WorksheetsFI TE5 Test
Total questions: 40
Worksheet time: 1hrs 20mins
Name
Class
Date
1.
Q. The process of moving credit ratings of different issues up or down from the issuer rating in response to different payment priorities is best described as:
a)
A. notching.
b)
B. structural subordination.
c)
C. cross-default provisions.
2.
Which bond is most likely to exhibit a reduction in duration as time to maturity increases? A bond priced at:
a)
A. a discount.
b)
B. par.
c)
C. a premium.
3.
Q. The yield spread of a specific bond over the standard swap rate in that currency of the same tenor is best described as the:
a)
A. I-spread.
b)
B. Z-spread.
c)
C. G-spread.
4.
a)
A. 2.97%.
b)
B. 5.72%.
c)
C. 5.94%.
5.
Q. A bond issued by a local government authority, typically without an explicit funding commitment from the national government, is most likely classified as a:
a)
A. sovereign bond.
b)
B. quasi-government bond
c)
C. non-sovereign government bond.
6.
From the perspective of a CDO manager, an arbitrage collateralized debt obligation most likely differs from a traditional asset-backed security because it involves the:
a)
A. pooling of debt obligations.
b)
B. active management of the collateral.
c)
C. creation of a special purpose entity.
7.
Q. The rating agency process whereby the credit ratings on issues are moved up or down from the issuer rating best describes:
a)
A. notching.
b)
B. pari passu ranking.
c)
C. cross-default provisions.
8.
A bond has a Macaulay duration of 6.0, modified duration of 6.5, and convexity of 50.25. If the bond’s yield to maturity decreases by 50 bps, the expected percentage price change is closest to:
a)
A. 3.06%.
b)
B. 3.31%.
c)
C. 3.25%.
9.
A bond has a 10-year maturity, a $1,000 face value, and a 7% coupon rate. If the market requires a yield of 8% on similar bonds, it will most likely trade at a:
a)
A. discount.
b)
B. premium.
c)
C. discount or premium, depending on its duration.
10.
An investor purchases a 30-year, 5% annual pay bond at 86.24 and plans to sell it in 11 years. Immediately after purchase, interest rates increase by 1%, and they remain at that level until maturity. Assuming coupons are reinvested at the new yield, the investor’s realized horizon yield is closest to:
a)
A. 5.67%.
b)
B. 6.0%.
c)
C. 6.13%.
11.
The option-free bonds of Argus Corporation have a duration of eight years. When interest rates rise by 100 bps, the bond’s price declines by 7.9%. When interest rates fall by 100 bps, however, the price rises by 8.2%. The asymmetrical price change is most likely caused by the:
a)
A. coupon effect.
b)
B. maturity effect.
c)
C. convexity effect.
12.
Q. When the investor’s investment horizon is less than the Macaulay duration of the bond she owns:
a)
A. the investor is hedged against interest rate risk.
b)
B. reinvestment risk dominates, and the investor is at risk of lower rates.
c)
C. market price risk dominates, and the investor is at risk of higher rates.
13.
a)
A. 572 .
b)
B. 660 .
c)
C. 696 .
14.
Q. Which of the following statements related to securitization is correct?
a)
A. Time tranching addresses the uncertainty of a decline in interest rates.
b)
B. Securitizations are rarely structured to include both credit tranching and time tranching.
c)
C. Junior and senior bond classes differ in that junior classes can be paid off only at the bond’s set maturity.
15.
All else equal, interest rate risk is lowest for which of the following non-callable bonds?
a)
A. Discount
b)
B. Premium
c)
C. Zero-coupon
16.
Q. Credit yield spreads most likely widen in response to:
a)
A. high demand for bonds.
b)
B. weak performance of equities.
c)
C. strengthening economic conditions.
17.
a)
A. Company A.
b)
B. Company B.
c)
C. Company C.
18.
Q. Eurocommercial paper is most likely:
a)
A. negotiable.
b)
B. denominated in euros.
c)
C. issued on a discount basis.
19.
The bonds of Apex Corporations have a par value of $10,000 each and an annual required rate of return of 10%. The bonds make quarterly coupon payments at an annual rate of 6% and have two years remaining until maturity. The current market price of each bond is closest to:
a)
A. $10,749 .
b)
B. $9,283 .
c)
C. $9,306 .
20.
Which bonds most likely rank the highest with respect to priority of claims?
a)
A. Subordinated debt
b)
B. Second lien debt
c)
C. Senior unsecured bond
21.
