NEW
Font size
WorksheetsTopic4-CFA
Total questions: 75
Worksheet time: 38mins
Given that the coupon rate of a bond is higher than the market interest rate on bonds with similar maturities and payment structures, the bond will be trading:
at a premium.
at a discount.
at par value.
Which of the following statements about duration is CORRECT?
A bond's percentage change in price and dollar change in price are both tied to the underlying price volatility.
The result of the formula for effective duration is for a 0.01% change in interest rates.
The formula for effective duration is: (price when yields fall − price when yields rise) / (initial price × change in yield expressed as a decimal).
As compared to an equivalent nonputable bond, a putable bond’s yield should be:
the same.
higher.
lower.
A municipal bond carries a coupon of 6% and is traded at par. To a taxpayer in the 34% tax bracket, this bond provides an equivalent taxable yield of:
8.53%.
9.09%.
6.00%.
Interest rate risk for a bond refers to the fact that when interest rates:
decrease, the realized yield on the bond will be less than the yield to maturity.
increase, prepayments of principal will decrease.
increase, the bond’s value decreases.
Which of the following embedded options most likely benefits the bondholder?
Put provision at par on a bond that is trading at a premium.
Prepayment option on an amortizing security.
Interest rate cap on a floating-rate bond.
The six-month spot rate is 4% and the 1 year annualized spot rate is 9% (4.5% on a semiannual basis). Based on the pure expectations theory of interest rates, the implied six-month rate six months from now is closest to:
5%.
6%.
4%
the value of callable bonds. She has the following information: a callable bond with a call option value calculated at 1.75 (prices are quoted as a percent of par) and a straight bond similar in all other aspects priced at 98.0. Which of the following choices is closest to what England calculates as the value for the callable bond?
99.75.
98.75.
96.25.
Simone Girard, CFA candidate, is studying yield volatility and the value of callable bonds. She has the following information: a callable bond with a call option value calculated at 1.25 (prices are quoted as a percent of par) and a straight bond similar in all other aspects priced at 98.5. Girard also wants to determine how the bond’s value will change if yield volatility increases. Which of the following choices is closest to what Girard calculates as the value for the callable bond and correctly describes the bond’s price behavior as yield volatility increases?
97.25, price decreases.
97.25, price increases
99.75, price decreases.
In the context of bonds, accrued interest:
with other cash flows to arrive at the dirty, or full price.
covers the part of the next coupon payment not earned by seller.
quals interest earned from the previous coupon to the sale date.
A normally sloped yield curve has a:
zero slope.
negative slope.
positive slope.
What will happen to interest rate risk for an option-free bond if market yields decrease?
Interest rate risk will increase.
Interest rate risk will decrease.
Even if the term structure is flat, interest rate risk could go up or down based on the level of the term structure at the time market yields decrease.
The risk that relates to the amount and timing of cash flows from a mortgage is known as:
liquidity risk.
default risk.
prepayment risk.
Sometimes floating rate issues have caps and/or floors, which limit the maximum or minimum coupon rate that the issue will pay. Which of the following statements is CORRECT with regard to floating rate issues that have caps and floors?
disadvantage to both the issuer and the bondholder while a cap is an advantage to both the issuer and the bondholder.
A cap is a disadvantage to the bondholder while a floor is a disadvantage to the issuer.
A cap is an advantage to the bondholder while a floor is an advantage to the issuer.
Which of the following statements regarding accrued interest on a bond is most accurate?
If the buyer must pay the seller the accrued interest, the bond is said to be trading ex-coupon.
The bond is trading flat if the bond issuer is in default and the bond is trading without accrued interest.
The accrued interest is paid by the seller of the bond to the buyer (new owner) of the bond.
Kyle Barnes, CFA, is meeting his friend, Lita Rombach, about possible bond investments. Rombach is concerned about reinvestment risk. Which of the following statements about Rombach is CORRECT? Rombach:
will prefer a higher coupon bond to a lower coupon bond.
need only be concerned about reinvestment risk on coupon payments.
will prefer a noncallable bond to a callable bond.
