A bond with par value of 100 pays annual coupon of 10%; it is maturing in two years. The 1 year short rate is currently 2%. After one year (T=1), Forward Rate can be 3% or 5%; both scenarios are equally likely.

What is the bond price at time (T=0) (currently).

113.50

105.77

108.60

None of this

Question 3

0.25 / 0.25 pts

A callable bond with par value of 100 pays annual coupon of 10%; it is maturing in two years. Bond is callable after one year. The 1 year short rate is currently 2%. After one year (T=1), Forward Rate can be 3% or 5%; both scenarios are equally likely.

What is the bond price at time (T=0) (currently).

108.91

110

107.84

None of this

Question 4

0.25 / 0.25 pts

A callable bond with par value of 100 pays annual coupon of 10%; it is maturing in two years. Bond is callable after one year. The 1 year short rate is currently 2%. After one year (T=1), Forward Rate can be 3% or 5%; both scenarios are equally likely.

What is the value of the call option?

5.66

3.33

2.05

10.82

Question 5

0.25 / 0.25 pts

A callable bond with par value of 100 pays annual coupon of 2%; it is maturing in N years. Its price currently is P1. A bond issued by the same issuer with the same coupon and maturity, but not callable is priced at P3. a puttable bond issued by the same issuer with the same coupon and maturity is priced at P2.

Identify the correct statement regarding their prices

P1

P1

P2

We need more information to answer

Question 6

0.25 / 0.25 pts

A puttable bond with par value of 100 pays annual coupon of 3%; it is maturing in three years. Bond is puttable after one year and two year. The 1 year short rate is currently 3%. After one year (T=1), one-year Forward Rate is 4%; and after two year, one year forward rate is 5%.

What is the bond price at time (T=0) (currently)?

103

98.65

100

None of these

Question 7

0.25 / 0.25 pts

Par rate is 2% for a one year annual-coupon benchmark bond. Par rate is 3% for a two year annual coupon benchmark bond. What is the year-2 spot rate?

2%

6.12%

4.5%

None of these

Question 8

0.25 / 0.25 pts

The following information is available on the current 10-year bond yields of four firms.

GE       6%

AT&T   4.5%

FORD   5.3%

COKE   4.8%

Which of these bonds is the riskiest?

COKE

AT&T

FORD

GE

Question 9

0.25 / 0.25 pts

What happens to the price of a puttable bond when volatility of interest rates increase?

Price increases

Price decreases

Price is unchanged

We need more information to answer

Question 10

0.25 / 0.25 pts

A major reason we should not use historical volatility of interest rates to create a Binary tree is the following?

Volatility has high auto-correlation

Volatility is high

Volatility is low

None of these

Question 11

0.25 / 0.25 pts

Delta airlines is considering issuing a bond with $1 Billion in face value, and 6% coupon. Delta's cost of debt is currently around 6%. Delta's CFO believes interest rates will reduce significantly in the near future. Given this belief of the CEO, Delta should issue the following type of debt.

Convertible Bond

Puttable Bond

Straight Bond

Callable Bond

Question 12

0.25 / 0.25 pts

An analyst is creating a Binary Tree. The following is his estimate of the lower of the forward rates: i,1,L = 3.5%. His estimate of volatility is 20%. What value should he choose for the higher forward rate: i1,H?

2.34%

5.22%

4.27%

3.50%

Question 13

0.25 / 0.25 pts

An analyst uses Monte-Carlo simulation to estimate a bond price after a year. The following table summarizes the estimates from 8 possible paths. The bond price after one year is.

1   103.6

2   98.5

3   95.5

4   100.3

5   101.5

6   104

7   103

8   104.8

100.2

101.4

100.8

None of these

Question 14

0.25 / 0.25 pts

An analyst uses Monte-Carlo simulation to estimate a bond price callable at par (100) after one year. The following table summarizes the estimates from 8 possible paths. The bond price after one year is

Path   Price (1)

1   103.6

2   98.5

3   95.5

4   100.3

5   101.5

6   104

7   103

8   104.8

100.2

101.4

99.25

100.8

Question 15

0.25 / 0.25 pts

An analyst uses Monte-Carlo simulation to estimate a bond price puttable at par (100) after one year. The following table summarizes the estimates of one-year price from 8 possible paths. The bond price after one year is

Path   Price (1)

1   103.6

2   98.5

3   95.5

4   100.3

5   101.5

6   104

7   103

8   104.8

102.15

101.4

100.2

None of these

Question 16

0.25 / 0.25 pts

An investor is considering buying a bond. He believes interest rates will remain flat over the life of the bond. Given this belief , the investor should buy the following type of bond.

Convertible Bond

Puttable Bond

Callable Bond

Straight Bond