Answer the following questions.
1. Coupon reinvestment risk increases with
a. Lower coupon/shorter reinvestment period
b. Higher coupon/longer reinvestment period
c. Coupon and reinvestment period have no impact
2. If interest rates rise the price of a bond will
a. Rise
b. Stay the same
c. Decline
3. If interest rates rise, the value of reinvested coupons
a. Rise
b. Stay the same
c. Decline
4. Bond capital gains are measured from
a. Purchase price
b. Carrying value
c. Coupon rate
d. Sale price
5. MacAulay duration measures
a. Estimated linear change in price for a change in yield to maturity
b. Estimated linear change in price for a change in benchmark yield
c. Weighted average of time to receipt of coupon interest payments
6. Effective duration measures
a. Estimated linear change in price for a change in yield to maturity
b. Estimated linear change in price for a change in benchmark yield
c. Weighted average of time to receipt of coupon interest payments
7. Modified duration measures
a. Estimated linear change in price for a change in yield to maturity
b. Estimated linear change in price for a change in benchmark yield
c. Weighted average of time to receipt of coupon interest payments
8. The point where reinvested coupons offsets the drop in the price of a bond in a rising rate environment is also known as
a. MacAulay duration
b. Effective Duration
c. Modified Duration
Referring to the graph in the appendix answer questions 9-11
9. Line A represents
a. Effective duration
b. Modified duration
c. MacAulay duration
d. Convexity
e. Bond price
10. Curve B represents
a. Effective duration
b. Modified duration
c. MacAulay duration
d. Convexity
e. Bond price
11. Area C represents
a. Effective duration
b. Modified duration
c. MacAulay duration
d. Convexity
e. Bond price
12. Coupon reinvestment risk dominates price risk when
a. Investment horizon > MacAulay Duration
b. Investment horizon < MacAulay Duration
c. Investment horizon = MacAulay Duration
13. The two KEY components of credit risk are - select 2
a. Spread risk
b. Default risk
c. Downgrade risk
d. Loss severity
14. Place the following in order of claims seniority
a. First lien
b. Junior subordinated
c. Senior secured
d. Subordinated
e. Senior subordinated
f. Senior unsecured
15. Which is NOT one of the 4 C's of credit analysis
a. Capacity
b. Collection
c. Collateral
d. Covenants
e. Character
16. All creditors at the same level of the capital structure being treated the same is known as?
17. A credit analyst is looking at three different companies - an auto company, a drug company and a mining company. The auto and mining companies are cyclical. The drug company is non-cyclical. The least credit risk is likely in the
a. Auto company
b. Drug company
c. Mining company
18. Same companies in #17. The auto company has a debt/ebitda ratio of 6.0, the mining company has a debt/ebitda of 2.0 and the drug company has a debt/ebitda ratio of 1.0. Which company likely carries the most credit risk?
a. Auto company
b. Drug company
c. Mining company
19. At the bottom of an economic cycle the loss severity on a credit default is likely to be
a. Lower
b. Higher
c. Unchanged
20. At default at a company that is in a mature/declining industry is likely to experience severity that is
a. Lower
b. Higher
c. Unchanged