Sold to Sophy Thwe (#YUTFIFX4)

Fixed Income

1. What would be most attractive to an investor who believes interest rates will
decline?

A. Inverse Floater
B. Floating-rate security
C. Callable Bond

2. Which is least accurate regarding non-callable bonds?

A. The call feature prevents redemption from other sources
B. Investors face price risk when interest rates rise
C. Bonds are more likely to be called if interest rates decline

3. Which feature increases interest rate risk?

A. High yield
B. High coupon
C. Long maturity

4. What does a 5-year key-rate duration of 2 mean?

A. The approximate dollar price change is 2% for a 100 basis point change
in the 5-year yield.
B. The approximate dollar price change is 5% for a 100 basis point change
in the 2-year yield.
C. The portfolio’s value will change by about 2% for a 100 basis point
change in the 5-year value.

5. For amortizing bonds, the reinvestment risk for an investor holding bonds to
maturity is greatest for bonds selling …

A. At par value
B. Below par value
C. Above par value

6. An increase in expected yield volatility will cause the value of …

A. Putable bonds to increase
B. Callable bonds to increase
C. Putable bonds to decrease



Sold to Sophy Thwe (#YUTFIFX4)

7. Mortgage pass-through securities …

A. Have more prepayment risk than individual mortgages
B. Have more predictable prepayments than individual mortgages
C. Are obligations of the U.S. Treasury and have no default risk

8. Under liquidity preference theory, what is the most likely explanation for an
upward sloping yield curve?

A. Increasing yield premium required
B. Expectations that short term rates will rise
C. Different levels of supply and demand for short and long term funds

9. For an investor in the 40% tax bracket considering bond X, a taxable bond with a
yield of 6.8%, and bond Y, a tax-exempt security with a yield of 4.8%, what is the
after-tax yield of bond X and the taxable equivalent yield of bond Y?

A. After-tax yield for bond X = 4.08%, taxable equivalent yield for bond Y =
8.00%
B. After-tax yield for bond X = 4.08%, taxable equivalent yield for bond Y =
6.72%
C. After-tax yield for bond X = 4.85%, taxable equivalent yield for bond Y =
8.00%

10. Which is the closest to the change in present value of a 5-year security with a
7% annual coupon and a par value of $100, when the time to maturity changes from
5 years to 4 years, using a discount rate of 5%?

A. Decrease of $1.56
B. Decrease of $0.88
C. Increase of $1.56

11. An investor buys a 6% coupon bond with 20 years to maturity at a price of
$89.32, a par value of $100, and yield to maturity of 7%. Which is closest to the
dollar return that must be generated from reinvestment income order to generate a
yield of 7%?

A. $130.68
B. $133.64
C. $264.32






Sold to Sophy Thwe (#YUTFIFX4)

12. Which is a characteristic of an option free bond?

A. The price moves in the same direction as the change in yield
B. For large changes in yield, the percentage price change for a given bond is
roughly the same, whether the yield increases or decreases
C. For a given large change in yield, the percentage price increase is greater
than the percentage price decrease.

13. If a 9% coupon, 20-year option-free bond selling at 134.67 to yield 6% has a
duration of 10.67, which is the closest to the price if the yield increases to 6.2%?

A. 131.8
B. 133.2
C. 137.6

14. Which is closest to percentage price change for a bond with modified duration
of 6.5 and convexity of -42.4 if yields decrease by 100 basis points?

A. -6.92%
B. -0.42%
C. 6.08%

15. What in a contract between a company and its bondholders could be positive,
setting forth activities the borrower promises to do, or could be negative, setting
forth limitations and restrictions on the borrower’s activities?

A. Covenant
B. Indenture
C. Embedded option

16. An investor who plans to hold a security one year is considering a Treasury
security that matures in one year, or, alternatively, purchasing a Treasury security
that matures in 30 years. Which best describes the difference in the major risk
associated with the investment alternatives?

