Formulas:
Future Value and Present Value:
Future value interest factor (with $1 at 0): FVIF (r , n) (1 r ) n
Present value interest factor (with $1 at time n): PVIF (r , n)
1
(1 r ) n
For Ordinary annuity, i.e., the first $1 at time 1 and the last $1 at

ANSWERS TO SUGGESTED QUESTIONS FOR CHAPTER 6
(Questions are in bold print followed by answers.)
1. What are the differences among a Treasury bill, Treasury note, and Treasury bond?
Fixed-Principal Treasury Securities are fixed-income principal securities

ANSWERS TO SUGGESTED QUESTIONS FOR CHAPTER 5
(Questions are in bold print followed by answers.)
13. You observe the yields of the following Treasury securities (all yields are shown on a bondequivalent basis):
Year (Period)Yield to Maturity (%)Spot Rate (

ANSWERS TO SUGGESTED QUESTIONS FOR CHAPTER 7
(Questions are in bold print followed by answers.)
1. What is the significance of a secured position if the absolute priority rule is typically not
followed in a reorganization?
A corporate debt obligation can

ANSWERS TO SUGGESTED QUESTIONS FOR CHAPTER 10
(Questions are in bold print followed by answers.)
3. Explain why the higher the loan-to-value ratio is, the greater the credit risk is to which the
lender is exposed.
The loan-to-value ratio (LTV) is the rati

ANSWERS TO SUGGESTED QUESTIONS FOR CHAPTER 12
(Questions are in bold print followed by answers.)
1. How does a CMO alter the cash flow from mortgages so as to shift the prepayment risk across
various classes of bondholders?
Prepayment risk refers to the r

ANSWERS TO SUGGESTED QUESTIONS FOR CHAPTER 13
(Questions are in bold print followed by answers.)
1. Answer the below questions.
a. Why is it necessary for a nonagency mortgage-backed security to have credit enhancement?
Credit enhancement is a key part of

ANSWERS TO SUGGESTED QUESTIONS FOR CHAPTER 4
(Questions are in bold print followed by answers.)
2. Calculate the requested measures in parts (a) through (f) for bonds A and B (assume that each
bond pays interest semiannually):
Coupon
Yield to maturity
Mat

ANSWERS TO SUGGESTED QUESTIONS FOR CHAPTER 15
(Questions are in bold print followed by answers.)
1. Why is the entity seeking to raise funds through a securitization referred to as the seller or the
originator?
A security created by pooling loans other th

ANSWERS TO SELECTED QUESTIONS FOR CHAPTER 1
(Questions are in bold print followed by answers.)
1. What is the cash flow of a 10-year bond that pays coupon interest semiannually, has a coupon
rate of 7%, and has a par value of $100,000?
The principal or pa

Questio
n
1
2
3
4
5
6
Total
Credit
Mark
15
15
15
15
15
25
100
Question 1 (15 points)
A 5% U.S. Treasury bond will mature June 30, 2020. Today is April 30, 2008. For
simplicity, assume that the bond trading is also settled on the same day. If the
yield-to-

ADM 3351 B
Midterm Exam
Winter 2007
(1 hour 20 minutes)
Dr. C. Guo
Name (print legibly) _
Student Number
_
Closed- book exam. No material of any kind is allowed. A calculator is required.
The formula page can be detached and need not submit.
Statement of

Questions on Bond Pricing
3. Answer the following questions.
(a) The portfolio manager of a tax-exempt fund is considering investing $500,000 in a debt
instrument that pays an annual interest rate of 5.7% for four years. At the end of four
years, the port

Chapter 4
Duration and Convexity
2. Calculate the requested measures in parts (a) through (f) for bonds A and B (assume that
each bond pays interest semiannually):
Bond A Bond B
Coupon
8%
9%
Yield to maturity
8%
8%
Maturity (years)
2
5
Par
$100.00 $100.00

Time Value of Money
Nominal Rate (APR)
Componding Assupmtion
The divisor m
Effective Annual Rate (EAR)
Length of a period
# of compounding per year
Interest rate per period
Number of Periods
PVIF
PVIFA
6.60%
Semiannual
2
6.71%
Semiannual
2
3.3000%
5
0.850

Compounding assumption
Num of periods per year
EAR given
0.12 APR
APR given
0.12 EAR
Period
1
2
3
4
5
6
7
8
9
10
Interest Rate
2 per period
0.116601 0.0583005
0.1236
0.06
Interest Rate Discount Cash
Per Period
Factor
Flow
0.06
0.9434
5
0.06
0.8900
5
0.06

CHAPTER 2
PRICING OF BONDS
REVIEW OF TIME VALUE OF MONEY
Money has time value because of the opportunity to invest it at some interest
rate.
Future Value
The future value of any sum of money invested today is: Pn = P0 (1 + r)n,
where n = number of periods

CHAPTER 10
RESIDENTIAL MORTGAGE LOANS
CHAPTER SUMMARY
When purchasing a home, the major portion of the funds must be borrowed.
The market where these funds are borrowed is called the mortgage market.
This chapter and the two that follow describe residenti

CHAPTER 5
FACTORS AFFECTING BOND YIELDS AND THE TERM
STRUCTURE OF INTEREST RATES
BASE INTEREST RATE
The securities issued by the U.S. Department of the Treasury are the key
interest rates in the U.S. economy as well as in international capital markets.
Th

ANSWERS TO SUGGESTED QUESTIONS FOR CHAPTER 14
(Questions are in bold print followed by answers.)
1. How is the net operating income (NOI) of a commercial property determined?
The NOI of a commercial property is determined by taking the rental income and r