1.A 10 year bond pays no interest for three years, then pays USD 229.

25, followed by payments of USD

35 for seven years and additional USD 1000 at maturity. This is a:
a)Step-up bond
b)Zero coupon bond
c)Deferred-coupon bond
2.Consider a USD 1 Mio semi-annual pay, floating rate issue where the rate is reset on Jan. 1 and Jul. 1
each year. The reference rate is 6M Libor and the stated margin is + 1.25%. If 6M Libor is 6.5% on Jul. 1
what will be the next semi-annual coupon on this issue?
A)38,750
B)65,000
C)77,500
3. An investor paid a full price of USD 1,059.04 each for 100 bonds. The purchase was between coupon
dates, and accrued interest was USD 23.54 per bond. What was the bond clean price?
A.1000.00
B.1035.50
C.1082.58
4. Consider a USD 1 Mio par value, 10Y, 6.5% coupon bond issued on Jan. 1 2005. The bonds are
callable and there is a sinking fund provision. The market rate for similar bonds is currently 5.7%. The main
points of the prospectus are summarized as follows:
Call dates and prices:
2005 through 2009: 103
After Jan. 1, 2010: 102
The bonds are non-refundable
The sinking fund provision requires that the company redeem USD 0.1 Mio of the principal amount each
year. Bonds called under the terms of the sinking fund provision will be redeemed at par
The credit rating of the bonds is currently the same as at issuance
Questions
Using only the preceding information, an analyst should conclude that
A. The bonds do not have call protection
B. The bonds were issued and currently trade at a premium
C. Given current rates, the bonds will likely be called and new bonds issued
Questions
Which of the following statements about the sinking fund provisions for these bonds is most accurate?
A. An investor would benefit from having his bonds called under the provision of the sinking fund
B. An investor would receive a premium if the bond is redeemed prior to maturity under the provision
of the sinking fund
C. The bonds do not have an accelerated sinking fund provision
5. A bond with a 7.3% yield has a duration of 5.4 and is trading at $985. If the yield decreases to 7.1%,
the new bond price is closest to:
A.$974.40
B.$995.60
C.$1, 091.40

6. The current price of a bond is 102.50. If interest rates change by 0.5%, the value of the bond price
changes by 2.50. What is the duration of the bond?
A.2.44.
B.2.50.
C.4.88.
7. Which of the following bonds has the greatest interest rate risk?
A.5% 1 0-year callable bond
B.5% 1 0-year putablebond
C.5% 1 0-year option-free bond
8.A floating-rate security will have the greatest duration:
A.the day before the reset date.
B.the day after the reset date.
C.Never -floating-rate securities have a duration of zero
9. A straight 5% bond has two years remaining to maturity and is priced at $981.67. A callable bond that
is the same in every respect as the straight bond, except for the call feature, is priced at $917.60. With the
yield curve flat at 6%, what is the value of the embedded call option?
A.$45.80
B.$64.07
C.$101.00
10. Which of the following statements about the risks of bond investing is most accurate?
A.A bond rated AAA has no credit risk
B.A bond with call protection has volatility risk
C.A U.S. Treasury bond has no reinvestment risk
11. A Treasury security is quoted at 97-17 and has a par value of $ 100,000. Which of the following is its
quoted dollar price?
A.$97,170.00.
B.$97,531.25.
C.$100,000.00
12. An investor holds $100,000 (par value) worth of Treasury Inflation Protected Securities (TIPS) that
carry a 2.5% semiannual pay coupon. If t he annual inflation rate is 3%, what is the inflation-adjusted
principal value of the bond after six months?

13. A Treasury note (T-note) principal strip has six months remaining to maturity. How is its price likely
to compare to a 6-month Treasury bill (T-bill) that has just been issued? The T-note price should be:
A.lower
B.higher
C.the same

14. Under the pure expectations theory, an inverted yield curve is interpreted as evidence that:
a.demand for long-term bonds is falling
b.short-term rates are expected to fall in the future
c.investors have very little demand for liquidity
15. With respect to the term structure of interest rates, the market segmentation theory holds that:
-term borrowings could lead to an inverted yield curve
-term interest rates are the major determinants of the shape of
the yield curve

