Question 1

What is the TEd spread and what type of risk does it measure?

Accepted Answer

The TEd spread is the difference between a libor rate and the uS T-Bill rate of matching maturity. It is an indicator of perceived credit risk in the general economy. In particular, because sovereign debt instruments are typically the benchmark for the lowest default risk instruments in a given market, and loans between banks (often at libor) have some counterparty risk, the TEd spread is considered to at least in part reflect default (or coun-terparty) risk in the banking sector.

Question 2

Given spot rates for one-, two-, and three-year zero coupon bonds, how many forward rates can be calculated?

Accepted Answer

Three forward rates can be calculated from the one-, two-, and three-year spot rates. The rate on a one-year loan that begins at the end of year 1 can be calculated using the one-and two-year spot rates; in the following equation one would solve for   $[ 1 + r ( 2 ) ] ^ { 2 } = [ 1 + r ( 1 ) ] ^ { 1 } [ 1 + f ( 1,1 ) ] ^ { 1 }$ The rate on a one-year loan that starts at the end of year 2 can be calculated from the two-and three-year spot rates; in the following equation one would solve for   $[ 1 + r ( 3 ) ] ^ { 3 } = [ 1 + r ( 2 ) ] ^ { 2 } [ 1 + f ( 2,1 ) ] ^ { 1 }$ Additionally, the rate on a two-year loan that begins at the end of year 1 can be computed from the one- and three-year spot rates; in the following equation one would solve for $f ( 1,2 ) :$ $[ 1 + r ( 3 ) ] ^ { 3 } = [ 1 + r ( 1 ) ] ^ { 1 } [ 1 + f ( 1,2 ) ] ^ { 2 }$

Question 3

Explain the strategy of riding the yield curve.

Accepted Answer

The strategy of riding the yield curve is one in which a bond trader attempts to generate atotal return over a given investment horizon that exceeds the return to bond with maturity matched to the horizon. The strategy involves buying a bond with maturity more distant than the investment horizon. Assuming an upward sloping yield curve, if the yield curve does not change level or shape, as the bond approaches maturity (or rolls down the yield curve) it will be priced at successively lower yields. So as long as the bond is held for a period less than maturity, it should generate higher returns because of price gains.

Question 4

The following information relates to Questions 49-57liz Tyo is a fund manager for an actively managed global fixed-income fund that buys bonds
issued in Countries A, b, and
-With respect to their discussion of yield curves, Tyo and her assistant are most likely dis- cussing which term structure theory?

Accepted Answer

A)  Pure expectations theory 
B)  local expectations theory 
C)  liquidity preference theory 
A)  Pure expectations theory 
B)  local expectations theory 
C)  liquidity preference theory

Question 5

The following information relates to Questions 16-29
  
-The one-year spot rate r(1) = 4%, the forward rate for a one-year loan beginning in one year is 6%, and the forward rate for a one-year loan beginning in two years is 8%. Which Of the following rates is closest to the three-year spot rate?

Accepted Answer

A)  4.0% 
B)  6.0% 
C)  8.0% 
A)  4.0% 
B)  6.0% 
C)  8.0%

Question 6

The following information relates to Questions 16-29
  
-The swap spread is quoted as 50 bps. If the five-year uS Treasury bond is yielding 2%, the rate paid by the fixed payer in a five-year interest rate swap is closest to:

Accepted Answer

A)  0.50%. 
B)  1.50%. 
C)  2.50%. 
A)  0.50%. 
B)  1.50%. 
C)  2.50%.

Question 7

The following information relates to Questions 49-57liz Tyo is a fund manager for an actively managed global fixed-income fund that buys bonds
issued in Countries A, b, and
-based on the given Z-spreads for bonds 1, 2, and 3, which bond has the greatest credit and liquidity risk?

Accepted Answer

A)  bond 1 
B)  bond 2 
C)  bond 3 
A)  bond 1 
B)  bond 2 
C)  bond 3

Question 8

The following information relates to Questions 16-29
  
-A two-year fixed-for-floating libor swap is 1.00% and the two-year uS Treasury bond is yielding 0.63%. The swap spread is closest to:

Accepted Answer

A)  37 bps. 
B)  100 bps. 
C)  163 bps. 
A)  37 bps. 
B)  100 bps. 
C)  163 bps.

