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2007 Fixed Income Midterm exam

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Easiest Fixed Income Midterm exam ever

February 21, 2007 (30 points)

1. (7 points) Today is February 21st 2007. You borrow $1MM (1,00,000 USD) for 18

months and decide to invest it for 15 months at the current market rates shown below : (use bid rates for his problem)

 You wish to hedge the mismatched position. Use the adequate Eurodollar contract quotes from handout1 1 to determine which FRA to use and its price (use last trade quote)

 What amount to you deal for a complete hedge ?

When it comes to fixing the FRA after 15 months, the 3-month rate is 4.93% / 4.95%.

 What is the settlement amount?

 What is the overall profit or loss on the overall position at the end of the 18 months?

2. (4points)

 Dollar and commodity prices are inversely related : a) True b) False

What is your total cost including accrued interest? a)$51 020 b) $52 040 c) $54 080 d) $56 200

 A floating rated bond pegged to Libor will increase in nominal value as Libor increase

a) True b) False

 If a corporate bond is priced below par and its YTM is 8%, its coupon rate should be:

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 What is the dollar price of a 2 year bond with a coupon of 8% paid semi-annually if the yield curve is flat at 5%

a) 87.50 b) 97.75 c) 105.75 d)120.80

 A callable bond has a higher YTM than a non-callable bond a) True b) False

 The greater the liquidity, the highest yield required by the investor : a. True b. False

---3. (3 points)Today is March 7, 2006. IBM 7% October 15, 2026 bond trades at 101 and pays semi annually.

 What is the YTM of the bond using the approximation formula only?

 What is the dirty price?

 What is my total cost including accrued interest if I wish to purchase 120 bonds?

---4. (3 points)What is the modified duration of a 5-year 5% coupon bond paying annually? Assume a flat yield curve at 5.5%.

This bond has a convexity of 120. What is the bond’s new price for a 50BP increase in yield using duration and convexity?

5. (2 points)Here are the following bids on the $70 billion face value of the 10-year Treasury bond auction. The Fed requested $20 billion.

 JPM : 20 billion @4.65%

 Merrill :15 billion @4.68%

 Goldman Sachs: 15 billion @4.63%

 Morgan Stanley : 22 billion @4.66%

Who gets what and what is the Fed’s bid on its share ?

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B. What is this trade betting on?

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