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1、Fixed Income 1.A 10-year bond was issued four years ago. The bond is denominated in US dollars, offers a coupon rate of 10% with interest paid semi-annually, and is currently priced at 102% of par. The bonds: A. B. C.tenor is six years. nominal rate is 5%. redemption value is 102% of the par value.A
2、 is correct. The tenor of the bond is the time remaining until the bonds maturity date. Although the bond had a maturity of 10 years at issuance (original maturity), it was issued four years ago. Thus, there are six years remaining until the maturity date. B is incorrect because the nominal rate is
3、the coupon rate, i.e., the interest rate that the issuer agrees to pay each year until the maturity date. Although interest is paid semi- annually, the nominal rate is 10%, not 5%. C is incorrect because it is the bonds price, not its redemption value (also called principal amount, principal value,
4、par value, face value, nominal value, or maturity value), that is equal to 102% of the par value.2. A. B. C.A sovereign bond has a maturity of 15 years. The bond is best described as a: perpetual bond. pure discount bond. capital market security.C is correct. A capital market security has an origina
5、l maturity longer than one year. A is incorrect because a perpetual bond does not have a stated maturity date. Thus, the sovereign bond, which has a maturity of 15 years, cannot be a perpetual bond. B is incorrect because a pure discount bond is a bond issued at a discount to par value and redeemed
6、at par. Some sovereign bonds (e.g., Treasury bills) are pure discount bonds, but others are not.3. A company has issued a floating-rate note with a coupon rate equal to the three- month Libor + 65 basis points. Interest payments are made quarterly on 31 March, 30 June, 30 September, and 31 December.
7、 On 31 March and 30 June, the three-month Libor is 1.55% and 1.35%, respectively. The coupon rate for the interest payment made on 30 June is: A. B. C.2.00%. 2.10%. 2.20%.C is correct. The coupon rate that applies to the interest payment due on 30 June is based on thethree-month Libor rate prevailin
8、g on 31 March. Thus, the coupon rate is 1.55% + 0.65% = 2.20%.4. The legal contract that describes the form of the bond, the obligations of the issuer, and the rights of the bondholders can be best described as a bonds: A. B. C.covenant. indenture. debenture.B is correct. The indenture, also referre
9、d to as trust deed, is the legal contract that describes the form of the bond, the obligations of the issuer, and the rights of the bondholders. A is incorrect because covenants are only one element of a bonds indenture. Covenants are clauses that specify the rights of the bondholders and any action
10、s that the issuer is obligated to perform or prohibited from performing. C is incorrect because a debenture is a type of bond.5. A. B. C.Which of the following is a type of external credit enhancement? Covenants A surety bond OvercollaterizationB is correct. A surety bond is an external credit enhan
11、cement, i.e., a guarantee received from a third party. If the issuer defaults, the guarantor who provided the surety bond will reimburse investors for any losses, usually up to a maximum amount called the penal sum. A is incorrect because covenants are legally enforceable rules that borrowers and le
12、nders agree upon when the bond is issued. C is incorrect because overcollateralization is an internal, not external, credit enhancement. Collateral is a guarantee underlying the debt above and beyond the issuers promise to pay, and overcollateralization refers to the process of posting more collater
13、al than is needed to obtain or secure financing. Collateral, such as assets or securities pledged to ensure debt payments, is not provided by a third party. Thus, overcollateralization is not an external credit enhancement.6. A. B. C.An affirmative covenant is most likely to stipulate: limits on the
14、 issuers leverage ratio. how the proceeds of the bond issue will be used. the maximum percentage of the issuers gross assets that can be sold.B is correct. Affirmative (or positive) covenants enumerate what issuers are required to do and are typically administrative in nature. A common affirmative c
15、ovenant describes what theissuer intends to do with the proceeds from the bond issue. A and C are incorrect because imposing a limit on the issuers leverage ratio or on the percentage of the issuers gross assets that can be sold are negative covenants. Negative covenants prevent the issuer from taki
16、ng actions that could reduce its ability to make interest payments and repay the principal.7. A. B. C.Which of the following best describes a negative bond covenant? The issuer is: required to pay taxes as they come due. prohibited from investing in risky projects. required to maintain its current l
17、ines of business.B is correct. Prohibiting the issuer from investing in risky projects restricts the issuers potential business decisions. These restrictions are referred to as negative bond covenants. A and C are incorrect because paying taxes as they come due and maintaining the current lines of b
18、usiness are positive covenants.8.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. B. C.Eurobonds. global bonds. foreign bonds.C is correct. Bonds sold in a country and denominated in that cou
19、ntrys currency by an entity from another country are referred to as foreign bonds. A is incorrect because Eurobonds are bonds issued outside the jurisdiction of any single country. B is incorrect because global bonds are bonds issued in the Eurobond market and at least one domestic country simultane
20、ously.9. A. B. C.Relative to domestic and foreign bonds, Eurobonds are most likely to be: bearer bonds. registered bonds. subject to greater regulation.A is correct. Eurobonds are typically issued as bearer bonds, i.e., bonds for which the trustee does not keep records of ownership. In contrast, dom
21、estic and foreign bonds are typically registered bonds for which ownership is recorded by either name or serial number. B is incorrect because Eurobonds are typically issued as bearer bonds, not registered bonds. C is incorrect because Eurobonds are typically subject to lower, not greater, regulatio
22、n than domestic and foreign bonds.10. An investor in a country with an original issue discount tax provision purchases a20-year zero-coupon bond at a deep discount to par value. The investor plans to hold the bond until the maturity date. The investor will most likely report: A. B. C.a capital gain
23、at maturity. a tax deduction in the year the bond is purchased. taxable income from the bond every year until maturity.C is correct. The original issue discount tax provision requires the investor to include a prorated portion of the original issue discount in his taxable income every tax year until
24、 maturity. The original issue discount is equal to the difference between the bonds par value and its original issue price. A is incorrect because the original issue discount tax provision allows the investor to increase his cost basis in the bond so that when the bond matures, he faces no capital g
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