A. The 1-year Treasury exposes the investor to interest rate risk
B. The 30-year Treasury exposes the investor to interest rate risk
C. The 1-year Treasury exposes the investor to liquidity risk

17. Which issue has the greatest interest rate risk: Issue 1 with a 5% coupon and
15 year maturity; Issue 2 with a 4% coupon and 20 year maturity; Issue 3 with a 6%
coupon and 10 year maturity?

A. Issue 1
B. Issue 2
C. Issue 3
Sold to Sophy Thwe (#YUTFIFX4)

18. Which is closest to the dollar price change of a bond, with a market value of $5
million and a duration of 10.44, for a 100 basis point change in yield?

A. $130 500
B. $261 000
C. $522 000

19. Which feature is least likely to increase reinvestment risk?

A. Callable
B. Zero-coupon
C. Pre-payment option

20. If interest rate volatility increases, which bond will have a decrease in price?

A. Putable bond
B. Callable bond
C. Option-free bond

21. The accrued interest on zero coupon bonds …

A. is tax free
B. is taxed in the year it is received
C. is taxed each year even though interest is not received

22. What is the absolute yield spread between a 6.2%, 5-year bond with a 5.11%
yield and a 4.98%, 5-year on-the-run Treasury with a 4.18% yield?

A. 93 basis points
B. 22.2%
C. 1.222

23. Which is the closest to the present value of a 5-year amortizing security with
end-of-year payments of $2,309.75 that include all interest and principal, using a
discounted rate of 6%?

A. $9,729.51
B. $10,012.89
C. $10,313.28




Sold to Sophy Thwe (#YUTFIFX4)

24. What approach values a bond as a package of cash flows, with each cash flow
viewed as a zero-coupon bond and each cash flow discounted at its own unique
discount rate?

A. Arbitrage-free approach
B. Monte Carlo simulation model
C. Traditional valuation methodology

25. Which is closest to the value of a $100 par, 2-year, 6% coupon Treasury bond if
the forward rates for the periods 1, 2, 3 and 4 are 3.00%, 3.92%, and 5.15%,
respectively?

A. $96
B. $102
C. $104

26. For an 8% option-free bond, the price changes by 3% if the rates fall 50 basis
points. What is the change if rates increase by 50 basis points?

A. Less than 3%
B. Exactly 3%
C. More than 3%

27. If Bond A has a price of 90 and modified duration of 6, and Bond B has a price of
50 and modified duration of 4, then Bond A will have a greater price volatility in
terms of …

A. dollar price change and percentage price change
B. dollar price change but not percentage price change
C. Percentage price change but not dollar price change

28. What is the full price of a bond if the clean price is $1,050 and the accrued
interest is $25?

A. $1,025
B. $1,050
C. $1,075

29. Which embedded option is an advantage to the issuer?

A. Put provision
B. Floor on a floater
C. Accelerated sinking fund


Sold to Sophy Thwe (#YUTFIFX4)

30. What is the price of a bond when the coupon rate is great than the yield
required by the market?

A. Equal to par value
B. Less than par value
C. Greater then par value

31. Which is closest to the duration of a bond if the current price is 102, the price if
yields decline by 50 basis points is 109, and the price if yields rise by 50 basis is 96?

A. 12.75
B. 19.12
C. 25.49

32. Which is least likely to be considered credit risk?

A. Interest rate risk
B. Downgrade risk
C. Credit spread risk

33. What risk is associated with natural disasters?

A. Event risk
B. Volatility risk
C. Purchasing power risk

34. What includes secured bonds, unsecured or debenture bonds, and credit
enhanced bonds?

A. Corporate bonds
B. Structured notes
C. Commercial paper

35. How can the Federal Reserve withdraw funds from the market?

A. Selling Treasury securities
B. Purchasing Treasury securities
C. Decreasing the discount rate

36. What do investors require for an issue with a call option with a longer deferred
call period compared to a shorter deferred call period?

A. Larger yield spread
B. Smaller yield spread
C. The same yield spread

Sold to Sophy Thwe (#YUTFIFX4)

37. What relates the annual dollar coupon interest to the market price and fails to
recognize any capital gain or loss and reinvestment income?

