Question 1

Historically, the yield curve has most often been:

Accepted Answer

A)  upward sloping. 
B)  downward sloping. 
C)  flat. 
D)  bell-shaped. 
A)  upward sloping. 
B)  downward sloping. 
C)  flat. 
D)  bell-shaped.

Question 2

The term structure of interest rates is also known as the:

Accepted Answer

A)  yield to maturity. 
B)  probability distribution. 
C)  yield differential. 
D)  yield curve. 
A)  yield to maturity. 
B)  probability distribution. 
C)  yield differential. 
D)  yield curve.

Question 3

Which of the following statements concerning yield spreads is not true?

Accepted Answer

A)  Yield spreads may be positive or negative. 
B)  Credit spreads are often calculated across bond maturities. 
C)  Yield spreads are influenced by the level of interest rates in the market. 
D)  Credit spreads can change over time. 
A)  Yield spreads may be positive or negative. 
B)  Credit spreads are often calculated across bond maturities. 
C)  Yield spreads are influenced by the level of interest rates in the market. 
D)  Credit spreads can change over time.

Question 4

The measured credit spread widens as you move into lower and lower quality bonds i.e., the spread between long-term T-bonds and BBB bonds is higher than the spread between long-term T-bonds and AAA bonds. Where do you generally find the largest increase in the credit spread due to a single step down in credit rating? Explain.

Accepted Answer

The largest increase in the credit sprea

Question 5

An increase in expected inflation tends to decrease bond prices.

Accepted Answer

A) True 
 B)False

Question 6

Convexity is used to correct the approximate percentage change in bond value calculated using modified duration.

Accepted Answer

A) True 
 B)False

Question 7

One of the most cost-effective methods of passive bond investing is buying into a bond ETF.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is not a passive bond strategy?

Accepted Answer

A)  A barbell strategy 
B)  A bond swap strategy 
C)  A buy and hold strategy 
D)  An indexing strategy 
A)  A barbell strategy 
B)  A bond swap strategy 
C)  A buy and hold strategy 
D)  An indexing strategy

Question 9

Why is immunization considered to be a hybrid strategy?

Accepted Answer

Immunization is a hybrid between passive

Question 10

A zero-coupon bond has 10-years to maturity and a YTM of 8%. If the YTM instantaneously increases to 9%, what happens to the bond's price and duration?

Accepted Answer

A)  The price decreases and the duration increases. 
B)  The price increases and the duration decreases. 
C)  The price decreases and the duration decreases. 
D)  The price decreases and the duration stays the same. 
A)  The price decreases and the duration increases. 
B)  The price increases and the duration decreases. 
C)  The price decreases and the duration decreases. 
D)  The price decreases and the duration stays the same.

Question 11

Using its modified duration, the price of a coupon bond is forecasted to change from $990 to $925 due to an increase in interest rates. If the bond's convexity is considered, the new forecasted price of the bond will be:

Accepted Answer

A)  higher than $925. 
B)  lower than $925. 
C)  equal to $925. 
D)  Cannot be determined. 
A)  higher than $925. 
B)  lower than $925. 
C)  equal to $925. 
D)  Cannot be determined.

Question 12

What are the two components of interest-rate risk? How do they work to immunize a portfolio?

Accepted Answer

The two parts are price risk and reinves

Question 13

The size of yield spreads tends to remain constant over time.

Accepted Answer

A) True 
 B)False

Question 14

A noncallable bond would be expected to have a higher yield to maturity than a comparable callable bond.

Accepted Answer

A) True 
 B)False

Question 15

You are asked to invest $30 million in a bond portfolio consisting of only two bonds. Bond A has a duration of 4.36 years, and bond B has a duration of 6.50 years. The portfolio is to have an investment horizon of 5 years. How much of each bond issue would you have to buy to immunize the portfolio?

Accepted Answer

The portfolio's duration must equal the

Question 16

Yield spreads tend to be highest during periods of economic turmoil.

Accepted Answer

A) True 
 B)False

Question 17

A commercial bank that always invests in short-term bonds in order to meet deposit withdrawals is a good example of a firm following the liquidity preference theory.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following 10-year, 8% bonds will offer the highest YTM?

Accepted Answer

A)  AAA-rated, callable bond 
B)  AAA-rated, non-callable bond 
C)  BBB-rated, callable bond 
D)  BBB-rated, non-callable bond 
A)  AAA-rated, callable bond 
B)  AAA-rated, non-callable bond 
C)  BBB-rated, callable bond 
D)  BBB-rated, non-callable bond

Question 19

During recessions, yield spreads tend to:

Accepted Answer

A)  narrow, whereas they generally widen during economic expansions. 
B)  widen, whereas they generally narrow during economic expansions. 
C)  narrow and they also generally narrow during economic expansions. 
D)  widen and they also generally widen during economic expansions. 
A)  narrow, whereas they generally widen during economic expansions. 
B)  widen, whereas they generally narrow during economic expansions. 
C)  narrow and they also generally narrow during economic expansions. 
D)  widen and they also generally widen during economic expansions.

Question 20

If two coupon bonds are equivalent in all other respects, which will have the higher convexity?

Accepted Answer

A)  The bond with the higher coupon. 
B)  The bond with the longer maturity. 
C)  The bond with the greater yield. 
D)  The bond with the lower credit rating. 
A)  The bond with the higher coupon. 
B)  The bond with the longer maturity. 
C)  The bond with the greater yield. 
D)  The bond with the lower credit rating.

Exam 18: Bonds: Analysis and Strategy

Historically, the yield curve has most often been:

The term structure of interest rates is also known as the:

Which of the following statements concerning yield spreads is not true?

An increase in expected inflation tends to decrease bond prices.

Convexity is used to correct the approximate percentage change in bond value calculated using modified duration.

One of the most cost-effective methods of passive bond investing is buying into a bond ETF.

Which of the following is not a passive bond strategy?

Why is immunization considered to be a hybrid strategy?

A zero-coupon bond has 10-years to maturity and a YTM of 8%. If the YTM instantaneously increases to 9%, what happens to the bond's price and duration?

Using its modified duration, the price of a coupon bond is forecasted to change from $990 to $925 due to an increase in interest rates. If the bond's convexity is considered, the new forecasted price of the bond will be:

What are the two components of interest-rate risk? How do they work to immunize a portfolio?

The size of yield spreads tends to remain constant over time.

A noncallable bond would be expected to have a higher yield to maturity than a comparable callable bond.

You are asked to invest $30 million in a bond portfolio consisting of only two bonds. Bond A has a duration of 4.36 years, and bond B has a duration of 6.50 years. The portfolio is to have an investment horizon of 5 years. How much of each bond issue would you have to buy to immunize the portfolio?

Yield spreads tend to be highest during periods of economic turmoil.

A commercial bank that always invests in short-term bonds in order to meet deposit withdrawals is a good example of a firm following the liquidity preference theory.

Which of the following 10-year, 8% bonds will offer the highest YTM?

During recessions, yield spreads tend to:

If two coupon bonds are equivalent in all other respects, which will have the higher convexity?

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