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Bad on the following information to answer questions from 39 to 40: A mortgage-backed curity has been divided into three class or tranches as follows:
Tranche 鈪? receives net interest and all the principal payments
until it is completely paid off.
Tranche 鈪?receives its share of net interest and starts receiving
all the principal repayments after
Tranche 鈪?has been completely paid off. Prior to that, it only receives interest payments.
Tranche 鈪?receives monthly net interest and starts receiving all principal repayments after
Tranches 鈪?and 鈪?have been completely paid off. Prior to that, it only receives interest payments.锛堝垎鏁帮細11.00锛?/div>
(1).For a relatively small decline in mortgage interest rates, which of the tranches has the least amount of prepayment risk?
• A. Tranche 鈪?
• B. Tranche 鈪?
• C. Tranche 鈪?
锛堝垎鏁帮細1.00锛?/div>
A. 鈭?/span>
B.
C.
D.
瑙ｆ瀽锛歍ranche 鈪?has the least amount of prepayment risk since it receives the prepayments last.
(2).For an investor who is interested in long-term gains, in which tranche should she invest?
川端康成作品• A. Tranche 鈪?
• B. Tranche 鈪?
• C. Tranche 鈪?
锛堝垎鏁帮細1.00锛?/div>
A. 鈭?/span>
B.
临沂大学是几本
C.
D.
瑙ｆ瀽锛歍ranche 鈪?has the least amount of prepayment risk; therefore, there is a greater chance that the investor will be able to hold on to the investment for a longer time horizon.
(3).Which of the following is TRUE about a bond with a deferred call provision?
• A. It could be called at any time during the initial call period, but not later.
• B. It could not be called right after the date of issue.
• C. Principal repayment can be deferred until it reaches maturity.
锛堝垎鏁帮細1.00锛?/div>
孕妇梦见龙A.
B. 鈭?/span>
C.
D.
瑙ｆ瀽锛欰 deferred call provision means the issue is initially (say, for the first 5 to 7 years) non-callable, after which time it becomes freely callable. In other words, there is a deferment period during which time the bond cannot be called, but after that, it becomes freely callable.
(4).An investor most concerned with reinvestment risk would be least likely to:
• A. eliminate reinvestment risk by holding a coupon bond until maturity.
• B. prefer a lower coupon bond to a higher coupon bond.
• C. be more concerned in a decreasing interest rate environment.
锛堝垎鏁帮細1.00锛?/div>
A. 鈭?/span>
B.
C.
D.
瑙ｆ瀽锛歍he key term here is coupon bond. While an investor in a fixed-coupon bond can usually eliminate price risk by holding a bond until maturity, the same is not true for reinvestment risk. The receipt of periodic coupon payments expos the investor to reinvestment risk.
(5).A bond portfolio manager owns $ 5 million par valfie of a noncallable bond issue. The duration of the bonds is 5.6 and the current market value of the bonds is $5125000. If yield decline by 25 basis points, the approximate new price of the bonds after the decline in
yield will be clost to:
• A. $5053250.
• B. $5070000.
• C. $5196750.
锛堝垎鏁帮細1.00锛?/div>
A.
B.
C. 鈭?/span>
D.
瑙ｆ瀽锛欴uration of 5.6 means that the approximate percentage price change for a 100 basis point change in yield will be 5.6%. A 25 basis point change would be 5.6/4=1.4%. The approximate new price would be $5125000脳1.014=$5196750.
(6).Which of the following investors faces the least inflation risk? An investor who portfolio is concentrated in:
• A. long-term treasury bonds.
• B. medium-term fixed-rate coupon bonds.
• C. equity curities.
锛堝垎鏁帮細1.00锛?/div>
A.
B.
C. 鈭?/span>
D.
