Question

1. In the context of bond valuation, what does a built-in put option do?

Select one:

a. It gives the bond issuer the right buy the bond back from the bond holder prior to maturity.

b. It gives the bond holder the right to sell the bond back to the bond issuer prior to maturity.

c. Both of the above.

d. None of the above.

2. Which of the following is mostly likely to lead to an increase in the price of a bond?

Select one:

a. A premium bond gets closer to maturity.

b. The bond issuer receives a ratings downgrade from one of the ratings agencies.

c. None of these are likely to lead to an increase in the price of a bond.

d. The general level of interest rates decreases.

3. How would you describe a bond if the yield is not greater than the coupon rate and the price is not greater than the face value?

Select one:

a. The bond is trading at a premium.

b. The bond is trading at a discount.

c. The bond is trading at par.

d. This is not possible.

4. What is the price (per $100 of face value) of a bond which makes quarterly coupon payments at a coupon rate of 6.3% p.a. and which has 5 years to maturity, if the bond is trading at a yield of 4.1% p.a.? (Please give working.)

Select one:

a. $109.855

b. $109.767

c. $90.627

d. $109.900

5. A $3000 bond makes semi-annual coupon payments at the rate of 9.5% p.a. on the 1st of February and the 1st of August each year. What would the accrued interest be on the bond if it was sold on the 7th of April 2020? ( please give working)

Select one:

a. $51.68

b. $51.96

c. $52.46

d. $51.17

Answer 1

1. b. It gives the bond holder the right to sell the bond back to the bond issuer prior to maturity.

2. d. The general level of interest rates decreases.

3. b. The bond is trading at a discount.

4.

FV = 100

N = 4 x 5 = 20

PMT = (100 x 6.3%)/4 = 1.575

I/Y = 4.1/4 = 1.025

calculating PV = $109.9

d. $109.900

5.

Number of days between 1st Feb and 1st August = 181 days

Number of days between 1st February and 7th April = 65 days

annual coupon payment = (3000 x 9.5%) = 142.5

Accrued interest = (65/181) x 142.5 = $51.17

d. $51.17