单选题 Support for the revenue bonds comes from:

A. property taxes based on the project.
B. the gross revenues of the underlying project.
C. the net revenues of the underlying project.

单选题 Credit risk is measured in several ways. The yield differential above the return on a benchmark security measures the:

A. default risk.
B. downgrade risk.
C. credit spread risk.

【正确答案】 C

【答案解析】The yield differential above the return on a benchmark security measures the credit spread risk. Credit spread risk is also known as the risk premium or spread.

单选题 Which of the following statements concerning asset-backed securities (ABSs) is FALSE?

A. The asset-backed pool may be overcollateralized to provide a credit enhancement.
B. The assets are typically placed in a special purpose vehicle to shield them from the firm's creditors.
C. ABSs typically have lower debt ratings than the firm's other borrowings.

【正确答案】 C

【答案解析】The objective of the firm with an ABS issue typically is to get a higher debt rating (a lower cost of borrowing). Typically, the ABS has a higher debt rating, perhaps because of credit enhancements.

单选题 A $1000 par, semiannual-pay bond is trading for 89.14, has a coupon rate of 8.75%, and accrued interest of $ 43.72. The clean price of the bond is:

A. $847.69.
B. $891.40.
C. $935.12.

单选题 Which of the following statements about balancing reinvestment risk and price risk is TRUE? When interest rates:

A. decline, price risk decreases and reinvestment risk decreases.
B. rise, price risk increases and reinvestment risk increases.
C. decline, price risk decreases and reinvestment risk increases.

【正确答案】 C

【答案解析】All else equal, reinvestment risk and price risk move in opposite directions. For example, when interest rates rise, bond prices decrease, but the loss is at least partially offset by decreased reinvestment risk (it is less likely that a bond will be called and bondholders can invest coupon payments at higher yields). When interest rates fall, price risk decreases because the bond value is rising and reinvestment risk increases because it is more likely that the issuer/ borrower will call the security and the bondholder must reinvest coupon payments at lower yields.

单选题 For a decline in interest rates, the price of a callable bond, when compared to an otherwise identical option-free bond, will most likely rise by:

A. less because the price of the embedded option rises.
B. less because the price of the embedded option falls.
C. more because the price of the embedded option rises.

【正确答案】 A

【答案解析】As interest rates decline, the price of the option-free bond rises. However, the price Of the embedded call option also rises. Consequently, the price of a callable bond rises by less than the price of an otherwise identical option-free bond.

单选题 Paul Blackburn is describing mortgage backed securities and makes the following statements: Statement 1: A mortgage pass-through security is formed by pooling a large number of mortgages and issuing certificates that represent ownership shares in the pool. Because each mortgage borrower has the right to prepay the mortgage, the value of a pass-through security behaves as if the security has an embedded put feature. Statement 2: A collateralized mortgage obligation with sequential tranches is created by pooling mortgage pass-through certificates. Securities are issued in different tranches that have proportionate claims on the cash flows from the pass-through certificates. Are Blackburn's statements correct? Statement 1 Statement 2 ①A. Correct Correct ②B. Correct Incorrect ③C. Incorrect Incorrect A. ①B. ②C. ③

【正确答案】 C

【答案解析】Statement 1 is incorrect. A borrower who prepays a mortgage is in effect exercising a call option, similar to a corporate bond issuer who calls a bond and prepays the principal. Therefore the pool of mortgages and the securities created from it behave as if they had an embedded call feature. Statement 2 is incorrect. Sequential tranches issued as a collateralized mortgage obligation do not have proportionate claims on the cash flows from the pool. Instead they have sequential claims. The shortest-term tranche receives principal and interest payments until it is paid off. The cash flows then go to the second tranche until it is paid off, and so on. This structure allows securities with different timing and risk profiles to be issued from the same pool of certificates.

单选题 If the slope of the yield curve begins to rise sharply, it is usually an indication that:

A. the rate of inflation is starting to increase or is expected to do so in the near future.
B. stocks are offering abnormally high rates of return.
C. the Fed has been aggressively driving up short-term interest rates.