瑙ｆ瀽锛欼nflation risk refers to the possibility that prices of general goods and rvices will increa in the economy. Empirical evidence shows that equity curities, or stocks, have the least inflation risk of the investments listed here. Since fixed coupon bonds pay a constant coupon, increasing prices erode the buying power associated with bond payments. (7).An investor is considering the purcha of two bonds. One of the bonds is tax-exempt and yields 4.5% while the other bond is taxable and yield 6.0%. If the two bonds are alike in
all other characteristics, the rate that would make the investor indifferent between the two bonds is clost to:
余秋雨书法• A. 9.0%.
• B. 25.0%.
• C. 27.0%.
锛堝垎鏁帮細1.00锛?/div>
A.
B. 鈭?/span>
C.
倩碧水磁场D.
瑙ｆ瀽锛歍he indifference point would be the rate satisfies the equation: 6.0%脳(1-T)=4.5%. solving for T, the marginal tax rate =25%.丙火喜忌
(8).Generally speaking, all el being equal, an upward-sloping yield curve can be expected when:
• A. inflationary expectations are beginning to subside and investors begin to show a preference for more liquid/less risky short-term curities.
• B. the supply of long-term funds falls short of demand and investors begin to show a preference for more liquid/less risky short-term curities.
• C. inflationary expectations are beginning to subside.
锛堝垎鏁帮細1.00锛?/div>
A.
B. 鈭?/span>
C.
D.
瑙ｆ瀽锛歐hen demand for loanable funds outstrips supply, interest rates can be expected to ri in that (long-term) gment of the market; also, more preference for short-term curities can be expected to drive up long-term rates as the liquidity premium ris. Thus, both circumstances in the answer can be expected to put upward pressure on the long end of the yield curve.
(9).For collateralized mortgage obligations (CMOs) , are prepayment risk and interest rate risk, respectively, different for the various class (tranches) of bonds? Prepayment risk Interest rate risk 鈶燗. NO NO 鈶. YES YES 鈶. YES NO A. 鈶燘. 鈶. 鈶紙鍒嗘暟锛?.00锛?/div>
A.
B. 鈭?/span>
C.
D.
瑙ｆ瀽锛欳MOs are structured so as to redistribute prepayment risk and interest rate risk among the different class, or tranches, of bonds using rules for the distribution of interest and principal. For example, if there are three class of bonds, the distribution rules ensure that the first class of bonds receives all principal until they are completely paid off. Then the next class of bonds receives all principal until they are paid off. Finally, the last class receives principal payments. Effectively, the first tranche has the shortest maturity (duration) while the last tranche has the longest maturity (duration). Thus prepayment risk and interest rate risk have been redistributed across the bond class with the first tranche experiencing the greatest prepayment risk and the last tranche experiencing the most interest rate risk.
(10).Which of the following statements regarding mortgage-backed curities (MBS) and collateralized mortgage obligations (CMOs) is most likely correct?
• A. MBS are created from CMOs.
• B. Creating CMOs does not reduce the overall prepayment risk of a mortgage pass through curity.
• C. The prepayment option of an MBS benefits the curity holder.
锛堝垎鏁帮細1.00锛?/div>
A.
B. 鈭?/span>
C.
D.
瑙ｆ瀽锛欳reating a CMO can redistribute the prepayment risk among the tranches, but it does not alter the overall prepayment risk of a mortgage passthrough curity. CMOs are created from MBS.
(11).When determining credit risk spread, the benchmark curity is most likely a(n):
• A. Low-yield corporate bond.
• B. Treasury bond.
• C. AA rated bond.
锛堝垎鏁帮細1.00锛?/div>
减脂期A.
B. 鈭?/span>
C.
D.
瑙ｆ瀽锛歍he credit risk spread is measured in relation to a default-free curity. Of the choices above, the curity with the least chance of default is the Treasury bond. The AA rated bond is high quality, but not the highest quality (which would have an AAA rating). The low-yield corporate bond is a possibility, but it is not likely that this bond is as default-free as the Treasury curity.
