Question 1

The duration of a par-value bond with a coupon rate of 8% (paid annually) and a remaining time to maturity of 5 years is

Accepted Answer

A) 5 years. 
B) 5.4 years. 
C) 4.17 years. 
D) 4.31 years. 
A) 5 years. 
B) 5.4 years. 
C) 4.17 years. 
D) 4.31 years.

Question 2

Par-value-bond GE has a modified duration of 11.Which one of the following statements regarding the bond is true?

Accepted Answer

A) If the market yield increases by 1%, the bond's price will decrease by $55. 
B) If the market yield increases by 1%, the bond's price will increase by $55. 
C) If the market yield increases by 1%, the bond's price will decrease by $110. 
D) If the market yield increases by 1%, the bond's price will increase by $110. 
A) If the market yield increases by 1%, the bond's price will decrease by $55. 
B) If the market yield increases by 1%, the bond's price will increase by $55. 
C) If the market yield increases by 1%, the bond's price will decrease by $110. 
D) If the market yield increases by 1%, the bond's price will increase by $110.

Question 3

When interest rates decline, the duration of a 10-year bond selling at a premium

Accepted Answer

A) increases. 
B) decreases. 
C) remains the same. 
D) increases at first, then declines. 
A) increases. 
B) decreases. 
C) remains the same. 
D) increases at first, then declines.

Question 4

One way that banks can reduce the duration of their asset portfolios is through the use of

Accepted Answer

A) fixed-rate mortgages. 
B) adjustable-rate mortgages. 
C) certificates of deposit. 
D) short-term borrowing. 
A) fixed-rate mortgages. 
B) adjustable-rate mortgages. 
C) certificates of deposit. 
D) short-term borrowing.

Question 5

Consider a bond selling at par with modified duration of 10.6 years and convexity of 210.A 2% decrease in yield would cause the price to increase by 21.2% according to the duration rule.What would be the percentage price change according to the duration-with-convexity rule?

Accepted Answer

A) 21.2% 
B) 25.4% 
C) 17.0% 
D) 10.6% 
A) 21.2% 
B) 25.4% 
C) 17.0% 
D) 10.6%

Question 6

Cash flow matching on a multiperiod basis is referred to as

Accepted Answer

A) immunization. 
B) contingent immunization. 
C) dedication. 
D) duration matching. 
A) immunization. 
B) contingent immunization. 
C) dedication. 
D) duration matching.

Question 7

Which one of the following par-value 12% coupon bonds experiences a price change of $23 when the market yield changes by 50 basis points?

Accepted Answer

A) The bond with a duration of 6 years 
B) The bond with a duration of 5 years 
C) The bond with a duration of 2.7 years 
D) The bond with a duration of 5.15 years 
A) The bond with a duration of 6 years 
B) The bond with a duration of 5 years 
C) The bond with a duration of 2.7 years 
D) The bond with a duration of 5.15 years

Question 8

Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par-value bond, D, with a 2 year to maturity and an 8% coupon rate.
2) A zero-coupon bond, E, with a 2 year to maturity and an 8% yield to maturity.

Accepted Answer

A) Bond D because of the higher yield to maturity 
B) Bond E because of the longer duration 
C) Bond D because of the longer time to maturity 
D) Both have the same sensitivity because both have the same yield to maturity. 
A) Bond D because of the higher yield to maturity 
B) Bond E because of the longer duration 
C) Bond D because of the longer time to maturity 
D) Both have the same sensitivity because both have the same yield to maturity.

Question 9

Holding other factors constant, which one of the following bonds has the smallest price volatility?

Accepted Answer

A) 20-year, 0% coupon bond 
B) 20-year, 6% coupon bond 
C) 20 year, 7% coupon bond 
D) 20-year, 9% coupon bond 
A) 20-year, 0% coupon bond 
B) 20-year, 6% coupon bond 
C) 20 year, 7% coupon bond 
D) 20-year, 9% coupon bond

Question 10

Holding other factors constant, the interest-rate risk of a coupon bond is lower when the bond's

Accepted Answer

A) term to maturity is lower. 
B) coupon rate is higher. 
C) yield to maturity is lower. 
D) term to maturity is lower and coupon rate is higher. 
A) term to maturity is lower. 
B) coupon rate is higher. 
C) yield to maturity is lower. 
D) term to maturity is lower and coupon rate is higher.

Question 11

Which of the following is not true?

Accepted Answer

A) Holding other things constant, the duration of a bond increases with time to maturity. 
B) Given time to maturity, the duration of a zero-coupon decreases with yield to maturity. 
C) Given time to maturity and yield to maturity, the duration of a bond is higher when the coupon rate is lower. 
D) Duration is a better measure of price sensitivity to interest-rate changes than is time to maturity. 
A) Holding other things constant, the duration of a bond increases with time to maturity. 
B) Given time to maturity, the duration of a zero-coupon decreases with yield to maturity. 
C) Given time to maturity and yield to maturity, the duration of a bond is higher when the coupon rate is lower. 
D) Duration is a better measure of price sensitivity to interest-rate changes than is time to maturity.

Question 12

The "modified duration" used by practitioners is equal to ______ divided by (one plus the bond's yield to maturity).

Accepted Answer

A) current yield 
B) the Macaulay duration 
C) yield to call 
D) yield to maturity 
A) current yield 
B) the Macaulay duration 
C) yield to call 
D) yield to maturity

Question 13

Holding other factors constant, the interest-rate risk of a coupon bond is higher when the bond's

Accepted Answer

A) term to maturity is lower. 
B) coupon rate is lower. 
C) yield to maturity is higher. 
D) term to maturity is lower and yield to maturity is higher. 
A) term to maturity is lower. 
B) coupon rate is lower. 
C) yield to maturity is higher. 
D) term to maturity is lower and yield to maturity is higher.