【正确答案】 A

【答案解析】According to the expectations hypothesis, higher long-term interest rates and, therefore, up-ward-sloping yield curves will occur if the rate of inflation starts to heat up or is expected to do so in the near future.

单选题 Price compression:

A. occurs when a bond's cap and floor are set close together.
B. occurs when demand for a bond is high near the first call date.
C. reduces the potential for price appreciation and benefits the issuer.

【正确答案】 C

【答案解析】When a bond has a call provision, the potential for price appreciation is reduced, because the call caps the price of the bond near the call price, even if interest rates fall considerably. It is unlikely that investors would pay a price that exceeds the call price. Price compression benefits the issuer, because it allows the issuer to call the bond if interest rates decrease allowing the issuer to replace the existing debt with lower cost debt.

单选题 If investors expect future rates will be higher than current rates, the yield curve should be:

A. upward sweeping.
B. downward sweeping.
C. flat.

【正确答案】 A

【答案解析】When interest rates are expected to go up in the future the yield curve will be upward sweeping because time is on the x-axis and rates are on the y-axis, thus forming an upward sweeping curve.

单选题 Which of the following statements regarding financing bond purchases is TRUE?

A. In margin transactions, the broker borrows from the bank at the call money rate plus a spread.
B. The rate the investor pays on the loan in a margin transaction is known as the call money rate.
C. Purchasing securities on margin allows investors to leverage assets and make larger purchases.

【正确答案】 C

【答案解析】In margin transactions, the broker borrows from the bank at the call money rate. The rate the investor pays on the loan in a margin transaction is known as the call money rate plus a spread. Remember that the broker needs to make profit, so the investor will pay a rate higher than the broker pays to the bank. The investor collateralizes the margin loan with the securities purchased.

单选题 The liquidity preference theory of the term structure of interest rates implies that the shape of the yield curve should be:

A. flat or humped.
B. downward-sloping.
C. upward-sloping.

【正确答案】 C

【答案解析】The liquidity preference theory definitely puts upward pressure on the long end of the term structure and, by itself, would lead to an upward-sloping yield curve.

单选题 Which of the following statements about how the features of a bond impact interest rate risk is FALSE?

A. Bond price movements depend upon the direction and magnitude of changes in interest rates.
B. All else equal, a longer-term bond is more sensitive to interest rates than a shorter-term bond.
C. An inverse relationship between interest rates and bond prices means that the greater the change in interest rates, the less the change in fixed-coupon bond prices.

【正确答案】 C

【答案解析】The inverse relationship between interest rates and bond prices means that when interest rates increase, fixed-coupon bond prices decrease. In other words, the inverse relationship means that interest rates and bond prices move in opposite directions, it does not infer anything about the magnitude of the change.

单选题 Which of the following statements about different types of bonds is least likely correct?

A. Municipal bonds are traded primarily on the New York Stock Exchange.
B. Tax-backed bonds are backed by the full faith and credit of the issuer's entire taxing power.
C. Government-sponsored enterprises issue securities directly in the marketplace, but federally related institutions generally do not.

单选题 Simone Girard, CFA candidate, is studying yield volatility and the value of callable bonds. She has the following information: a callable bond with a call option value calculated at 1.25 (prices are quoted as a percent of par) and a straight bond similar in all other aspects priced at 98.5. Girard also wants to determine how the bond's value will change if yield volatility increases. Which of the following choices is closest to what Girard calculates as the value for the callable bond and correctly describes the bond's price behavior as yield volatility increases?

A. 97.25, price increases.
B. 99.75, price decreases.
C. 97.25, price decreases.

【正确答案】 C

【答案解析】To calculate the callable bond value, use the following formula: Value of callable bond = Value of straight bond - Call option value =98.5-1.25=97.25. Remember: The call option is subtracted from the bond value because the call option is of value to the issuer, not the holder. As yield volatility increases, the value of the embedded option increases. The formula above shows that for a callable bond, an increase in the option value results in a decreased bond value.