11
CHAPTER 3
INTRODUCTION TO
FIXEDINCOME VALUATION
PROBLEMS
1. A portfolio manager is considering the purchase of a bond with a 5.5% coupon rate that
pays interest annually and matures in three years. If the required rate of return on the
bond is 5%, the price of the bond per 100 of par value is closest to:
A. 98.65.
B. 101.36.
C. 106.43.
2. A bond with two years remaining until maturity offers a 3% coupon rate with interest
paid annually. At a market discount rate of 4%, the price of this bond per 100 of par value
is closest to:
A. 95.34.
B. 98.00.
C. 98.11.
3. An investor who owns a bond with a 9% coupon rate that pays interest semiannually and
matures in three years is considering its sale. If the required rate of return on the bond is
11%, the price of the bond per 100 of par value is closest to:
A. 95.00.
B. 95.11.
C. 105.15.
12 Part I: Learning Objectives, Summary Overview, and Problems
4. A bond offers an annual coupon rate of 4%, with interest paid semiannually. e bond
matures in two years. At a market discount rate of 6%, the price of this bond per 100 of
par value is closest to:
A. 93.07.
B. 96.28.
C. 96.33.
5. A bond offers an annual coupon rate of 5%, with interest paid semiannually. e bond
matures in seven years. At a market discount rate of 3%, the price of this bond per 100 of
par value is closest to:
A. 106.60.
B. 112.54.
C. 143.90.
6. A zero-coupon bond matures in 15 years. At a market discount rate of 4.5% per year and
assuming annual compounding, the price of the bond per 100 of par value is closest to:
A. 51.30.
B. 51.67.
C. 71.62.
7. Consider the following two bonds that pay interest annually:
Bond Coupon Rate Time-to-Maturity
A 5% 2 years
B 3% 2 years
At a market discount rate of 4%, the price difference between Bond A and Bond B per
100 of par value is closest to:
A. 3.70.
B. 3.77.
C. 4.00.
e following information relates to Questions 8 and 9
Bond Price Coupon Rate Time-to-Maturity
A 101.886 5% 2 years
B 100.000 6% 2 years
C 97.327 5% 3 years
8. Which bond offers the lowest yield-to-maturity?
A. Bond A
B. Bond B
C. Bond C
9. Which bond will most likely experience the smallest percent change in price if the market
discount rates for all three bonds increase by 100 basis points (bps)?
A. Bond A
B. Bond B
C. Bond C
Chapter 3 Introduction to Fixed-Income Valuation 13
10. Suppose a bond’s price is expected to increase by 5% if its market discount rate decreases
by 100 bps. If the bond’s market discount rate increases by 100 bps, the bond price is most
likely to change by:
A. 5%.
B. less than 5%.
C. more than 5%.
e following information relates to Questions 11 and 12
Bond Coupon Rate Maturity (years)
A 6% 10
B 6% 5
C 8% 5
All three bonds are currently trading at par value.
11. Relative to Bond C, for a 200 basis point decrease in the required rate of return, Bond B
will most likely exhibit a(n):
A. equal percentage price change.
B. greater percentage price change.
C. smaller percentage price change.
12. Which bond will most likely experience the greatest percentage change in price if the mar-
ket discount rates for all three bonds increase by 100 bps?
A. Bond A
B. Bond B
C. Bond C
13. An investor considers the purchase of a 2-year bond with a 5% coupon rate, with interest
paid annually. Assuming the sequence of spot rates shown below, the price of the bond is
closest to:
Time-to-Maturity Spot Rates
1 year 3%
2 years 4%
A. 101.93.
B. 102.85.
C. 105.81.
14 Part I: Learning Objectives, Summary Overview, and Problems
14. A 3-year bond offers a 10% coupon rate with interest paid annually. Assuming the follow-
ing sequence of spot rates, the price of the bond is closest to:
Time-to-Maturity Spot Rates
1 year 8.0%
2 years 9.0%
3 years 9.5%
A. 96.98.
B. 101.46.
C. 102.95.
e following information relates to Questions 15–17
Bond Coupon Rate Time-to-Maturity Time-to-Maturity Spot Rates
X 8% 3 years 1 year 8%
Y 7% 3 years 2 years 9%
Z 6% 3 years 3 years 10%
All three bonds pay interest annually.