A. Current yield
B. Yield to maturity
C. Bond-equivalent yield

38. If spot rates on an annual basis are 3.0% for 6 months, 3.3% for 1 year, and
3.5% for 1.5 years, which is closest to the price of a $100 par, 3% coupon 1.5 year
Treasury security?

A. $99
B. $100
C. $101

39. Bonds with positive convexity …

A. are always superior to bonds with negative convexity
B. will have less price appreciation than its price decline for a large change
in interest rates
C. will have greater price appreciation than its price decline for a large
change in interest rates

40. What definition of duration should be used for bonds with embedded options?

A. Modified duration
B. Effective duration
C. Macaulay duration

41. Callable bonds are more likely to be called if …

A. interest rates increase
B. interest rates decrease
C. interest rates are stable

42. What provision allows the issuer to retire more of the issue each year than
required?

A. Sinking fund
B. Make-whole premium
C. Accelerated sinking fund




Sold to Sophy Thwe (#YUTFIFX4)

43. Which is least likely to explain why the price of a floating rate security will
fluctuate?

A. The required margin that investors demand in the market changes
B. The shorter the time to the next coupon reset date, the greater the
potential price fluctuation
C. Floating-rate securities typically have a cap, and once the cap is reached,
the price reacts much the same as a fixed-rate security

44. Which is closest to the dollar price change for a 25 basis point change in yield
for a bond with a par value of $5 million, market value of $4.875 million, and a
duration of 5.6?

A. $68 250
B. $70 000
C. $71 750

45. Option-free bonds are least likely exposed to …

A. liquidity risk
B. volatility risk
C. reinvestment risk

46. How are Treasury securities sold in the primary market?

A. Ad hoc auction system
B. Over-the-counter market
C. Sealed bid auction system on a regular cycle using a single-price method

47. The rating of an asset-backed securities can be improved by transferring assets
to a …

A. bank
B. collateralized debt obligation
C. special purpose entity

48. What shape of the yield curve reflects an expectation that future short-term
rates will fall?

A. Flat
B. Inverted
C. Upward sloping



Sold to Sophy Thwe (#YUTFIFX4)

49. Which is closest to the change in present value of a 5-year security with a 7%
annual coupon and a par value of $100, using a discount rate of 9% rather than 7%?

A. Decrease of $8.66
B. Decrease of $7.78
C. Increase of $8.66

50. Which is closest to the yield to put for a 7% 8-year bond selling for $94.17,
callable at 101 in 4 years and putable at 100 in 4 years?

A. 8.6%
B. 8.8%
C. 9.0%

51. Which spread measure uses all points on the Treasury spot rate curve as a
benchmark, reflects compensation for credit risk, liquidity risk, and adjusts for
volatility?

A. Bid-ask
B. Nominal
C. Option-adjusted

52. For a 9% coupon option-free bond, the price changes by 12% if market yields
decrease 100 basis points. What is the price change if yields increase 100 basis
points?

A. Decrease by less than 12%
B. Decrease exactly 12%
C. Decrease by more than 12%

53. What is the approximate percentage change in a bond’s price for a 100 basis
point change in yield assuming that the bond’s expected cash flows do not change
when the yield changes?

A. Convexity
B. Modified duration
C. Effective duration

54. Which is the closest to percentage price change if yields decrease by 200 basis
points for a callable bond with an effective duration of 4 and a convexity adjustment
of -1.2%?

A. -9.2%
B. -8.0%
C. -6.8%

Sold to Sophy Thwe (#YUTFIFX4)

55. What type of coupon could have a coupon of 20% minus double the 5-year
Treasury rate?

A. Step-up note
B. Inverse floater
C. Floating-rate security

56. Duration captures the true price effects for …

A. parallel shifts in the yield curve
B. non-parallel shifts in the yield curve
C. both parallel and non-parallel shifts in the yield curve

57. Which would have the least reinvestment risk?

A. T-bill
B. Zero-coupon bond
C. Prepayable amortizing bond

58. What is the value of the embedded call option if the price of a callable bond is
$920 and the price an option free bond with the same yield, rating, and maturity is
$980?

