Question: Assume that you hold a portfolio of bonds as follows:
$4,000,000 of 5-year bonds with a duration of 3.861 priced at 100 (par)
$5,000,000 par value of 10-year bonds with a duration of 8.047 priced at 84.6275
$1,000,000 par value of 30-year bonds with a duration of 9.168 priced at 137.8586
The duration of this portfolio is 6.4655, which is the weighted average duration of the component bonds. Assume that the yield for each of these bonds decreases by 10 basis points.
Estimate the new market value for the portfolio.
Select an Answer: The market value will decrease by approximately .64655%. The market value will decrease by approximately 6.4655%. The market value will decrease by approximately 21.076%.
The market value will increase by approximately .64655%. The market value will increase by approximately 6.4655%. The market value will increase by approximately 21.076%.
Rationale:
Duration may be used to estimate the change in market value for every 100 basis point change in yield.
Since the yields in this case go down by 10 basis points, we know that the market value of the portfolio must increase by approximately .64655%.
2024-04-25
Question: Joe Zheng has held a twenty-year mortgage loan with Northern Trent Bank for the last ten years. During the last month, Mr. Zheng has become the recipient of a significant inheritance due to the death of his brother, James Zheng. Using funds acquired from the inheritance, Joe decides to pay off the entire balance of his mortgage with Northern Trent Bank, a full ten years before the loan is due to be repaid.
Which of the following best characterizes the action taken by Joe Zheng?
Select an Answer: prepayment net interest curtailment unscheduled principal repayment
Rationale:
The action taken by Mr. Zheng is best characterized as a prepayment. Rarely will there exist a penalty for prepayment of a mortgage balance, and mortgage holders commonly pay in excess of their required monthly payment.
When the payment is for less than the outstanding mortgage balance, it is characterized as a "curtailment."
When a mortgage holder pays off the outstanding balance of her mortgage prior to the maturity date of the loan, the mortgage holder is said to be involved in a "prepayment."
"Net interest" describes the interest rate that an investor in a mortgage-backed security receives.
Finally, while intuitively appealing, "unscheduled principal repayment" does not represent the best possible answer.
2024-04-24
Question: A bond selling at $1,100, with a principal of $1,000 and a coupon rate of 7% will pay annual interest of ________.
Select an Answer: $77 $0 $70 $100
Rationale:
Annual interest is simply the principal amount times the coupon rate.
2024-04-23
Question: Microscam International, a large software developer based in the United States, has recently issued a new series of debt securities in Japan. These debt securities feature a 20-year term, a 7.875% coupon rate, and are callable at par in 2009. Additionally, the cash flows of these bonds are denominated entirely in Japanese Yen. (Assume these securities are registered with the government of Japan and trade almost exclusively within Japan.)
Which of the following best characterizes this debt issue?
Select an Answer: Eurobond, Yankee bond Foreign bond, Yakuza bond Foreign bond, Samurai bond Foreign bond, Yankee bond Eurobond, Yakuza bond
Rationale:
The bonds profiled in this example are best classified as "foreign bonds" and "Samurai bonds." Foreign bonds are classified as debt securities that are issued by a non-native issuer. For example, bonds issued in the United Kingdom by Sony (a Japanese company) would be classified as foreign bonds, just as would a series of bonds issued in the Netherlands by Dell Computer (a U.S. company). In addition to being classified as foreign bonds, the debt securities profiled in this example can also be described as Samurai bonds. Foreign bonds are given special names according to where they are issued. For example, foreign bonds in the Netherlands are called Rembrandt bonds and foreign bonds issued in the United Kingdom are called Bulldog bonds.
Eurobonds are issued outside of the jurisdiction of any single country, and as such are largely unregulated. Further, Eurobonds are typically issued by an international syndicate and are "unregistered." (While said to be unregistered, most Eurobonds are registered with a national stock exchange, the most common of which being the London, Zurich, and Luxembourg exchanges. The reasoning behind this registration is to circumvent many restrictions placed on institutional investors, who are commonly prohibited from investing in unregistered securities). Eurobonds are named according to the currency in which they are denominated. For example, Eurobonds denominated in Japanese Yen are classified as Euroyen bonds and Eurobonds issued in the United States are classified as Eurodollar bonds.
2024-04-22
Question: Calculate the current yield for a 7%, 8-year bond whose price is $94.17.
Select an Answer: 3.72% 3.5% 7.43% 8.00%
7.00% 7.72%
Rationale:
The current yield relates the annual dollar coupon interest to the market price. In this case, current yield = 7 / 94.17 = 7.43%. The current yield will be greater than the coupon rate when the bond sells at a discount; the reverse is true for a bond selling at a premium. For a bond selling at par, the current yield will be equal to the coupon rate.
