1.Which of the following statements about risks associated with investing in bonds is FALSE?

Select one:

A. Credit risk is the likelihood that an investor will be unable to sell the security quickly and at a fair price

B. Default risk is the risk of the bond issuer being defaulted to fulfill the bond payment obligation to bondholders.

C. Inflation risk arises from the decline in value of a securitys cash flows due to inflation, which is measured in terms of purchasing power.

D. Reinvestment risk is the risk of having to reinvest the proceeds available for reinvestment at a lower interest rate than the instrument that generated the proceeds.

E. Interest rate risk is the risk that a bondholder faces if the price of a bond held in a portfolio will decline due to rising market interest rates.

2. A 20-year maturity bond pays interest of $90 once per year and has a face value of $1,000. Its yield to maturity is 10%. Over the upcoming year, you expect interest rates to decline and that the yield to maturity on this bond will only be 8% a year from now. Using realized compound yield (RCY) analysis, the return you expect to earn by holding this bond over the upcoming year is _________.

Select one:

A. 21.6%

B. 29.6%

C. 10.0%

D. 31.12%

E. 12.0%

3.Which of the following theories of the term structure is (are) able to explain the fact that interest rates on bonds of different maturities tend to move together over time?

Select one:

A. The expectations theory

B. The segmented markets theory

C. The liquidity premium theory

D. Both (A) and (B) of the above

E. Both (A) and (C) of the above

4.

This question consists of an assertion and a reason.

ASSERTION Asset default risk does not contribute to interest rate risk.

BECAUSE

REASON An asset default results in the loss of all future cash flows.

Select one:

A. If the assertion is a true statement, but the reason is a false statement.

B. If both the assertion and the reason are true statements, but the reason is NOT a correct explanation of the assertion.

C. If both the assertion and the reason are true statements, and the reason is a correct explanation of the assertion.

D. If both the assertion and the reason are false statements.

E. If the assertion is a false statement, but the reason is a true statement.

5. Which of the following durations most closely matches that of a bond quoted at 98:16, whose value falls to 95:29 if interest rates rise by 75bps?

[Note: 98:16 = 98(16/32); 95:29=95(29/32))

Select one:

A. 3.0

B. 4.5

C. 3.5

D. 5.0

E. 4.0

6.

A US Treasury bill has 75 days to maturity and is currently trading at a price of $99.252 (for a par of $100). Day count convention is Act/360. What is the discount rate on this bill?

Select one:

A. 4.59%

B. 0.75%

C. 2.60%

D. 3.60%

E. 1.75%

7. A highly liquid, 10 year, 6.5% semiannual coupon, AAA rated corporate bond callable at 101% after 2 years. Assume the bond was issued today. During the first year, an investor would be least concerned with

Select one:

A. Interest rate risk

8.

Convexity implies that duration predictions _______.

I. underestimate the % increase in bond price when the yield falls

II. underestimate the % decrease in bond price when the yield rises

III. overestimates the % increase in bond price when the yield falls

IV. overestimates the % decrease in bond price when the yield rises

Select one:

A. I and III only

B. II and IV only

C. I and IV only

D. II and III only

E. None of the above

B. Prepayment risk

C. Reinvestment risk

D. Liquidity risk

E. Credit risk