INV3702 – Investments, Fixed Income Analysis Exam Memo 2026

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INV3702 – INVESTMENTS: FIXED INCOME ANALYSIS

EXAM MEMO


SECTION A: MULTIPLE CHOICE QUESTIONS (30 MARKS)

*THERE MAY BE MINOR EDITORIAL DIFFERENCES BETWEEN THE QUESTIONS IN THIS MEMO AND
THOSE ON THE FINAL QUESTION PAPER. THESE DO NOT AFFECT THE ANSWERS.
** THE CORRECT OPTION IS SHADED.


1. Other things equal, for option-free bonds:

1. a bond’s value is more sensitive to yield increases than to yield decreases.
2. the value of a long-term bond is more sensitive to interest rate changes than the value of a short-
term bond.
3. the value of a low-coupon bond is less sensitive to interest rate changes than the value of a high-
coupon bond.
4. the duration of a zero-coupon bond rises as yields rise.

*Long-term, low-coupon bonds are more sensitive than short-term and high-coupon bonds.
Prices are more sensitive to rate decreases than to rate increases (duration rises as yields fall).


2. An investor has a 1-year, semiannual, 10% coupon bond which is priced at R 1,025. If the 6-month spot
rate on a bond-equivalent basis is 8%, the 1-year theoretical spot rate as a BEY is:

1. 6.4%.
2. 7.3%.
3. 8.0%.
4. 9.6%

*A BEY of 8% is equivalent to a 6-month discount rate of 8/2 = 4%.

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3. The 3-year annual spot rate is 7%, the 4-year annual spot rate is 7.5%, and the 5-year annual spot rate
is 8%. Based on the pure expectations theory of interest rates, the 1-year implied forward rate in four
years is closest to:

1. 7%.
2. 8%.
3. 9%.
4. 10%.

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4. A bond priced at par (R 1,000) has a modified duration of 8 and a convexity of 50. If interest rates fall 50
basis points, the new price will be:

1. R 875.00.
2. R 958.75.
3. R 1,041.25.
4. R 1,059.55.

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5. Which of the following statements about embedded options is least likely correct?

1. An investor benefits when a floating rate bond has an interest rate floor.
2. The prepayment right granted with a mortgage favours the issuer/borrower.
3. If the issuer/borrower prepays, the holder of the bond has reinvestment risk.
4. If the market value of a putable bond falls below the par value, the issuer will likely exercise the
option.

A put option may be exercised by the holder or buyer of the bond, not the issuer. The other
statements are true. Interest rate floors benefit the holder by providing a lower limit (or
minimum) on the interest rate the bondholder will receive. To understand why the prepayment
right granted to a mortage holder benefits the issuer, remember that the issuer here is the
homeowner. The bank acts as a passthrough from the homeowner to the owner of a bond
collateralised by the loan. The right to repay if interest rates decrease is a benefit to the
homeowner. If the homeowner repays, the holder of the bond has reinvestment risk.


6. A R 1,000 par, semiannual-pay bond is trading for 89.14, has a coupon rate of 8.75%, and accrued
interest of R 43.72. The clean price of the bond is:

1. R 847.69.
2. R 869.17.
3. R 891.40.
4. R 935.12.

The clean price of the bond is the quoted price, 89.14% of par value, which is R 891.40.



7. Which of the following scenarios would be most beneficial to a domestic investor purchasing foreign
bonds?

1. Appreciation of both the asset and the foreign currency.
2. Depreciation of both the asset and the foreign currency.
3. Appreciation of the asset and depreciation of the foreign currency.
4. Depreciation of the asset and appreciation of the foreign currency.

When the foreign currency appreciates, each foreign currency-denominated cash flow buys more
domestic currency units – increasing the domestic currency return from the investment. The
appreciation of the foreign asset benefits the investor as well.