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Fixed-Income Investments Quiz: Bond Valuation and Yield Analysis, Quizzes of Investment Theory

University of Ottawa Investment Theory

Prof. Fabio Moneta

This quiz assesses fixed-income investment knowledge, covering bond types, provisions, and yield calculations. It features multiple-choice questions and problem-solving exercises on forward rates, yield to maturity, and arbitrage. Detailed solutions are provided, making it ideal for students of fixed-income securities and financial analysis. It enhances understanding of bond valuation and investment strategies, testing knowledge through quantitative problems and scenario analysis. Suitable for students and professionals, it deepens understanding of bond markets and investment techniques, covering bond pricing, yield calculations, and arbitrage strategies for comprehensive assessment.

Typology: Quizzes

2024/2025

Available from 05/29/2025

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ADM3351 Fixed-Income Investments

Winter 2025

Instructor: Fabio Moneta

Quiz 1

11th February 2025

8:30am-9:50am

• This is an open book test. You are allowed to use the slides, notes, and

textbook to help you answer the questions. You are not allowed to use phones

and other smart devices unless authorized by the instructor.

• You should write the quiz independently. Plagiarism is not tolerated.

• Use a financial calculator to take this quiz.

• Keep 4 decimals. If the answer is 2.99999%, then keep 4 decimals to

2.9999%.

• Show your work for the long-answer problems (except MCQs).

Question

1-5.

Total

Maximum

5 points

16 points

9 points

30 points

Points

Partial preview of the text

Download Fixed-Income Investments Quiz: Bond Valuation and Yield Analysis and more Quizzes Investment Theory in PDF only on Docsity!

ADM3351 Fixed-Income Investments

Winter 2025

Instructor: Fabio Moneta

Quiz 1

11 th^ February 2025

8:30am-9:50am

• This is an open book test. You are allowed to use the slides, notes, and

textbook to help you answer the questions. You are not allowed to use phones

and other smart devices unless authorized by the instructor.

• You should write the quiz independently. Plagiarism is not tolerated.

• Use a financial calculator to take this quiz.

• Keep 4 decimals. If the answer is 2.99999%, then keep 4 decimals to

• Show your work for the long-answer problems ( except MCQs ).

Question 1-5. 6. 7. Total

Maximum 5 points 16 points 9 points 30 points

Points

Enter your choices of Q1-Q5 below

1. (1 point) A South African company issues bonds denominated in pound sterling that are

sold to investors in the United Kingdom. These bonds can be best described as:

A. Eurobonds.

B. Foreign bonds.

C. Global bonds.

Answer: B. Bonds sold in a country and denominated in that country’s currency by an entity

from another country are referred to as foreign bonds.

2. (1 point) Which of the following provisions is a benefit to the issuer?

A. Put provision

B. Call provision

C. Conversion provision.

Answer: B. A call provision (callable bond) gives the issuer the right to redeem all or part of the

bond before the specified maturity date. If market interest rates decline or the issuer’s credit

quality improves, the issuer of a callable bond can redeem it and replace it by a cheaper bond.

Thus, the call provision is beneficial to the issuer.

3. (1 point) If you buy a 10-year 6% coupon bond today (right after the coupon payment)

and sell it next year (right after the next coupon payment), what is your expected capital

gain yield (i.e., by how many % the price of the bond will increase over the year)?

Assume the bond pays annual coupons, the face value is $1,000 and YTM=8%

A 1.01%

B 1.07%

C 2.86%

answer: b

Solutions: N=10, I/Y=8, PMT=60, FV=1,000. PV=865.

N=9, ……………………………. PV=875.

4. (1 point)

Assume that all coupons are paid semi-annually. Use face value of $100. Keep 4 decimals for all

the numbers, e.g., 0.3999, 2.9999% for percentage.

Consider 6-month and 1-year forward rates of r(0.5)=5% and r(1)=7%.

Consider 18-month and 2-year spot rates of 𝑟𝑟̂ (1.5) = 6.8% and 𝑟𝑟̂ (2) = 9%.

The price of a zero-coupon bond maturing in 2.5 years from now is $78.

a) (2 points) Find the 1-year spot rate 𝑟𝑟̂ (1).

b) (3 points) Find the 18-month forward rate r(1.5).

c) (4 points) Find the yield to maturity of a 5% coupon bond maturing 2 years from now.

d) (3 points) Find the future price one year from now for a two-year 6% coupon bond

e) (4 points) Find the 2.5-year forward rate.