15. Based upon the given sequence of spot rates, the price of Bond X is closest to:
A. 95.02.
B. 95.28.
C. 97.63.
16. Based upon the given sequence of spot rates, the price of Bond Y is closest to:
A. 87.50.
B. 92.54.
C. 92.76.
17. Based upon the given sequence of spot rates, the yield-to-maturity of Bond Z is closest to:
A. 9.00%.
B. 9.92%.
C. 11.93%
18. Bond dealers most often quote the:
A. flat price.
B. full price.
C. full price plus accrued interest.
Chapter 3 Introduction to Fixed-Income Valuation 15
e following information relates to Questions 19–21
Bond G, described in the exhibit below, is sold for settlement on 16 June 2014.
Annual Coupon 5%
Coupon Payment Frequency Semiannual
Interest Payment Dates 10 April and 10 October
Maturity Date 10 October 2016
Day-Count Convention 30/360
Annual Yield-to-Maturity 4%
19. e full price that Bond G will settle at on 16 June 2014 is closest to:
A. 102.36.
B. 103.10.
C. 103.65.
20. e accrued interest per 100 of par value for Bond G on the settlement date of 16 June
2014 is closest to:
A. 0.46.
B. 0.73.
C. 0.92.
21. e flat price for Bond G on the settlement date of 16 June 2014 is closest to:
A. 102.18.
B. 103.10.
C. 104.02.
22. Matrix pricing allows investors to estimate market discount rates and prices for bonds:
23. When underwriting new corporate bonds, matrix pricing is used to get an estimate of the:
A. required yield spread over the benchmark rate.
B. market discount rate of other comparable corporate bonds.
C. yield-to-maturity on a government bond having a similar time-to-maturity.
24. A bond with 20 years remaining until maturity is currently trading for 111 per 100 of
par value. e bond offers a 5% coupon rate with interest paid semiannually. e bond’s
annual yield-to-maturity is closest to:
A. 2.09%.
B. 4.18%.
C. 4.50%.
25. e annual yield-to-maturity, stated for with a periodicity of 12, for a 4-year, zero-coupon
bond priced at 75 per 100 of par value is closest to:
A. 6.25%.
B. 7.21%.
C. 7.46%.
16 Part I: Learning Objectives, Summary Overview, and Problems
26. A 5-year, 5% semiannual coupon payment corporate bond is priced at 104.967 per 100
of par value. e bond’s yield-to-maturity, quoted on a semiannual bond basis, is 3.897%.
An analyst has been asked to convert to a monthly periodicity. Under this conversion, the
yield-to-maturity is closest to:
A. 3.87%.
B. 4.95%.
C. 7.67%.
e following information relates to Questions 27–30
A bond with 5 years remaining until maturity is currently trading for 101 per 100 of par value.
e bond offers a 6% coupon rate with interest paid semiannually. e bond is first callable
in 3 years, and is callable after that date on coupon dates according to the following schedule:
End of Year Call Price
3 102
4 101
5 100
27. e bond’s annual yield-to-maturity is closest to:
A. 2.88%.
B. 5.77%.
C. 5.94%.
28. e bond’s annual yield-to-first-call is closest to:
A. 3.12%.
B. 6.11%.
C. 6.25%.
29. e bond’s annual yield-to-second-call is closest to:
A. 2.97%.
B. 5.72%.
C. 5.94%.
30. e bond’s yield-to-worst is closest to:
A. 2.88%.
B. 5.77%.
C. 6.25%.
31. A two-year floating-rate note pays 6-month Libor plus 80 bps. e floater is priced at
97 per 100 of par value. Current 6-month Libor is 1.00%. Assume a 30/360 day-count
convention and evenly spaced periods. e discount margin for the floater in basis points
is closest to:
A. 180 bps.
B. 236 bps.
C. 420 bps.
32. An analyst evaluates the following information relating to floating rate notes (FRNs) is-
sued at par value that have 3-month Libor as a reference rate:
Floating Rate Note Quoted Margin Discount Margin
X 0.40% 0.32%
Y 0.45% 0.45%
Z 0.55% 0.72%
Chapter 3 Introduction to Fixed-Income Valuation 17
Based only on the information provided, the FRN that will be priced at a premium on
the next reset date is:
A. FRN X.
B. FRN Y.
C. FRN Z.
33. A 365-day year bank certificate of deposit has an initial principal amount of USD 96.5
million and a redemption amount due at maturity of USD 100 million. e number of
days between settlement and maturity is 350. e bond equivalent yield is closest to:
A. 3.48%.
B. 3.65%.
C. 3.78%.
34. e bond equivalent yield of a 180-day banker’s acceptance quoted at a discount rate of
4.25% for a 360-day year is closest to:
A. 4.31%.
B. 4.34%.
C. 4.40%.
35. Which of the following statements describing a par curve is incorrect?
A. A par curve is obtained from a spot curve.
B. All bonds on a par curve are assumed to have different credit risk.
C. A par curve is a sequence of yields-to-maturity such that each bond is priced at par
value.
36. A yield curve constructed from a sequence of yields-to-maturity on zero-coupon bonds is
the:
A. par curve.
B. spot curve.
C. forward curve.
37. e rate, interpreted to be the incremental return for extending the time-to-maturity of
an investment for an additional time period, is the:
A. add-on rate.
B. forward rate.
C. yield-to-maturity.
e following information relates to Questions 38 and 39
Time Period Forward Rate
“0y1y” 0.80%
“1y1y” 1.12%
“2y1y” 3.94%
“3y1y” 3.28%
“4y1y” 3.14%
All rates are annual rates stated for a periodicity of one (effective annual rates).
18 Part I: Learning Objectives, Summary Overview, and Problems
38. e 3-year implied spot rate is closest to:
A. 1.18%.
B. 1.94%.
C. 2.28%.
39. e value per 100 of par value of a two-year, 3.5% coupon bond, with interest payments
paid annually, is closest to:
A. 101.58.
B. 105.01.
C. 105.82.
40. e spread component of a specific bond’s yield-to-maturity is least likely impacted by
changes in:
A. its tax status.
B. its quality rating.
C. inflation in its currency of denomination.
41. e yield spread of a specific bond over the standard swap rate in that currency of the same
tenor is best described as the:
A. I-spread.
B. Z-spread.
C. G-spread.
e following information relates to Question 42
Bond Coupon Rate Time-to-Maturity Price
UK Government Benchmark Bond 2% 3 years 100.25
UK Corporate Bond 5% 3 years 100.65
Both bonds pay interest annually. e current three-year EUR interest rate swap benchmark
is 2.12%.
42. e G-spread in basis points on the UK corporate bond is closest to:
A. 264 bps.
B. 285 bps.
C. 300 bps.
Chapter 3 Introduction to Fixed-Income Valuation 19
43. A corporate bond offers a 5% coupon rate and has exactly 3 years remaining to maturity.
Interest is paid annually. e following rates are from the benchmark spot curve:
Time-to-Maturity Spot Rate
1 year 4.86%
2 years 4.95%
3 years 5.65%
e bond is currently trading at a Z-spread of 234 bps. e value of the bond is closest to:
A. 92.38.
B. 98.35.
C. 106.56.
44. An option-adjusted spread (OAS) on a callable bond is the Z-spread:
A. over the benchmark spot curve.
B. minus the standard swap rate in that currency of the same tenor.
C. minus the value of the embedded call option expressed in basis points per year.