Of the following three otherwise identical bonds, which is likely to exhibit the greatest price volatility?
10% coupon bond with 10 years to maturity.
5% coupon bond with 20 years to maturity.
10% coupon bond with 20 years to maturity.
Which of the following investors is least susceptible to inflation risk?
The holder of a 15-year bond with a coupon formula equal to the U.S. prime rate plus 3.25%.
An individual with a 5 year certificate of deposit at a local financial institution.
A financial institution with assets concentrated in fixed-rate mortgages
Which of the following statements regarding liquidity risk is NOT correct?
Emerging markets typically have more liquidity risk than established markets.
Liquidity risk is not important to an investor who intends to hold a security until maturity.
Liquidity risk is not important to an investor who intends to hold a security until maturity.
Which of the following statements is CORRECT for both callable and putable bonds?
The value of the bond is equal to the value of a similar straight bond plus the value of the option.
When yield volatility increases, the value of the bond increases.
When yield volatility increases, the value of the option increases.
regarding a bond being called is CORRECT? Call prices are known as regular redemption prices when bonds are called at:
at the par value.
at a premium.
under the call provisions specified in the bond indenture.
Kira Sigard, CFA and an attorney with an investment banking firm, structures a client’s bond issue to include a “poison put.” This is a provision that requires the issuer to redeem the bond at par in the case of a corporate takeover, a merger, or anti-takeover measure that would dissipate significant corporate assets. An investor who purchases this bond is protected from what type of risk?
Liquidity Risk.
Event Risk.
Call Risk.
The dirty, or full, price of a bond:
is paid when a security trades ex-coupon.
applies if an issuer has defaulted.
equals the present value of all cash flows, plus accrued interest.
Which of the following bond price calculations is NOT correct? An investor would pay:
$1,000 corporate bond quoted at 95 20/32.
$941.00 for a $1,000 Treasury bond quoted at 94 10/32.
$9,684.38 for a $10,000 Treasury note quoted at 96 27/32.
Which of the following is NOT a negative bond covenant?
Current ratio of at least 2.25
Credit rating must be investment grade
Restriction on asset sales
To reduce the cost of long-term borrowing, a corporation with a below average credit rating could:
issue asset backed securities.
decrease credit enhancement.
issue commercial paper.
Which of the following statements about a callable bond is CORRECT?
A bondholder usually loses if a bond is called by being forced to reinvest the proceeds at a lower interest rate.
Callable bonds follow the standard inverse relationship between interest rates and price.
The call option on a bond trades separately from the bond itself.
Which of the following statements about liquidity risk is least accurate?
A lack of liquidity may make it difficult to determine the value of a security.
Liquidity risk and the bid-ask spread are not relevant to an investor who is planning to hold a security to maturity.
The bid-ask spread is an indication of the liquidity of a security.
As compared to an equivalent noncallable bond, a callable bond’s yield should be:
the same.
higher.
lower.
Which of the following assets is the least liquid?
Limited Partnership
Foreign exchange futures contract.
On-the-run Treasury security.
Which of the following statements regarding floating-rate securities is most accurate?
The longer the time until the next reset for a floating-rate security, the less interest rate risk it has.
A floating-rate security’s price will always equal par at its coupon reset date.
Prices of floating-rate securities are less sensitive to changes in market yields than the prices of fixed-rate securities
An option-free bond has a market price and par value equal to $1,000. For small changes in the yield of this bond, its price will change one dollar for every basis point change in the yield. What is the duration of the bond?
1
5
10
Most often the initial call price of a bond is its:
par value plus one year's interest.
par value.
principal plus a premium.
Which of the following statements about inflation risk is NOT correct?
The short term inflation premium is less than the long term premium.
Treasury securities are considered immune to inflation and liquidity risk.
The real return on a fixed coupon bond is variable.
