Question 1

Mortgage-backed CDOs were a disaster in 2007 because

Accepted Answer

A)  they were formed by pooling high quality fixed-rate loans with low interest rates. 
B)  they were formed by pooling subprime mortgages. 
C)  home prices stalled. 
D)  the mortgages were variable rate loans, and interest rates increased. 
E)  they were formed by pooling subprime mortgages, home prices stalled, the mortgages were variable rate loans, and interest rates increased. 
A)  they were formed by pooling high quality fixed-rate loans with low interest rates. 
B)  they were formed by pooling subprime mortgages. 
C)  home prices stalled. 
D)  the mortgages were variable rate loans, and interest rates increased. 
E)  they were formed by pooling subprime mortgages, home prices stalled, the mortgages were variable rate loans, and interest rates increased.

Question 2

SIVs raise funds by ______ and then use the proceeds to ______.

Accepted Answer

A)  issuing short-term commercial paper; retire other forms of their debt 
B)  issuing short-term commercial paper; buy other forms of debt such as mortgages 
C)  issuing long-term bonds; retire other forms of their debt 
D)  issuing long-term bonds; buy other forms of debt such as mortgages 
A)  issuing short-term commercial paper; retire other forms of their debt 
B)  issuing short-term commercial paper; buy other forms of debt such as mortgages 
C)  issuing long-term bonds; retire other forms of their debt 
D)  issuing long-term bonds; buy other forms of debt such as mortgages

Question 3

A CDS is a

Accepted Answer

A)  command duty supervisor. 
B)  collateralized debt security. 
C)  commercial debt servicer. 
D)  collateralized debenture security. 
E)  credit default swap. 
A)  command duty supervisor. 
B)  collateralized debt security. 
C)  commercial debt servicer. 
D)  collateralized debenture security. 
E)  credit default swap.

Question 4

A Treasury bond due in one year has a yield of 6.2%; a Treasury bond due in five years has a yield of 6.7%. A bond issued by Xerox due in five years has a yield of 7.9%; a bond issued by Exxon due in one year has a yield of 7.2%. The default risk premiums on the bonds issued by Exxon and Xerox, respectively, are

Accepted Answer

A)  1.0% and 1.2%. 
B)  0.5% and .7%. 
C)  1.2% and 1.0%. 
D)  0.7% and 0.5%. 
E)  None of the options are correct. 
A)  1.0% and 1.2%. 
B)  0.5% and .7%. 
C)  1.2% and 1.0%. 
D)  0.7% and 0.5%. 
E)  None of the options are correct.

Question 5

SIVs are

Accepted Answer

A)  structured investment vehicles. 
B)  structured interest rate vehicles. 
C)  semi-annual investment vehicles. 
D)  riskless investments. 
E)  structured insured variable rate instruments. SIVs are structured investment vehicles. 
A)  structured investment vehicles. 
B)  structured interest rate vehicles. 
C)  semi-annual investment vehicles. 
D)  riskless investments. 
E)  structured insured variable rate instruments. SIVs are structured investment vehicles.

Question 6

The invoice price of a bond that a buyer would pay is equal to

Accepted Answer

A)  the asked price plus accrued interest. 
B)  the asked price less accrued interest. 
C)  the bid price plus accrued interest. 
D)  the bid price less accrued interest. 
E)  the bid price. 
A)  the asked price plus accrued interest. 
B)  the asked price less accrued interest. 
C)  the bid price plus accrued interest. 
D)  the bid price less accrued interest. 
E)  the bid price.

Question 7

You have just purchased a 12-year zero-coupon bond with a yield to maturity of 9% and a par value of $1,000. What would your rate of return at the end of the year be if you sell the bond? Assume the yield to maturity on the bond is 10% at the time you sell.

Accepted Answer

A)  10.00% 
B)  20.42% 
C)  -1.4% 
D)  1.4% 
A)  10.00% 
B)  20.42% 
C)  -1.4% 
D)  1.4%

Question 8

A coupon bond that pays interest annually has a par value of $1,000, matures in eight years, and has a yield to maturity of 9%. The intrinsic value of the bond today will be ______ if the coupon rate is 6%.

Accepted Answer

A)  $833.96 
B)  $620.92 
C)  $1,123.01 
D)  $886.28 
E)  $1,000.00 
A)  $833.96 
B)  $620.92 
C)  $1,123.01 
D)  $886.28 
E)  $1,000.00

Question 9

Which of the following is not a type of international bond?

