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Free Test Prep CFA-Level-I Exam Questions (page: 23)

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Duration of a bond normally increases with an increase in:

  1. time to maturity.
  2. coupon rate.
  3. yield to maturity.
  4. par value.

Answer(s): A

Explanation:

Duration is directly related to maturity and inversely related to the coupon rate and yield to maturity (YTM).
Duration is approximately equal to the point in years where the investor receives half of the present value of the bond's cash flows. Therefore, the later the cash flows are received, the greater the duration.
The longer the time to maturity, the greater the duration (and vice versa). A longer-term bond pays its cash flows later than a shorter-term bond, increasing the duration. The lower the coupon rate, the greater the duration (and vice versa). A lower coupon bond pays lower annual cash flows than a higher-coupon bond and thus has less influence on duration. The lower the YTM, the higher the duration. This is because the bond's price (or present value) is inversely related to interest rates. When market yields fall, the value (or cash flow) of a bond increases without increasing the time to maturity.
Consider the purchase of an existing bond selling for $1,150. This bond has 28 years to maturity, pays a 12 percent annual coupon, and is callable in 8 years for $1,100.



What is the bond's yield to call (YTC)?

  1. 10.05%.
  2. 9.26%.
  3. 10.34%.
  4. 10.55%.

Answer(s): A

Explanation:

N = 8, PMT = 120, PV = -1150, FV = 1100, CPT I/Y.



What is the bond's yield to maturity (YTM)?

  1. 9.26%.
  2. 10.34%.
  3. 10.05%.
  4. 10.55%.

Answer(s): B

Explanation:

N = 28, PMT = 120, PV = -1150, FV = 1000, CPT I/Y.



What rate should be used to estimate the potential return on this bond?

  1. the YTM.
  2. 12.00%.
  3. 10.34%.
  4. the YTC.

Answer(s): D



An investor buys a 25-year, 10 percent annual pay bond for $900 planning to sell the bond in 5 years when he estimates yields will be 9 percent. What is the estimate of the future price of this bond?

  1. $964.
  2. $1,000.
  3. $1,122.
  4. $1,091.

Answer(s): D

Explanation:

This is a Present Value problem 5 years in the future. Input into your calculator:
N = 20, PMT = 100, FV = 1000, I/Y = 9CPT PV = 1,091.28The $900 purchase price is a distracter for this problem.



A trader has a long position in a wheat contract.
What is the price at which the trader will receive a maintenance margin call?

  1. $1.90.
  2. $2.05.
  3. $2.25.
  4. $1.75.

Answer(s): D

Explanation:

The trader would have to lose $1,250 or 5,000-3,750 before they get a margin call. 5,000(2.00-P) = 1,250. P = $1.75.



Which of the following statements is TRUE about the profits and losses from buying a put:

  1. potential losses are limited to the initial premium the buyer pays when he buys the put.
  2. potential profits are theoretically unlimited.
  3. potential losses are theoretically unlimited.
  4. none of these choices are correct.

Answer(s): A



XYZ company has entered into a "plain-vanilla" interest rate swap on $1,000,000 notional principal. XYZ company pays a fixed rate of 8 percent on payments that occur at 90-day intervals. Six payments remain with the next one due in exactly 90 days. On the other side of the swap, XYZ company receives payments based on the LIBOR rate. Describe the transaction between XYZ company and the dealer at the end of the sixth period if the appropriate LIBOR rate is 5 percent.

  1. XYZ company receives $12,500.
  2. Dealer pays XYZ company $7,500.
  3. Dealer receives $20,000.
  4. XYZ company pays dealer $7,500.

Answer(s): D

Explanation:

XYZ company owes the dealer ($1,000,000)(.08)(90/360) = $20,000. The dealer owes XYZ company ($1,000,000)(.05)(90/360) = $12,500. Net: XYZ company pays the dealer $7,500.



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