Q. Collateralized mortgage obligations are designed to:
a)
A. eliminate contraction risk in support tranches.
b)
B. distribute prepayment risk to various tranches.
c)
C. eliminate extension risk in planned amortization tranches.
22.
Holding all other characteristics the same, the bond exposed to the greatest level of reinvestment risk is most likely the one selling at:
a)
A. a premium.
b)
B. a discount.
c)
C. par.
23.
Which of the following contingency provisions in a bond most likely benefits the issuer?
a)
A. Put provision
b)
B. Conversion to common shares
c)
C. Call provision
24.
Which of the following is least likely a feature of an auto loan ABS?
a)
A. Non-amortizing collateral
b)
B. Overcollateralization
c)
C. Senior/subordinated tranche structure
25.
Which type of bond is most likely to be preferred by investors in a falling interest rate environment?
a)
A. A floored floating-rate note
b)
B. A capped floating-rate note
c)
C. A floating-rate note with no cap or floor
26.
Q. Which of the following sources of return is most likely exposed to interest rate risk for an investor of a fixed-rate bond who holds the bond until maturity?
a)
A. Capital gain or loss
b)
B. Redemption of principal
c)
C. Reinvestment of coupon payments
27.
In a securitization structure, credit tranching allows investors to choose between:
a)
A. subordinated bonds and senior bonds.
b)
B. extension risk and contraction risk.
c)
C. partially amortizing loans and fully amortizing loans.
28.
During the lockout period for a non-amortizing asset-backed security, the principal payment of €100 million on a €1 billion face value issue will result in the security having a total face value of:
a)
A. €0.9 billion.
b)
B. €1.1 billion.
c)
C. €1.0 billion.
29.
High-yield bond analysis differs from investment-grade bond analysis in that high-yield:
a)
A. analysis is less likely to focus on an issuer’s liquidity.
b)
B. covenant analysis is more important than for investment-grade bonds.
c)
C. bond prices are more affected by interest rate changes than higher-quality bonds.
30.
a)
A. Bond A
b)
B. Bond B
c)
C. Bond C
31.
a)
A. €20 million
b)
B. €25 million
c)
C. €26 million
32.
An investor who owns a mortgage pass-through security is exposed to extension risk, which is the risk that when interest rates:
a)
A. fall, the security will effectively have a shorter maturity than was anticipated at the time of purchase.
b)
B. rise, the security will effectively have a shorter maturity than was anticipated at the time of purchase.
c)
C. rise, the security will effectively have a longer maturity than was anticipated at the time of purchase.
33.
A bond is currently selling for 102.31. A valuation model estimates the price will fall to 101.12 if interest rates increase by 20 bps and rise to 103.74 if interest rates decrease by 20 bps. Using these estimates, the effective duration of the bond is closest to:
a)
A. 6.48.
b)
B. 6.40.
c)
C. 6.31.
34.
Q. Which of the following statements describing a par curve is incorrect?
a)
A. A par curve is obtained from a spot curve.
b)
B. All bonds on a par curve are assumed to have different credit risk.
c)
C. A par curve is a sequence of yields-to-maturity such that each bond is priced at par value.
35.
a)
A. 96.98.
b)
B. 101.46.
c)
C. 102.95.
36.
Q. Which statement about covered bonds is least accurate?
a)
A. Covered bonds provide investors with dual recourse, to the cover pool and also to the issuer.
b)
B. Covered bonds usually carry higher credit risks and offer higher yields than otherwise similar ABS.
c)
C. Covered bonds have a dynamic cover pool, meaning sponsors must replace any prepaid or non-performing assets.
37.
Q. The tranches in a collateralized mortgage obligation that are most likely to provide protection for investors against both extension and contraction risk are:
a)
A. planned amortization class (PAC) tranches.
b)
B. support tranches.
c)
C. sequential-pay tranches.
38.
Given two otherwise identical bonds, when interest rates rise, the price of Bond A declines more than the price of Bond B. Compared with Bond B, Bond A most likely:
a)
A. has a shorter maturity.
b)
B. is callable.
c)
C. has a lower coupon.
39.
Q. In a securitization, the collateral is initially sold by the:
a)
A. issuer.
b)
B. depositor.
c)
C. underwriter.
40.
Q. An option-adjusted spread (OAS) on a callable bond is the Z-spread:
a)
A. over the benchmark spot curve.
b)
B. minus the standard swap rate in that currency of the same tenor.
c)
C. minus the value of the embedded call option expressed in basis points per year.
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