1112. Ifa 7.59 coupon bond that pays interest every 182 days paid interest 62 days ago, the accrued Interest would be A167 8.1235 1277 D.11.98 e12as $37.5 * (62/182) = $12.77 1113, If 9% coupon bond that pays interest every 182 days paid interest 112 days ago, the accrued interest would be 4.27.69 8.27.35 26.7 ».27.98 £28.15 $45 * (212/182) = $27.69 1114. A7% coupon bond with an ask price of 100:00 pays interest every 182 days. If the bond paid interest 32 days ago, the invoice price of the bond would be A 1,005.67 8. 1,007.35 c. 1,006.35 1B. 1,006.15 1,007.12 $1000 + [35 * (32/182)] = $1006.15 1115, A7.5% coupon bond with an ask price of 100:00 pays interest every 182 days. Ifthe bond paid interest 62 days ago, the invoice price of the bond would be A. 1,011.67 8. 1,012.35 1012.77 D.1,011.98 £.1,012.15. $1000 + [37.5 * (62/182) 1116. A 9% coupon bond with an ask price of 100:00 pays interest every 182 days. Ifthe bind paid interest 1112 days ago, the invoice price of the bond would be A. 1,027.69 8. 1,027.35 ©. 1,026.77 D. 1,027.98 1,028.15 $1,000 + [45 * (112/182)] = $1,027.691117. One year ago, you purchased a newiy issued TIPS bond that has a 5% coupon rate, five years to maturity, and a par value of $1,000. The average inflation rate over the year was 3.2%. What's the ‘amount of the coupon payment you will receive and what is the current face value of the bond? A. $50.00, $2,000 8. $32.00, $1,032 C. $50.00, $1,032 D. $32.00, $1,050 £, $51.60, $1,032 The bond price, which is indexed to the inflation rate, becomes $1,000 * 1.032 = $1,032. The interest payment is based on the coupon rate and the new face value. The interest amount equals $1,032 * 0: $51.60. 1118, One year ago, you purchased a newly issued TIPS bond that has a 4% coupon rate, five years to ‘maturity, and a par value of $1,000. The average inflation rate over the year was 3.6% What is the amount of the coupon payment you will ceive and what is the current face value of the bond? A, $40.00, $1,000 B. $41.44, $1,036 C. $40.00, $1,036 0. $36.00, $1,040 €. $76.00, $1,000 ‘The bond price, which is indexed to the inflation rate, becomes $1,000 * 1.036 = $1,036. The interest payment is based on the coupon rate and the new face value. The interest ammount equals $1,036 * 04 $41.44, 119. ACDOis a A, Command Duty Officer B. collateralized debt obligation commercial debt originator D. collateralized debenture originator . common debt officer 120, sIvs are A. structured investment vehicles 8. structured interest rate vehicles . semi-annual investment vehicles D. riskless investments €. structured insured variable rate instruments 121, SIVs raise funds by ‘and then use the proceeds to, A. Issuing short-term commercial paper; retire other forms of their debt {issuing short-term commercial paper; buy other forms of debt such as mortgages C. issuing long-term bonds; retire other forms of their debt D. Issuing long-term bonds; buy other forms of debt such as mortgages E.Aand D. SIVs raise funds by issuing short-term commercial paper and then use the proceeds to buy other forms ‘of debt such as mortgages.122, CDOs are divided in tranches A. that provide investors with securities with varying degrees of credit risk 8. and each tranch is given a different evel of seniority in terms ofits claims on the underlying pool and none of the tranches are risky D. and equity tranch is very low risk E,AandB Both A and B are correct. 123, Mortgage-backed CDOs were a disaster in 2007 because | they were formed by pooling high quality fixed-rated loans with low interest rates 8, they were formed by pooling sub-prime mortgages C. home prices stalled ©. the mortgages were variable rate loans and interest rates increased E.8,CandD Mortgage-backed CDOs were a disaster in 2007 because they were formed by pooling sub-prime ‘mortgages, home prices stalled, the mortgages were variable rate loans and interest rates increased. 