Question 1

What is the yield to maturity of a 3-year bond?

Accepted Answer

A) 4.6% 
B) 4.9% 
C) 5.2% 
D) 5.5% 
E) 5.8% 
A) 4.6% 
B) 4.9% 
C) 5.2% 
D) 5.5% 
E) 5.8%

Question 2

Answer the following questions that relate to bonds.
A 2-year zero-coupon bond is selling for $890.00.What is the yield to maturity of this bond?The price of a 1-year zero coupon bond is $931.97.What is the yield to maturity of this bond?Calculate the forward rate for the second year.How can you construct a synthetic one-year forward loan (you are agreeing now to loan in one year)?
 State the strategy and show the corresponding cash flows.Assume that you can purchase and sell fractional portions of bonds.Show all calculations and discuss the meaning of the transactions.

Accepted Answer

Calculations are shown in the table belo

Question 3

The expectations theory of the term structure of interest rates states that

Accepted Answer

A) forward rates are determined by investors' expectations of future interest rates. 
B) forward rates exceed the expected future interest rates. 
C) yields on long- and short-maturity bonds are determined by the supply and demand for the securities. 
D) all of the above. 
E) none of the above. 
A) forward rates are determined by investors' expectations of future interest rates. 
B) forward rates exceed the expected future interest rates. 
C) yields on long- and short-maturity bonds are determined by the supply and demand for the securities. 
D) all of the above. 
E) none of the above.

Question 4

$$\begin{array} { l | l } 
\hline \text { Year } & \text { 1-Year Forward Rate } \
\hline 1 & 4.6 \% \
\hline 2 & 4.9 \% \
\hline 3 & 5.2 \% \
\hline 4 & 5.5 \% \
\hline 5 & 5.8 \% \
\hline
\end{array}$$
-What should the purchase price of a 3-year zero coupon bond be if it is purchased today and has face value of $1,000?

Accepted Answer

A) $887.42 
B) $871.12 
C) $879.54 
D) $856.02 
E) $866.32 
A) $887.42 
B) $871.12 
C) $879.54 
D) $856.02 
E) $866.32

Question 5

The following is a list of prices for zero coupon bonds with different maturities and par value of $1,000. $$\begin{array} { | l | l | } 
\hline \text { Maturity (Years) } & \underline { \text { Price } } \
\hline 1 & \$ 943.40 \
\hline 2 & \$ 881.68 \
\hline 3 & \$ 808.88 \
\hline 4 & \$ 742.09 \
\hline
\end{array}$$
-What is the yield to maturity on a 3-year zero coupon bond?

Accepted Answer

A) 6.37% 
B) 9.00% 
C) 7.33% 
D) 10.00% 
E) none of the above 
A) 6.37% 
B) 9.00% 
C) 7.33% 
D) 10.00% 
E) none of the above

Question 6

Which of the following is not proposed as an explanation for the term structure of interest rates:

Accepted Answer

A) The expectations theory. 
B) The liquidity preference theory. 
C) The safety of principal theory. 
D) Modern portfolio theory. 
E) A and B. 
A) The expectations theory. 
B) The liquidity preference theory. 
C) The safety of principal theory. 
D) Modern portfolio theory. 
E) A and B.

Question 7

An inverted yield curve implies that:

Accepted Answer

A) Long-term interest rates are lower than short-term interest rates. 
B) Long-term interest rates are higher than short-term interest rates. 
C) Long-term interest rates are the same as short-term interest rates. 
D) Intermediate term interest rates are higher than either short- or long-term interest rates. 
E) none of the above. 
A) Long-term interest rates are lower than short-term interest rates. 
B) Long-term interest rates are higher than short-term interest rates. 
C) Long-term interest rates are the same as short-term interest rates. 
D) Intermediate term interest rates are higher than either short- or long-term interest rates. 
E) none of the above.

