Given a 10-year time horizon, the reinvestment rate risk is LOWEST for a: a) 4-year, 5% coupon bond b) 8-year, 8% coupon bond c) 5-year, zero-coupon…

a) 1.74%

b) 3.36%

c) 4.51%

d) 7.16%

4.) According to liquidity preference theory, which of the following statements is FALSE?

  • a) All else equal, investors prefer short-term securities over long-term securities
  • b) Long-term rates should be higher than short-term rates because of the added risks
  • c) Investors perceive little risk differential between short-term and long-term securities
  • d) Borrowers will pay a premium for long-term funds  to avoid having to roll over short-term debt

5.) For the YTM to equal to actual compound return an investor realizes on an investment in a coupon bond, we must assume all of the following EXCEPT:

  • a) Cash flows will be paid as promised
  • b) The bond will not be sold at a capital loss
  • c) Cash flows will be reinvested at the YTM rate
  • d) The bond will be held until maturity

6.) What is the relative yield credit spread of a 10-year Treasury bond with a yield-to-maturity of 5.35% and a 10-year AAA corporate bond with a yield-to-maturity of 5.70%?

  • a) 0.0654
  • b) 0.0035
  • c) 0.1105
  • d) 0.0614

8.) A trader wants to duration-neutral position in US Treasury 2-year and 10-year notes. The trader wants a long position in the 2-year note (DV01 = 187.70) and short position in the 10-year note (DV01 = 812.84). How much worth of 10-year notes should the trader position if the 2-year note value is set at $50MM

  • a) $ 11. 35
  • b) – $ 11.55
  • c) $ 216.53
  • d) – $ 216.53

9.) Which of the following is TRUE with US Treasury auctions?

  • a) Uniform price auction appears to have higher bid-cover ratio and a lower dispersion of winning bids
  • b) Bidders face quantity uncertainty in both the uniform and discriminatory price auctions
  • c) The US treasury makes an equivalent allocation for bidders at the stop-out yield
  • d) Bidders cannot diversify their bids

10.) Which statement is TRUE according to pure expectations theory of yield curve shape?

  • a) Lower inflation expectations result in a flat yield curve
  • b) Higher inflation expectations result in a flat yield curve
  • c) Lower short-term inflation expectations result in a humped yield curve
  • d) Higher short-term inflation followed by lower  long-term inflation results in a humped yield curve

11.) If a trader expects a flatter yield curve, he/she expects to profit from the move by going __ short-end bonds and going ___ long-end bonds.

  • a) Long, short
  • b) Long, long
  • c) Short, long
  • d) Short, short
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