Question 9

The following information relates to Questions 30-36
Jane nguyen is a senior bond trader and Christine Alexander is a junior bond trader for an investment bank. nguyen is responsible for her own trading activities and also for providing assignments to Alexander that will develop her skills and create profitable trade ideas. Exhibit
1 presents the current par and spot rates.
 $\begin{array}{l}
\text { EXHIBIT } 1 \text { Current Par and Spot Rates }\
\begin{array} { l c c } 
\hline \text { Maturity } & \text { Par Rate } & \text { Spot Rate } \
\hline \text { One year } & 2.50 \% & 2.50 \% \
\text { Two years } & 2.99 \% & 3.00 \%
\end{array}
\end{array}$ (continued)
(Continued)
 $\begin{array} { l c c } 
\hline \text { Maturity } & \text { Par Rate } & \text { Spot Rate } \
\hline \text { Three years } & 3.48 \% & 3.50 \% \
\text { Four years } & 3.95 \% & 4.00 \% \
\text { Five years } & 4.37 \% & \
\hline
\end{array}$ 
Note: Par and spot rates are based on  nnual-coupon sovereign bonds. nguyen gives Alexander two assignments that involve researching various questions:
Assignment 1: What is the yield to maturity of the option-free, default risk-free bond presented in Exhibit 2? Assume that the bond is held to maturity, and use the rates shown in Exhibit 1.
 $\begin{array}{l}
\text { EXHIBIT } 2 \text { Selected Data for } \$ 1,000 \text { Par Bond }\
\begin{array} { l c c } 
\hline \text { Bond Name } & \text { Maturity (T) } & \text { Coupon } \
\hline \text { Bond Z } & \text { Three years } & 6.00 \% \
\hline
\end{array}
\end{array}$ 
Note: Terms are today for a T-year loan.
Assignment 2: Assuming that the projected spot curve two years from today will be below the current forward curve, is bond Z fairly valued, undervalued, or overvalued?
After completing her assignments, Alexander asks about nguyen's current trading activ- ities. nguyen states that she has a two-year investment horizon and will purchase bond Z as part of a strategy to ride the yield curve. Exhibit 1 shows nguyen's yield curve assumptions implied by the spot rates.
-based on Exhibit 1, the market is most likely expecting:

Accepted Answer

A)  deflation. 
B)  inflation. 
C)  no risk premiums. 
A)  deflation. 
B)  inflation. 
C)  no risk premiums.

Question 10

The following information relates to Questions 30-36
Jane nguyen is a senior bond trader and Christine Alexander is a junior bond trader for an investment bank. nguyen is responsible for her own trading activities and also for providing assignments to Alexander that will develop her skills and create profitable trade ideas. Exhibit
1 presents the current par and spot rates.
 $\begin{array}{l}
\text { EXHIBIT } 1 \text { Current Par and Spot Rates }\
\begin{array} { l c c } 
\hline \text { Maturity } & \text { Par Rate } & \text { Spot Rate } \
\hline \text { One year } & 2.50 \% & 2.50 \% \
\text { Two years } & 2.99 \% & 3.00 \%
\end{array}
\end{array}$ (continued)
(Continued)
 $\begin{array} { l c c } 
\hline \text { Maturity } & \text { Par Rate } & \text { Spot Rate } \
\hline \text { Three years } & 3.48 \% & 3.50 \% \
\text { Four years } & 3.95 \% & 4.00 \% \
\text { Five years } & 4.37 \% & \
\hline
\end{array}$ 
Note: Par and spot rates are based on  nnual-coupon sovereign bonds. nguyen gives Alexander two assignments that involve researching various questions:
Assignment 1: What is the yield to maturity of the option-free, default risk-free bond presented in Exhibit 2? Assume that the bond is held to maturity, and use the rates shown in Exhibit 1.
 $\begin{array}{l}
\text { EXHIBIT } 2 \text { Selected Data for } \$ 1,000 \text { Par Bond }\
\begin{array} { l c c } 
\hline \text { Bond Name } & \text { Maturity (T) } & \text { Coupon } \
\hline \text { Bond Z } & \text { Three years } & 6.00 \% \
\hline
\end{array}
\end{array}$ 
Note: Terms are today for a T-year loan.
Assignment 2: Assuming that the projected spot curve two years from today will be below the current forward curve, is bond Z fairly valued, undervalued, or overvalued?
After completing her assignments, Alexander asks about nguyen's current trading activ- ities. nguyen states that she has a two-year investment horizon and will purchase bond Z as part of a strategy to ride the yield curve. Exhibit 1 shows nguyen's yield curve assumptions implied by the spot rates.
-by choosing to buy bond Z, nguyen is most likely making which of the following assumptions?

