Free CFA Level 2 practice question bank for June 2011 exam

[ashish24]

Two things:

a) questions 36 is identical to question 35.
b) the answer to question 35 is b which is 104.98 and not 105.21.

Please re-verify.

[DG_Admin]

Two things:

a) questions 36 is identical to question 35.
b) the answer to question 35 is b which is 104.98 and not 105.21.

Please re-verify.

Sorry for the confusion. We have solved a)
We have requested the content provider to solve b)

[DG Mod]

Q 36 Ans B:

Value of the bond at the upper node after 1 year
= (108 * 0.5 + 108 * 0.5)/1.068548 = 101.0717

Since the bond can be put at $101.5, the bond price cant be below 101.5 in the upper node, hence we will set the price of the bond as 101.5 in the upper node.

Value of the bond at the lower node after 1 year
= (108 * 0.5 + 108 * 0.5)/1.059 = 101.983

Value of the bond at the starting node
= {(101.5 +8) * 0.5 + (101.983 + 8) * 0.5}/1.041 = 105.419

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Today's Question (Questions and answers provided by Knowledge Varsity)

Q37. There is a callable bond that will mature in 2 years, pays $8 as the annual coupon and has face value of $100. The bond can be called after 1 year at $101.5. If the market price of the bond is $104.2561, then which of the following is most likely the OAS (option adjusted spread) for the bond?

A. 0.6%
B. 0.4%
C. 0.5%

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[DG Mod]

Q 37 Ans C:

The best way to approach these kind of problems in the exam is to take the middle value given in the answer as the OAS and arrive at the option value from the binomial model. If the answer matches with the market price of the bond, then the chosen value is the OAS.

If the binomial model price is more than that of the market price, then OAS has to be lesser than the value that is chosen.

If the binomial model price is less than that of the market price, then OAS has to be more than the value that is chosen.

Here we will choose OAS as 0.5% and then we will adjust the interest rates.

The adjusted interest rate will be = old rate + OAS
Rate in node 0 (at t = 0) = 4.6%
Rate in upper node after 1 year (at t = 1) = 7.3548%
Rate in lower node after 1 year (at t = 1) = 6.4%

Find out the value of the bond.
Value of the bond at the upper node after 1 year
= (108 * 0.5 + 108 * 0.5)/1.073548 = 100.60

Value of the bond at the lower node after 1 year
= (108 * 0.5 + 108 * 0.5)/1.064 = 101.5038
Since the bond can be called at $101.5, the bond price cant rise above 101.5 in the lower node, hence we will set the price of the bond as 101.5 in the lower node.

Value of the bond at the starting node
= {(100.6+8) * 0.5 + (101.5 + 8) * 0.5}/1.046 = 104.2561

[DG_Admin]

Dear DG Members,

We have posted the last question on May 10, 2011 (as promised earlier). Thank you for your support and we are grateful to our content partner - Knowledge Varsity.

We hope that all of you will pass the Level 2 CFA exam. All the best!

Regards,
Team DG

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