The reinvestment assumption is less important if the coupon and term to maturity are:
Coupon: lowerTerm to Maturity: longer
Coupon: higherTerm to Maturity: shorter
Coupon: lowerTerm to Maturity: shorter
Which of the following statements about a bond with a call feature is least accurate? The call feature:
increases the bond's duration, increasing price risk.
reduces the bond's capital appreciation potential.
exposes investors to additional reinvestment rate risk.
With respect to bond investing, reinvestment risk is a very important component of what other type of risk?
Liquidity risk.
Default risk.
Call risk.
Consider a floating rate issue that has a coupon rate that is reset on January 1 of each year. The coupon rate is defined as one-year London Interbank Offered Rate (LIBOR) + 125 basis points and the coupons are paid semiˇannually. If the one-year LIBOR is 6.5% on January 1, which of the following is the semi-annual coupon payment received by the holder of the issue in that year?
3.875%.
3.250%..
7.750%
If the issuer of a bond is in default, the bond will be trading:
on accrual.
flat.
off the market.
Which of the following embedded options benefits the bond investor?
Call provision.
Prepayment option.
Put provision.
Which of the following is closest to the maximum price for a bond that is currently callable?
Its par value.
Its par value plus accrued interest.
The call price.
Consider three bonds that are similar in all features except those shown. The bond with the greatest reinvestment risk is:
15% coupon, callable.
15% coupon, non-callable.
5% coupon, callable.
Which of the following is the least significant risk faced by a holder of a mortgage-backed security?
Scheduled principal payment risk.
Reinvestment risk.
Interest rate risk.
Relative to a bond sold as part of a large issue, an otherwise equivalent bond that is sold as part of a smaller issue will be sold for a:
lower price and have a higher yield to maturity.
lower price and have a lower yield to maturity.
higher price and have a lower yield to maturity.
Which of the following statements is NOT correct? Compared to a callable bond, a noncallable bond:
is more attractive to an investor concerned with reinvestment risk.
provides a higher yield.
has more predictable cash flows.
Which of the following situations lead to short-term profit opportunities in the bond market?
Interest rates become more volatile.
Inflation is expected to rise.
Yields of all maturities start to rise.
The risk that an investor will earn less than the quoted yield-to-maturity on a fixed-coupon bond due to a decrease in interest rates is known as:
prepayment risk.
reinvestment risk.
event risk.
Which of the following statements does NOT describe a characteristic of an illiquid asset or market?
Large block trades that do not materially affect prices.
Small trading volumes.
Wide bid-ask spreads.
If a portfolio manager anticipates a major increase in market interest rates, the most appropriate trading strategy is to purchase:
short-maturity bonds with high coupon rates.
long-maturity bonds with low coupon rates.
high yield bonds with high coupon rates.
Which of the following investors faces the least inflation risk? An investor whose portfolio is concentrated in:
equity securities.
long-term treasury bonds.
fixed-rate certificates of deposit.
Which one of the following bonds has the shortest duration?
Zero-coupon, 13-year maturity.
Zero-coupon, 10-year maturity.
8% coupon, 10-year maturity.
A bond with a yield to maturity of 8.0% is priced at 96.00. If its yield increases to 8.3% its price will decrease to 94.06. If its yield decreases to 7.7% its price will increase to 98.47. The effective duration of the bond is closest to:
2.75.
4.34.
7.66.
Value a semi-annual, 8% coupon bond with a $1,000 face value if similar bonds are now yielding 10%? The bond has 10 years to maturity.
$1,373.87.
$875.38.
$1,000.00.
What is the semiannual-pay bond equivalent yield on an annual-pay bond with a yield to maturity of 12.51%?
12.14%.
12.00%.
12.51%
A bond's yield to maturity decreases from 8% to 7% and its price increases by 6%, from $675.00 to $715.50. The bond's effective duration is closest to:
7.0.
5.0.
6.0.
A coupon bond that pays interest semi-annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 10%. What is the value of the bond today if the coupon rate is 8%?
$1,221.17
$1,144.31.
