midterm solution

# midterm solution - FIN 4243 Fall 2009 Midterm...

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1 FIN 4243 Fall 2009 Midterm Solution (Version A) Name: UFID: Section (circle one): 3027 or 3038 DO NOT BEGIN UNTIL YOU ARE TOLD TO DO SO.

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2 Part I. Multiple Choice. 2.5 points per question. (Total 50 pts) 1. An investor paid a full price of \$1059.04 each for 100 bonds. The purchase was between coupon dates, and accrued interest was \$23.54 per bond. What is each bond’s clean price? A. \$1000.00 B. \$1059.04 C. \$1035.50 D. \$1082.58 Answer: C [Testing for basic concept; Rated easy] 2. A bond with a 7.3% yield has a duration of 5.4 and is trading at \$985.00. If the yield decreases to 7.1%, the new bond price is closet to: A. \$974.40 B. \$1038.30 C. \$995.60 D. \$1091.40 Answer: C [Testing for “can you solve for any of the parameters given the others?” knowledge and application of duration; Rated medium] 3. If interest rate volatility increases, which of the following bonds will experience a price decrease? A. A callable bond B. A putable bond C. A zero-coupon, option-free bond D. An option-free, 4% coupon bond Answer: A [Interest rate volatility affects the value of options. With a callable bond, the call option value increases with increasing interest rate volatility, leads to a decrease in the price. Rated medium] 4. Which of the following is a difference between an on-the-run and an off-the-run issue? An on-the-run issue: A. Will always carry a higher coupon B. Is the most recently issued security of that type C. Has a shorter maturity than an off-the-run issue D. Is publicly traded whereas off-the-run issue is not Answer: B [Testing for basic concept; Rated easy] 5. Under the pure expectations theory, an inverted yield curve is interpreted as evidence that:
3 A. Demand for long term bonds is falling B. Inflation is expected to rise in the future C. Short-term rates are expected to fall in the future D. Investors have very little demand for liquidity Answer: C [Testing for understanding of term structure theory; Rated easy] 6. According to the liquidity preference theory, which of the following statement is least accurate? A. All else equal, investors prefer short-term securities over long-term securities B. Long-term rates should be higher than short-term rates because of the added risks C. Investors perceive little risk differential between short-term and long-term securities D. Borrowers will pay a premium for long-term funds to avoid having to roll over short-term debt Answer: C [Testing for understanding of term structure theory; Rated medium] 7. For two bonds that are alike in all respects except maturity, the relative yield spread is 7.14%. The yield ratio is closest to: A. 92.85 B. 0.714 C. 1.0714 D. 107.14 Answer: C [Testing for conversion between two measures of yield change; Rated easy] 8. Assume the following corporate yield curve: 1-year bond: 5.00% 2-year bond: 6.00% 3-year bond: 7.00% If a 3-year U.S. Treasury is yielding 6%, the relative yield spread on the 3-year corporate is: A. 16.67% B. 1.167 C. 14.28% D. 100bp Answer: A [Testing for application of formula and concept; Rated easy]

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midterm solution - FIN 4243 Fall 2009 Midterm...

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