NPTEL Online Certification Courses

Indian Institute of Technology Kharagpur

Financial Institutions and Markets

Assignment- Week 9
TYPE OF QUESTION: MCQ/MSQ
Number of questions: 20 Total mark: 20 X 1 = 20
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QUESTION 1:
When yield curves are flat,
a. Long-term interest rates are above short-term interest rates.
b. Short-term interest rates are above long-term interest rates.
c. Short-term interest rates are about the same as long- term interest rates.
d. Medium-term interest rates are above both short-term and long-term interest rates.

Correct Answer: c. Short-term interest rates are about the same as long- term interest
rates.

Detailed Solution:

When yield curves are flat short-term interest rates are about the same as long- term interest rates.

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QUESTION 2:
At issue, zero coupon bonds typically sell at ______

a. Premium
b. Discount
c. Par
d. At or near par

Correct Answer: b. Discount

Detailed Solution:

Zero coupon bonds are called zero-discount bonds (also called pure discount bonds (PDB)).This
types of bonds do not make any periodic coupon payments. The investor realizes interest as the
difference between the maturity value and the purchase price.
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QUESTION 3:
Which of the following statement(s) is/are true with respect to yield to maturity (YTM):
Statement I YTM is the rate that equates the price of the bond, to the future value of the
bond’s cash flow (CF)
Statement II YTM is the effective rate of return
Statement III As a rate measure, YTM includes: Return from coupons, Capital gains or
losses, Reinvestment of coupons at the calculated YTM
a. Only I
b. Only I and II
c. Only II and III
d. I, II and III
Correct Answer: c. Only II and III
Detailed Solution:
YTM is the rate that equates the price of the bond, to the PV of the bond’s cash flow (CF); it is
similar to the internal rate of return, IRR.

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QUESTION 4:
Consider a 10 year, 6% option free bond with semiannual coupons. The required YTM on the
semiannual bond basis was 6%, but suddenly it decreased to 4.5%. As a result, the price of the
bond has _____________
a. Increased
b. Decreased
c. Stayed the same
d. Not enough information to conclude
Correct Answer: a. Increased
Detailed Solution:
Price-yield relationship is inverse. If the required yield decreases, the bond's price will increase,
and vice-versa
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Indian Institute of Technology Kharagpur

QUESTION 5:
The YTM is the effective rate of return. As a rate measure, it includes:
I Return from coupons
II Capital gains or losses
III Reinvestment of coupons at the calculated YTM

a. I and II
b. I and III
c. II and III
d. I, II and III
Correct Answer: d. I, II and III
Detailed Solution:
The YTM is the effective rate of return. As a rate measure, it includes:
1. Return from coupons
2. Capital gains or losses
3. Reinvestment of coupons at the calculated YTM
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QUESTION 6:
Consider a 12 year 8% semi-annual coupon bond with Face Value =₹ 10,000 and required rate of
return of 10%. Which of the following is the closest approximation to the value of the bond?

a. ₹12682.75
b. ₹8620.14
c. ₹1639.67
d. ₹14139.59

Correct Answer: b. ₹8620.14

Detailed Solution:
1
1−( ) 10,000
1.0524
𝑉𝑎𝑙𝑢𝑒 = 400 [ ] + [ 1.0524 ] = ₹8620.14
0.05

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Indian Institute of Technology Kharagpur

QUESTION 7:
A zero coupon bond matures in 10 years. At a market discount rate of 4.5% per year and assuming
annual compounding, the price of the bond per 100 of par value is closest to:

a. 51.30
b. 51.67
c. 64.391
d. 71.62

Correct Answer: c. 64.391

Detailed Solution:
100
𝑃𝑉 = = 64.39
(1 + 0.045)10

QUESTION 8:
The price of the 10-year, 9% coupon bond with semi-annual payments and par value INR1000 is
priced at ₹880.5. Its effective annual rate of return is ________ % (use ATRM formula).

a. 10.843
b. 11.092
c. 12.270
d. 15.000
Correct Answer: b. 11.092
Detailed Solution:

C + [(F − PoB ) / M ]
ARTM =
(F + P0b ) / 2
P0= ₹880.5
Coupon=90/2 =45
Periods =10X2 =20
FV= ₹1000 →calculate ATRM
ATRM =5.421
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YTM= 10.843

EAR= (1.054)2-1 = 11.092

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QUESTION 9:
With an annual interest of 9% compounded continuously for 2 years, the future value of an
investment of 1000 will be the closest to ________________

a. ₹2188.35
b. ₹1197.22
c. ₹1094.17
d. ₹835.27

Correct Answer: b. ₹1197.22

Detailed Solution:

FV=PVerN=1000*e.09*2=1197.22

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QUESTION 10:
Consider a 12 year 8% semi-annual coupon bond with Face Value =₹10,000 and required rate of
return of 10%. The current yield on the bond is closest to_____ %
a. 3.15
b. 4.64
c. 9.26
d. 9.28

Correct Answer: d. 9.28

Detailed Solution:
1
1−( )
𝑉𝑎𝑙𝑢𝑒 = 400 [ 1.0524 ] + [10,000] = 8620.14
0.05 1.0524

Current Yield = 800/8620.14 = 9.281

Note: current yield is based on annual coupon interest.
Current yield of a bond is the ratio of its annual coupon to its closing price.
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QUESTION 11:

