FI 1.11 Test

Q. The CDO tranche with a credit-rating status between senior and subordinated bond classes is called the:

• A. equity tranche.
• B. residual tranche.
• C. mezzanine tranche.

Which bond is most likely to exhibit a reduction in duration as time to maturity increases? A bond priced at:

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

Q. The provision that provides bondholders the right to sell the bond back to the issuer at a predetermined price prior to the bond’s maturity date is referred to as:

• A. a put provision.
• B. a make-whole call provision.
• C. an original issue discount provision.

None

• A. Investor A
• B. Investor B
• C. Investor C

An investor purchases a five-year, 4% annual coupon bond for 104.58 and sells it exactly three years later. Immediately after the bond is purchased and before the first coupon is received, interest rates decline to 2.25%, and they remain at that level for the next three years. Assuming that the coupon payments are received and reinvested at 2.25%, the investor’s realized horizon yield is closest to:

• A. 2.26%.
• B. 2.31%.
• C. 3.41%.

Q. The benefit to the issuer of a deferred coupon bond is most likely related to:

• A. tax management.
• B. cash flow management.
• C. original issue discount price.

Q. The expected loss for a given debt instrument is estimated as the product of default probability and:

• A. (1 + Recovery rate).
• B. (1 – Recovery rate).
• C. 1/(1 + Recovery rate).

Q. The longest-term tranche of a sequential-pay CMO is most likely to have the lowest:

• A. average life.
• B. extension risk.
• C. contraction risk.

None

• A. 9.00%.
• B. 9.92%.
• C. 11.93%.

Q. Matrix pricing allows investors to estimate market discount rates and prices for bonds:

• A. with different coupon rates.
• B. that are not actively traded.
• C. with different credit quality.