QUESTION 1

For the price of a Treasury coupon bond, which of the following are TRUE?

Check all that apply:

A. To find market price, treasury spot rates should be used

B. When market price equals fair price, YTM is a complex average of treasury spot rates

C. To find fair price, YTM should be used

D. Supply and demand determines the fair price

E. Supply and demand determines the market price

QUESTION 2

Bond X and Bond Y were issued at a premium to par value three years ago. Bond X matures in five years, and Bond Y matures in ten years. Both bonds carry the same credit rating. Bond X has a coupon of 7.25%, and Bond Y has a coupon of 8.00%. If the yield to maturity for both bonds is 7.60% today:

Check all that apply:

A. Compared to three years ago, YTM today goes up for Bond Y

B. both bonds are priced at a premium

C. Compared to three years ago, price for Bond Y goes up

D. Compared to three years ago, YTMs today go up for both Bond X and Bond Y

E. Bond X is priced at a premium, and Bond Y is priced at a discount

F. Compared to three years ago, YTM today goes up for Bond X

G. Bond X is priced at a discount, and Bond Y is priced at a premium

H. Compared to three years ago, price for Bond X goes down

QUESTION 3

Fixed-income arbitrage is to seek mispriced Treasury coupon bonds, through a set of linear equations in the following framework:

P1 = C1P0,1+C1P0,2+...+(C1+F)P0,T

P1 = C1P0,1+C1P0,2+...+(C1+F)P0,T

P2 = C2P0,1+C2P0,2+...+(C2+F)P0,T

P2 = C2P0,1+C2P0,2+...+(C2+F)P0,T

...

Pn = CnP0,1+CnP0,2+...+(Cn+F)P0,T

Part1

What areP1,P2, ... ,Pn?

A. current prices of treasury coupon bonds observed in the market

B. fair prices of treasury coupon bonds at the time

C. fair prices of the STRIPS

D. current prices of treasury STRIPS observed in the market

Part2

What doP0,1,P0,2, ... ,P0,Tdenote? Select the most accurate one

A. fair prices of treasury coupon bonds standardized for $1 face value

B. 1-year STRIPS, 2-year STRIPS, ... T-year STRIPS

C. current market prices of all STRIPS standardized for $1 face value

D. current market prices of all treasury coupon bonds standardized for $1 face value

Part3

About the framework of linear equations, which statements are true?

Check all that apply:

A. Because the total number of Treasury Notes and Bonds is a lot greater than total number of STRIPS, not all equations can hold

B. Not all equations can hold, because market anomaly and market disruption happens from time to time

C. On the left-hand side of the equations are fair value of the coupon bonds, and right hand side are market value of the coupon bonds

D. Because there are over 200 Treasury Notes and Bonds trading everyday, but only 30~60 STRIPS, not all equations can hold

E. Not all equations can hold, because the market is not always efficient

F. Because the number of equationnis a lot greater thanT, not alln equations can hold

QUESTION 4

A Treasury coupon bond has 5-year to maturity with a face value of $1,000 and a current market price of $946.58. The bonds pay coupon annually and have a yield to maturity of 4 percent. Jake, a bond speculator, just purchased the bond at the current market price.

Part1

What is the coupon rate?

Part2

Jake is not happy with the 4% YTM, he wants to earn higher rate of return. He anticipates to hold the bond for only one year and earn 6% in that year. His strategy is to cash in the first coupon at the end of the first year and then sell the bond right away. What market price should he predict in one year's time?

Part3

What will be the YTM in one year if his prediction is accurate?

Part4

What will be the market price in one year if the YTM stays at 4%?