Based on semi-annual compounding, the YTM on a 15 year, zero-coupon, ₹1000 par value bond
that is currently trading at ₹331.40 is closest to __________%
a. 2.575
b. 3.750
c. 5.151
d. 7.500
Correct Answer: d. 7.500
Detailed Solution:
F 1
P0B =
(1 + YTM ) M 1000 30
F =[( ) − 1] ∗ 2
(1 + YTM ) M = 331.40
P0B
F
YTM = M − 1
P0B
= 7.500%
Or
1/ M
 F 
YTM =  B 
− 1
 P0 

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QUESTION 12:
The value of a 7 year 5% bond with a discount rate of 9% when compounded continuously is the
closest to (Assume par value= ₹1000)
a. 532.592
b. 780.753
c. 1877.611
d. 2387.441
Correct Answer: b. 780.753
Detailed Solution:
Coupon = 50
discount rate 0.09
t coupon exponential value coupon *exp value
1 50 0.913931 45.697
2 50 0.83527 41.764
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3 50 0.763379 38.169
4 50 0.697676 34.884
5 50 0.637628 31.881
6 50 0.582748 29.137
7 50 0.532592 26.63
1000 0.913931 532.592
780.753
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QUESTION 13:
Consider a 10-year, 7% annual coupon bond with Face Value =₹1000 and required rate of return
of 11%. Which of the following is the closest approximation to the value of the bond?

a. ₹764.43
b. ₹805.15
c. ₹358.07
d. ₹356.49

Correct Answer: a. ₹764.43

Detailed Solution:
1
1−( ) 1000
1.1110
𝑉𝑎𝑙𝑢𝑒 = 70 [ ] + [1.1110 ] = ₹764.43
0.11

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QUESTION 14:
Calculate the Effective Annual Rate of a bond with 15% interest compounded monthly
a. 16.1834%
b. 15.8650%
c. 16.0755%
d. 16.1798%

Correct Answer: c. 16.0755%

Detailed Solution:

0.15 12
𝐸𝐴𝑅 = (1 + ) − 1 = 16.0755%
12
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QUESTION 15:
The simple annualised yield to call of a 10-year, 9% coupon bond, (par value ₹1000) first callable
in 8 years at a call price of ₹1100, paying interest semiannually and trading at ₹940 is closest to
______________%:
[Use ARTM formula]

a. 5.592
b. 9.804
c. 10.784
d. 16.911

Correct Answer: c. 10.784

Detailed Solution:
(1100−940)
45+[ ] 55
16
ARTM= (1100+940)/2 = 1020 = 5.392

Simple Annualised Yield= 5.392 × 2 = 10.784

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QUESTION 16:
A coupon bond pays annual interest of 15%, matures in 12 years and has a yield to maturity of
12%. Considering the par value is ₹1000, the current yield on the bond is closest to:
a. 14.33%
b. 13.13%
c. 12.66%
d. 11.48%

Correct Answer: c. 12.66%

Detailed Solution:
1
1−( ) 1000
1.1212
𝑉𝑎𝑙𝑢𝑒 = 150 [ ] + [1.1212 ]=1185.83
0.12
Current Yield = 150/1185.83= 12.66%
______________________________________________________________________________
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QUESTION 17:
The convexity of a 10‑year, 4% semi-annual coupon bond with par value INR100 issued at par is
closest to:
a. 225.433
b. 256.464
c. 275.099
d. 315.592

Correct Answer: d. 315.592

Detailed Solution:

2
2∗2 1 2∗2∗20 20(21)[100−( )]
[1− ]− + 0.02
0.023 (1.02)20 0.022(1.02)21 (1.02)22
𝐶𝑜𝑛𝑣𝑒𝑥𝑖𝑡𝑦 = 100
163514.3334−131955.1634+0
𝐶𝑜𝑛𝑣𝑒𝑥𝑖𝑡𝑦 = =315.592
100

C= 2; y= 0.02; N= 20; P0 100;F= 100

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QUESTION 18:
A bond portfolio consists of the following three fixed-rate bonds. Assume annual coupon payments
and no accrued interest on the bonds. Prices are per 100 of par.

Market Modified
Bond Maturity Price Coupon YTM
Value Duration

A 6 years 70,000 85 2.00% 4.95% 5.42

B 10 years 10,000 80 2.40% 4.99% 8.44
C 15 years 20,000 100 5.00% 5.00% 10.38

The bond’s portfolio’s modified duration is closest to _______ years:

a. 3.794
b. 6.714
c. 9.675
d. 11.892

Correct Answer: b. 6.714

Detailed Solution:

BOND Ratio to Total Market Modified Duration Ratio*Duration

A 0.7 5.42 3.794
B 0.1 8.44 0.844
C 0.2 10.38 2.076
Portfolio Duration 6.714

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QUESTION 19:
An increase in yield from 7.8% to 7.82% would represent an increase of ____________ basis point
a. 0.2
b. 2
c. 20
d. 200
Correct Answer: b. 2
Detailed Solution:
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Fractions on yields are often quoted in terms of basis points (bp). A bp is equal to 1/100 of a
percentage point. An increase in yield from 7.8% to 7.82% would represent an increase of 2 basis
point.
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QUESTION 20:
Which of the following bonds will have the longest duration?
a. 20-year maturity and a 12% coupon.
b. 20-year maturity and an 8% coupon.
c. 15-year maturity and a 12% coupon.
d. 10-year maturity and a 15% coupon.
Correct Answer: b. 20-year maturity and an 8% coupon.
Detailed Solution:
The lower the coupon rate, the greater the duration. The longer the terms to maturity, the greater
the duration.

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