16. What is the equivalent of a money market yield of 6.00 percent in terms of a eurobondcoupon rate?
A: 6.0000%
B: 6.0833%
C: 5.9178%
D: 5.8750%
Correct answer
B: On a bond basis interest is payable for five days less in the year (360
divided by 360 rather than 365 divided by 360), therefore the equivalent
coupon rate must be higher. Through the formula it can be calculated as
6.0833 percent.
17. Which of the following rates represents the best yield?
A: Semi-annual money market yield of 4.50%
B: Semi-annual bond yield of 4.50%
C: Annual bond yield of 4.50%
D: Annual money market rate of 4.50%
18. A semi-annual CHF rate is 5 percent. What is the effective annual yield?
A: 4.939%
B: 4.945%
C: 5.0000%
D: 5.0625%
19.An annual DKK rate is 5 percent. What is the effective semi-annual yield?
A: 4.939%
B: 4.945%
C: 5.0000%
D: 5.0625%
20. Four banks in the international market quote you spot USD/JPY. Which is the best quote for you as a
buyer of JPY?
A: 121.49 53
B: 121.45 51
C: 121.50 57
D: 121.47 52
21. A client wants to sell CHF against GBP. The USD/CHF rate is 1.4915/20, the GBP/USD rate is
1.4628/33. What rate do you quote to the client?
A: 2.18 24
B: 2.18 32
C: 2.18 17
D: 2.18 47

22. USD/CHF is 1.52 50/55 and USD/JPY is 120.20/25. What price would you quote to a customer who
wishes to sell JPY against CHF?
A: 78.79
B: 78.82
C: 78.81
D: 78.85
23.USD/CHF is quoted 1.5005/15 and GBP/USD as 1.6120/30. At what rate could you buy GBP and sell
CHF?
A: 2.4188
B: 2.4203
C: 2.4219
D: 1.0742
24. Spot EUR/USD is quoted 0.9500 (mid point). If six months (180 days) USD interest rates are quoted
5.50 percent and same period EUR are 4.50 percent, what is the approximate level of the EUR/USD forward
swap points in dealer terms?
A: 45 47
B: 47 45
C: 4.70 4.50
D: 4.50 4.70
Problems:

A bond with a 7.3% yield has a duration of 5.4 and is trading at $985. If the yield decreases to
7.1% the new bond price is closest to:

A. $974.40
B. $995.64
C. $1091.40
Answer: B
-5.4 * .002 = 1.08%; therefore: $985 * 1+ (.0108) = $995.64

If interest rate volatility increases, which of the following bonds will experience a price decrease?

A. Callable bond
B. Putable bond
C. Zero coupon, option free bond
Answer: A
An increase in volatility will increase the value of the call option which will decrease the value of the
callable bond to the holder. A putable bond will increase and an option free bond will be unchanged.

A noncallable AA-rated bond, 5 year zero coupon bond with a yield of 6% is least likely to have:

A. interest rate risk

B. reinvestment risk

C. default risk
Answer: B
A zero coupon bond has no reinvestment riskbecause there are no cash flows prior to maturity that must
be reinvested. An AA rated bond will have very little default risk. Zeros have the most interest rate risk for
a given maturity.

The price of a bond is 102.50. If interest rates change by 0.5%, the value of the bond changes by
2.50; what is the duration of the bond?

A. 2.44
B. 2.50
C. 4.88
Answer: C
Duration = percentage change in price/change in yield as a decimal
(2.50/102.5)/.005 = .0224/.005 = 4.88

Which of the following has the most interest rate risk?

A. 5% 10 year callable
B. 5% 10 year putable
C. 5% 10 year option free
Answer: C
Embedded options reduce duration/interest rate risk.

A straight 5% bond has two years remaining and is priced at 981.67. A callable bond that is the
same in every way, except for the call feature and is priced at $917.50. A flat yield curve at 6%
what is the value of the embedded call option?

A. $45.80
B. $64.97
C. $101.00
Answer: B
Call option value = $981.67 - $917.50 = $64.97
Which is least likely to fall under the heading event risk with respect to fixed income securities?
A. A change in rate regulation
B. one firms acquisition of another
C. Federal Reserve decrease in money supply
Answer: C-Event risk refers to events that can impact a firms ability to pay its debt obligations that are
separate from market risks. The feds actions can impact interest rates, but this is a market risk factor, not
event risk.