Question 51 of 71 The treasury yield curve is usually (but not always) ... · fla

Question

Question 51 of 71

The treasury yield curve is usually (but not always) ...

·      flat.

·      upward sloping.

·      downward sloping.

·      humped up.

·      humped down.

Question 52 of 71

You’re considering investing in a 2-year 7% annual coupon bond priced at par. Alternatively, you’ll consider a 1-year 5% annual coupon bond priced at par and subsequently reinvesting all your proceeds in another identical 1-year bond. You expect the 1-year bond will yield 9% next year. Assuming you turn out to be right, which approach would generate the higher return?

·      Invest in the 2-year bond.

·      Invest in the 1-year and reinvest the proceeds in another 1-year.

Question 53 of 71

The Federal Reserve directly controls ...

·      the discount rate.

·      the federal funds rate.

·      the marginal rate.

·      the Prime rate.

·      the US Treasury rate.

Question 54 of 71

During a recession, monetary policy typically has an immediate impact via ...

·      an increase of long term interest rates.

·      a reduction of long term interest rates.

·      an increase of short term interest rates.

·      a reduction of short term interest rates.

·      a reduction of inflation expectations.

Question 55 of 71

An inverted yield curve is often ...

·      is often due to an economic recession.

·      is often a predictor of economic growth.

·      is often a harbinger of economic recession.

·      often occurs at the trough of the business cycle.

·      is more likely to occur at near-0 interest rate environments.

Question 56 of 71

The economy is currently in a strong expansion but there have been signs of inflation. After a Fed meeting, investors now expect that the central bank will raise short term rates soon and are confident that the central bank will be successful in holding off inflation. In such a scenario, which shift in the yield curve might you expect ...

·      a parallel shift up.

·      a parallel shift down.

·      a clockwise twist.

·      a counter clockwise twist.

Question 57 of 71

A 2-year semi-annual T-Note has been stripped into 4 0-coupon bonds with the following observed market prices. Calculate the 24-month spot rate.

Term

Price

6 month

97

12 month

94

18 month

91

24 month

88

·      13.64%

·      6.82%

·      6.49%

·      6.60%

·      3.25%

Question 58 of 71

Using the following spot rates for the following 4 strips of a 2-year semi-annual 3% coupon T-Note, what would you expect the YTM of this bond to be?

Term

Spot Rate

6 month

6.19%

12 month

8.51%

18 month

9.50%

24 month

9.54%

·      4.76%

·      8.94%

·      8.32%

·      9.52%

·      14.63%

Question 59 of 71

Using the following spot rates for the following 4 strips of a 2-year semi-annual 3% coupon T-Note, if the 2-year T-note was priced at 80, which of the statements below is most accurate:

Term

Spot Rate

6 month

6.19%

12 month

8.51%

18 month

9.50%

24 month

9.54%

·      The T-note is correctly priced and there is no arbitrage opportunity.

·      You buy the T-note and simultaneously sell the strips for a risk free arbitrage profit of 8.38.

·      You buy the strips and simultaneously sell the T-note for a risk free arbitrage profit of 8.38.

·      You buy the T-note and simultaneously sell the strips for a risk free arbitrage profit of 13.77.

·      You buy the strips and simultaneously sell the T-note for a risk free arbitrage profit of 13.77.

Question 60 of 71

You observe the treasury spot rates below. You are considering investing in either a 3-year 10% semi-annual coupon T-Note or a 3-year, 3% semi-annual coupon T-Note. Both are otherwise identical and both offer a YTM of 12.00%. Which is the best course of action?

Term

Spot Rate

6 month

6.19%

12 month

8.51%

18 month

9.50%

24 month

9.54%

30 month

11.28%

36 month

12.25%

·      You should be indifferent between the two T-Notes.

·      You should prefer to invest in the 10% T-Note over the 3% T-Note.

·      You should prefer to invest in the 3% T-Note over the 10% T-Note.

·      Do not invest in either bond — they are both rich.

Question 61 of 71

You are interested in valuing a 2-year semi-annual corporate coupon bond using spot rates but there are no liquid strips available. However, you do find the following 4 comparable semi-annual bonds (below) maturing over the next 2 years. What is the 6-month spot rate?

Time remaining to maturity

Coupon

Bond price

6 months

0.000%

99.000

1 year

1.250%

98.000

18 months

1.500%

97.000

2 years

1.250%

96.000

·      1.000%

·      1.010%

·      2.000%

·      2.020%

·      2.030%

Question 62 of 71

You are interested in valuing a 2-year semi-annual corporate coupon bond using spot rates but there are no liquid strips available. However, you do find the following 4 comparable semi-annual bonds (below) maturing over the next 2 years. Using the bootstrap approach, calculate the 12-month spot rate.

Time remaining to maturity

Coupon

Bond price

6 months

0.000%

99.000

1 year

1.250%

98.000

18 months

1.500%

97.000

2 years

1.250%

96.000

·      1.652%

·      2.041%

·      3.300%

·      3.304%

·      4.082%

Question 63 of 71

You are interested in valuing a 2-year semi-annual corporate coupon bond using spot rates but there are no liquid strips available. However, you do find the following 4 comparable semi-annual bonds (below) maturing over the next 2 years. Use the bootstrapping approach to calculate the 18-month spot rate.