Question 8

What is the price of a 4-year maturity bond with a 10% coupon rate paid annually? (Par value = $1,000)

Accepted Answer

A) $742.09 
B) $1,222.09 
C) $1,035.66 
D) $1,141.84 
E) none of the above 
A) $742.09 
B) $1,222.09 
C) $1,035.66 
D) $1,141.84 
E) none of the above

Question 9

$$\begin{array} { | l | l | } 
\hline \text { Par Value } & \$ 1,000 \
\hline \text { Time to Maturity } & 18 \text { years } \
\hline \text { Coupon } & 9 ^ { \circ } \% ( \text { paid annually) } \
\hline \text { Current Price } & \$ 917.99 \
\hline \text { Yield to Maturity } & 10 ^ { \circ } \% \
\hline
\end{array}$$
-Given the bond described above,if interest were paid semi-annually (rather than annually),and the bond continued to be priced at $917.99,the resulting effective annual yield to maturity would be:

Accepted Answer

A) Less than 10% 
B) More than 10% 
C) 10% 
D) Cannot be determined 
E) None of the above 
A) Less than 10% 
B) More than 10% 
C) 10% 
D) Cannot be determined 
E) None of the above

Question 10

Suppose that all investors expect that interest rates for the 4 years will be as follows: $$\begin{array} { l | l | } 
\hline \text { Year } & \text { Forward Interest Rate } \
\hline 0 & \text { (today) } 5 \% \
\hline 1 & 7 \% \
\hline 2 & 9 \% \
\hline 3 & 10 \% \
\hline
\end{array}$$
-If you have just purchased a 4-year zero coupon bond,what would be the expected rate of return on your investment in the first year if the implied forward rates stay the same?(Par value of the bond = $1,000)

Accepted Answer

A) 5% 
B) 7% 
C) 9% 
D) 10% 
E) none of the above 
A) 5% 
B) 7% 
C) 9% 
D) 10% 
E) none of the above

Question 11

$$\begin{array} { l | l } 
\hline \text { Year } & \text { 1-Year Forward Rate } \
\hline 1 & 4.6 \% \
\hline 2 & 4.9 \% \
\hline 3 & 5.2 \% \
\hline 4 & 5.5 \% \
\hline 5 & 5.8 \% \
\hline
\end{array}$$
-What should the purchase price of a 5-year zero coupon bond be if it is purchased today and has face value of $1,000?

Accepted Answer

A) $776.14 
B) $721.15 
C) $779.54 
D) $756.02 
E) $766.32 
A) $776.14 
B) $721.15 
C) $779.54 
D) $756.02 
E) $766.32

Question 12

Suppose that all investors expect that interest rates for the 4 years will be as follows: $$\begin{array} { l | l | } 
\hline \text { Year } & \text { Forward Interest Rate } \
\hline 0 & \text { (today) } 5 \% \
\hline 1 & 7 \% \
\hline 2 & 9 \% \
\hline 3 & 10 \% \
\hline
\end{array}$$
-What is the yield to maturity of a 3-year zero coupon bond?

Accepted Answer

A) 7.00% 
B) 9.00% 
C) 6.99% 
D) 7.49% 
E) none of the above 
A) 7.00% 
B) 9.00% 
C) 6.99% 
D) 7.49% 
E) none of the above

Question 13

According to the expectations hypothesis,an upward sloping yield curve implies that

Accepted Answer

A) interest rates are expected to remain stable in the future. 
B) interest rates are expected to decline in the future. 
C) interest rates are expected to increase in the future. 
D) interest rates are expected to decline first, then increase. 
E) interest rates are expected to increase first,then decrease. 
A) interest rates are expected to remain stable in the future. 
B) interest rates are expected to decline in the future. 
C) interest rates are expected to increase in the future. 
D) interest rates are expected to decline first, then increase. 
E) interest rates are expected to increase first,then decrease.

Question 14

Investors can use publicly available financial data to determine which of the following?
I.The shape of the yield curve
II.Expected future short-term rates (if liquidity premiums are ignored)
III.The direction the Dow indexes are heading
IV.The actions to be taken by the Federal Reserve

Accepted Answer

A) I and II 
B) I and III 
C) I, II, and III 
D) I, III, and IV 
E) I,II,III,and IV 
A) I and II 
B) I and III 
C) I, II, and III 
D) I, III, and IV 
E) I,II,III,and IV

Question 15

What should the purchase price of a 2-year zero coupon bond be if it is purchased at the beginning of year 2 and has face value of $1,000?

Accepted Answer

A) $877.54 
B) $888.33 
C) $883.32 
D) $893.36 
E) $871.80 
A) $877.54 
B) $888.33 
C) $883.32 
D) $893.36 
E) $871.80

Question 16

The most recently issued Treasury securities are called

Accepted Answer

A) on the run. 
B) off the run. 
C) on the market. 
D) off the market. 
E) none of the above. 
A) on the run. 
B) off the run. 
C) on the market. 
D) off the market. 
E) none of the above.

