Level I Fixed Income practice questions

For a discount bond, the correct ordering is coupon rate < current yield < YTM. At a discount, the capital gain component lifts YTM above current yield, and the coupon rate is lowest because it is computed on par.

• Option A is wrong because for a premium bond the ordering reverses: coupon rate > current yield > YTM.
• Option C is wrong because for a par bond all three are equal: coupon rate = current yield = YTM.

The call belongs to the issuer, so the investor holds the straight bond minus an option written against them:

• Option B (105.70) adds the call value, which would mean the option is worth something TO the bondholder.
• Option C (100.00) assumes the bond must trade at par because it will be called at par. A call is an option, not a certainty, and the price reflects both branches.

Greater reliance on short-term wholesale funding to finance long-term assets heightens refinancing and rollover risk, worsening credit quality.

• Option A is generally credit positive: stronger liquidity and longer maturities reduce near-term refinancing risk.
• Option C is generally credit positive: tighter covenants provide creditor protections and can limit risk-taking.

DV01 is the dollar change for a 1 bp yield move: $\text{DV01} = D_{mod} \times P \times 0.0001$.

Correct option: B.

• Option A uses 0.01 (1%) instead of 0.0001 (1 bp): $5.2 \times 109.30 \times 0.01 = 5.6836$
• Option C uses 0.001 (0.10%) instead of 0.0001 (0.01%): $5.2 \times 109.30 \times 0.001 = 0.56836$.

Coupon per period equals the annual coupon rate divided by the payment frequency, times par.

• Option A uses the full annual coupon without dividing by the semiannual frequency: $0.06 \times 1{,}000 = 60.00$
• Option B multiplies by the frequency instead of dividing: $0.06 \times 2 \times 1{,}000 = 120.00$

Spread per 100 of par:

Par blocks of 100 in $2,000,000:

Round-trip cost:

Therefore, the transaction cost is $2,500.

• Option A uses the quote as if it were per $1 of par: $0.125 \times 2{,}000{,}000 = 250{,}000$, overstating by a factor of 100.
• Option B uses only the half-spread: $0.0625 \times 20{,}000 = 1{,}250$, taking just one side of the spread instead of the full round-trip.

Compute annual debt service (interest-only) and then DSCR.

• Option A (0.625): inverts the ratio: $\frac{3{,}750{,}000}{6{,}000{,}000} = 0.625$.
• Option C (19.20): divides annual NOI by monthly debt service, mixing periods: monthly debt service $= \frac{3{,}750{,}000}{12} = 312{,}500$; $\frac{6{,}000{,}000}{312{,}500} = 19.20$.

The exact Fisher relationship gives the breakeven inflation rate as:

• Option B (2.178%) is correct, it applies the exact Fisher decomposition specified in the question.
• Option C (2.20%) is the simple approximation $3.20\% - 1.00\% = 2.20\%$, which is the conventional yield spread shortcut but not the exact Fisher calculation requested.
• Option A (4.20%) incorrectly adds the two yields: $3.20\% + 1.00\% = 4.20\%$.

Convert BEY to periodic rate and compound to an annual effective rate.

Periodic rate:

EAY:

• Option A compounds the full BEY without halving: $(1 + 0.072)^2 - 1 = 0.149184 = 14.92\%$.
• Option C simply reports the nominal BEY (7.20%) without converting to an effective annual rate.

OAS removes the value effect of the embedded option from the Z-spread.

• Option A is correct: Callable bonds have OAS < Z-spread (the call option reduces investor value), while putable bonds have OAS > Z-spread (the put option increases investor value).
• Option B is wrong because callable bonds have OAS < Z-spread, not greater.
• Option C is wrong because OAS equals Z-spread only for option-free bonds (or when the embedded option has zero value under the model), not generally for bonds with options.