A. -$60
B. $20
C. $60

59. An investor purchases $10,000 of par value of a Treasury inflation protection
security (TIPS). The real rate determined at the auction is 3.8%. If at the end of six
months the CPI-U is 2.4% on an annual rate, what is the inflation-adjusted principal
at the end of six months?

A. $10,120.00
B. $10,192.28
C. $10,240.00

60. Which are government-sponsored enterprises (GSEs)?

A. Ginnie Mae and Fannie Mae
B. Fannie Mae, Freddie Mac and Sallie Mae
C. Ginnie Mae, TVA and the Private Export Funding Corporation





Sold to Sophy Thwe (#YUTFIFX4)

61. How are bonds issued in the primary market?

A. over-the-counter market
B. electronic trading and trading on exchange
C. Bought deal, auction process, or private placement

62. What do larger fixed income issues most likely have?

A. Less liquidity and larger yield spreads
B. Greater liquidity and larger yield spreads
C. Greater liquidity and smaller yield spreads

63. Which is closest to the market value of a bond maturing in 2 years with a face
value of $1000 and a 5% annual coupon, if the 2-year Treasury rate is 3.75% for
years 1 and 2; and the Treasury spot rate is 3.0% for year 1, and 3.5% for year 2?

A. $1024
B. $1029
C. $1038

64. The basic principle underlying the bootstrap method is that the value of a
Treasury coupon security is equal to …

A. the difference between Z-spread and the option-adjusted spread (OAS)
B. the value of the package of zero-coupon securities that duplicates the
coupon bond’s cash flows
C. the spread that the investor will realize over the entire treasury spot rate
curve if the bond is held to maturity

65. What do putable bonds exhibit?

A. Positive convexity
B. Negative Convexity
C. Positive convexity at high yield levels and negative convexity at low yield
levels

66. How good is an estimated new price using duration likely to be for a 200 basis
point increase in yield?

A. Overestimates new price
B. Underestimates new price
C. Estimated price close to new price



Sold to Sophy Thwe (#YUTFIFX4)

67. Which is the closest to percentage price exchange for a 5% 25-year bond with
duration of 14.19 and convexity of 141.68 if yields increase by 200 basis points?

A. -34.05%
B. -28.38%
C. -22.71%

68. What is the price of a bond plus accrued interest?

A. Price or clean price
B. Full price or dirty price
C. Full price or clean price

69. Which imbedded option is an advantage to the bondholder?

A. Put provision
B. Cap on a floater
C. Accelerated sinking fund

70. Which bond has the greatest rate risk?

A. Floating rate bond
B. Zero-coupon bond
C. 7% fixed coupon bond

71. Which is the closest to the dollar price change of a bond, with a market value of
$8 million and a duration of 5, for a 50 basis point change in yield?

A. $100,000
B. $200,000
C. $400,000

72. What is the risk that the issuer will not make timely payments of interest and
principal?

A. Default risk
B. Downgrade risk
C. Credit spread risk

73. A decrease in expected yield volatility will cause the price of …

A. putable bonds to decrease
B. callable bonds to decrease
C. embedded put and call options to increase


Sold to Sophy Thwe (#YUTFIFX4)

74. What is the shape of the yield curve when yield increases with maturity?

A. Flat
B. Upward sloping
C. Downward sloping

75. For an investor considering a taxable bond with a yield of 6.0%, and a tax-
exempt security with a yield of 4.0%, what is the tax rate at which the investor is
indifferent?

A. 33%
B. 50%
C. 67%

76. Which is closest to the change in price due to the change in maturity of a bond
maturing in 6 years with an 8% annual coupon, a par value of $100, a price of
$95.51, and a yield of 9%; if the price one year earlier was $90.26 and the yield was
10%?

