Download Finance Midterm Exam Questions on Yield-to-Maturity, Forward Rates, and Bond Pricing and more Exams Finance in PDF only on Docsity!
FIN32O' MIDTERMZ' ;, I
.g F it.
- (^) 'Spring (^2008) i (^) n I ' Name:f&FF y (^) I
, ADVICE:^ Use^ the available^ time^ eTficiently.^ You^ don't^ really^ need^ to^ use^ your
. calculator^ to^ find^ final^ numerical^ answers^ to the^ calculation^ questions^ in^ the^ midterm.
. You witl get full grade for writing down correct"expressions (fully developed
i exfressions with numbers only, without referring to any unknowns).
t,
' ':t
Trrrp (T)^ nr I,rlsc /tr')?
True (T)^ or False (F)?^ "--^
t
,,
Consider two callbble bonds. The bonds are identical,'except for the fact the^ one has^ higher^ call
prices than the (^) otlier. The bond with higher call prices should-have a higher yield-to-maturity. (^) F
The yield to maturity of bond is 7o/o per year in the BEY codvention. Therefore, the yield to maturity
of the bond in the EAY convention is7.245% peryear.^ r' 1,
oL t-
The yield-to-maturity of a convertible bond should be lower than the yield-to:maturity of an
otherWise (^) identical non-convertible bond. (^) ' T- The yield-to-maturity of a given corporate bond is 3Yo per seniester, whereas the yield-to-maturity of a comparable US Treasury bonil is 2%, per semester. Therefore, the expected holding period of
buying the corporate bond and selling it after one semester is l%o higher than the expected holding
perioireturn (^) of Uuying the comfarable US Treasury bond is selling it after one semester. (^) PLII
^F'
If the yieldto-maturity^ of a US Treasury coupon bond remains constant'over time,^ the^ bond's^ yield
to maturity (EAY) is equal td the (annualned\ holding period of buying the bond, using the coupon
payments to buy additional uriits of the bond, and holding them until the bond's maturity. (^) i T
The Bootstrap method is used to calculate thb fair price of zero coupon bonds given the market firice
ofcoupon bonds. 7'
Consider a downward sloping Pdre Yield Curve (i.e.,^ risk^ free spot rates decrease with maturity) and
two fairly priced^ US Treasury coupbn bonds with the^ same^ time to maturity.^ The bbnd^ with^ the
higher coupon rate has the lower yield-to-maturity. (^) h,llltr (^) I TA (^) "rt Since mutual fund cash.inflows or outflows are not under the,control of mutual fund managers, the
geoinetric average is the appropriate method to the repgrt the realized holding pericid return of a
mutual fund- T
Every time a coupon bond pays a coupon, its (invoice or true) price falls by the amount of the
couponpaymentifthebond'syield-to-maturitydoesnotchange. (^) f
Unsecured bonds are corporate bonds rated BB or belbw.
f Coiporations can potentially take actions to benefit shareholders at the expense^ of hurting bondholders. Bond protective covenants, such as dividend and asset use restrictions, protect bondholders by mitigating the risk that corporations will^ engage in^ such^ harmful^ actions.^ f
In chse a corporation goes^ bankrupt, holders of senior bonds^ are ahead in^ line for receiving money
when compared to holders of subordinate bonds.
,T
The price dealers quote for a US Treasury bond is always higher or equal than the price invbstors actually pay^ for the bond: the difference is called accrued^ interest.^ l;hil l-= ,F All fairly priced^ US Treasury bonds with the^ sametime,toj?lurity have the^ szime^ yield{o-maturity.^ , t-,
According to the Pure Expectation Hypothesis, if two investment strhtdgies in US Treasury zero
coupon bonds have the^ same^ investment horizon,^ they^ have^ the^ same^ expected^ holding period^ return.^ T
When Pure Yield Curves are upward sloping (i.e,^ riskfree^ spot rates increase^ with^ maturity),^ the
Static Yield Curve method indicates^ higher^ expected^ rbto-s^ for buying^ longer term bonds.^ T
\
X
6.q &r
" (^) fle hr (^) d di.lec g,r"ul/ (^) €,l"rl - (^) eetl (^) bond6, h"lAq (^) ** foy (^) $cr,as;y;$f,{.rl
ft}"r#:^y
af ft' 6"^ *."/
-.), , "tng (^) hoaral fl-ts'liii"ir^'7"qn.,nes /t, (^) "(na,b&, h&en^ fle^ bl'l-6.t/ ' (^) 6qtrls, }f,-u,(ol ft<^ beg;^nt;?^ a, fe^ &,Eu.a rstai, ht^ e^ l).;i
iJ!,n''*,';i'f)r L::!fr;; Anla,s^ {2.^ /^, 6.os
' /b"., -fiL^ 6n,o,*r (^) ^-,^ ;
/t (^) ca"uat (^) k casr t4n
ts. rk 6L.,e _r"iT^*
,ru.,*,A,
rL h,'*>/^ A"^ pil
ra('€- (^) rt,ltro: fu. (^) a.r?v(-t (^) ,x..rrn| (^) f
l &4t /,^ fle &-d
ffi ,T*2,,1'^
i;"',
t-
W'*H;,p, fi^ *
V;rrt rolc^ =^ fa,^ r'
n '-"9'
Coel ot*(lowcf^ tr'2. '^ r g) (5 points) What (^) does tlie P-ure Expectation (^) Hypothesis conjecture about forward rates?