Time remaining to maturity

Coupon

Bond price

6 months

0.000%

99.000

1 year

1.250%

98.000

18 months

1.500%

97.000

2 years

1.250%

96.000

·      1.789%

·      3.093%

·      3.105%

·      3.572%

·      3.577%

Question 64 of 71

You are interested in valuing a 2-year semi-annual corporate coupon bond using spot rates but there are no liquid strips available. However, you do find the following 4 comparable semi-annual bonds (below) maturing over the next 2 years. Use the bootstrapping approach to calculate the 24-month spot rate.

Time remaining to maturity

Coupon

Bond price

6 months

0.000%

99.000

1 year

1.250%

98.000

18 months

1.500%

97.000

2 years

1.250%

96.000

·      1.668%

·      3.335%

·      4.167%

·      4.189%

·      4.204%

Question 65 of 71

What is the yield spread on a 5-year, 5% semi-annual coupon bond with priced at 97 while the same maturity benchmark treasury bond is a 2% semi-annual coupon treasury bond priced at 101?

·      4.50%

·      3.91%

·      3.74%

·      1.95%

·      7.49%

Question 66 of 71

A 3-year 5% semi annual coupon bond is priced at 103. Based on the following treasury spot rates, what is the Z-spread?

Term

Spot Rate

6 month

2.020%

12 month

3.304%

18 month

3.577%

24 month

3.335%

30 month

1.230%

36 month

1.305%

·      260bps

·      255bps

·      250bps

·      245bps

·      240bps

Question 67 of 71

A callable bond has an option adjusted spread (OAS) of 130bps, a z-spread of 180, and a yield spread of 185bps. If you believe the bond is accurately priced, which of the following statements is most accurate?

·      Investors are getting 50bps of compensation for call risk.

·      Investors are getting 55bps of compensation for call risk.

·      The issuer is getting 50bps of compensation for call risk.

·      The issuer is getting 55bps of compensation for call risk.

Question 68 of 71

You believe that 6 months from now, the 12-month treasury spot rate will be 7%. You believe that 1 year from now, the 6-month treasury spot rate will be 6.00%. Given the treasury spot rates below, which of the following strategies would generate the highest return?

Term

Spot Rate

6-month

4.00%

12-month

4.20%

18-month

4.50%

24-month

4.90%

30-month

5.40%

36-month

5.70%

42-month

6.00%

48-month

6.40%

·      Invest in an 18-month treasury.

·      Invest in a 12-month treasury, at maturity reinvest proceeds in a 6-month treasury.

·      Invest in a 6 month treasury, at maturity reinvest proceeds in a 12-month treasury.

·      You are indifferent between all 3 strategies.

Question 69 of 71

You believe that 6 months from now, the 12-month treasury spot rate will be 7.00%. You believe that 1 year from now, the 6-month treasury spot rate will be 6.00%. You believe that 18 months from now, the 6-month treasury spot rate will be 5%. Given the treasury spot rates below, which of the following strategies would generate the highest return?

Term

Spot Rate

6-month

4.00%

12-month

4.20%

18-month

4.50%

24-month

4.90%

30-month

5.40%

36-month

5.70%

42-month

6.00%

48-month

6.40%

·      Invest in an 18-month treasury.

·      Invest in a 12-month treasury, at maturity reinvest proceeds in a 6-month treasury.

·      Invest in a 6 -month treasury, at maturity reinvest proceeds in a 12-month treasury.

·      Invest in a 24-month treasury but sell 6-month prior to maturity.

·      You are indifferent between all 3 strategies.

Question 70 of 71

Given the spot rates below, calculate the 6-month forward rate 6 months from now (f 1,2) .

Term

Spot Rate

6-month

4.00%

12-month

4.20%

18-month

4.50%

24-month

4.90%

30-month

5.40%

36-month

5.70%

42-month

6.00%

48-month

6.40%

·      4.34%

·      4.40%

·      4.75%

·      5.10%

·      5.75%

Question 71 of 71

Given the spot rates below, calculate the 1-year forward rate 6 months from now (f1,3).

Term

Spot Rate

6-month

4.00%

12-month

4.20%

18-month

4.50%

24-month

4.90%

30-month

5.40%

36-month

5.70%

42-month

6.00%

48-month

6.40%

·      4.34%

·      4.40%

·      4.75%

·      5.10%

·      5.75%

Term

Price

6 month

97

12 month

94

18 month

91

24 month

88

Explanation / Answer

A 51

The treasury yield curve is usually upward sloping which indicates the expectation of higher intrest rates in the future. In normal conditions, the yield curve is upward sloping. It follows liquidity preference theory which suggests that investors are holding longer term securities. In this, investors expect future short term rates to be higher than current short term rates. When curve is upward sloping it means yield increases as maturities increases.

A. 53

The federal reserve directly controls the federal funds rate. It is the rate at which banks lend their money deposited at the federal reserve to each other. It is also known as overnite rate. The federal reserve uses the fed funds rate as a measure to control the economic growth and money supply. The federal reserve actually controls only two rates - one is the federal funds rate and the second is the discount rate. The federal discount rate is the rate at which banks can borrow directly from the federal reserve.

A. 54

During a recession, monetary policy has an immediate impact via a reduction of inflation expectations. During recession it will lower intrest rates and increase money supply.

A. 55

An inverted yield curve is often due to an economic recession. It is considered to be a predictor of economic recession. The curve is inverted when intrest rates on short term rate loans are higher than on long tern loans. It is an indicator of recession.

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.