Answer:

a).

�1 +

2 = �1 +

2 � �1 +^

2 = (1.025)(1.035) 𝑟𝑟̂(1) = 5.9976% b).

�1 +

3 = �1 +

2 � �1 +^

3 = (1.025)(1.035)^ �1 +

c).

1 + 𝑟𝑟̂(0.5) 2

2 +^

3 +^

4 =^ 𝑃𝑃𝑃𝑃

2 +^

3 +^

Use calculator, YTM/2=4.4460%. , YTM=4.4461%*2=8.8920%

Calculate f(2):

4 = �1 +

f(2)=15.7417%

Use calculator, YTM/2=4.4460%, YTM=4.4461%*2=8.8920%

d).

�1 + f(1.5) 2 �

�1 + f(1.5) 2 � �1 + 𝑓𝑓(2) 2 �

= 94.

e).

Calculate r(2):

�1 +^

4 = (^) �1 +

f(2)=15.7417%

5 = �1 +

Fixed-Income Investments Quiz: Bond Valuation and Yield Analysis, Quizzes of Investment Theory

Related documents

Partial preview of the text

Download Fixed-Income Investments Quiz: Bond Valuation and Yield Analysis and more Quizzes Investment Theory in PDF only on Docsity!

ADM3351 Fixed-Income Investments

Winter 2025

Instructor: Fabio Moneta

Quiz 1

11 th^ February 2025

8:30am-9:50am

• This is an open book test. You are allowed to use the slides, notes, and

textbook to help you answer the questions. You are not allowed to use phones

and other smart devices unless authorized by the instructor.

• You should write the quiz independently. Plagiarism is not tolerated.

• Use a financial calculator to take this quiz.

• Keep 4 decimals. If the answer is 2.99999%, then keep 4 decimals to

• Show your work for the long-answer problems ( except MCQs ).

Question 1-5. 6. 7. Total

Maximum 5 points 16 points 9 points 30 points

Points

Enter your choices of Q1-Q5 below

1. (1 point) A South African company issues bonds denominated in pound sterling that are

sold to investors in the United Kingdom. These bonds can be best described as:

A. Eurobonds.

B. Foreign bonds.

C. Global bonds.

Answer: B. Bonds sold in a country and denominated in that country’s currency by an entity

from another country are referred to as foreign bonds.

2. (1 point) Which of the following provisions is a benefit to the issuer?

A. Put provision

B. Call provision

C. Conversion provision.

Answer: B. A call provision (callable bond) gives the issuer the right to redeem all or part of the

bond before the specified maturity date. If market interest rates decline or the issuer’s credit

quality improves, the issuer of a callable bond can redeem it and replace it by a cheaper bond.

Thus, the call provision is beneficial to the issuer.

3. (1 point) If you buy a 10-year 6% coupon bond today (right after the coupon payment)

and sell it next year (right after the next coupon payment), what is your expected capital

gain yield (i.e., by how many % the price of the bond will increase over the year)?

Assume the bond pays annual coupons, the face value is $1,000 and YTM=8%

A 1.01%

B 1.07%

C 2.86%

answer: b

Solutions: N=10, I/Y=8, PMT=60, FV=1,000. PV=865.

N=9, ……………………………. PV=875.

4. (1 point)

Assume that all coupons are paid semi-annually. Use face value of $100. Keep 4 decimals for all

the numbers, e.g., 0.3999, 2.9999% for percentage.

Consider 6-month and 1-year forward rates of r(0.5)=5% and r(1)=7%.

Consider 18-month and 2-year spot rates of 𝑟𝑟̂ (1.5) = 6.8% and 𝑟𝑟̂ (2) = 9%.

The price of a zero-coupon bond maturing in 2.5 years from now is $78.

a) (2 points) Find the 1-year spot rate 𝑟𝑟̂ (1).

b) (3 points) Find the 18-month forward rate r(1.5).

c) (4 points) Find the yield to maturity of a 5% coupon bond maturing 2 years from now.

d) (3 points) Find the future price one year from now for a two-year 6% coupon bond

e) (4 points) Find the 2.5-year forward rate.

Answer:

2 � �1 +^

2 � �1 +^

2 � �1 +^

2 +^

3 +^

4 =^ 𝑃𝑃𝑃𝑃

2 +^

3 +^

d).

e).

�1 +^

Or