Toolan; (o.-".rJ^ r-l-es ^rc c./n6i ese
(^) d (^) €*pes/e.lo,.3 g€ *Lre EP't f^ cTes,
OTI,ESTION 2 (20^ points):
a). (a points) What is a forward rate? fo761,..d (^) 1l.l€S ae (^) Cales ilnl'' y;fi (^) 1*-':'dg 6llnn^ Ce(vrt'.
1
tL r., t
?a(ry I (^) ^6r Af 'f^ t
fXe fwfvrg.
I a b) (6 points) Explain in detail hciw a'bond dealer can attain (^) a forward rate'by (^) trading on zeio- coupon bonds (no calculations needed).
d)' (5^ points) The picture below shows the Ge'rman Treasury (Pure) (^) Yield Curve in two consecutive ( auyt. Oir."gurd (^) the small difference between the two consecutive days. Interpret the shape of the ) (^) .,.{ " Curve using the^ Pure^ Expectation Hypothesis^ (no^ calculations^ needed).^ -.a c-t{ f
,i,Qg3u6 €p"t.,D"<,^
beoLffi'"
t"da (^) $, /L (^) fed,.S dr..
tc (^) to6,ked - a Pu,'cl t
rh
l'
3m 6m ly 2y 3y 4y 5y"6y 7y 8y 9y lOy.^ l5y 2W 30y
ga li u'tt
,,
OUESTION 4"(25 poidts):^ Use the data page^ of the^ exam.
a) (5 points)^ [hat is the curr-ent six-year risk-free spot rate (EAY convention)?-,,
Y-=t6--toq.aol'-| fro*r-)f-l <
. -i . annual coupon^ rate of8%o^ (annual^ couporipayments)? r?r= (^) fa.u$o; r;y
\r r4,1;-^ '^ "(t t
2-ZS?:)
.,
b). (5 points) What is the fair price of a US Treasury bond with F:$1,000, 3 years to maturity and
o
I(=
7
- d) (5 points) What is the fair price of a BB-rated corporate bond with F:$1,000, 3 years to maturity ' (^) and annual coupon rate of 80% (^) Gllual coupon payments)?
:
(5 points) Let y be the yield-to-maturity of the coupon bond in item b.
from which y^ could be solved. You don't hdve to solve the equation.
i
Write down one equation
t:-f9-- (trz.tsl (^) t (^) Z.sZ). -
._/
frrffi.,ffii,
V=YTA
flo=
8o 60r
GilrP (iffir;+
e) (5 poiirts) (^) The market price (^) of a US Treasury coupon bond with F:$1,0O0, i year to m'aturity,
semi-annual coupon payments and annual coupon rate of 10% is $1,078.81. What is the fair
frice of US^ Treasury zero coupon bond^ with F:$1,000^ and^ maturing^ in^ six^ months?
l'?E.8t=#+,,tr f,,*lV
(u:u= I^
ooo
I
OUESTION 5 (20^ ooihts): Use the data page^ bf the exam.
' a) (13^ points) Consider d 5 year 2ero-coupon bond issued by the US government. After ond year, it will be a four year bond. Forecast the one year (^) aheiad price of this borid using the methods below.
I {'
\v.
., (^) a.1) Static Yield Curve Fl p -o Jg.o I t.ycr=^ (ffi
, a.2) Pure Expectation Hypothesis r (^) - (^ L,^
i-Y:.z:.Y )ft-t
' (^). rafl -(r*.oa) -l-l
E ,- lp ) looo-. \tfrrF (^) (t*€,"){
.3) Liquidity/Risk Premium Hypothesis with Cochrbn e-Piazzesipremium.
P.er..i ,.r^^ =^ -.O34^ -Z.l'|(t':l)^ t .Slf r^ 3Q^ +,(F1^ -^ Z.ot[o
r(upte)= :l+:+ =2rffi1 p.eni) vlz.fa
t(t-r) ="(i (^) f 1@^ p,env^)^ rfilz T- *t< ,l
lc
( (^)! ,. q.o
/-'t')-
I (t (^) r ,s'l)'11' I
(7 points) Consider buying a 5 year zero-coupon bond'issued by the (^) US government today, and
selling it after one ye'ar.^ Calculate the expected holding period return of this strateg! using the
methods below.
eorl al.
b.l) Static Yield Curve ,/
E(ilpR)=#H-_t
(t
ol
b.2) PureExpectation,Hyp jf+
p* (^) t AZ.. r(HPR)= t4ufr-t^
b.3 ) Liquidity/Risk Premium Hypothesis with Cochrans-pia zlesi^ piemium.
E (uPR)^ = Z'1.^
\
?c{r'}.
It
