Summary INV3702 May-June 2012 Exam Memo_1_ (1).pdf

INV3702 – INVESTMENTS: FIXED INCOME ANALYSIS

EXAM MEMO – MAY/JUNE 2012


SECTION A: MULTIPLE CHOICE QUESTIONS (30 MARKS)

*THERE MAY BE MINOR EDITORIAL DIFFERENCES BETWEEN THE QUESTIONS IN THIS MEMO AND
THOSE ON THE FINAL QUESTION PAPER. THESE DO NOT AFFECT THE ANSWERS.
** THE CORRECT OPTION IS SHADED.


1. Other things equal, for option-free bonds:

1. a bond’s value is more sensitive to yield increases than to yield decreases.
2. the value of a long-term bond is more sensitive to interest rate changes than the value of a short-
term bond.
3. the value of a low-coupon bond is less sensitive to interest rate changes than the value of a high-
coupon bond.
4. the duration of a zero-coupon bond rises as yields rise.

*Long-term, low-coupon bonds are more sensitive than short-term and high-coupon bonds.
Prices are more sensitive to rate decreases than to rate increases (duration rises as yields fall).


2. An investor has a 1-year, semiannual, 10% coupon bond which is priced at R 1,025. If the 6-month spot
rate on a bond-equivalent basis is 8%, the 1-year theoretical spot rate as a BEY is:

1. 6.4%.
2. 7.3%.
3. 8.0%.
4. 9.6%

*A BEY of 8% is equivalent to a 6-month discount rate of 8/2 = 4%.

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3. The 3-year annual spot rate is 7%, the 4-year annual spot rate is 7.5%, and the 5-year annual spot rate
is 8%. Based on the pure expectations theory of interest rates, the 1-year implied forward rate in four
years is closest to:

1. 7%.
2. 8%.
3. 9%.
4. 10%.

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