Exam 11: Managing Bond Portfolios

A portfolio manager believes interest rates will drop and decides to sell short-duration bonds and buy long-duration bonds. This is an example of ________ swap.

Bond portfolio immunization techniques balance ________ and ________ risk.

All other things equal (YTM = 10%), which of the following has the longest duration?

All other things equal, a bond's duration is ________.

All else equal, bond price volatility is greater for ________.

Compute the duration of an 8%, 5-year corporate bond with a par value of $1,000 and yield to maturity of 10%.

The duration is independent of the coupon rate only for which one of the following?

If you choose a zero-coupon bond with a maturity that matches your investment horizon, which of the following statements is (are) correct? I. You will have no interest rate risk on this bond. II. In the absence of default, you can be sure you will earn the promised yield rate. III. The duration of your bond is less than the time to your investment horizon.

Where y = yield to maturity, the duration of a perpetuity would be ________.

A portfolio manager sells Treasury bonds and buys corporate bonds because the spread between corporate- and Treasury-bond yields is higher than its historical average. This is an example of ________ swap.

Banks and other financial institutions can best manage interest rate risk by ________.

An investor who expects declining interest rates would maximize her capital gain by purchasing a bond that has a ________ coupon and a ________ term to maturity.

A bank has $50 million in assets, $47 million in liabilities, and $3 million in shareholders' equity. If the duration of its liabilities is 1.3 and the bank wants to immunize its net worth against interest rate risk and thus set the duration of equity equal to zero, it should select assets with an average duration of ________.

What strategy might an insurance company employ to ensure that it will be able to meet the obligations of annuity holders?

A bond pays annual interest. Its coupon rate is 9%. Its value at maturity is $1,000. It matures in 4 years. Its yield to maturity is currently 6%. The modified duration of this bond is ________ years.

Bond prices are ________ sensitive to changes in yield when the bond is selling at a ________ initial yield to maturity.

Moving to higher-yield bonds, usually with longer maturities, is called ________.

At a 4% yield, the duration of a perpetuity that pays $100 once a year forever is ________.

A bond with a 9-year duration is worth $1,080, and its yield to maturity is 8%. If the yield to maturity falls to 7.84%, you would predict that the new value of the bond will be approximately ________.

Compute the modified duration of a 9% coupon, 3-year corporate bond with a yield to maturity of 12%.