ADMS4504-Midterm-F10-Sol

ADMS4504-Midterm-F10-Sol - AP/ADMS4504 Midterm Exam Name...

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AP/ADMS4504 Midterm Exam Fall 2010 1 Name Section ID # AP/ADMS 4504 Fixed Income Securities and Risk Management Midterm Exam - Solutions Fall 2010 This exam consists of 30 multiple choice questions and carries a total of 100 points. Choose the response which best answers each question. Circle your answer below, and fill in your answers on the bubble sheet . Only the bubble sheet is used to determine your exam score . Please do not forget to write your name and ID # both at the top of this cover page and on the bubble sheet. Also please write the type of your exam (A or B) on the bubble sheet . Please note the following points: 1) Read the questions carefully and use your time efficiently. 2) Choose the answers that are closest to yours, because of possible rounding. 3) Keep at least 4 decimal places in your calculations and final answers, and at least 6 decimal places for interest rates. 4) The 20 “Numerical questions” are worth 4 points each. 5) The 10 “Conceptual questions” are worth 2 points each. 6) You may use the back of the exam paper as your scrap paper.
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AP/ADMS4504 Midterm Exam Fall 2010 2 Numerical questions (4 points each) 1. A 6-year step-up note pays semi-annual coupons with the following structure: The coupon rate starts at 4% for years 1-2, and then goes up by 50 bps for years 3-4 and by another 50 bps for years 5-6. What is the yield on a BEY basis of the note if it sells at $96? A) 2.5058% B) 4.7746% C) 5.0116% D) 5.2513% E) 5.2867% Answer D The step-up note price is given by: 12 11 9 8 5 4 1 ) 1 ( 5 . 102 ) 1 ( 5 . 2 ) 1 ( 25 . 2 ) 1 ( 2 96 y y y y P t t t t t t + + + + + + + = = = = Using the IRR function of the financial calculator, we can compute the IRR for a project with the same cash flows as the step-up note: y = 2.6257% or 5.2513% on a BEY basis. 2. Consider an 18-year 11% coupon bond with semi-annual coupons, a par value of $100 and selling at $116.90. Suppose that the first call date is in 8 years with a call price of $105.50, the first par call date is 13 years from now and that the issue is putable at par in 5 years. What is the yield to worst (BEY basis) of this bond? A) 3.4709% B) 4.2675% C) 4.5385% D) 6.9418% E) 8.5351% Answer D The different yields are: YTM = 9.0769%, YTFC = 8.5351%, YTFPC = 8.7929%, YTP = 6.9418%. So the YTW is the YTP. 3. Suppose that the coupon rate of a 6-year floating-rate security with a simple margin of 85 bps resets every six months. The current level of the reference rate
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AP/ADMS4504 Midterm Exam Fall 2010 3 is 6%. What is the approximate discount margin of the security if it sells at 98 of par? A) 50 bps B) 85 bps C) 91 bps D) 121 bps E) 127 bps Answer C The quoted margin can be found using the simple margin formula: bps 49.9667 margin Quoted 98 100 margin Quoted 6 ) 8 9 100 ( 100 85 Margin Simple = × + × = Knowing the quoted margin now, we can compute the YTM of the security using a reference rate of 6%, a quoted margin of 49.9667 bps and a price
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This note was uploaded on 05/01/2011 for the course ADMS 4504 taught by Professor Lee during the Fall '08 term at York University.

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ADMS4504-Midterm-F10-Sol - AP/ADMS4504 Midterm Exam Name...

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