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

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 
E)  Cannot tell from the information given 
A)  20-year, 0% coupon bond 
B)  20-year, 6% coupon bond 
C)  20 year, 7% coupon bond 
D)  20-year, 9% coupon bond 
E)  Cannot tell from the information given

Question 3

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 higher. 
C)  yield to maturity is lower. 
D)  current yield is higher. 
E)  None of the options are correct. 
A)  term to maturity is lower. 
B)  coupon rate is higher. 
C)  yield to maturity is lower. 
D)  current yield is higher. 
E)  None of the options are correct.

Question 4

Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par value bond, X, with a 5-year year to maturity and a 10% coupon rate.
2) A zero-coupon bond, Y, with a 5-year year to maturity and a 10% yield to maturity.

Accepted Answer

A)  Bond X because of the higher yield to maturity 
B)  Bond X because of the longer time to maturity 
C)  Bond Y because of the longer duration 
D)  Both have the same sensitivity because both have the same yield to maturity. 
E)  None of the options are correct. 
A)  Bond X because of the higher yield to maturity 
B)  Bond X because of the longer time to maturity 
C)  Bond Y because of the longer duration 
D)  Both have the same sensitivity because both have the same yield to maturity. 
E)  None of the options are correct.

Question 5

The duration of a perpetuity with a yield of 9.0% 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 6

The duration of a par-valueannual bond with a coupon rate of 6.5% and a remaining time to maturity of 4 years is

Accepted Answer

A)  3.65 years. 
B)  3.45 years. 
C)  3.85 years. 
D)  4.00 years. 
A)  3.65 years. 
B)  3.45 years. 
C)  3.85 years. 
D)  4.00 years.

Question 7

The duration of a bond normally increases with an increase in

Accepted Answer

A)  term to maturity. 
B)  yield to maturity. 
C)  coupon rate. 
D)  All of the options are correct. 
E)  None of the options are correct. 
A)  term to maturity. 
B)  yield to maturity. 
C)  coupon rate. 
D)  All of the options are correct. 
E)  None of the options are correct.

Question 8

Indexing of bond portfolios is difficult because

Accepted Answer

A)  the number of bonds included in the major indexes is so large that it would be difficult to purchase them in the proper proportions. 
B)  many bonds are thinly traded, so it is difficult to purchase them at a fair market price. 
C)  the composition of bond indexes is constantly changing. 
D)  All of the options are true. 
A)  the number of bonds included in the major indexes is so large that it would be difficult to purchase them in the proper proportions. 
B)  many bonds are thinly traded, so it is difficult to purchase them at a fair market price. 
C)  the composition of bond indexes is constantly changing. 
D)  All of the options are true.

Question 9

Consider a six yearannual bond paying a 5% coupon, with a yield to maturity of 4.5%. What is the duration of the bond?

Accepted Answer

A)  4.925 
B)  5.152 
C)  5.339 
D)  5.787 
A)  4.925 
B)  5.152 
C)  5.339 
D)  5.787

Question 10

Some of the problems with immunization are

Accepted Answer

A)  duration assumes that the yield curve is flat. 
B)  duration assumes that if shifts in the yield curve occur, these shifts are parallel. 
C)  immunization is valid for one interest-rate change only. 
D)  durations and horizon dates change by the same amounts with the passage of time. 
E)  immunization is valid for one interest-rate change only, duration assumes that the yield curve is flat, and that if shifts in the yield curve occur, these shifts are parallel. 
A)  duration assumes that the yield curve is flat. 
B)  duration assumes that if shifts in the yield curve occur, these shifts are parallel. 
C)  immunization is valid for one interest-rate change only. 
D)  durations and horizon dates change by the same amounts with the passage of time. 
E)  immunization is valid for one interest-rate change only, duration assumes that the yield curve is flat, and that if shifts in the yield curve occur, these shifts are parallel.

Question 11

Identify the bond that has the longest duration (no calculations necessary).

Accepted Answer

A)  20-year maturity with an 8% coupon 
B)  20-year maturity with a 12% coupon 
C)  20-year maturity with a 0% coupon 
D)  10-year maturity with a 15% coupon 
E)  12-year maturity with a 12% coupon 
A)  20-year maturity with an 8% coupon 
B)  20-year maturity with a 12% coupon 
C)  20-year maturity with a 0% coupon 
D)  10-year maturity with a 15% coupon 
E)  12-year maturity with a 12% coupon

Question 12

Consider a four yearannual bond paying a 8.5% coupon, with a yield to maturity of 9.3%. What is the duration of the bond?

