1
WALL STREET PREP: BONDS CRASH COURSE
EXAM QUESTIONS WITH COMPLETE
SOLUTIONS
What is the focus of the course? - correct-answer -analysis of debt
Bond Equivalent Yield - correct-answer -YTM x periods
- most common way bond yields are discussed
- BEY ignores reinvestment
- BEY does not equal the true YTM because coupons received mid year can be
reinvested
Effective annual yield - correct-answer -- true annual YTM is arrived by
compounding, not simply doubling. Resulting yield is the EAY
- EAY= (1 + YTM)^periods per year - 1
- EAY always larger than BEY for identical bonds (because of compounding)
Converting BEY to EAY - correct-answer -EAY = [(1 + BEY / n)^n - 1]
, 2
Bonds with maturity < 1 year - correct-answer -- predominantly zero coupon
bonds and comprise the money market
Money Market Instruments - correct-answer -CDs, treasury bills, commercial
paper, repos
- used 360 day year NOT 365
Treasury bills and commercial paper - correct-answer -- issued at discount and pay
par at maturity
Where does demand for bonds come from? - correct-answer -Demand comes
from governments, corporations, and households.
What are Fixed income securities? - correct-answer -Fixed income securities:
financial instruments that require the borrower to pay a predetermined amount
to the holder of the security in exchange for capital upfront.
Example of a fixed income security - correct-answer -Example: a corporation
needs to borrow $5,000,000. Corporation will issue a fixed income security.
WALL STREET PREP: BONDS CRASH COURSE
EXAM QUESTIONS WITH COMPLETE
SOLUTIONS
What is the focus of the course? - correct-answer -analysis of debt
Bond Equivalent Yield - correct-answer -YTM x periods
- most common way bond yields are discussed
- BEY ignores reinvestment
- BEY does not equal the true YTM because coupons received mid year can be
reinvested
Effective annual yield - correct-answer -- true annual YTM is arrived by
compounding, not simply doubling. Resulting yield is the EAY
- EAY= (1 + YTM)^periods per year - 1
- EAY always larger than BEY for identical bonds (because of compounding)
Converting BEY to EAY - correct-answer -EAY = [(1 + BEY / n)^n - 1]
, 2
Bonds with maturity < 1 year - correct-answer -- predominantly zero coupon
bonds and comprise the money market
Money Market Instruments - correct-answer -CDs, treasury bills, commercial
paper, repos
- used 360 day year NOT 365
Treasury bills and commercial paper - correct-answer -- issued at discount and pay
par at maturity
Where does demand for bonds come from? - correct-answer -Demand comes
from governments, corporations, and households.
What are Fixed income securities? - correct-answer -Fixed income securities:
financial instruments that require the borrower to pay a predetermined amount
to the holder of the security in exchange for capital upfront.
Example of a fixed income security - correct-answer -Example: a corporation
needs to borrow $5,000,000. Corporation will issue a fixed income security.
