Fixed Income - Fixed Income Section 1

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11. The type of bond that makes coupon payment in one currency and pays par value at maturity in another currency is a:

  • Option : C
  • Explanation : A dual-currency bond makes coupon payments in one currency and pays the par value at maturity in another currency. A currency option bond gives the bondholders the right to choose the currency in which they want to receive each interest payment and principal repayment. A pure discount bond is issued at a discount to par value and redeemed at par.
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12. Carla owns a floating rate note. Interest payments for the note are to be made on a semiannual basis with the second payment due in December 2013. The agreed upon coupon rate is six-month LIBOR + 30 bps. The table below shows the six-month LIBOR rates for the year 2013:

Date Six-month LIBOR
January 1, 2013 5.0%
June 30, 2013 5.5%
December 31, 2013 6.0%

Which of the following is most likely to be the applicable interest rate for the
second payment?

  • Option : B
  • Explanation : The applicable interest rate for the second payment due in December is the six month LIBOR at the end of June 2013 plus 30 bps. Therefore, 5.5% + 0.3% = 5.8%.
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13. The coupon rate of a floating- rate note is six-month Libor + 50 bps. It makes payments in June and December. The six-month Libor was 4.00% at the end of June 2014 and 4.50% at the end of December 2014. The interest rate used to calculate the payment due in December 2014 is:

  • Option : A
  • Explanation : The interest rate that should be used to calculate the payment due in December 2014 is the six-month Libor at the beginning of the period (i.e. the end of June 2014) plus 50 bps. Thus, it is 4.50% (4.00% + 0.50%).
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14. Assets underlying the debt obligation above and beyond the issuer’s promise to pay are:

  • Option : A
  • Explanation : Collaterals are assets underlying the debt obligation above and beyond the issuer’s promise to pay. Credit enhancements are provisions that may be used to reduce the credit risk of the bond issue. Covenants are clauses that specify the rights of bondholders and obligations of the issuer.
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15. The term least likely used to refer to the legal contract under which a bond is issued is:

  • Option : C
  • Explanation : A letter of credit is an external credit enhancement. A legal contract under which a bond is issued is called indenture or a trust deed.
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