Accepted Answer

A)  3.831 
B)  3.785 
C)  3.614 
D)  3.548 
A)  3.831 
B)  3.785 
C)  3.614 
D)  3.548

Question 13

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 14

Par-value-bond F has a modified duration of 9. 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 $90. 
B)  If the market yield increases by 1%, the bond's price will increase by $90. 
C)  If the market yield increases by 1%, the bond's price will decrease by $60. 
D)  If the market yield decreases by 1%, the bond's price will increase by $60. 
A)  If the market yield increases by 1%, the bond's price will decrease by $90. 
B)  If the market yield increases by 1%, the bond's price will increase by $90. 
C)  If the market yield increases by 1%, the bond's price will decrease by $60. 
D)  If the market yield decreases by 1%, the bond's price will increase by $60.

Question 15

A seven-year par value bond has a coupon rate of 9% (paid annually) and a modified duration of

Accepted Answer

A)  7 years. 
B)  5.49 years. 
C)  5.03 years. 
D)  4.87 years. 
A)  7 years. 
B)  5.49 years. 
C)  5.03 years. 
D)  4.87 years.

Question 16

If a bond portfolio manager believesI) in market efficiency, he or she is likely to be a passive portfolio manager.II) that he or she can accurately predict interest-rate changes, he or she is likely to be an active portfolio manager.III) that he or she can identify bond-market anomalies, he or she is likely to be a passive portfolio manager.

Accepted Answer

A)  I only 
B)  II only 
C)  III only 
D)  I and II 
E)  I, II, and III 
A)  I only 
B)  II only 
C)  III only 
D)  I and II 
E)  I, II, and III

Question 17

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 18

An analyst who selects a particular holding period and predicts the yield curve at the end of that holding period is engaging in

Accepted Answer

A)  a rate anticipation swap. 
B)  immunization. 
C)  horizon analysis. 
D)  an intermarket spread swap. 
E)  None of the options are correct. 
A)  a rate anticipation swap. 
B)  immunization. 
C)  horizon analysis. 
D)  an intermarket spread swap. 
E)  None of the options are correct.

Question 19

Which of the following bonds has the longest duration?

Accepted Answer

A)  A 15-year maturity, 0% coupon bond. 
B)  A 15-year maturity, 9% coupon bond. 
C)  A 20-year maturity, 9% coupon bond. 
D)  A 20-year maturity, 0% coupon bond. 
E)  Cannot tell from the information given 
A)  A 15-year maturity, 0% coupon bond. 
B)  A 15-year maturity, 9% coupon bond. 
C)  A 20-year maturity, 9% coupon bond. 
D)  A 20-year maturity, 0% coupon bond. 
E)  Cannot tell from the information given

Question 20

The curvature of the price yield curve for a given bond is referred to as the bond's

Accepted Answer

A)  modified duration. 
B)  immunization. 
C)  sensitivity. 
D)  convexity. 
E)  tangency. 
A)  modified duration. 
B)  immunization. 
C)  sensitivity. 
D)  convexity. 
E)  tangency.

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

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 higher when the bond's

Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par value bond, X, with a 5-year year to maturity and a 10% coupon rate. 2) A zero-coupon bond, Y, with a 5-year year to maturity and a 10% yield to maturity.

The duration of a perpetuity with a yield of 9.0% is

The duration of a par-valueannual bond with a coupon rate of 6.5% and a remaining time to maturity of 4 years is

The duration of a bond normally increases with an increase in

Indexing of bond portfolios is difficult because

Consider a six yearannual bond paying a 5% coupon, with a yield to maturity of 4.5%. What is the duration of the bond?

Some of the problems with immunization are

Identify the bond that has the longest duration (no calculations necessary).

Consider a four yearannual bond paying a 8.5% coupon, with a yield to maturity of 9.3%. What is the duration of the bond?

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

Par-value-bond F has a modified duration of 9. Which one of the following statements regarding the bond is true?

A seven-year par value bond has a coupon rate of 9% (paid annually) and a modified duration of

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

An analyst who selects a particular holding period and predicts the yield curve at the end of that holding period is engaging in

Which of the following bonds has the longest duration?

The curvature of the price yield curve for a given bond is referred to as the bond's

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