$922.78
A bond has a modified duration of 6 and a convexity of 62.5. What happens to the bond's price if interest rates rise 25 basis points? It goes:
down 15.00%.
up 1.46%.
down 1.46%.
30-year semiannual 6.5% coupon, $1000 par value bond yielding 8% when the nominal risk-free rate changes from 5% to 4%?
$98.83.
$106.34.
$107.31.
What value would an investor place on a 20-year, 10% annual coupon bond, if the investor required an 11% rate of return?
$879
$1,035
$920
When compared to modified duration, effective duration:
is equal to modified duration for callable bonds but not putable bonds.
factors in how embedded options will change expected cash flows.
places less weight on recent changes in the bond's ratings.
its current yield, and its current yield is greater than its yield to maturity, the bond is a:
premium bond.
discount bond.
par value bond.
Find the yield to maturity of a 6% coupon bond, priced at $1,115.00. The bond has 10 years to maturity and pays semi-annual coupon payments.
8.07%.
5.87%.
4.56%.
Jayce Arnold, a CFA candidate, is studying how the market yield environment affects bond prices. She considers a $1,000 face value, option-free bond issued at par. Which of the following statements about the bond’s dollar price behavior is most likely accurate when yields rise and fall by 200 basis points, respectively? Price will:
decrease by $124, price will increase by $149.
increase by $149, price will decrease by $124.
decrease by $149, price will increase by $124.
passes the price of a zero-coupon bond will:
approach the purchase price.
approach par.
approach zero.s
A bond with a face value of $1,000 pays a semi-annual coupon of $60. It has 15 years to maturity and a yield to maturity of 16% per year. What is the value of the bond?
$697.71.
$832.88.
$774.84.
The goal of computing effective duration is to get a:
preliminary estimate of modified duration.
more accurate measure of the bond's price sensitivity when embedded options exist.
measure of duration that is effectively constant for the life of the bond.
What is the bond-equivalent yield given if the monthly yield is equal to 0.7%?
8.65%
8.55%.
8.40%.
What is the value of a zero-coupon bond if the term structure of interest rates is flat at 6% and the bond has two years remaining to maturity?
83.75.
100.00
88.85.
Using the following spot rates for pricing the bond, what is the present value of a three-year security that pays a fixed annual coupon of 6%? Year 1: 5.0% Year 2: 5.5% Year 3: 6.0%
95.07.
100.10.
102.46.
102.46.What would an investor pay for a 25-year zero coupon bond if they required 11%? (Assume semi-annual compounding.)
$1,035.25
$103.53
$68.77
An international bond investor has gathered the following information on a 10-year, annual-pay U.S. corporate bond: Currently trading at par value Annual coupon of 10% Estimated price if rates increase 50 basis points is 96.99% Estimated price is rates decrease 50 basis points is 103.14% The bond’s duration is closest to:
3.14.
6.58.
6.15.
An investor is interested in buying a 4-year, $1,000 face value bond with a 7% coupon and semi-annual payments. The bond is currently priced at $875.60. The first put price is $950 in 2 years. The yield to put is closest to:
8.7%.
10.4%.
11.9%
A bond has a par value of $1,000, a time to maturity of 20 years, a coupon rate of 10% with interest paid annually, a current price of $850, and a yield to maturity (YTM) of 12%. If the interest payments are reinvested at 10%, the realized compounded yield on this bond is:
10.0%.
12.0%.
10.9%.
A 6-year annual interest coupon bond was purchased one year ago. The coupon rate is 10% and par value is $1,000. At the time the bond was bought, the yield to maturity (YTM) was 8%. If the bond is sold after receiving the first interest payment and the bond's yield to maturity had changed to 7%, the annual total rate of return on holding the bond for that year would have been:
11.95%
7.00%.
8.00%.
Georgia-Pacific has $1,000 par value bonds with 10 years remaining maturity. The bonds carry a 7.5% coupon that is paid semi-annually. If the current yield to maturity on similar bonds is 8.2%, what is the current value of the bonds?
$1,123.89.
$569.52.
$952.85.
