Please show work for calculations! Finance hwk

1. If one-period forward rates are decreasing with maturity, the yield curve is most likely

a. Flat

b. Upward sloping

c. Downward sloping

d. A tight spiral out to infinity.

2. Bond dealers most often quote

a. Full prices

b. Flat prices

c. Full price plus accrued interest

3. Spot rates can be calculated as geometric averages of implied forward rates.

a. True

b. False

4. A bond with two years remaining until maturity offers a 3% coupon with interest paid annually. At a market discount rate of 4%, the price of this bond per $100 of par value is closest to:

a. 95

b. 95.11

c. 105.15

d. 107.29

5. If the six month spot rate is 4% and the one-year spot rate is 4.4%, what is the six month forward six months hence:

a. 4%

b. 4.2%

c. 4.4%

d. 4.6%

e. 4.8%

f. 5.0%

6. The reinvestment rate risk of a bond is

a.the risk that interest rates will fall and the bonds coupon payments will be reinvested at these lower rates.

b.the risk that the issuer will not make all the contractual payments of interest and principal as scheduled.

c.the risk that the bond will be called by the issuer.

d.the unique risk caused by a factor unique to the bond.

e.all of these statements are true.

7. Consider a 10-year bond with a 8% coupon that has a yield to maturity of 9%. If interest rates remain constant and the yield to maturity does not change, one year from now the price of this bond will be..

a. higher

b. lower

c. the same

d. zero

8. If a floater is priced at a premium above par value, the quoted margin is greater than the discount margin.

a. True

b. False

8. When issuing debt , a company may use a sinking fund as a means of reducing:

a. Interest rate risk

b. Credit risk

c. Inflation risk

d. Reinvestment rate risk

1. What is the Z-spread? How is it calculated? What is the difference between the z-spread and the nominal spread? Discuss.

2. Consider the following five hypothetical Treasury securities.

Maturity Yield to Maturity Price

0.50 3.25 -----

1.00 3.60 -----

1.50 3.90 100

2.00 3.95 100

2.50 4.40 100

Answer the following questions using these data.

a. What is the implied 1.5 spot rate obtained using bootstrapping?

b. Compare your answer is part (a) to the 1.5 year par rate and explain the difference.

c. Why do we use rates on implied zeros rather strip rates to construct the spot curve

3. The following question has two parts and pertains to the yield curve.

a. Suppose on February 6, 2007, the following information is available from the Treasury spot curve:

One-year spot rate = 5%

Two-year spot rate = 4.915%

What is the implied forward rate on a one-year zero coupon Treasury one year from now quoted on a bond-equivalent basis and how should this rate be interpreted?

b. What are three ways the yield curve changes or moves? How are these three changes correlated? Explain

4. Suppose that a U.S. Treasury note maturing February 15, 2009 is purchased with a settlement date of February 7, 2007. The coupon rate is 4.5% and the maturity value of the position is $1,000,000. The next coupon date is February 15, 2007.

a. What is the full price of this bond given the required yield is 4.877%? (Note there are 184 days in the coupon period and there are 8 days between the settlement date and the next coupon date.)

b. What is the accrued interest? (Note there are 176 days between the last coupon date and the settlement date.)

c. What is the clean or flat price?

5. We use no arbitrage to calculate implied forward rates from the spot curve. What does mean when we say that implied forward rates are breakeven rates? What do we use implied forward rates for? Are expectations of future interest rates the only factor that drives the yield curve? (10 points)