Question

3a)The additional risk inherent to a callable bond is best described as:

Select one:

A. credit risk.

B. reinvestment risk.

C. interest rate risk.

D. market risk.

b)A US Treasury Note with a $5,000 par value is quoted 106-10 – 106-15. A customer sell order would be executed, disregarding commissions, at which of the following prices assuming no change in the quote?

Select one:

A. $5,307.50

B. $1,061.50

C. $1,061.00

D. $5,315.63

c)If the bond’s price is higher than its par value, the bond is trading at:

Select one:

A. a premium.

B. a discount.

C. par.

D. a price above its fair value.

d)The type of bonds with an embedded option that would most likely sell at a lower price than an otherwise similar bond without the embedded option is a:

Select one:

A. Putable bond.

B. Bond cu.m warrant.

C. Callable bond.

D. Convertible bond.

e)Financial intermediation is the process that the financial intermediaries connect borrowers and __________ by transferring funds from one side to another.

Select one:

A. government

B. banks

C. lenders

D. securities firms

Answer 1

3a) Reinvestment risk is inherent to a callable bond.

This is because if the bond is called by the issuer, and the market interest rates become lower subsequently, Then the bondholder will earn lower returns by reinvesting the coupons of the callable bond.

3b)

Treasury Notes are quoted in 32nd.

The bid price is 106+ 15/32 = 106.4388

The ask price is 106+ 10/32 = 106.3125

A customer sell order would be executed, disregarding commissions at 5000 * 1.063125 = 5315.63

3c)

If the bond’s price is higher than its par value, the bond is trading at premium

If the bond’s price is lower than its par value, the bond is trading at discount

3d)

The type of bonds with an embedded option that would most likely sell at a lower price than an otherwise similar bond without the embedded option is a callable bond

Normally a callable bond is disliked by the investor, because the issuer has the right to repurchase the bond before it reaches the maturity at a predetermined price. in most cases the call price is higher than issue price. The bondholder is subjected to subsequent reinvestment risk after that.

3e)

Financial intermediation is the process that the financial intermediaries connect borrowers and __________ by transferring funds from one side to another.

Financial intermediation generally connects investors and lenders.

Since one party is given as borrower, the other party should be lenders