INV3702 May-June 2013 Exam Memo (1).pdf

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INV3702
May/June 2013

SECTION A: MULTIPLE CHOICE QUESTIONS (40 MARKS)


1. All else equal, which of the following would most likely increase the yield to maturity
on a debt security?


1. Put option.
2. Conversion option.
3. Negative covenants.
4. Cap on a floating-rate security.


A cap on a floating-rate secutity is an embedded option that favours the issuer, not the
buyer, so buyers will would demand a higher YTM for a bond with such a feature. The
other alternatives favour the buyer and decrease the YTM that buyers require.


2. One year ago, an investor purchased a 10-year, R1,000 par value, 8% semiannual
coupon bond with an 8% yield to maturity. Today interest rates remain unchanged at
8%. If the investor sells the bond today (immediately after receiving the second
coupon payment, and with no transaction costs), he will have:


1. a capital loss of R80.
2. a capital gain of R80.
3. no capital gain or loss.
4. a capital gain of R1,080.


One year ago (when he bought the bond) the coupon rate was equal to the YTM, so
the bond would have traded at par. Now (one year later), with interest rates
unchanged, the bond will still sell at par. There would therefore be no capital gain or
loss from the sale.


3. A 15-year, 8% semiannual-pay bond has a par value of R10,000. If it were priced to
yield 7.4%, this bond would be trading for:


1. R10,523.
2. R10,528.
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