Accepted Answer

A)  bond Z will be held to maturity. 
B)  The three-year forward curve is above the spot curve. 
C)  Future spot rates do not accurately reflect future inflation. 
A)  bond Z will be held to maturity. 
B)  The three-year forward curve is above the spot curve. 
C)  Future spot rates do not accurately reflect future inflation.

Question 11

The following information relates to Questions 49-57liz Tyo is a fund manager for an actively managed global fixed-income fund that buys bonds
issued in Countries A, b, and
-did Tyo's assistant accurately describe the process of bootstrapping?

Accepted Answer

A)  yes. 
B)  no, with respect to par yields. 
C)  no, with respect to backward substitution. 
A)  yes. 
B)  no, with respect to par yields. 
C)  no, with respect to backward substitution.

Question 12

The following information relates to Questions 16-29
  
-If the three-month T-bill rate drops and the libor rate remains the same, the relevant TEd spread:

Accepted Answer

A)  increases. 
B)  decreases. 
C)  does not change. 
A)  increases. 
B)  decreases. 
C)  does not change.

Question 13

Give two interpretations for the following forward rate: The two-year forward rate one year from now is 2%.

Accepted Answer

For the two-year forward rate one year f

Question 14

The following information relates to Questions 30-36
Jane nguyen is a senior bond trader and Christine Alexander is a junior bond trader for an investment bank. nguyen is responsible for her own trading activities and also for providing assignments to Alexander that will develop her skills and create profitable trade ideas. Exhibit
1 presents the current par and spot rates.
 $\begin{array}{l}
\text { EXHIBIT } 1 \text { Current Par and Spot Rates }\
\begin{array} { l c c } 
\hline \text { Maturity } & \text { Par Rate } & \text { Spot Rate } \
\hline \text { One year } & 2.50 \% & 2.50 \% \
\text { Two years } & 2.99 \% & 3.00 \%
\end{array}
\end{array}$ (continued)
(Continued)
 $\begin{array} { l c c } 
\hline \text { Maturity } & \text { Par Rate } & \text { Spot Rate } \
\hline \text { Three years } & 3.48 \% & 3.50 \% \
\text { Four years } & 3.95 \% & 4.00 \% \
\text { Five years } & 4.37 \% & \
\hline
\end{array}$ 
Note: Par and spot rates are based on  nnual-coupon sovereign bonds. nguyen gives Alexander two assignments that involve researching various questions:
Assignment 1: What is the yield to maturity of the option-free, default risk-free bond presented in Exhibit 2? Assume that the bond is held to maturity, and use the rates shown in Exhibit 1.
 $\begin{array}{l}
\text { EXHIBIT } 2 \text { Selected Data for } \$ 1,000 \text { Par Bond }\
\begin{array} { l c c } 
\hline \text { Bond Name } & \text { Maturity (T) } & \text { Coupon } \
\hline \text { Bond Z } & \text { Three years } & 6.00 \% \
\hline
\end{array}
\end{array}$ 
Note: Terms are today for a T-year loan.
Assignment 2: Assuming that the projected spot curve two years from today will be below the current forward curve, is bond Z fairly valued, undervalued, or overvalued?
After completing her assignments, Alexander asks about nguyen's current trading activ- ities. nguyen states that she has a two-year investment horizon and will purchase bond Z as part of a strategy to ride the yield curve. Exhibit 1 shows nguyen's yield curve assumptions implied by the spot rates.
-For Assignment 2, Alexander should conclude that bond Z is currently:

Accepted Answer

A)  undervalued. 
B)  fairly valued. 
C)  overvalued. 
A)  undervalued. 
B)  fairly valued. 
C)  overvalued.

Question 15

The following information relates to Questions 49-57liz Tyo is a fund manager for an actively managed global fixed-income fund that buys bonds
issued in Countries A, b, and
-Tyo's assistant should calculate a forward rate closest to:

Accepted Answer

A)  9.07%. 
B)  9.58%. 
C)  9.97%. 
A)  9.07%. 
B)  9.58%. 
C)  9.97%.

