Fixed income Qs

1, The expected 1-year total return is higher than the purchase-date yield to maturity for which of the following reasons?

A. The credit spread for the issuer is expected to narrow. B. The reinvestment rate is expected o be lower than the YTM. C. The coupon rate is higher than the YTM

2, Which of the following statements is least correct with respect to the call risk faced by an institution?

A. The risk relates to the fact that the issuer of a liability may be able to terminate (call) the liability prior to the stated maturity date. B. The consequence of the call will be that the institution has to reinvest at a lower interest rate. C. The consequence of the call will be that the institution has to find alternative funds, and these are likely to be more expensive.

1 B

2 C

I would have said

  1. A

  2. A

I would say

  1. A

  2. C

ditto A + C.

IDK what you other people are smoking.





  1. A

  2. C, although something of a poorly worded question.

  1. A - My reasoning is that as yield spread narrows, the price goes up. Since the spread is narrowing relative to what the original YTM was priced off of, expected total return should exceed earning the YTM.

  2. C - The institution faces the risk of getting back its funds too early, and has to find a place to put its funds in. Actually obtaining the funds isn’t a problem, since they’re getting those funds back from the issuer’s call.

Answers Please

  1. A 2. C

This is the answer from Schw, but no explanation.

like most, I agree with 1 being A

2 is just a poorly written question

In 1)… I marked B.

In both A and B … there is expectation of credit spread narrowing, and an expectation of Reinvestment rate < YTM.

Now I do not believe they say anywhere as to which effect is higher. When Reinvestment Rate < YTM - it usually means a downward sloping yield curve - and this means while the reinvestment income is lower - the Horizon price would be higher. Not sure which impact would be higher. One of credit spread narrowing or the one with reinvestment income reducing.

If the expected reinvestment rate was lower than the YTM, wouldn’t that make total return less than YTM?

that entire discussion in the chapter about that one statement.

reinvestment rate is lower - but the repriced bond would be greater. so the target rate of return would be > YTM…

if I am not mistaken