Question

In: Finance

Given the following government bond yields: one-year, 2% and four-year, 9.5%. What is the two-year government...

  1. Given the following government bond yields: one-year, 2% and four-year, 9.5%. What is the two-year government bond yield one would linearly interpolate from this information?
  1. 3.25%
  1. 4.50%
  1. 3.67%
  1. none of the above.

  1. A 15 year coupon bond, that makes payments annually, has a coupon rate of 5%. The market discount rate on the bond is 8%. If interest rates were to rise by 100 bps today, how long would it take before the reinvested coupon payments offset the capital loss?
  1. 14.37 years
  1. 8.56 years
  1. 11.02 years
  1. none of the above.
  1. Yield spreads are often calculated as the difference between the interest rate on a risky bond and the interest rate on:
  1. Corporate Bonds
  1. Commercial Paper
  1. Banker’s Acceptances
  1. none of the above.

  1. A fixed income analyst is likely to conduct an independent analysis of the credit risk because credit rating agencies:
    1. Often lag the market in pricing credit risk
    2. Rating agencies may make mistakes
    3. Some risks are difficult to capture in credit ratings
    4. All of the above.

  1. Investment Grade bonds are rated _______/______ or higher by Moody’s/S&P. (Looking for the definition here, not just a true statement)
  1. Ba1/BB+
  1. A3/A-
  1. Baa3/BBB-
  1. none of the above.

Solutions

Expert Solution

1 4.5%

Y1 Y2 Y3 Y4
2% 4.50% 7% 9.50%
(9.5-2)/3+2%

2.Bond price at 8% = 1000*C*PVIFA(8%,15)+1000*PVIF(8%,15)=742.975, where C=0.05/5%

Bond price at 9% = 1000*.05*PVIFA(9%,15)+1000*PVIF(9%,15)=678.035

Loss in capital = 64.94

To recover 64.94, annual coupon payments are reinvested at 9% and present value of interest received should be equal to 64.94

64.94= 50*9%^n

n=18.26 years plus 1 year as coupon payment is received at year 1 end. hence total reinvestment period = 19.26 years.

Ans.none of the above

3. none of the above. Usually calculated as difference between risky bond and treasury bills/bonds.

4.d

5. A bond rating refers to the company's ability/likelihood to repay the issued debt. Highest ratings for Long term bonds - Moody's is Aaa and S&P is AAA. Probability of repayment reduces as rating decreases. Investment Grade bonds are rated Baa3/BBB- or higher by Moody’s/S&P. Highest rating for Moody's is Aaa and S&P AAA. anything below this rating is non investment grade.


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