f826_mid_f03_ans - Finance 826 Midterm Professor Helwege...

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Finance 826 Professor Helwege Midterm Fall 2003 You have the entire class period to finish this exam. You may use a calculator, a one page formula sheet that has been approved for this exam, scrap paper, and a writing tool to complete this exam. You may hand in the scrap paper (with your name on it) to help you receive partial credit for incorrect answers. Total points=100. Part I. Answer all questions in this section to receive full credit. (80 points) (5 pts.) 1. Rank the following in terms of credit risk (1 is the riskiest, 5 is the least risky). a. A 10 year bond with a 5.8% YTM when the 10 year Treasury rate is 4% ___2 __ b. A 10 year bond with a Baa2 rating and a spread of 123 bp ___3 __ c. A 5 year bond with a rating of A- ___4 __ d. A 10 year bond with a coupon of 6.5% trading at $97 ___1 __ e. The senior tranche of a mortgage-backed security ___5 __ (8 pts.) 2. For each pair of bonds below, circle the one which should have the lower yield to maturity: a. A residential mortgage originated in 2000 to a homeowner who works for Wash Mutual A residential mortgage originated in 2000 to a homeowner who runs a high-end crafts store. b. A ten year corporate bond with a spread of 20 bp over today’s comparable Treasury. c. A senior subordinated bond of a company that has just filed a prepack. d. A 30-year I/O Strip (4 pts) 3. The rate on a 3 mo Treasury bill is 7%, while a 6 month T-bill trades at a YTM of 6.87%. The two-year note has a coupon of 6.8% and sells at a slight premium. A 10-year Treasury bond with a 6% coupon and MD=8 years (at par) trades at $98. Which of the following statements are likely to be true? (Circle ALL that are true.) a. The implied Fed Funds rate for the contract ending in two months is above 7%. b. Within the next nine months, payroll figures reported by the Bureau of Labor Statistics (BLS) will be negative. c. The current Fed chairman is a dove. d. Put options on 10-year Treasuries are likely to be in the money as inflation rises.
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(13 pts.) 4. Answer True or False to the following questions: a. The default rate on junk bonds was well above average in 1980 and 1981 because of the recession caused by Volcker._F __ b. Federal Reserve Chairman Burns caused two recessions when he switched from targeting interest rates to targeting the money supply. __F__ c. The highest default rates on home mortgages have occurred in parts of the country that are manufacturing oriented and are suffering the effects of a recession. _F __ d. A community bank would prefer to hold adjustable rate mortgages over fixed rate mortgages in its asset portfolio. _T __ e. Credit enhancement on a mortgage backed security is accomplished by requiring the homeowner to pay private mortgage insurance (PMI). _F __ f. If you have an assumable mortgage then the sale of your house results in a prepayment on your mortgage._F __ g. The mortgages backing the C tranche of a collateralized mortgage obligation (CMO) have a lower PSA speed than the mortgages backing the A tranche of the same CMO. _F
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f826_mid_f03_ans - Finance 826 Midterm Professor Helwege...

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