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Homework 2: Practice Problems for Finals Exam Part 2

Question 1

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The bond pricing equation is given by:

where C is coupon rate, N is number of periods, Si is spot rate for year i (obtained from a Treasury bond), SN is spot rate for year N (obtained from a Treasury bond),

This equation assumes that

The bond has same risk as a Treasury Bond

The bond has no interest rate risk

The bond has no liquidity risk

The bond is an Junk Bond

All of these

Question 2

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The following is the sequence of forward rates. What is the value of the year 3 spot rate? [ Select the closest option]

t   Forward rate

1   2.00%

2   4.00%

3   5.00%

7.02%

3.66%

1.05%

None of these

Question 3

0.25 / 0.25 pts

The following is the sequence of spot rates. What is the value of the year 3 forward rate? [ Select the closest option]

t   Spot rate

1   2.00%

2   3.00%

3   4.00%

6.03%

7.15%

2.08%

None of these

Question 4

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A bond is yielding 7%. The yield decreases to 6%. The change in the bond price depends on

Its coupon

Its maurity

Its duration

All of these

Question 5

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The yield on a ten-year US Treasury Bond is 3%. The yield on a ten-year Investment grade Corporate bond is 4%. The yield on a a ten-year Non-Investment grade Corporate bond is y. The following statement is true:

3%

y>4%

y<3%

None of these

Question 6

0 / 0.25 pts

10-year Sovereign Bond yield in US is now 3%. In contrast, the 10-year government bond yield for China is 2.8%. An investor based in China is considering adding 10-year US treasury to her Portfolio. She intends to sell these bonds after two years. Identify the primary risk of investing in the 10-year US Treasury bonds to her portfolio.

Inflation in US

Inflation in China

USD/ CNY Exchange rate

All of the above three

None of these

Question 7

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A corporate bond with three years from maturity has a Coupon rate of 4% (it pays coupons annually). First coupon payment is in 1 year. Spot rates are 4.5% for year 1, 5.5% for year 2, and 7% for year 3. Z-Spread is 1%. Par Value is 100. Compute bond price.

85.22

89.88

93.25

None of these

Question 8

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10-year Sovereign Bond yield in US is now 3%. In contrast, the 10-year government bond yield for China is 2.8%. An investor based in China is considering adding 10-year US treasury to her Portfolio. She intends to hold these bonds until maturity. Identify the primary risk of adding US Treasury bonds to her portfolio.

Inflation in US

Default Risk

USD/CNY Exchange rate

All of these

None of these

Question 9

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The following are the spot rates and maturities for government bonds

Stock   yield

1 year  2.1%

2 year  4.5%

5 year  5.9%

10 year  5.5%

Given this information, price a Govt bond with two-year maturity paying annual coupon of 5%. Par value is 100.

100.59

100

101.05

None of these

Question 10

0.25 / 0.25 pts

The following are the spot rates and maturities for government bonds

Stock   yield

1 year  2.1%

2 year  3.5%

3 year  4.9%

10 year  8.5%

Given this information, price a Corporate bond with three-year maturity paying annual coupon of 5%. Z spread is 1.5%. Par value is 100.

109.75

100.53

96.53

None of these

Question 11

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The following are the spot rates and maturities for government bonds

Stock   yield

1 year  2.1%

2 year  3.5%

3 year  4.9%

10 year  8.5%

A Corporate bond with three-year maturity paying annual coupon of 5% is priced at 91.54% of Par. What is the Z-spread?

2%

3.5%

2,7%

None of these

Question 12

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The Debt of a firm due in 6 months is $80 Million, its market value (debt + equity) is $100 Million. The expected growth in assets is 6% annually while volatility is 30%. What is the default probability using Distance-to-default?

6%

10%

14%

34%

Question 13

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The following statement regarding the Distance to default is incorrect

Distance to default depends on the volatility

Distance to default depends on the debt

Distance to default depends on the Normal Distribution

None of these

Question 14

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An investor bought a semiannual bond (with 4% coupon rate) bond maturing in four years when it was yielding 5%. He sold the bond after 6 months (after getting the coupon) when the yield was 4%. What was his holding period return?

5.80%

3.72%

9.05%

None of these

Question 15

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The yield on a govt bond with three years to maturity is y3. Yield on another govt bond with seven years to maturity is y7. Compute yield on a govt bond with 6 years to maturity.

y3+(2/4)* (y7-y3)

y3+(3/4)* (y7-y3)

y3+(1/4)* (y7-y3)

None of these

Question 16

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Keynesian Economics suggests that the Central Banks should do the following to fight unemployment in a recession

Lower Interest rates

Fiscal Stimulus

Both of these

None of these

Question 17

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A bond maturing on Dec 31, 2024. is sold on May 1, 2021. Last coupon date was Dec 31, 2020. Next Coupon date is June 30, 2021. It pays 6% coupon semi-annually. Par value is $1000. Yield is 5%. Bond follows actual/ actual convention. What is the accrued interest (in $)?

11.92

20.06

41.25

None of these

Question 18

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A bond maturing on Dec 31, 2024. is sold on May 1, 2021. Last coupon date was Dec 31, 2020. Next Coupon date is June 30, 2021. It pays 6% coupon semi-annually. Par value is $1000. Yield is 5%. Bond follows actual/ actual convention. What is the full price (in $)?

1040

1053

1033

None of these

Question 19

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A bond maturing on Dec 31, 2024. is sold on May 1, 2021. Last coupon date was Dec 31, 2020. Next Coupon date is May 31, 2021. It pays 6% coupon semi-annually. Par value is $1000. Yield is 5%. Bond follows actual/ actual convention. What is the flat price (in $)?

1040

1053

1033

None of these

Question 20

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Bonds rated AA by Credit Rating agencies have zero chance of default. True or False?

True

False