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QUESTION 50

1. Assume the two-year "real" interest rate is 1.25%, and the market expects an inflation rate of 1.5% over each of the next two years. The nominal two-year interest rate equals approximately:

   		0.25%
   		2.75%
   		4.00%
   		4.25%
   		5.5%

2 points

QUESTION 51

1. Compared to companies whose bonds ae rated higher on the credit rating scale, companies whose bonds are rated lower:

   		typically have greater default risk, hence narrower credit spreads
   		typically have greater default risk, hence wider credit spreads
   		typically have lower default risk, hence narrower credit spreads
   		typically have lower default risk, hence wider credit spreads

2 points

QUESTION 52

1. Investor X has a one-year horizon, Investor Y has a three-year horizon. They both purchase the same two-year Treasury note. Which of the following expectations are consistent with their respective actions?

   		X and Y must have similar expectations regarding interest rates as they purchased the same bond!
   		X believes interest rates will rise soon and remain there for a few years; Y believes rates will fall soon and remain there for a few years.
   		X believes interest rates will decline soon and remain there for a few years; Y believes rates will increase soon and remain there for a few years.

2 points

QUESTION 53

1. An investor purchases a 6% coupon, ten-year note issued by company ABC, from a bond dealer. The investor enters into a ten-year interest rate swap agreement with a swaps dealer, to pay 5% and receive six-month LIBOR. What is the investor's "net" situation (assuming ABC and the swaps dealer do not default)?

   		Receives 6% plus LIBOR
   		Receives LIBOR plus 1%
   		Pays 1%
   		Receives 1%
   		Receives LIBOR
   		Receives 11%

2 points

QUESTION 54

1. In the above question, who faces default risk from ABC?

   		Company ABC
   		The swaps dealer
   		The bond dealer
   		The investor

2 points

QUESTION 55

1. You own Bond B and are concerned about interest rates increasing soon. You have chosen Bond H to hedge your B risk. The greater H's dv01:

   		the more of it you need to buy
   		the more of it you need to sell short
   		the less of it you need to buy
   		the less of it you need to sell short

2 points

QUESTION 56

1. You expect interest rates to fall. Which of the following would produce the greatest (percentage) price increase should you be correct?

   		A two-year bond with a 4% coupon
   		A four-year zero coupon bond
   		A four-year, 4% coupon bond which amortizes half of its principal at the end of year three
   		A four-year, 4% coupon bullet bond
   		A forty-year floating rate note which pays LIBOR and reprices every six months

2 points

QUESTION 57

1. An Amortizing bond and a Bullet bond have the same coupon, maturity and yield-to-maturity. They are both at par. Which of the following is true? 3 points

   		Amortizer has a higher dv01, therefore a change in yield has a greater effect on its price than the bullet.
   		Amortizer has a lower dv01, therefore a change in yield has a greater effect on its price than the bullet.
   		Amortizer has a lower dv01, therefore a change in yield has a smaller effect on its price than the bullet.
   		Amortizer has a higher dv01, therefore a change in yield has a smaller effect on its price than the bullet.

3 points

QUESTION 58

1. Which of the following is true of the fixed side payer of 2% in a 5-year swaps?

   		If it is an inflation swap, he believes inflation will average less than 2% over the next five years.
   		If a credit default swap by PKW Company, an investor in a 5-year bond issued is paying 2% to protect against default by PKW.
   		If "plain vanilla" swap, she will receive the principal at the end of five years in exchange for her 2% over the five years.

2 points

QUESTION 59

1. If you believe the economy is accelerating its way out of the recent deep recession, and thereby soon to push interest rates up significantly, you should stay away from:

   		money market instruments
   		long duration fixed income bonds
   		short term floating rate notes
   		long term floating rate notes

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