Fixed Income Questions.

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Damil4real

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Fixed Income Questions.
I’ll provide answers & reasoning after 10 responses.
1) Which of the following bonds has the greatest interest rate risk?
A) A 5% 10-year callable bond yielding 4%
B) A 5% 10-year putable bond yielding 6%
C) A 5% 10-year option-free bond yielding 4%
2) A Floating-rate security will have the greatest duration:
A) the day before the reset date
B) the day after the reset date
C) floating-rate securities have a duration of zero
3) All of the following are possible examples of event risk with respect to fixed-income securities, except:
A) a change in rate regulation
B) a Federal Reserve decrease in money supply
C) one firm’s acquisition by another
4) Which of the following 5-year bonds has the highest interest rate risk?
A) A floating-rate bond
B) A zero-coupon bond
C) An option-free 5% fixed-coupon bond
5) An investor is concerned about interest rate risk. Which of the following three bonds has the least interest rate risk? The bond with:
A) 5% yield and 10-year maturity
B) 6% yield and 20-year maturity
C) 6% yield and 10-year maturity
6) Which of the following statements about the risks of bond investing is true?
A) A U.S. Treasury bond has no reinvestment risk.
B) A U.S. treasury bond has no exchange risk.
C) A bond with a call protection has volatility risk.
7) Which of the following securities will have the least reinvestment risk for a long-term investor?
A) A 6-month T-bill
B) A 10-year, 4% debenture
C) A 10-year, zero-coupon bond
8) Which of the following does a 2-year, zero-coupon U.S. Treasury note not have?
A) Volatility risk
B) Inflation risk
C) Currency risk
9) A straight 5% coupon bond has two years remaining to maturity and is priced at $981.67 ($1,000 par value). A putable bond that is the same in every respect as the straight bond except that the put provision is priced at 101.76 (percent of par value). With the yield curve flat at 6%, what is the value of the embedded put option?
A) $20.35
B) $17.60
C) $35.93
 
we already have the answers and the explanations from CFAI…BTW…copying questions like this is infringement of the copyright regulations. If you really want the CFA designation, it is better you start following the Ethics and the CFA Code right away…:)))
 
I have no clue on 8 and 9, would love to see how you work through those
 
8) I feel it cannot be currency risk because its for non-dollar denominated bod and volatility risk is for bonds with embedded options
9) Puttable bond = option free bond + value of the embedded put option
1017.6=981.67+x
solve for x
 
imranmir1, if you’re not interested in answering these questions, then keep ur mouth shut. I’ve seen many questions on here that were from the CFAI or other websites, and I’ve yet to see anyone complain…, so please get out of here. See you couldn’t even answer one question…, how do you expect to pass the CFA?
Answers to the questions:
1)
Answer C
Embedded options reduce duration/interest rate risk. The straight bond with lower coupon will have greater duration than the straight bond with the higher duration.
2)
Answer B
The duration of a floating-rate bond is higher the greater the time lag until the next coupon payment/reset date. The greatest duration/interest rate risk is, therefore, immediately after the coupon has been reset.
3)
Answer B
Event risk refers to events that can impact a firm’s ability to pay its debt obligations that are separate from market risks. The Fed’s actions can impact interest rates, but this is market risk factor, and not event risk.
4)
Answer B
The zero-coupon bond will have the greatest duration of any of the three bonds and, as such, will be subject to the greatest interest rate risk.
5)
Answer C
Interest rate risk is inversely related to the yield and directly related to maturity. All else equal, the lower the yield, the greater the interest rate risk. All else equal, the longer the maturity, the greater the interest rate risk. This bond has the higher yield and the shorter maturity, and thus has the lowest interest rate risk.
6)
Answer C
A Treasury bond pays semiannual coupon interest and, therefore, has reinvestment risk. A triple-A rated bond can lost its AAA rating, so it has downgraded risk, a component of credit risk. Any bond can have exchange rate risk if the security holder’s returns are measured in a different currency. A bond with a call feature has volatility risk even when the call cannot be exercised immediately. The call feature still has value (to the issuer), and its value will be affected by volatility changes.
7)
Answer C
A 10-yearm zero-coupon bond has no cash flows prior to maturity to reinvest while the entire amount invested in 6-month bills must be reinvested twice each year.
8)
Answer A
It will have Inflation (purchasing power) risk. It will also have currency risk to non-U.S. dollar investors. Volatility risk only applies to bonds with embedded options.
9)
Answer C
The value of the embedded put option is the difference between the price of the putable bond and the price of the straight bond. So it is computed as:
Call option value = $1,017.60 - $981.67 = $35.93
 
Sweet, 100%!
As far as question 8 goes - it was pretty obvious to me…how can a t-note have volatility risk, as it has no options, and only options have volatility risk?
 
imranmir1, Is this the first set of questions you see on this forum?
 
got 8/9
ohh gosh !!! I guess I misread the 8th question ….Infact I had my logic right abt volatility risk …..I missed atleast 10-15 questions like this in dec 2008 …sigh.. landed with a band 10
Posted by: Factor hedge (IP Logged) [hide posts from this user]
Date: April 16, 2009 01:43PM
8) I feel it cannot be currency risk because its for non-dollar denominated bod and volatility risk is for bonds with embedded options
 
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