Laura Mack, is considering purchasing two Treasury securities. The first is the 7-year on-the-run Treasury issued last week that has a coupon rate of 4.98%. The second is a 7-year off-the-run Treasury that was issued two months ago and has a coupon rate of 4.74%. Which of the following statements regarding the two issues under consideration is most accurate?
A. The on-the-run issue has higher reinvestment risk because of its higher coupon rate.
B. The on-the-run issue has higher interest rate risk because of its higher coupon rate.
C. Both the on-the-run and the off-the-run issues have equivalent interest rate risk.
An investor wants to take advantage of the 5-year spot rate, currently at a level of 4.0%. Unfortunately, the investor just invested all of his funds in a 2-year bond with a yield of 3.2%. The investor contacts his broker, who tells him that in two years he can purchase a 3-year bond and end up with the same return currently offered on the 5-year bond. What 3-year forward rate beginning two years from now will allow the investor to earn a return equivalent to the 5-year spot rate?
A. 3.5%.
B. 4.5%.
C. 5.6%.
Eileen Hart, CFA, is a fixed income portfolio manager for MTY Investment Management. Hart's portfolio includes US agency mortgage-backed securities. Which of the following statements about U.S. agency mortgage-backed securities is least accurate?
A. Cash flows from mortgage loans include prepayments, which could affect the future performance of Hart's portfolio.
B. Pass-through securities issued by Ginnie Mae guarantee the timely payment of interest and principal.
C. Collateralized mortgage obligations (CMO) redirect cash flows from the underlying mortgage pool to eliminate prepayment risk.
Charlotte Villa, CFA, is a portfolio manager analyzing two securities. The 10-year bonds of Zehmer Corp. are callable beginning in two years. The 10-year bonds of Cavalier Inc. are not callable, but have a floating coupon that adjusts annually based on a margin above comparable maturity U.S. Treasury issues with no limits on the rate adjustment. Both bond issues are rated AA. Villa uses a computer model to value individual bonds based on their zero-volatility spread and/or option-adjusted spread (OAS). She decided to increase the interest rate volatility assumption in her model without changing any of the other model inputs. Identify how this change in assumption will affect the OAS for each bond.
A. The OAS for both bonds will increase.
B. The OAS for both bonds will decrease.
C. The OAS for the Zehmer bond will decrease, but the OAS for the Cavalier bond will be unchanged.
Rob Pirate is considering investing in a subordinated tranche in a collateralized mortgage obligation (CMO). If Pirate wishes to measure his interest rate risk for this debt security, which measure would be most appropriate!
A. Modified duration
B. Effective duration
C. Effective convexity
Mark Davidson and James Case are bond traders at a large fixed-income investment firm. Both Davidson and Case have developed bond valuation models for bonds with embedded options. Using their respective valuation models, the traders have calculated the price of BMC Corp.'s callable and putable bonds. Davidson uses a yield volatility assumption of 23%, while Case uses an assumption of 31%. Other than the volatility assumption, the traders use identical inputs for the valuation models. Which of the following best summarizes the output of the two valuation models?
A. Davidson's model will calculate a lower value for the call option and a lower value for the putable bond.
B. Case's model will calculate a higher value for the call option and a lower value for the putable bond.
C. Davidson's model will calculate a lower value for the put option and a lower value for the callable bond.
Al the end of the last 12-month period, Romano s Italian Foods had net income and ending equity for the company of $16.68 million and $115 million, respectively. Romano's declared a $7.5 million dividend for the year. Using internally generated funds, Romano's can grow its equity by approximately:
A. 8.0% per year.
B. 10.0% per year.
C. 14.5% per year.
Van Jeffery, CFA, utilizes price multiples to evaluate the attractiveness of potential investment
opportunities. However, Jeffery's supervisor does not support using price multiples exclusively in making
investment decisions. The supervisor points out the following:
Statement 1:P/S ratios are not able to capture the different cost structures of companies-Statement 2: The
P/CF ratio is more stable than the P/E ratio.
Statement 3:An advantage of the P/B ratio (unlike the P/E ratio) is that the P/B ratio cannot be negative.
Which of the supervisor's three statements is least likely to be correct?
A. Statement 1
B. Statement 2
C. Statement 3
Rock Inc. maintains a policy of paying 30% of earnings to its investors in the form of dividends. Rock is expected to generate a return on equity of 9.3%. Rock's beta is 1.5. The equity risk premium is 6% and
U.S.
Treasury notes are yielding 3%. Rock's required rate of return is closest to:
A.
9.0%.
B.
9.3%.
C.
12.0%.
Ben Click is analyzing an equity security using price-to-earnings, price-to-sales, price-to-book value, and price-to-cash flow ratios. Which statement correctly identifies a drawback of using one of the listed ratios?
A. Earning power is a chief driver of investment value.
B. Accounting effects may compromise the use of book value.
C. Sales are generally less subject to distortion or manipulation than are other fundamentals.
Nowadays, the certification exams become more and more important and required by more and more enterprises when applying for a job. But how to prepare for the exam effectively? How to prepare for the exam in a short time with less efforts? How to get a ideal result and how to find the most reliable resources? Here on Vcedump.com, you will find all the answers. Vcedump.com provide not only CFA Institute exam questions, answers and explanations but also complete assistance on your exam preparation and certification application. If you are confused on your CFA-LEVEL-1 exam preparations and CFA Institute certification application, do not hesitate to visit our Vcedump.com to find your solutions here.