A. $1.03
B. $4.22
C. $5.25

77. Which is closest to the bond-equivalent yield if the yield to maturity on an
annual pay bond is 6%?

A. 5.91%
B. 6.0%
C. 6.09%

78. Which is least accurate regarding interest rate risk?

A. Two bonds with the same duration can have different convexities
B. The duration/convexity approach does not take into consideration how
the yield curve can shift
C. If two bonds have the same duration, then the percentage change in price
of the two bonds will be exactly the same for any given change in interest
rates.

79. Which is closest to the duration of a portfolio with $0.5 million in 11% coupon
bonds with a duration of 6.2; $1.2 million in 6% coupon bonds with a duration of
5.7; and $0.3 million in 9% coupon bonds with a duration of 3.0?

A. 5.42
B. 5.73
C. 6.85
Sold to Sophy Thwe (#YUTFIFX4)

80. Which is closest to percentage price change if yields increase by 10 basis points
based on duration and the convexity adjustment of a 6% coupon 20-year option-free
bond selling at par of 100 yield 6%, if the price increases to 101.1651 at a yield of
5.8%, and the price decreases to 98.8535 at a yield fo 6.2%?

A. -1.17%
B. -1.16%
C. -1.15%

81. What are attractive features for issuers of floating-rate securities?

A. Caps
B. Floors
C. Both caps and Floors

82. Which imbedded option is least likely to be considered an advantage to the
issuer?

A. Put provision
B. Cap on a floater
C. Prepayment rights

83. When interest rates rise, the price of a callable bond …

A. will fall more than an option-free bond
B. will not fall as much as an option-free bond because the price decline is
offset by a decrease in the value of the call option
C. will not fall as much as an option-free bond because the price decline is
offset by an increase in the value of the call option

84. What is key-rate duration?

A. A measure of the price sensitivity of a bond to change in yield
B. The approximate dollar price change for a 100 basis point change in yield
C. The percentage change in the value of a portfolio if only one maturity’s
yield changes

85. For amortizing bonds, the reinvestment risk for an investor holding bonds to
maturity is greatest for bonds selling…

A. at par
B. at a discount
C. at a premium


Sold to Sophy Thwe (#YUTFIFX4)

86. What is the yield spread between a non-Treasury security and a similar
Treasury security?

A. Yield ratio
B. Credit spread
C. Relative yield spread

87. Which is closest to the percentage change in price due to the change in yield of a
bond maturing in 6 years with an 8% annual coupon, a par value of $100, and a yield
of 8%; if the yield changes to 7%?

A. 4.76%
B. 5.38%
C. 6.00%

88. When are the Z-spread and the OAS equal?

A. If the bond is option free
B. When the yield curve is flat
C. When the yield curve is upwardly sloping

89. Which is closest to the duration of a 6% coupon 20-year option-free bond
selling at par, if the price increases to 101.17 to yield 5.9%, and the price decreases
to 98.85 to yield 6.1%?

A. 10.5
B. 10.6
C. 11.6

90. Which is closest to percentage price change for a bond with modified duration
of 6.5 and convexity of 42.4 if yields increase to 100 basis points?

A. -6.92%
B. -6.08%
C. 6.92%

91. What is an advantage to the issuer and disadvantage to the bondholder?

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




Sold to Sophy Thwe (#YUTFIFX4)

92. Which is a collateralized borrowing arrangement used by investors with a

commitment to buy the security back?

A. Sinking fund
B. Make-whole premium
C. Repurchase agreement

93. Which feature decreases interest rate risk?

A. High yield
B. Low coupon
C. Long maturity

94. Which has the greatest credit risk?

A. 10-year Treasury security
B. 30-year Treasury security
C. AAA 10-year corporate bond


Answers


1. A is correct. As rates drop, inverse floaters increase their coupon payments.
B is incorrect since coupon payments would drop with rates. C is incorrect
since reinvestment of coupon payments would happen at a lower rate, and
since it is callable, price appreciation will be limited.

2. B is correct. Both A and C refer to callable bonds, the question asks about
non-callable bonds.

3. C is correct. Interest rate risk comes from both reinvestment and price risk.

4. C is correct. Key Rate duration is used to assess the impact of a specific rate
on a portfolio of bonds. If we have just one bond, we would not need to use
key-rate duration.

