Exhibit 19 -Refer to Exhibit 19

question 74

Multiple Choice

Exhibit 19.6
Use the Information Below for the Following Problem(S)
The following information is given concerning a substitution swap. You currently hold a 25 year, Aa 10 percent coupon bond priced to yield 12 percent. As a swap candidate you are considering a 25 year, Aa 10 percent coupon bond priced to yield 13 percent. Assume a reinvestment rate of 12 percent, semiannual compounding, and a one-year workout period.
$$\begin{array} { l c c } & \text { Current Bond } & \text { Candidate Bond } \\\hline \text { Dollar Investment } & \$ 842.38 & ? \\\text { Caupan } & 100.00 & 100.00 \\\text { i an One Coupon } & 3.0 & 2.75 \\\text { Principal Value at Year End } & 843.50 & 780.46 \\\text { Total Accrued } & 946.50 & 883.21 \\\text { Total Gain } & 104.12 & ? \\\text { Gain per Invested Dollar } & ? & ? \\\text { Realized Compound Yield } & ? & ?\end{array}$$
-Refer to Exhibit 19.6.The value of the swap is ____ basis points in one year.

• A) 94.14
• B) 0.9414
• C) 9.414
• D) 941.4
• E) 0.09414

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Definitions:

Adjustment Heuristic

A mental shortcut that involves basing decisions on an initial estimate and making adjustments to that figure to reach a final decision or judgment.

Judgment

involves making considered decisions or forming opinions based on the evaluation of available information and reasoning.

Decision Making

The cognitive process of making choices or selecting options among various alternatives.

Definition of Intelligence

The capacity for learning, understanding, and applying knowledge, as well as problem-solving and adapting to new situations.