Exam 11: Managing Bond Portfolios

Steel Pier Company has issued bonds that pay semiannually with the following characteristics: The modified duration for the Steel Pier bond is ________.

Which of the following is a strategy to shield net worth from interest rate movements?

A ________ investment strategy takes market prices of securities as set fairly.

Advantages of cash flow matching and dedicated strategies include: I. Once the cash flows are matched, there is no need for rebalancing. II. Cash flow matching typically earns a higher rate of return than active bond portfolio management. III. Financial institutions' liabilities often exceed the maturity of available bonds, making cash matching even more desirable.

The duration of a portfolio of bonds can be calculated as ________.

A zero-coupon bond is selling at a deep discount price of $430. It matures in 13 years. If the yield to maturity of the bond is 6.7%, what is the duration of the bond?

Because of convexity, when interest rates change, the actual bond price will ________ the bond price predicted by duration.

________ is an important characteristic of the relationship between bond prices and yields.

Market economists all predict a rise in interest rates. An astute bond manager wishing to maximize her capital gain might employ which strategy?

Duration is a concept that is useful in assessing a bond's ________.

When interest rates increase, the duration of a 20-year bond selling at a premium ________.

In a pure yield pickup swap, ________ bonds are exchanged for ________ bonds.

You have an investment that in today's dollars returns 15% of your investment in year 1, 12% in year 2, 9% in year 3, and the remainder in year 4. What is the duration of this investment?

A forecast of bond returns based largely on a prediction of the yield curve at the end of the investment horizon is called a ________.

A bond swap made in response to forecasts of interest rate changes is called ________.

As a result of bond convexity, an increase in a bond's price when yield to maturity falls is ________ the price decrease resulting from an increase in yield of equal magnitude.

You find a 5-year AA Xerox bond priced to yield 6%. You find a similar-risk 5-year Canon bond priced to yield 6.5%. If you expect interest rates to rise, which of the following should you do?

A 20-year maturity corporate bond has a 6.5% coupon rate (the coupons are paid annually). The bond currently sells for $925.50. A bond market analyst forecasts that in 5 years yields on such bonds will be at 7%. You believe that you will be able to reinvest the coupons earned over the next 5 years at a 6% rate of return. What is your expected annual compound rate of return if you plan on selling the bond in 5 years?

A bond portfolio manager notices a hump in the yield curve at the 5-year point. How might a bond manager take advantage of this event?

Convexity implies that duration predictions: I. Underestimate the percentage increase in bond price when the yield falls. II. Underestimate the percentage decrease in bond price when the yield rises. III. Overestimate the percentage increase in bond price when the yield falls. IV. Overestimate the percentage decrease in bond price when the yield rises.