Question 16

The following information relates to Questions 30-36
Jane nguyen is a senior bond trader and Christine Alexander is a junior bond trader for an investment bank. nguyen is responsible for her own trading activities and also for providing assignments to Alexander that will develop her skills and create profitable trade ideas. Exhibit
1 presents the current par and spot rates.
 $\begin{array}{l}
\text { EXHIBIT } 1 \text { Current Par and Spot Rates }\
\begin{array} { l c c } 
\hline \text { Maturity } & \text { Par Rate } & \text { Spot Rate } \
\hline \text { One year } & 2.50 \% & 2.50 \% \
\text { Two years } & 2.99 \% & 3.00 \%
\end{array}
\end{array}$ (continued)
(Continued)
 $\begin{array} { l c c } 
\hline \text { Maturity } & \text { Par Rate } & \text { Spot Rate } \
\hline \text { Three years } & 3.48 \% & 3.50 \% \
\text { Four years } & 3.95 \% & 4.00 \% \
\text { Five years } & 4.37 \% & \
\hline
\end{array}$ 
Note: Par and spot rates are based on  nnual-coupon sovereign bonds. nguyen gives Alexander two assignments that involve researching various questions:
Assignment 1: What is the yield to maturity of the option-free, default risk-free bond presented in Exhibit 2? Assume that the bond is held to maturity, and use the rates shown in Exhibit 1.
 $\begin{array}{l}
\text { EXHIBIT } 2 \text { Selected Data for } \$ 1,000 \text { Par Bond }\
\begin{array} { l c c } 
\hline \text { Bond Name } & \text { Maturity (T) } & \text { Coupon } \
\hline \text { Bond Z } & \text { Three years } & 6.00 \% \
\hline
\end{array}
\end{array}$ 
Note: Terms are today for a T-year loan.
Assignment 2: Assuming that the projected spot curve two years from today will be below the current forward curve, is bond Z fairly valued, undervalued, or overvalued?
After completing her assignments, Alexander asks about nguyen's current trading activ- ities. nguyen states that she has a two-year investment horizon and will purchase bond Z as part of a strategy to ride the yield curve. Exhibit 1 shows nguyen's yield curve assumptions implied by the spot rates.
-based on Exhibit 1, the forward rate of a one-year loan beginning in three years is closest to:

Accepted Answer

A)  4.17%. 
B)  4.50%. 
C)  5.51%. 
A)  4.17%. 
B)  4.50%. 
C)  5.51%.

Question 17

A. list the three factors that have empirically been observed to affect Treasury security returns and explain how each of these factors affects returns on Treasury securities.
b. What has been observed to be the most important factor in affecting Treasury returns?
C. Which measures of yield curve risk can measure shaping risk?

Accepted Answer

Studies have shown that there have been

Question 18

Which forward rate cannot be computed from the one-, two-, three-, and four-year spot
rates? The rate for a:
A. one-year loan beginning in two years.
b. two-year loan beginning in two years.
C. three-year loan beginning in two years.

Accepted Answer

However, r

Question 19

The following information relates to Questions 16-29
  
-The one-year spot rate r(1) = 5% and the forward price for a one-year zero-coupon bond beginning in one year is 0.9346. The spot price of a two-year zero-coupon bond is closest to:

Accepted Answer

A)  0.87. 
B)  0.89. 
C)  0.93. 
A)  0.87. 
B)  0.89. 
C)  0.93.

Question 20

According to the local expectations theory, what would be the difference in the one-month total return if an investor purchased a five-year zero-coupon bond versus a two-year zero-coupon bond?

Accepted Answer

The local expectations theory

What is the TEd spread and what type of risk does it measure?

Given spot rates for one-, two-, and three-year zero coupon bonds, how many forward rates can be calculated?

Explain the strategy of riding the yield curve.

The following information relates to Questions 16-29 -The one-year spot rate r(1) = 4%, the forward rate for a one-year loan beginning in one year is 6%, and the forward rate for a one-year loan beginning in two years is 8%. Which Of the following rates is closest to the three-year spot rate?

The following information relates to Questions 16-29 -The swap spread is quoted as 50 bps. If the five-year uS Treasury bond is yielding 2%, the rate paid by the fixed payer in a five-year interest rate swap is closest to:

The following information relates to Questions 49-57liz Tyo is a fund manager for an actively managed global fixed-income fund that buys bonds issued in Countries A, b, and -based on the given Z-spreads for bonds 1, 2, and 3, which bond has the greatest credit and liquidity risk?

The following information relates to Questions 16-29 -A two-year fixed-for-floating libor swap is 1.00% and the two-year uS Treasury bond is yielding 0.63%. The swap spread is closest to:

The following information relates to Questions 49-57liz Tyo is a fund manager for an actively managed global fixed-income fund that buys bonds issued in Countries A, b, and -did Tyo's assistant accurately describe the process of bootstrapping?

