Learning Module 8 Yield and Yield Spread Measures for Floating-Rate Instruments

An FRN pays a 3-month MRR plus a quoted margin of 150 bps. On the reset date the market requires a discount margin of 165 bps. All else equal, the FRN will be priced at:

Using the simplified FRN pricing model PV = sum[(MRR + QM)*FV/m / (1 + (MRR + DM)/m)^{k}] + FV/(1 + (MRR + DM)/m)^{N}, which variable is solved for when market price, QM, and current MRR are known?

A two-year zero-coupon bond is priced at 95.00 with annual compounding. What is the annual yield-to-maturity?

A 90-day Treasury bill is quoted on a 360-day discount rate basis at 0.120%. Its price per 100 of face value is closest to:

Convert a money market discount rate quote of 0.55% on a 90-day instrument (360-day year) to the bond-equivalent add-on yield using a 365-day basis. The BEY is closest to:

A bank CD is quoted on an add-on 365-day basis at 0.12% for 90 days. If the issuance principal is 20,000,000, the redemption amount is closest to:

Which of the following best explains why a money market discount rate understates investor yield relative to an equivalent add-on yield?

An FRN has QM = 75 bps, MRR = 1.10%, FV = 100, semiannual payments (m=2), N=8, and market PV = 95.50. Which margin is implied by the market price?

If two FRNs have identical QM and MRR but one resets quarterly and the other semiannually, which will typically have the lower Macaulay duration just after a reset?

Which conversion formula converts an APR with periodicity m to an APR with periodicity n?

An analyst observes a commercial paper quoted on a 360-day discount basis at 4.33% for 180 days. What is the approximate bond-equivalent add-on yield on a 365-day basis?

A 365-day CD is quoted as an add-on rate of 0.12% and purchased for 20,000,000. If sold after 45 days in a market where 45-day add-on quotes are 0.06%, what is the sale price approximate? (Use AOR formula PV = FV / (1 + Days/Year * AOR) and assume FV from initial issuance.)

Which money market quote basis typically uses FV as the quoted amount and therefore understates the investor return if DR > 0?

A 3-year FRN pays quarterly and was issued at par with QM = 50 bps. If investor-required DM falls to 30 bps on reset, the floater will trade at:

Which of the following is the correct pricing equation for a money market instrument quoted on a discount basis?

A 3-month commercial paper is quoted at a 0.100% discount rate with a 360-day year. Convert this into an approximate 365-day add-on (BEY).

Which day-count convention is commonly used for corporate bond yields and often converted to actual/actual for government-equivalent yields?

A corporate bond uses a 30/360 day count and has a stated semiannual YTM of 3.2% (periodicity 2). To compare with a quarterly bond (periodicity 4), which conversion approach is correct?

Which statement best describes a bond equivalent yield (BEY) for money market instruments?

A floater is reset quarterly. If today is 57 days after the prior reset and the coupon period is 90 days, what is its Macaulay duration expressed in fraction of years (period fraction)?

An analyst wants to compare two short-term instruments: one quoted on DR (360-day) and one on AOR (365-day). What is the correct first step to compare yields?

Which of the following best describes the meaning of an implied forward rate IFR_{A,B-A} derived from spot rates ZA and ZB?

Given spot rates Z1=1.00%, Z2=1.50%, Z3=2.00% (annual, effective), what is the implied 2-year forward rate one year from now (1y2y)?

Which of these statements is true about spot, par, and forward curves when the spot curve is upward sloping?

A 3-month commercial paper has DR quoted at 0.12% (360-day). If an investor wants to know the effective annual (periodicity=1) rate, which formula should she use?

Which of the following is true about a floater issued at par with QM equal to the market's DM at issuance?

In practice, how is the discount margin for an FRN typically obtained from market data?

A 180-day T-bill quoted at a discount rate of 4.78% (360-day) yields a BEY of 4.965%. Which step is NOT part of converting DR to BEY?

You observe a 6-month bank CD with add-on quote AOR365 = 6.218% and a 6-month T-bill BEY = 4.36%. Which instrument likely has higher credit risk?

Which of the following best describes why FRNs have low interest rate risk compared to fixed-rate bonds?

A 20-year strip (zero) priced at 69.43 has an effective annual YTM of 1.8410%. What is the semiannual bond-equivalent yield (APR2) approximately?

Which formula isolates the discount rate DR from PV and FV for a money market instrument?

A floater with QM 140 bps and market-implied DM 128 bps will trade on the next reset at:

Which day-count is commonly used for government bonds in many jurisdictions as described in the chapter?

Why do analysts convert money market discount quotes to bond-equivalent yield when comparing with other securities?

Which spread compares a bond's yield to an interpolated government benchmark yield with the same maturity?

An analyst has a 4% annual-coupon 3-year bond priced using spot rates. To compute the par rate for 3 years, which condition is applied?

Why are on-the-run government bonds often observed to trade at slightly lower yields than off-the-run issues?

An analyst prices a 3-year corporate bond and obtains a Z-spread of 82 bps using government spot curve. What does Z-spread represent?

If a money market instrument is quoted with an add-on rate of 4.45% for 180 days on a 365-day basis, what is the price for PV per 100 of face value?

What is the primary reason investors track G-spreads historically for a corporate bond?

Which of the following is NOT true about converting a corporate yield from 30/360 to actual/actual government-equivalent yield?

An FRN with QM fixed at issuance is priced well below par between resets. Which of the following explanations is most consistent with that observation?

If a 3-year money market instrument has been quoted at DR360 = 3.48% but an analyst prefers to compare using semiannual bond basis (periodicity 2), what is the general approach?

Which of the following is a key practical limitation when using the simplified FRN pricing model given in the chapter?

Which quote type is most common for commercial paper and Treasury bills in many markets?

An analyst uses the simplified FRN pricing model and gets DM = 3.29% at PV=97 for a four-year quarterly FRN. Which of these is the best interpretation?

Which of the following best explains why floating-rate instruments are often used by banks to fund floating-rate loans?

An investor comparing two FRNs with same QM but different quoted periodicities should:

Which spreadsheet functions are commonly recommended by the chapter to compute yields, PV, and solve for discount margin or other unknowns?