5. C is correct. Bonds selling above par have coupons greater than market
rates. When each payment is received, they then have to be reinvested at
lower market rates.

6. A is correct. The value of a putable bond equals the value of the underlying
straight bond plus the put option. Higher volatility raises option prices, so
the putable bond will increase in value. That makes C incorrect. B is
Sold to Sophy Thwe (#YUTFIFX4)

incorrect since the call feature has value for the issuer. As such, a callable
bond is equal to the value of the underlying straight bond less the call option.

7. B is correct. As a result of both pooling and tranching, the prepayment risk of
the security is less than the pre-payment risk of the individual mortgages.
Pre-payments on individual securities are a random variable, but over a pool
of mortgages, the random variables have a well-defined expected value.

8. A is correct. A liquidity premium is added on to rates the further out on the
curve they are. B is incorrect since liquidity preference does not talk about
expectations.

9. A is correct. 6.8%(1-40%) = 4.08%. 4.08%/(1-40%) = 8.00%

10. A is correct. N = 5, I/Y = 5, PMT = 7, FV = 100, resulting in PV= -108.65; N = 4,
I/Y = 5, PMT = 7, FV = 100 resulting in PV= -107.09. The difference is -$1.56

11. B is correct. To generate a 7% yield, we need [89.32(1.035)40] – 89.32 =
264.32. Coupon payments will generate $120 and the difference between the
discount and par will generate $10.68. Thus, the reinvestment must equal
264.32 – 120 – 10.68 = 133.64.

12. C is correct. Bond prices are more sensitive to drops in rates than increases
in rates.

13. A is correct. Since we already have a measure of duration, we can solve
directly: 134.67 – [10.76*.002*134.67] = 131.80

14. C is correct. 6.5(.01) – 42.4(.01)2 = 0.06078.

15. A is correct.

16. B is correct. There is no liquidity or interest rate risk with a Treasury
security held to maturity in which the maturity period matches the
investment horizon.

17. B is correct. Issue 2 has the longest term to maturity.

18. C is correct. 10.44(.01)(5,000,000) = $522,000

19. B is correct. There are no coupons to reinvest.

20. B is correct. Callable bonds are equal to the value of the underlying straight
bond less the call option. Increased volatility increases the value of the
embedded option, thus lowering the value of the callable bond.

Sold to Sophy Thwe (#YUTFIFX4)

21. C is correct. The entire price difference between discount and par is
considered interest and is amortized and claimed as interest income each
year.

22. A is correct. 5.11 – 4.18 = 0.93. 93 basis points. We are looking at yield
spreads, not coupons.

23. A is correct. N = 5, I/Y = 6, PMT = 2.309.75, FV = 0, CPT PV = 9,729.51

24. A is correct.

25. C is correct. 6/1.03 + 106/1.03922 = 103.979

26. A is correct. Bond prices are less sensitive for increases in rates (drops in
price) than they are for decreases in rates.

27. A is correct. Bond A has a higher duration and a higher price.

28. C is correct.

29. C is correct.

30. C is correct.

31. A is correct. (109 – 96)/(2*.005)*102) = 12.75

32. A is correct.

33. A is correct.

34. A is correct.

35. A is correct. By selling securities, the Fed draws funds out of the market.

36. B is correct. The longer the lockout period the longer the bond acts like a
straight bond, the lower the call risk. Thus, a lower yield will result.

37. A is correct. The current yield is simply the coupon/price paid.

38. A is correct. 1.5/1.015 + 1.5/1.01652 + 101.5/1.01753 = 99.282

39. C is correct. Prices are more sensitive for drops in rates than increases in
rates.

40. B is correct.

Sold to Sophy Thwe (#YUTFIFX4)

41. B is correct.

42. C is correct, hence the word accelerated.

43. B is correct. The shorter the time frame to next coupon, the LESS the
potential price fluctuation.

44. A is correct. 5.6*.0025*4,875,000 = 68,250

45. B is correct. Volatility affects options prices but does not affect straight bond
prices.

46. C is correct.

47. C is correct

48. B is correct.

49. B is correct. N = 5, I/Y = 9, FV = 100, PMT = 7, CPT PV = 92.22. 100 – 92.22 =
7.78.

50. B is correct. N = 8 (still an 8 year bond – do not use N = 4), FV = 100, PMT =
3.5, PV = -94.17, CPT I/Y = 4.3795. Multiply by 2 = 8.759.

