1

1. Three bonds were issued by the same company about four years ago.The three bonds have similar maturities and coupons.Bond A is callable, Bond B is putable, and Bond C is option-free.

Statement 1:If interest rates decline, Bonds B and C will have a higher market price than Bond A.

Statement 2:If interest rates increase, Bonds A and C will have a higher market price than Bond B.

1. Both statements are correct.
2. Both statements are not correct.
3. Only statement 1 is correct.
4. Only statement 2 is correct.

2 points

QUESTION 2

You have one-year, three-year, and four-year spot rates.Which of the following forward rates cannot be computed from this information.

1. Three-year loan beginning in one year
2. Two-year loan beginning in two years
3. Two-year loan beginning in one year
4. One-year loan beginning in three years

2 points

QUESTION 3

Are these statements correct?

Statement1:The segmented market theory assumes that bond market participants are limited to purchase maturities that match the timing of their liabilities.

Statement2:The preferred habitat theory assumes that bond market participants have a preferred maturity for asset purchases, but may deviate from it if they feel returns in other maturities offer sufficient compensation for leaving their preferred habitat segment.

1. Both statements are correct.
2. Both statements are not correct.
3. Only statement 1 is correct.
4. Only statement 2 is correct.

2 points

QUESTION 4

The spot price of a three year zero coupon bond is 0.8950 and the forward price of a one-year zero-coupon bond beginning in three years is 0.9350.What is the four-year spot rate?

1. 7.21%
2. 6.37%
3. 5.43%
4. 4.55%

2 points

QUESTION 5

Assume the location and shape of the yield curve is not expected to change."Riding the yield curve" will be a profitable strategy if the yield curve is:

1. positively sloped.
2. negatively sloped.
3. flat.

2 points

QUESTION 6

The two-year spot rate is 4% and the four-year spot rate is 5%.You can buy a two-year zero coupon bond or a four-year zero coupon bond.Which bond will have the highest return over the first year?

1. The two-year zero.
2. The four-year zero.
3. Both zeros have the same return over the first year.

2 points

QUESTION 7

Consider the following interest rates on four zero-coupon bonds.Maturity (years)Spot rate16.0%26.5%37.0%47.5%

1. What is the forward rate for a two-year loan beginning one year from now?
2. 6.75%
3. 6.50%
4. 7.5%
5. 7.75%

2 points

QUESTION 8

If a bond is callable, what is the likely impact on the Z-spread?

1. Z-spread is smaller.
2. Z-spread is larger.
3. No effect on the Z-spread.

2 points

QUESTION 9

In a typical interest rate swap contract, the swap rate is best described as the interest rate for the:

1. fixed-rate leg of the swap.
2. floating-rate leg of the swap.
3. difference between the fixed and float legs of the swap.

2 points

QUESTION 10

Are these statements correct?

Statement1:The yield to maturity of a coupon bond is the expected rate of return on a bond if the bond is held to maturity, there is no default, and the bond and all coupons are reinvested at the original yield to maturity.

Statement2:Treasury curves and swap curves can differ because of differences in their credit exposures, liquidity, and other supply/demand factors.

1. Both statements are correct.
2. Both statements are not correct.
3. Only statement 1 is correct.
4. Only statement 2 is correct.