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:
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 ?
B. What is this trade betting on?