Accepted Answer

A)  Samurai bonds 
B)  Yankee bonds 
C)  Bulldog bonds 
D)  Elton bonds 
E)  All of the options are international bonds. 
A)  Samurai bonds 
B)  Yankee bonds 
C)  Bulldog bonds 
D)  Elton bonds 
E)  All of the options are international bonds.

Question 10

Which one of the following statements about convertibles is true?

Accepted Answer

A)  The longer the call protection on a convertible, the less the security is worth. 
B)  The more volatile the underlying stock, the greater the value of the conversion feature. 
C)  The smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond, the more the convertible is worth. 
D)  The collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock. 
E)  Convertibles are not callable. 
A)  The longer the call protection on a convertible, the less the security is worth. 
B)  The more volatile the underlying stock, the greater the value of the conversion feature. 
C)  The smaller the spread between the dividend yield on the stock and the yield-to-maturity on the bond, the more the convertible is worth. 
D)  The collateral that is used to secure a convertible bond is one reason convertibles are more attractive than the underlying stock. 
E)  Convertibles are not callable.

Question 11

A bond will sell at a discount when

Accepted Answer

A)  the coupon rate is greater than the current yield, and the current yield is greater than yield to maturity. 
B)  the coupon rate is greater than yield to maturity. 
C)  the coupon rate is less than the current yield, and the current yield is greater than the yield to maturity. 
D)  the coupon rate is less than the current yield, and the current yield is less than yield to maturity. 
E)  None of the options are true. 
A)  the coupon rate is greater than the current yield, and the current yield is greater than yield to maturity. 
B)  the coupon rate is greater than yield to maturity. 
C)  the coupon rate is less than the current yield, and the current yield is greater than the yield to maturity. 
D)  the coupon rate is less than the current yield, and the current yield is less than yield to maturity. 
E)  None of the options are true.

Question 12

A 10% coupon bond maturing in 10 years that requires annual payments is expected to make all coupon payments but to pay only 50% of par value at maturity. What is the expected yield on this bond if the bond is purchased for $975?

Accepted Answer

A)  10.00% 
B)  6.68% 
C)  11.00% 
D)  8.68% 
E)  None of the options are correct. 
A)  10.00% 
B)  6.68% 
C)  11.00% 
D)  8.68% 
E)  None of the options are correct.

Question 13

A Treasury bond due in one year has a yield of 4.3%; a Treasury bond due in five years has a yield of 5.06%. A bond issued by Boeing due in five years has a yield of 7.63%; a bond issued by Caterpillar due in one year has a yield of 7.16%. The default risk premiums on the bonds issued by Boeing and Caterpillar, respectively, are

Accepted Answer

A)  3.33% and 2.10%. 
B)  2.57% and 2.86%. 
C)  1.2% and 1.0%. 
D)  0.76% and 0.47%. 
E)  None of the options are correct. 
A)  3.33% and 2.10%. 
B)  2.57% and 2.86%. 
C)  1.2% and 1.0%. 
D)  0.76% and 0.47%. 
E)  None of the options are correct.

Question 14

One year ago, you purchased a newly-issued TIPS bond that has a 6% coupon rate, five years to maturity, and a par value of $1,000. The average inflation rate over the year was 4.2%. What is the amount of the coupon payment you will receive, and what is the current face value of the bond?

Accepted Answer

A)  $60.00, $1,000 
B)  $42.00, $1,042 
C)  $60.00, $1,042 
D)  $62.52, $1,042 
E)  $102.00, $1,000 
A)  $60.00, $1,000 
B)  $42.00, $1,042 
C)  $60.00, $1,042 
D)  $62.52, $1,042 
E)  $102.00, $1,000

Question 15

Floating-rate bonds are designed to ___________, while convertible bonds are designed to __________.

Accepted Answer

A)  minimize the holders'interest rate risk; give the investor the ability to share in the price appreciation of the company's stock 
B)  maximize the holders'interest rate risk; give the investor the ability to share in the price appreciation of the company's stock 
C)  minimize the holders'interest rate risk; give the investor the ability to benefit from interest rate changes 
D)  maximize the holders'interest rate risk; give investor the ability to share in the profits of the issuing company 
E)  None of the options are correct. 
A)  minimize the holders'interest rate risk; give the investor the ability to share in the price appreciation of the company's stock 
B)  maximize the holders'interest rate risk; give the investor the ability to share in the price appreciation of the company's stock 
C)  minimize the holders'interest rate risk; give the investor the ability to benefit from interest rate changes 
D)  maximize the holders'interest rate risk; give investor the ability to share in the profits of the issuing company 
E)  None of the options are correct.

