2
year from now XYZ is expected to remain at A with 85% probability, upgraded to
AA with 5% probability, and downgraded to BBB with 10% probability. The risk
free rate is flat at 4%. The credit spreads are flat at 40, 80, and 150 basis points for
AA, A, and BBB rated issuers, respectively. All rates are compounded annually.
Estimate the expected value of the zero-coupon bond one year from now (for USD
100 face amount). Fixed Income Securities:
A.
USD 92.59
B.
USD 95.33
C.
USD 95.37
D.
USD 95.42
5.
Assuming the long-term yield on a perpetual note is 5%, compute the dollar value
of a 1 bp. Increase in the yield (DV01) for a perpetual note paying a USD
1,000,000 annual coupon.
A.
-20,000
B.
-30,000
C.
-40,000
D.
-50,000
6.
Given the following portfolio of bonds:
What is the value of the portfolio’s DV01 (Dollar value of 1 basis point)?
A.
8,019
B.
8,294
C.
8,584
D.
8,813
7.
Assuming other things constant, bonds of equal maturity will still have different
DV01 per USD 100 face value. Their DV01 per USD 100 face value will be in the
following sequence of highest value to lowest value:
A.
Premium bonds, par bonds, zero coupon bonds
B.
Zero coupon bonds, Premium bonds, par bonds
C.
Premium bonds, zero coupon bonds, par bonds
D.
Zero coupon bonds, par bonds, Premium bonds
8.
Which of the following statements about standard fixed rate government bonds
with no optionality is TRUE?
I.
Higher coupon implies shorter duration.
II.
Higher yield implies shorter duration.
III.
Longer maturity implies larger convexity.
A.
I and II only