Question 17

What is the yield to maturity on a 3-year zero coupon bond?

Accepted Answer

A) 6.37% 
B) 9.00% 
C) 7.33% 
D) 8.24% 
E) none of the above 
A) 6.37% 
B) 9.00% 
C) 7.33% 
D) 8.24% 
E) none of the above

Question 18

If the value of a Treasury bond was lower than the value of the sum of its parts (STRIPPED cash flows)

Accepted Answer

A) arbitrage would probably occur. 
B) arbitrage would probably not occur. 
C) the FED would adjust interest rates. 
D) B and C 
E) none of the above 
A) arbitrage would probably occur. 
B) arbitrage would probably not occur. 
C) the FED would adjust interest rates. 
D) B and C 
E) none of the above

Question 19

Given the bond described above,if interest were paid semi-annually (rather than annually),and the bond continued to be priced at $850,the resulting effective annual yield to maturity would be: $$\begin{array} { | l | l | } 
\hline \text { Par Value } & \$ 1,000 \
\hline \text { Time to Maturity } & 20 \text { years } \
\hline \text { Coupon } & 10 \% \text { (paid annually) } \
\hline \text { Current Price } & \$ 850 \
\hline \text { Yield to Maturity } & 12 \% \
\hline
\end{array}$$

Accepted Answer

A) Less than 12% 
B) More than 12% 
C) 12% 
D) Cannot be determined 
E) None of the above 
A) Less than 12% 
B) More than 12% 
C) 12% 
D) Cannot be determined 
E) None of the above

Question 20

What is the yield to maturity of a 3-year zero coupon bond?

Accepted Answer

A) 7.00% 
B) 9.00% 
C) 6.99% 
D) 4% 
E) none of the above 
A) 7.00% 
B) 9.00% 
C) 6.99% 
D) 4% 
E) none of the above

Exam 15: The Term Structure of Interest Rates

What is the yield to maturity of a 3-year bond?

The expectations theory of the term structure of interest rates states that

Year 1-Year Forward Rate 1 4.6\% 2 4.9\% 3 5.2\% 4 5.5\% 5 5.8\% -What should the purchase price of a 3-year zero coupon bond be if it is purchased today and has face value of $1,000?

The following is a list of prices for zero coupon bonds with different maturities and par value of $1,000. Maturity (Years) 1 \ 943.40 2 \ 881.68 3 \ 808.88 4 \ 742.09 -What is the yield to maturity on a 3-year zero coupon bond?

Which of the following is not proposed as an explanation for the term structure of interest rates:

An inverted yield curve implies that:

What is the price of a 4-year maturity bond with a 10% coupon rate paid annually? (Par value = $1,000)

Year 1-Year Forward Rate 1 4.6\% 2 4.9\% 3 5.2\% 4 5.5\% 5 5.8\% -What should the purchase price of a 5-year zero coupon bond be if it is purchased today and has face value of $1,000?

Suppose that all investors expect that interest rates for the 4 years will be as follows: Year Forward Interest Rate 0 (today) 5\% 1 7\% 2 9\% 3 10\% -What is the yield to maturity of a 3-year zero coupon bond?

According to the expectations hypothesis,an upward sloping yield curve implies that

Investors can use publicly available financial data to determine which of the following? I.The shape of the yield curve II.Expected future short-term rates (if liquidity premiums are ignored) III.The direction the Dow indexes are heading IV.The actions to be taken by the Federal Reserve

What should the purchase price of a 2-year zero coupon bond be if it is purchased at the beginning of year 2 and has face value of $1,000?

The most recently issued Treasury securities are called

What is the yield to maturity on a 3-year zero coupon bond?

If the value of a Treasury bond was lower than the value of the sum of its parts (STRIPPED cash flows)

What is the yield to maturity of a 3-year zero coupon bond?

The Investment Environment

Asset Classes and Financial Instruments

How Securities are Traded

Mutual Funds and Other Investment Companies

Introduction to Risk,return,and the Historical Record

Risk Aversion and Capital Allocation to Risky Assets

Optimal Risky Portfolios

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

Managing Bond Portfolios

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, swaps, and Risk Management

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the CFA Institute Appendices

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