Question

1) An investor buys a 10-year bond with a 7.5% coupon rate paid annually. The bond with a YTM of 6%, is purchased at a price of $111.040 per $100 of par value. Assuming a 25bp change in the YTM, the bond’s approximate modified duration is closest to: a) a) 7.100 years

b) 7.450 years

c) 7.253 years

2) As a corporate bond analyst, you see a 10-year newly bond issued by Apple trading at a spread to Treasuries of 120bps. This bonds was issued 1-year ago at a spread of 90bps. What was the most likely reason the credit spread widened from 90 to 120bps?

a) Strong demand for the securities caused bond spreads to widen.

b) Strong economic conditions resulted in Apple offering their securities at higher spreads.

c) Risk off sentiment in the market driving the weak performance of equities?

3) What is not one of the reasons that investors would require larger yield spreads for long duration securities, such as a 30-year bond?

a) The longer the maturity of a security the greater the uncertainty about an issuer’s future creditworthiness due to the potential for poor management decisions and technological obsolescence.

b) Longer maturity securities have historically shown higher default rates, the greater the maturity.

c) Investors usually don’t require additional spread for taking on more duration risk.

4) What is the price impact of a 10-year corporate bond with a 5.75% coupon rate priced at par ($100) with an instantaneous 75bps widening in spread due to an issuer’s recent announcement that they were adding a significant amount of debt to finance an acquisition which resulted in their debt being downgraded from Aa3 to A2, a 2-notch downgrade. Assume the bond has a Macaulay duration of 7.88 years and its Convexity is 71.375.

a) -5.71%

b) 5.71%

c) -5.39%

d) 5.39%

Answer 1

1)

Hence, correct option is a) 7.100 years