Question 14

Holding other factors constant, which one of the following bonds has the smallest price volatility?

Accepted Answer

A) 7-year, 0% coupon bond 
B) 7-year, 12% coupon bond 
C) 7 year, 14% coupon bond 
D) 7-year, 10% coupon bond 
A) 7-year, 0% coupon bond 
B) 7-year, 12% coupon bond 
C) 7 year, 14% coupon bond 
D) 7-year, 10% coupon bond

Question 15

Which of the following are false about the interest-rate sensitivity of bonds? I) Bond prices and yields are inversely related.
II) Prices of long-term bonds tend to be more sensitive to interest-rate changes than prices of short-term bonds.
III) Interest-rate risk is correlated with the bond's coupon rate.
IV) The sensitivity of a bond's price to a change in its yield to maturity is inversely related to the yield to maturity at which the bond is currently selling.

Accepted Answer

A) I 
B) III 
C) I, II, and IV 
D) II, III, and IV 
A) I 
B) III 
C) I, II, and IV 
D) II, III, and IV

Question 16

The duration of a 15-year zero-coupon bond is

Accepted Answer

A) smaller than 15. 
B) larger than 15. 
C) equal to 15. 
D) equal to that of a 15-year 10% coupon bond. 
A) smaller than 15. 
B) larger than 15. 
C) equal to 15. 
D) equal to that of a 15-year 10% coupon bond.

Question 17

The duration of a perpetuity with a yield of 8% is

Accepted Answer

A) 13.50 years. 
B) 12.11 years. 
C) 6.66 years. 
D) Cannot be determined 
A) 13.50 years. 
B) 12.11 years. 
C) 6.66 years. 
D) Cannot be determined

Question 18

Which of the following bonds has the longest duration?

Accepted Answer

A) A 12-year maturity, 0% coupon bond. 
B) A 12-year maturity, 8% coupon bond. 
C) A 4-year maturity, 8% coupon bond. 
D) A 4-year maturity, 0% coupon bond. 
A) A 12-year maturity, 0% coupon bond. 
B) A 12-year maturity, 8% coupon bond. 
C) A 4-year maturity, 8% coupon bond. 
D) A 4-year maturity, 0% coupon bond.

Question 19

Two bonds are selling at par value, and each has 17 years to maturity.The first bond has a coupon rate of 6%, and the second bond has a coupon rate of 13%.Which of the following is true about the durations of these bonds?

Accepted Answer

A) The duration of the higher coupon bond will be higher. 
B) The duration of the lower coupon bond will be higher. 
C) The duration of the higher coupon bond will equal the duration of the lower coupon bond. 
D) There is no consistent statement that can be made about the durations of the bonds. 
A) The duration of the higher coupon bond will be higher. 
B) The duration of the lower coupon bond will be higher. 
C) The duration of the higher coupon bond will equal the duration of the lower coupon bond. 
D) There is no consistent statement that can be made about the durations of the bonds.

Question 20

Consider a bond selling at par with modified duration of 12 years and convexity of 265.A 1% decrease in yield would cause the price to increase by 12%, according to the duration rule.What would be the percentage price change according to the duration-with-convexity rule?

Accepted Answer

A) 21.2% 
B) 25.4% 
C) 17.0% 
D) 13.3% 
A) 21.2% 
B) 25.4% 
C) 17.0% 
D) 13.3%

Exam 16: Managing Bond Portfolios

The duration of a par-value bond with a coupon rate of 8% (paid annually) and a remaining time to maturity of 5 years is

Par-value-bond GE has a modified duration of 11.Which one of the following statements regarding the bond is true?

When interest rates decline, the duration of a 10-year bond selling at a premium

One way that banks can reduce the duration of their asset portfolios is through the use of

Consider a bond selling at par with modified duration of 10.6 years and convexity of 210.A 2% decrease in yield would cause the price to increase by 21.2% according to the duration rule.What would be the percentage price change according to the duration-with-convexity rule?

Cash flow matching on a multiperiod basis is referred to as

Which one of the following par-value 12% coupon bonds experiences a price change of $23 when the market yield changes by 50 basis points?

Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par-value bond, D, with a 2 year to maturity and an 8% coupon rate. 2) A zero-coupon bond, E, with a 2 year to maturity and an 8% yield to maturity.

Holding other factors constant, which one of the following bonds has the smallest price volatility?

Holding other factors constant, the interest-rate risk of a coupon bond is lower when the bond's

Which of the following is not true?

The "modified duration" used by practitioners is equal to ______ divided by (one plus the bond's yield to maturity).

Holding other factors constant, the interest-rate risk of a coupon bond is higher when the bond's

Holding other factors constant, which one of the following bonds has the smallest price volatility?

The duration of a 15-year zero-coupon bond is

The duration of a perpetuity with a yield of 8% is

Which of the following bonds has the longest duration?

Two bonds are selling at par value, and each has 17 years to maturity.The first bond has a coupon rate of 6%, and the second bond has a coupon rate of 13%.Which of the following is true about the durations of these bonds?

Consider a bond selling at par with modified duration of 12 years and convexity of 265.A 1% decrease in yield would cause the price to increase by 12%, according to the duration rule.What would be the percentage price change according to the duration-with-convexity rule?

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