Test 1 Sample Questions & Answers
Chapter 1
1) Give an example of a primary security invested in by FIs and an example of a secondary
security issued by FIs? (two answers)
Primary- loans, stocks, bonds; Secondary- deposits, insurance policies. (4pts)
2) I
Finance 475
Spring 2013
Professor Helwege
Homework #1
This assignment involves using the Bloomberg machine in the library. There is only one
machine in the room, so allow plenty of time in case it is in use. To avoid making this terribly
unwieldy, you may
Finance 475
Spring 2013
Professor Helwege
Homework #2
Hand in this page for HOMEWORK #2 Finance 475
Names in ALPLHABETICAL ORDER:_
_
All of the answers for homework #2 are related to the yield curve. To get to that part of
Bloomberg, type GOVT GO and then
Fixed-income Securities
FINA 475
Professor Steven Mann
Your instructor and host
Four Main Components
Fixed-income products
Analytical tools
Institutional features
Fixed-income portfolio management
Largest capital market in the world!
Fixed-income markets
Bond Valuation
Cancel and tear to pieces
that great bond which keeps
me pale. Macbeth
Valuation of Option-Free
Bonds
General Principles of Valuation:
1. Estimate the expected future cash flows
2. Determine the appropriate discount
rate(s)
3. Calculate the
THE ARBITRAGE-FREE
VALUATION APPROACH
The traditional approach to valuation is to
discount every cash flow of a bond with the
same discount rate (i.e., assuming that the
yield curve is flat).
For example, consider a 10-year U.S.
Treasury note with an 6% c
Problem Set 4
Professor Steven Mann
1. Rank the following bonds in order of descending Macaulay duration. Explain the
reasoning of your rankings. No calculations are required.
A.
B.
C.
D.
E.
F.
Zero coupon, 20 years to maturity, yield to maturity is 12%
Z
Fixed-income Exam
Steven Mann, Instructor
ASSUME THE CASH FLOWS ARE DELIVERED SEMIANNUALLY UNLESS
TOLD OTHERWISE
Consider a 6.25% coupon 30-year Treasury bond selling at 108.6034 and yielding
5.817%. If the yield is decreased by 20 basis points, the price
Fixed-income Securities
FINA 475
Professor Steven Mann
Your instructor and host
Four Main Components
Fixed-income products
Analytical tools
Institutional features
Fixed-income portfolio management
Largest capital market in the world!
Fixed-income markets
Bond Valuation
Cancel and tear to pieces
that great bond which keeps
me pale. Macbeth
Valuation of Option-Free
Bonds
General Principles of Valuation:
1. Estimate the expected future cash flows
2. Determine the appropriate discount
rate(s)
3. Calculate the
Total Return Analysis
Most portfolio managers care about total return rather than yield.
Total return
Yield to maturity/yield to call are measures of expected
returns given two strong assumptions:
The bond is held to maturity/call
All coupon payments a
Yield Curve Analysis
January 30th & February 1st
Our analysis focuses on government
securities that have known cash flows
(no default risk, no embedded options).
Yield to maturity is the single
discount rate that equates the present
value of a bonds cash
Practice Problems Topics 1-5
Finance 475
Professor Helwege
1. Interest rates
1. If a coupon is expected to be paid tomorrow then the buyer of a bond has to pay
more _ accrued interest _ to the seller of the bond than he would if he were to buy the
bond ne
Practice Problems Topics 1-5
Finance 475
Professor Helwege
1. Interest rates
1. If a coupon is expected to be paid tomorrow then the buyer of a bond has to pay
more _ to the seller of the bond than he would if he were to buy the
bond next week.
2. A bond
Topic 1 Interest Rates
Fixed income markets and instruments
Interest rates in general
Bond returns and prices
What is an interest rate?
The return on a bank account?
The rate charged to borrow on a credit card?
The yield on a Treasury?
Which maturi
Topic 2 The Federal Reserve and Interest Rates
Bond returns and rate changes
Why do Treasury rates move?
Fisher Equation
The Fed
Fed policy changes
Interest Rate Changes
Interest Rate Changes and Bond Prices
Rise (fall) in interest rates leads to fal
Topic 3 Fed Funds Futures
Predicting Fed moves
Futures and Forwards
FOMC meetings and targets
Effective FF rates
Implied rate changes
The Fed & Short Term Interest Rates
What will the Fed Do Next? Is the Fed in control of inflation or just reacting
Topic 4 Auctions and Swaps
Auctions
On the run bonds
TIPS
Swaps
Treasury Auctions
Treasury bills, bonds and notes are sold to investors via auctions to get the best price for
the US government.
Auctions are announced in advance, stating the total am
Topic 5 Treasury Term Structure
Yield curve
Expectations theory and other theories
Zero curve/spot rates
The Swap Curve
Treasury Yield Curve
The yield curve is a plot of the yields of Treasury instruments against maturity
Nearly always use on-the-ru
Finance 475
Midterm 1
Professor Helwege
Spring 2012
You have the entire class period to finish this exam. You may use a calculator, a formula sheet that meets
the guidelines, scrap paper, and a writing tool to complete this exam. You may hand in the scrap