• 1.74%%
• 3.36%
• 4.51%
• 7.16%

• 1. Given a 10-year time horizon, the reinvestment rate risk is LOWEST for a:
• a) 4-year, 5% coupon bond
• b) 8-year, 8% coupon bond
• c) 5-year, zero-coupon bond
• d)9-year,zero-couponbond

2. If the nominal yield spread is computed as the difference in the yield-to-maturity of callable corporate bond less the yield-to-maturity of a comparable maturity treasury bond, the nominal spread will:

• a) Overstate the attractiveness of the corporate bond
• b) Understate the attractiveness of the corporate bond
• c) Be less than the bonds option adjusted spread (OAS)
• d)Beusefulasameasureofthebondsattractivenessversusothercallablecorporatebonds.

3.)Based upon the table, calculate the forward rate for a 2-year bond, 3 years from now ( assuming annual compounding)

MATURIY	YTM	SPOT RATE
1 YEAR	3.0%	3.0%
2 YEAR	4.0%	4.1%
3 YEAR	5.0%	5.1%
4 YEAR	4.5%	4.4%
5 YEAR	4.0%	4.4%

a) 1.74%

b) 3.36%

c) 4.51%

d) 7.16%

4.)According to liquidity preference theory, which of the following statements is FALSE?

• a) All else equal, investors prefer short-term securities over long-term securities
• b) Long-term rates should be higher than short-term rates because of the added risks
• c) Investors perceive little risk differential between short-term and long-term securities
• d)Borrowerswillpayapremiumforlong-termfundstoavoidhavingtorollovershort-termdebt

5.)For the YTM to equal to actual compound return an investor realizes on an investment in a coupon bond, we must assume all of the following EXCEPT:

• a) Cash flows will be paid as promised
• b) The bond will not be sold at a capital loss
• c) Cash flows will be reinvested at the YTM rate
• d)Thebondwillbehelduntilmaturity

6.)What is the relative yield credit spread of a 10-year Treasury bond with a yield-to-maturity of 5.35% and a 10-year AAA corporate bond with a yield-to-maturity of 5.70%?

• a) 0.0654
• b) 0.0035
• c) 0.1105
• d)0.0614

8.)A trader wants to duration-neutral position in US Treasury 2-year and 10-year notes. The trader wants a long position in the 2-year note (DV01 = 187.70) and short position in the 10-year note (DV01 = 812.84). How much worth of 10-year notes should the trader position if the 2-year note value is set at $50MM

• a) $ 11. 35
• b) - $ 11.55
• c) $ 216.53
• d)-$216.53

9.)Which of the following is TRUE with US Treasury auctions?

• a) Uniform price auction appears to have higher bid-cover ratio and a lower dispersion of winning bids
• b) Bidders face quantity uncertainty in both the uniform and discriminatory price auctions
• c) The US treasury makes an equivalent allocation for bidders at the stop-out yield
• d)Bidderscannotdiversifytheirbids

10.)Which statement is TRUE according to pure expectations theory of yield curve shape?

• a) Lower inflation expectations result in a flat yield curve
• b) Higher inflation expectations result in a flat yield curve
• c) Lower short-term inflation expectations result in a humped yield curve
• d)Highershort-terminflationfollowedbylowerlong-terminflationresultsinahumpedyieldcurve

11.)If a trader expects a flatter yield curve, he/she expects to profit from the move by going __ short-end bonds and going ___ long-end bonds.

• a) Long, short
• b) Long, long
• c) Short, long
• d) Short, short