CFA questions with correct answers
What is a covenant that forces the issuer to take action called? What is a covenant that prevents issuer from doing something called? CORRECT ANSWER Affirmative covenant.
Negative covenant.
What is the current yield of a bond? CORRECT ANSWER (annual cash coupon payment) / (current bond price)
Given below information and assuming annual compounding, calculate the four-
year spot rate: One-year spot rate is 3.25% One-year forward rate is 4.5%. Two-
year forward rate is 3.50%. Three-year forward rate is 3.00%. CORRECT ANSWER The four-year spot rate is the annualized rate of return that an investor will get over the next four years if he invests a dollar today. If a dollar is invested today, value at the end of each year is calculated as: End of year 1 = 1*(1.0325) = 1.0325 End of year 2 = the proceeds from year 1 will be invested at one-year forward rate = (1.0325)*(1.045) = 1.079 Similarly, end of year
3 = (1.079)*(1.035) = 1.117 Similarly, end of year 4 = (1.117)*(1.03) = 1.15 So at the end of year 4 the dollar value will be $1.15, which means the investor made 15%. To calculate the annual compounded growth rate: (1.15)^(1/4) -1 = 3.56%
What is the unamortized discount of a company bond at issuance? CORRECT ANSWER Face Value of Bond - PV(Bond)
What is the effect on the balance sheet when the company issues a 10-year maturity annual coupon paying bond with face value of 100,000, a coupon rate of 8%, and the market rate of 10%? CORRECT ANSWER Liabilities will increase by
the present value of the bond.
What is a covenant that forces the issuer to take action called? What is a covenant that prevents issuer from doing something called? CORRECT ANSWER Affirmative covenant.
Negative covenant.
What is the current yield of a bond? CORRECT ANSWER (annual cash coupon payment) / (current bond price)
Given below information and assuming annual compounding, calculate the four-
year spot rate: One-year spot rate is 3.25% One-year forward rate is 4.5%. Two-
year forward rate is 3.50%. Three-year forward rate is 3.00%. CORRECT ANSWER The four-year spot rate is the annualized rate of return that an investor will get over the next four years if he invests a dollar today. If a dollar is invested today, value at the end of each year is calculated as: End of year 1 = 1*(1.0325) = 1.0325 End of year 2 = the proceeds from year 1 will be invested at one-year forward rate = (1.0325)*(1.045) = 1.079 Similarly, end of year
3 = (1.079)*(1.035) = 1.117 Similarly, end of year 4 = (1.117)*(1.03) = 1.15 So at the end of year 4 the dollar value will be $1.15, which means the investor made 15%. To calculate the annual compounded growth rate: (1.15)^(1/4) -1 = 3.56%
What is the unamortized discount of a company bond at issuance? CORRECT ANSWER Face Value of Bond - PV(Bond)
What is the effect on the balance sheet when the company issues a 10-year maturity annual coupon paying bond with face value of 100,000, a coupon rate of 8%, and the market rate of 10%? CORRECT ANSWER Liabilities will increase by
the present value of the bond.
