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Given a 10-year time horizon, the reinvestment rate risk is LOWEST for a: a) 4-year, 5% coupon bond b) 8-year, 8% coupon bond c) 5-year, zero-coupon...
a) 1.74%
b) 3.36%
c) 4.51%
d) 7.16%
4.) According to liquidity preference theory, which of the following statements is FALSE?
- a) All else equal, investors prefer short-term securities over long-term securities
- b) Long-term rates should be higher than short-term rates because of the added risks
- c) Investors perceive little risk differential between short-term and long-term securities
- d) Borrowers will pay a premium for long-term funds to avoid having to roll over short-term debt
5.) For the YTM to equal to actual compound return an investor realizes on an investment in a coupon bond, we must assume all of the following EXCEPT:
- a) Cash flows will be paid as promised
- b) The bond will not be sold at a capital loss
- c) Cash flows will be reinvested at the YTM rate
- d) The bond will be held until maturity
6.) What is the relative yield credit spread of a 10-year Treasury bond with a yield-to-maturity of 5.35% and a 10-year AAA corporate bond with a yield-to-maturity of 5.70%?
- a) 0.0654
- b) 0.0035
- c) 0.1105
- d) 0.0614
8.) A trader wants to duration-neutral position in US Treasury 2-year and 10-year notes. The trader wants a long position in the 2-year note (DV01 = 187.70) and short position in the 10-year note (DV01 = 812.84). How much worth of 10-year notes should the trader position if the 2-year note value is set at $50MM
- a) $ 11. 35
- b) - $ 11.55
- c) $ 216.53
- d) - $ 216.53
9.) Which of the following is TRUE with US Treasury auctions?
- a) Uniform price auction appears to have higher bid-cover ratio and a lower dispersion of winning bids
- b) Bidders face quantity uncertainty in both the uniform and discriminatory price auctions
- c) The US treasury makes an equivalent allocation for bidders at the stop-out yield
- d) Bidders cannot diversify their bids
10.) Which statement is TRUE according to pure expectations theory of yield curve shape?
- a) Lower inflation expectations result in a flat yield curve
- b) Higher inflation expectations result in a flat yield curve
- c) Lower short-term inflation expectations result in a humped yield curve
- d) Higher short-term inflation followed by lower long-term inflation results in a humped yield curve
11.) If a trader expects a flatter yield curve, he/she expects to profit from the move by going __ short-end bonds and going ___ long-end bonds.
- a) Long, short
- b) Long, long
- c) Short, long
- d) Short, short