Question 16

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 of 12%. Intuitively and without using calculations, if interest payments are reinvested at 10%, the realized compound yield on this bond must be

Accepted Answer

A)  10.00%. 
B)  10.9%. 
C)  12.0%. 
D)  12.4%. 
E)  None of the options are correct. 
A)  10.00%. 
B)  10.9%. 
C)  12.0%. 
D)  12.4%. 
E)  None of the options are correct.

Question 17

A coupon bond that pays interest annually has a par value of $1,000, matures in seven years, and has a yield to maturity of 9.3%. The intrinsic value of the bond today will be ______ if the coupon rate is 8.5%.

Accepted Answer

A)  $712.99 
B)  $960.14 
C)  $1,123.01 
D)  $886.28 
E)  $1,000.00 
A)  $712.99 
B)  $960.14 
C)  $1,123.01 
D)  $886.28 
E)  $1,000.00

Question 18

If a 7.5% coupon bond that pays interest every 182 days paid interest 62 days ago, the accrued interest would be

Accepted Answer

A)  $11.67. 
B)  $12.35. 
C)  $12.77. 
D)  $11.98. 
E)  $12.15. 
A)  $11.67. 
B)  $12.35. 
C)  $12.77. 
D)  $11.98. 
E)  $12.15.

Question 19

Most corporate bonds are traded

Accepted Answer

A)  on a formal exchange operated by the New York Stock Exchange. 
B)  by the issuing corporation. 
C)  over the counter by bond dealers linked by a computer quotation system. 
D)  on a formal exchange operated by the American Stock Exchange. 
E)  on a formal exchange operated by the Philadelphia Stock Exchange. 
A)  on a formal exchange operated by the New York Stock Exchange. 
B)  by the issuing corporation. 
C)  over the counter by bond dealers linked by a computer quotation system. 
D)  on a formal exchange operated by the American Stock Exchange. 
E)  on a formal exchange operated by the Philadelphia Stock Exchange.

Question 20

The ______ is a measure of the average rate of return an investor will earn if the investor buys the bond now and holds until maturity.

Accepted Answer

A)  current yield 
B)  dividend yield 
C)  P/E ratio 
D)  yield to maturity 
E)  discount yield 
A)  current yield 
B)  dividend yield 
C)  P/E ratio 
D)  yield to maturity 
E)  discount yield

Exam 14: Bond Prices and Yields

Mortgage-backed CDOs were a disaster in 2007 because

SIVs raise funds by ______ and then use the proceeds to ______.

A CDS is a

SIVs are

The invoice price of a bond that a buyer would pay is equal to

You have just purchased a 12-year zero-coupon bond with a yield to maturity of 9% and a par value of $1,000. What would your rate of return at the end of the year be if you sell the bond? Assume the yield to maturity on the bond is 10% at the time you sell.

A coupon bond that pays interest annually has a par value of $1,000, matures in eight years, and has a yield to maturity of 9%. The intrinsic value of the bond today will be ______ if the coupon rate is 6%.

Which of the following is not a type of international bond?

Which one of the following statements about convertibles is true?

A bond will sell at a discount when

A 10% coupon bond maturing in 10 years that requires annual payments is expected to make all coupon payments but to pay only 50% of par value at maturity. What is the expected yield on this bond if the bond is purchased for $975?

One year ago, you purchased a newly-issued TIPS bond that has a 6% coupon rate, five years to maturity, and a par value of $1,000. The average inflation rate over the year was 4.2%. What is the amount of the coupon payment you will receive, and what is the current face value of the bond?

Floating-rate bonds are designed to ___________, while convertible bonds are designed to __________.

A coupon bond that pays interest annually has a par value of $1,000, matures in seven years, and has a yield to maturity of 9.3%. The intrinsic value of the bond today will be ______ if the coupon rate is 8.5%.

If a 7.5% coupon bond that pays interest every 182 days paid interest 62 days ago, the accrued interest would be

Most corporate bonds are traded

The ______ is a measure of the average rate of return an investor will earn if the investor buys the bond now and holds until maturity.

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

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

The Term Structure of Interest Rates

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

Filters

SIVs raise funds by and then use the proceeds to .

Floating-rate bonds are designed to _, while convertible bonds are designed to .