Question: You are currently holding a bond with a duration of 5. Which of the following statements is true?
Select an Answer: If rates decline 100 basis points, the market value of the bond will increase exactly 2.5%.
If rates decline 100 basis points, the market value of the bond will decrease exactly 2.5%.
If rates decline 100 basis points, the market value of the bond will decrease exactly 5%. If rates decline 100 basis points, the market value of the bond will increase exactly 5%. If rates decline 100 basis points, the market value of the bond will decrease approximately 5%. If rates decline 100 basis points, the market value of the bond will increase approximately 5%.
Rationale:
Duration is an estimate of the percentage price change of a bond for a 100 basis point change in interest rates. A duration of 5 means that for every 100 basis point change in rates, we will estimate the price of the bonds will change in the opposite direction by 5%.
2024-04-18
Question: Assume that a bond has a market value of $1,097.71. This value is the full or "dirty" price. It is an investment grade security with a coupon rate of 8%, paid semi-annually. Currently, you are 100 days into this bond's 182-day coupon period.
Calculate the clean price of this bond.
Select an Answer: $1,075.73 $1,051.42 $1,000 $1,080 $1,040
Rationale:
The clean price of the bond is simply the total (or "dirty" price), less accrued interest.
Since you are currently 100 days into a 182-day coupon period, 54.9% of the $40 interest payment has accrued and is owed to the seller.
Thus, .549 × 40 = $21.98 is deducted from the full price to determine the actual bond value to the buyer.
The clean price = $1,097.71 − $21.98 = $1,075.73.
2024-04-17
Question: You are considering the purchase of a callable bond and have completed a complete analysis of the instrument. During the analysis you have noticed something of interest. When starting at relatively high yield levels, if you change the yield by 100 basis points both up and down, the price appreciation is more than the price decline.
Rationale:
If the price appreciation is greater than the price decline for a change in yield of 100 basis points (both up and down), the bond is said to exhibit positive convexity. If the price decline is more than the price appreciation, the bond is said to exhibit negative convexity. Callable bonds tend to be negatively convex at low yield levels and may exhibit positive convexity at relatively high yield levels.
2024-04-16
Question: Which of the following can serve as the best explanation of why a corporate code of ethics should contain provisions on related party transactions?
Select an Answer: Related party transactions can create an inherent conflict of interest for the board members or senior executives. Related party transactions should be disclosed to the public, whatever the size of such a transaction; therefore, a corporate code should include provisions for related party transactions disclosure. Related party transactions are illegal since they violate SEC regulation. Related party transactions increase the company's financial leverage, and therefore should be closely monitored by the board.
Rationale:
Related party transactions involve buying, selling, and other transactions with board members, executives, partners, employees, family members, and so on. They are not illegal or necessarily a violation of any kind. Current accounting and auditing standards require the disclosure of these transactions (only if material), but no more. Board members and executive officers have a fiduciary duty to the company, and are supposed to make independent decisions. Receiving personal benefits from the company can create an inherent conflict of interest. Therefore, the company's ethical code should limit the circumstances in which insiders can accept remuneration from the company for consulting or other services outside of the scope of their positions.
When board members or executive officers have loaned, leased, or otherwise provided property or equipment to the company, this may increase the company's leverage. However, related party transactions do not always increase leverage. For example, receiving consultancy fees for work performed on behalf of the company or receiving finders' fees for bringing merger, acquisition, or sales partners to the company's attention does not create any leverage.
2024-04-15
Question: Calculate the accrued interest of a $1,000, 8% coupon bond.
Assume that the bond's interest payments are made semi-annually and that it has been rated as an investment grade security by the major rating services.
You are currently 45 days into a 182-day coupon period.
Select an Answer: $80.00 $40.00 $19.78 $14.36 $26.73 $30.11
$9.89
Rationale:
Since you are currently 45 days into a 182-day coupon period, 24.7% of the interest payment has accrued up until this point. The semi-annual interest payment is $40. Thus .247 × 40 = $9.89.
Accrued interest is the coupon amount earned by the seller between the last coupon date and the settlement date. The buyer must compensate the seller for this amount. In this case, the bond rating was irrelevant to the calculation.
