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fixed income securities mock exam, Exams of Public finance

London Business School (LBS)Public finance

It's an example of fixed income securities exam

Typology: Exams

2022/2023

Uploaded on 12/05/2023

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tlemcani-selima 🇬🇧

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Fixed Income
MOCK EXAM
INSTRUCTIONS
The exam is a MCQ exam where a valid justification is required for each question. A valid
justification is given by correctly discarding irrelevant choices, directly justify the correct answer
or after showing a detailed calculation. Traditional and financial calculators are authorized. If you
use your financial calculator, please indicate the input parameters and the functions that you use
to reach the final answer. There are 14 questions and you have 70 minutes to solve them, i.e., 5
minutes per question.
Marking grid:
- Good answer and good justification: 1
- Good answer: 0.5
- No answer: 0
- Wrong answer: 0.25
Cheating is forbidden and will involve a grade equal to 0/20! (ZERO TOLERANCE)
Advice: Read the questions carefully!
1. The expected loss for a given debt instrument is estimated as the product of default
probability and:
A. (1 + Recovery rate).
B. (1 – Recovery rate).
C. 1/(1 + Recovery rate).
2. Which of the following statements related to securitization is correct?
A. Time tranching addresses the uncertainty of a decline in interest rates.
B. Securitizations are rarely structured to include both credit tranching and time tranching.
C. Junior and senior bond classes differ in that junior classes can only be paid off at the bond’s
set maturity.
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Fixed Income MOCK EXAM INSTRUCTIONS The exam is a MCQ exam where a valid justification is required for each question. A valid justification is given by correctly discarding irrelevant choices, directly justify the correct answer or after showing a detailed calculation. Traditional and financial calculators are authorized. If you use your financial calculator, please indicate the input parameters and the functions that you use to reach the final answer. There are 14 questions and you have 70 minutes to solve them, i.e., 5 minutes per question. Marking grid:

  • Good answer and good justification: 1
  • Good answer: 0.
  • No answer: 0
  • Wrong answer: 0. Cheating is forbidden and will involve a grade equal to 0/20! ( ZERO TOLERANCE ) Advice: Read the questions carefully!
  1. The expected loss for a given debt instrument is estimated as the product of default probability and: A. (1 + Recovery rate). B. (1 – Recovery rate). C. 1/(1 + Recovery rate).
  2. Which of the following statements related to securitization is correct? A. Time tranching addresses the uncertainty of a decline in interest rates. B. Securitizations are rarely structured to include both credit tranching and time tranching. C. Junior and senior bond classes differ in that junior classes can only be paid off at the bond’s set maturity.
  1. Which of the following describes privately placed bonds? A. They are non-underwritten and unregistered. B. They usually have active secondary markets. C. They are less customized than publicly offered bonds.
  2. A bond is currently trading for $109.246 per $100 of par value. If the bond's yield to maturity falls by 25 bps, the bond's full price is expected to rise to $110.481. If the bond's yield to maturity rises by 25 bps, the bond's full price is expected to fall to $108.029. The bond's approximate convexity is closest to: A. 0. B. 400. C. 26.
  3. What statement about bond convexity is the most correct: A. The increase in the price of the bond if the discount rate decreases by 100 basis points (bps) is greater than the decrease in the price of the bond if the discount rate increases by 100 bps. B. The increase in the price of the bond if the discount rate decreases by 100 basis points (bps) is lower than the decrease in the price of the bond if the discount rate increases by 100 bps C. The increase in the price of the bond if the discount rate increases by 100 basis points (bps) is lower than the decrease in the price of the bond if the discount rate decreases by 100 bps
  1. Which of the following statements is correct concerning mortgage loan defaults? A. A non-recourse jurisdiction poses higher default risks for lenders. B. In a non-recourse jurisdiction, strategic default will not affect the defaulting borrower’s future access to credit. C. When a recourse loan defaults, the mortgaged property is the lender’s sole source for recovery of the outstanding mortgage balance.
  2. In contrast to high-yield credit analysis, investment-grade analysis is more likely to rely on: A. spread risk. B. an assessment of bank credit facilities. C. matching of liquidity sources to upcoming debt maturities.
  3. Assume the following annual forward rates were calculated from the yield curve. The four-year spot rate is closest to: A. 1.348% B. 0.924% C. 1.178%
  1. An investor purchases a 10 ‐year, 7% annual‐pay bond at a price of 91.541225 (per 100 of par) implying a YTM of 8.5%. The investor holds the bond for 4 years, after which she sells the bond at a price that entails a YTM of 8.5% (the YTM at date of sale is the same as the YTM at issuance). She is also able to reinvest the coupons at 8.5%. Her realized rate of return is: A. 6 .348% B. 8.088 % C. 1. 779 %
  2. The accrued interest of a 7% semi-annual 180-days government coupon bond per 100 of par value on a settlement date occurring 45 days after the last coupon payment is closest to: A. 0. B. 1. C. 3.