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MBA 641 Fixed Income Securities Exam 2 Chapters 5, 6, 7, 8, 9 Directions: Answer the following questions and submit your answers to the Dropbox by midnight Sunday CT. Part I. Short Questions: please organize your answer so that it is short but to the point. Organization will count! 1) Identify or define each of the following terms (each is worth 5 points, 15 points total). a) The difference between noncallable and nonrefundable bonds b) Why would an investor prefer a TIPS which offers a lower coupon rate over a comparable T-note with a higher coupon rate? c) What is the advantage of purchasing a STRIPS over a Treasury note? Part II. Numerical Problems: you are required to show steps/formulas/solutions to obtain credit. That is, I need to be able to follow how you get the answer; you cannot simply tell me that the answer is generated by computer. 2) Following are U.S. Treasury benchmarks available on December 31, 2007: (15 points) Issue US/T 3.125 11/30/2009 US/T 3.375 11/30/2012 US/T 4.25 11/15/2017 US/T 4.75 02/15/20377 Yield (%) 3.218 3.616 4.201 4.619 On the same day, the following trades were executed: Issuer General Elect. Capital Corp. EI Du Pont De Nemours & Co. The Coca-Cola Company Issue GE 4.125 09/01/2009 DD 5 01/15/2013 KO 5.35 11/15/2017 Yield (%) 4.008 4.843 5.020 Based on the above, complete the following table: Issue GE 4.125 09/01/2009 DD 5 01/15/2013 KO 5.35 11/15/2017 Yield (%) 4.008 4.843 5.020 Treasury Benchmark Benchmark Spread (bps) Relative Yield Yield Ratio Spread 3) You observe the yields of the following Treasury securities (all yields are shown on a bond-equivalent basis): All the securities maturing from 1.5 years on are selling at par. The 0.5 and 1.0-year securities are zero-coupon instruments. Answer the below questions. (10 points) Year (Period) Yield to Maturity (%) Spot Rate (%) 0.5 2% 2% 1.0 1.5 2.0 2.5% 3% 3.5% 2.5% ? ? Calculate the missing spot rates. 4) Suppose that the one-year spot rate of interest at time 0 is 8% and the two-year spot rate is 8.50%. What is the one-year forward rate for year 2? (5 points) . 5) A Treasury bond has a face value of $30,000 and a quoted price of 102.18. What is the bond's dollar price? (5 points)