B floating rate leg of the swap c difference between

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B floating-rate leg of the swap. C difference between the fixed and floating legs of the swap. © CFA Institute. For candidate use only. Not for distribution.
Reading 32 The Term Structure and Interest Rate Dynamics 58 23 A two-year fixed-for-floating Libor swap is 1.00% and the two-year US Treasury bond is yielding 0.63%. The swap spread is closest to: A 37 bps. B 100 bps. C 163 bps. 24 The swap spread is quoted as 50 bps. If the five-year US Treasury bond is yield- ing 2%, the rate paid by the fixed payer in a five-year interest rate swap is closest to: A 0.50%. B 1.50%. C 2.50%. 25 If the three-month T-bill rate drops and the Libor rate remains the same, the relevant TED spread: A increases. B decreases. C does not change. 26 Given the yield curve for US Treasury zero-coupon bonds, which spread is most helpful pricing a corporate bond? The: A Z-Spread. B TED spread. C Libor–OIS spread. 27 A four-year corporate bond with a 7% coupon has a Z-spread of 200 bps. Assume a flat yield curve with an interest rate for all maturities of 5% and annual compounding. The bond will most likely sell: A close to par. B at a premium to par. C at a discount to par. 28 The Z-spread of Bond A is 1.05% and the Z-spread of Bond B is 1.53%. All else equal, which statement best describes the relationship between the two bonds? A Bond B is safer and will sell at a lower price. B Bond B is riskier and will sell at a lower price. C Bond A is riskier and will sell at a higher price. 29 Which term structure model can be calibrated to closely fit an observed yield curve? A The Ho–Lee Model B The Vasicek Model C The Cox–Ingersoll–Ross Model © CFA Institute. For candidate use only. Not for distribution.
Practice Problems 59 The following information relates to Questions 30–36 Jane Nguyen is a senior bond trader and Christine Alexander is a junior bond trader for an investment bank. Nguyen is responsible for her own trading activities and also for providing assignments to Alexander that will develop her skills and create profitable trade ideas. Exhibit 1 presents the current par and spot rates. Exhibit 1 Current Par and Spot Rates Maturity Par Rate Spot Rate One year 2.50% 2.50% Two years 2.99% 3.00% Three years 3.48% 3.50% Four years 3.95% 4.00% Five years 4.37% Note : Par and spot rates are based on annual-coupon sovereign bonds. Nguyen gives Alexander two assignments that involve researching various questions: Assignment 1 What is the yield to maturity of the option-free, default risk– free bond presented in Exhibit 2? Assume that the bond is held to maturity, and use the rates shown in Exhibit 1. Exhibit 2 Selected Data for $1,000 Par Bond Bond Name Maturity ( T ) Coupon Bond Z Three years 6.00% Note : Terms are today for a T -year loan. Assignment 2 Assuming that the projected spot curve two years from today will be below the current forward curve, is Bond Z fairly valued, undervalued, or overvalued?

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