51. C is correct. The OAS, or option-adjusted spread.

52. A is correct. Prices are less sensitive for drops in price than for increases in
prices.

53. C is correct. The assumption that cash flows do not change indicates the
presence of an embedded option. For a straight bond, that assumption need
not be made.

54. A is correct. (-4 * 0.02) + (-.012) = -.092

55. B is correct. As interest rates increase, the rate on this security would
decrease.

56. A is correct.

57. B is correct. A T-Bill is a money market security with no coupon that matures
in less than one year.

58. C is correct. The call has value for the issuer, so the callable bond = the
straight bond – call option value.

Sold to Sophy Thwe (#YUTFIFX4)

59. A is correct. 10,000 * (1 + .024/2) = 10,120

60. B is correct.

61. C is correct.

62. C is correct.

63. B is correct. 50/1.03 + 1050/1.0352 = 1,028.73

64. B is correct.

65. A is correct. Only callable bonds have the potential to have negative
convexity.

66. B is correct. Duration would need a convexity adjustment for very large
changes in yield.

67. C is correct. (-14.19 * .02) + 141.68(.02)2 = -.227128

68. B is correct.

69. A is correct

70. B is correct. Recall that the duration of a zero coupon bond is equal to its
term to maturity.

71. B is correct. 5 * .005 * 8,000,000 = 200,000

72. A is correct.

73. A is correct. Option prices drop with decreases in volatility. Since a putable
bond is the straight bond plus the option price, the putable bond would drop
in price.

74. B is correct.

75. A is correct. .06 * (1 – tax rate) =.04, (1 – tax rate) = .04/.06, tax rate = 1 -
.6666 = .33333.

76. A is correct. N = 6, I/Y = 10. PMT = 8, FV = 100, CPR PV = -91.29; 91.29 –
90.26 = 1.03

77. A is correct. 2[(1 + 0.06)^.5 – 1]

Sold to Sophy Thwe (#YUTFIFX4)

78. C is correct. Duration is a measure that captures the balance between

reinvestment risk and price risk. Two bonds can have the same duration but
have different independent reinvestment risk and different independent
price risk.

79. A is correct. (.5/2)6.2 + (1.2/2)5.7 + (.3/2)3 = 5.42

80. C is correct.

81. A is correct. Caps limit the amount of interest that has to be paid.

82. A is correct. A put is a benefit to the holder, not the issuer.

83. B is correct. The callable bond is the value of the straight bond less the
option value. As interest rates rise, the call option value drops, so that the
drop in the value of the callable bond is less than the drop in the value of the
straight bond since the price decline is offset buy the drop in value of the
option.

84. C is correct. Key-Rate duration is used to isolate the effect of only a change in
one of the rates on the yield curve.

85. C is correct. If the bond is selling at a premium, that means that market rates
are lower than the coupon. So as each payment comes in, reinvestment will
have to be done at lower market rates.

86. B is correct.

87. A is correct. N = 6, I/Y = 7, PMT = 8, FV = 100, CPT PV = -104.76. (104.76 –
100)/100 = 4.76%

88. A is correct. Hence the name Option Adjusted Spread.

89. C is correct. (101.17 – 98.85)/(2 * 0.001 * 100) = 11.6

90. B is correct. -6.5(.01) + 42.4(.01)2 = -.06076

91. C is correct.

92. C is correct.

93. A is correct. A high yield implies a discount bond. Market rates are higher
than the coupon rate, so coupon payments are reinvested at higher rates.

94. C is correct. Both A and B a re government, default-free bonds