1124. Ifyou are buying a coupon bond between interest paying dates, is the amount you would pay to your broker for the bond more or less than the amount quoted in the financial quotation pages? Discuss the differences and how these differences arise. If you are buying a bond between interest paying dates, you will pay more than the amount quoted in the financial pages. You wil pay that price plus the interest that has accrued since the last interest paying date. That interest belongs to the seller of the bond and willbe remitted to the seller by the broker. When the next interest paying date arrives, you will receive the entire coupon payment. Feedback: The rationale for this question is be certain that the student understands the mechanism Involved in the payment of interest on coupon bonds and the pricing of bonds. 125. Discuss the taxation ramifications of zero coupon bonds. How has this taxation procedure changed lover the years? How has this change affected the demand for these bonds? The only return on a zero coupon bond is the capital gain realized when the bond is sold. Initially, the investor was required to pay capital gains tax only when the bond was sold. However, the IRS later decided that part ofthis capital gain each year was really imputed interest and thus now one must pay tax on this imputed interest income (Income that the investor has not yet received). As a result, zero ‘coupon bonds are no longer particularly attractive for individual investors and institutional investors subject to income tax. However, zeros remain attractive to institutional investors not subject to income taxes, such as pension plans and endowments. Feedback: This question tests the depth of the student's understanding of the tax ramification of zero- ‘coupon bonds.126. Why are many bonds callable? What isthe disadvantage to the investor of a callable bond? What does the investor receive in exchange for a bond being callable? How are bond valuation calculations affected if bonds are callable? Many bonds are callable to give the issuer the option of calling the bond in and refunding (reissuing) the bond if interest rates decline. Bonds issued in a high interest rate environment will have the cal feature. Interest rates must decline enough to offset the cost of floating a new issue. The disadvantage to the Investor is that the investor will not receive that long stream of constant income that the bondholder ‘would have received with a noncallable bond. In return, the yields on callable bonds are usually slightly higher than the yields on noncallable bonds of equivalent risk. When the bond is called, the investor receives the call price (an amount greater than par value). The bond valuation calculation should include the call price rather than the par value as the final amount received; also, only the cash flows until the first call should be discounted. The results that the investor should be looking at yield to first call, not Yield to maturity, for callable bonds. Feedback: This question tests the student's understanding of callable bonds. 127. You purchased a zero-coupon bond that has a face value of $1,000, five years to maturity and a yield to maturity of 7.3%. I is one year later and similar bonds are offering a yield to maturity of 8.1%. You will sell the bond now. You have a tax rate of 40% on regular income and 15% on capital gains. Calculate the following for this bond. ‘the purchase price of the bond ‘the current price of the bond + the imputed interest income ‘ the capital gain (or loss) on the bond ‘the before-tax rate of return on this investment ‘the after-tax rate of return on this investment Calculations are shown in the table below. Purchase Price of the Bond is 73) PMT=0 | FV=1000 CPTP' Current Price of the Bond Ne 81 PMT=0 | FV=1000 CPTP’ Imputed Interest Income Find price at original YTM N=4 1-73 | PMT=0 | FV=1000 | CPTP Change in price at original YTM = imputed interest income 754,40 - $703.07 = $51.33 Capital Gain (Loss) Change in price due to interest rate change = $732.31 - 754.40 = -$22.09 ‘Note’ total change in price=imputed interest income + capital gain (loss) $732.31 - 703.07 = $29.24 = $51.33 - 22.09 Bafore-tax Rate of Return ($732.31 - 703,07yS703.07 = 4.16% After-tax Rate of Retum tax on imputed interest income=$51.33 * 4 = $20.53 tax on capital gain (loss) = -§22.09 * 15 = -$3.31 (savings due to capital loss) After-tax return=(S732.31 - 703.07 - 20.53 + 3.31/$703.07 = 1.71%