The following information relates to Questions 16-29 -If the three-month T-bill rate drops and the libor rate remains the same, the relevant TEd spread:

Give two interpretations for the following forward rate: The two-year forward rate one year from now is 2%.

The following information relates to Questions 49-57liz Tyo is a fund manager for an actively managed global fixed-income fund that buys bonds issued in Countries A, b, and -Tyo's assistant should calculate a forward rate closest to:

Which forward rate cannot be computed from the one-, two-, three-, and four-year spot rates? The rate for a: A. one-year loan beginning in two years. b. two-year loan beginning in two years. C. three-year loan beginning in two years.

The following information relates to Questions 16-29 -The one-year spot rate r(1) = 5% and the forward price for a one-year zero-coupon bond beginning in one year is 0.9346. The spot price of a two-year zero-coupon bond is closest to:

According to the local expectations theory, what would be the difference in the one-month total return if an investor purchased a five-year zero-coupon bond versus a two-year zero-coupon bond?

Fixed-Income Securities: Defining Elements

Fixed-Income Markets: Issuance, Trading, and Funding

Introduction to Fixed-Income Valuation

Introduction to Asset-Backed Securities

Understanding Fixed Income Risk and Return

Fundamentals of Credit Analysis

The Arbitrage-Free Valuation Framework

Valuation and Analysis of Bonds With Embedded Options

Credit Analysis Models

Credit Default Swaps

Overview of Fixed-Income Portfolio Management

Liability-Driven and Index-Based Strategies

Yield Curve Strategies

Fixed-Income Active Management: Credit Strategies

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Exam 7: The Term Structure and Interest Rate Dynamics

What is the TEd spread and what type of risk does it measure?

Given spot rates for one-, two-, and three-year zero coupon bonds, how many forward rates can be calculated?

Explain the strategy of riding the yield curve.

The following information relates to Questions 16-29 -The one-year spot rate r(1) = 4%, the forward rate for a one-year loan beginning in one year is 6%, and the forward rate for a one-year loan beginning in two years is 8%. Which Of the following rates is closest to the three-year spot rate?

The following information relates to Questions 16-29 -The swap spread is quoted as 50 bps. If the five-year uS Treasury bond is yielding 2%, the rate paid by the fixed payer in a five-year interest rate swap is closest to:

The following information relates to Questions 49-57liz Tyo is a fund manager for an actively managed global fixed-income fund that buys bonds issued in Countries A, b, and -based on the given Z-spreads for bonds 1, 2, and 3, which bond has the greatest credit and liquidity risk?

The following information relates to Questions 16-29 -A two-year fixed-for-floating libor swap is 1.00% and the two-year uS Treasury bond is yielding 0.63%. The swap spread is closest to:

The following information relates to Questions 49-57liz Tyo is a fund manager for an actively managed global fixed-income fund that buys bonds issued in Countries A, b, and -did Tyo's assistant accurately describe the process of bootstrapping?

The following information relates to Questions 16-29 -If the three-month T-bill rate drops and the libor rate remains the same, the relevant TEd spread:

Give two interpretations for the following forward rate: The two-year forward rate one year from now is 2%.

The following information relates to Questions 49-57liz Tyo is a fund manager for an actively managed global fixed-income fund that buys bonds issued in Countries A, b, and -Tyo's assistant should calculate a forward rate closest to:

Which forward rate cannot be computed from the one-, two-, three-, and four-year spot rates? The rate for a: A. one-year loan beginning in two years. b. two-year loan beginning in two years. C. three-year loan beginning in two years.

The following information relates to Questions 16-29 -The one-year spot rate r(1) = 5% and the forward price for a one-year zero-coupon bond beginning in one year is 0.9346. The spot price of a two-year zero-coupon bond is closest to:

According to the local expectations theory, what would be the difference in the one-month total return if an investor purchased a five-year zero-coupon bond versus a two-year zero-coupon bond?

Fixed-Income Securities: Defining Elements

Fixed-Income Markets: Issuance, Trading, and Funding

Introduction to Fixed-Income Valuation

Introduction to Asset-Backed Securities

Understanding Fixed Income Risk and Return

Fundamentals of Credit Analysis

The Arbitrage-Free Valuation Framework

Valuation and Analysis of Bonds With Embedded Options

Credit Analysis Models

Credit Default Swaps

Overview of Fixed-Income Portfolio Management

Liability-Driven and Index-Based Strategies

Yield Curve Strategies

Fixed-Income Active Management: Credit Strategies

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