Question 1

Which factors indicate that in-depth credit analysis of high-yield bonds is important?

Accepted Answer

A)  The large number of high-yield issues. 
B)  The overall decline in quality of these bonds. 
C)  The wide range of quality among these bonds. 
D)  The growing complexity of these bonds. 
E)  All of the above. 
A)  The large number of high-yield issues. 
B)  The overall decline in quality of these bonds. 
C)  The wide range of quality among these bonds. 
D)  The growing complexity of these bonds. 
E)  All of the above.

Question 2

Assuming no change in interest rates,the duration of a coupon bond

Accepted Answer

A)  Stays constant. 
B)  Declines more slowly than the term to maturity. 
C)  Declines more quickly than the term to maturity 
D)  Increases at a slower rate than the term to maturity. 
E)  Changes in line with the term to maturity. 
A)  Stays constant. 
B)  Declines more slowly than the term to maturity. 
C)  Declines more quickly than the term to maturity 
D)  Increases at a slower rate than the term to maturity. 
E)  Changes in line with the term to maturity.

Question 3

Exhibit 19.1
Use the Information Below for the Following Problem(S)
The following information is given concerning a pure yield pick-up swap: You currently hold a 10 year, 7 percent coupon bond priced to yield 8 percent. As a swap candidate you are considering a 10 year, 8 percent coupon bond priced to yield 9 percent. Assume a reinvestment at 9 percent, semiannual compounding, and a one-year workout period.
 $$\begin{array} { l c c } 
& \text { Current Bond } & \text { Candidate Bond } \
\hline \text { Dollar Investment } & \$ 932.05 & \$ 934.96 \
\text { Caupan } & \$ 70.00 & \$ 80.000 \
\text { i an One Coupon } & \$ 1.575 & ? \
\text { Principal Value at Year End } & \$ 936.70 & ? \
\text { Total Accrued } & \$ 1008.28 & ? \
\text { Realized Compound Yield } & 8.018 \% & ?
\end{array}$$
-Refer to Exhibit 19.1.The value of the swap is ____ basis points in one year.

Accepted Answer

A)  32.3 
B)  48.7 
C)  75.8 
D)  98.2 
E)  104.3 
A)  32.3 
B)  48.7 
C)  75.8 
D)  98.2 
E)  104.3

Question 4

The term dedication,used to describe portfolio management techniques,is referring to servicing a prescribed set of

Accepted Answer

A)  Interest payments. 
B)  Assets. 
C)  Liabilities. 
D)  Pensioners. 
E)  Sinking fund payments. 
A)  Interest payments. 
B)  Assets. 
C)  Liabilities. 
D)  Pensioners. 
E)  Sinking fund payments.

Question 5

Which of the following is a matched funding technique?

Accepted Answer

A)  Classical immunization 
B)  Contingent immunization 
C)  Bond swaps 
D)  Valuation analysis 
E)  Interest rate anticipation 
A)  Classical immunization 
B)  Contingent immunization 
C)  Bond swaps 
D)  Valuation analysis 
E)  Interest rate anticipation

Question 6

An investor in a pure yield pickup swap is most concerned about changes in interest rates.

Accepted Answer

A) True 
 B)False

Question 7

The bond management strategy intended to eliminate interest rate risk is immunization.

Accepted Answer

A) True 
 B)False

Question 8

Exhibit 19.6
Use the Information Below for the Following Problem(S)
The following information is given concerning a substitution swap. You currently hold a 25 year, Aa 10 percent coupon bond priced to yield 12 percent. As a swap candidate you are considering a 25 year, Aa 10 percent coupon bond priced to yield 13 percent. Assume a reinvestment rate of 12 percent, semiannual compounding, and a one-year workout period.
 $$\begin{array} { l c c } 
& \text { Current Bond } & \text { Candidate Bond } \
\hline \text { Dollar Investment } & \$ 842.38 & ? \
\text { Caupan } & 100.00 & 100.00 \
\text { i an One Coupon } & 3.0 & 2.75 \
\text { Principal Value at Year End } & 843.50 & 780.46 \
\text { Total Accrued } & 946.50 & 883.21 \
\text { Total Gain } & 104.12 & ? \
\text { Gain per Invested Dollar } & ? & ? \
\text { Realized Compound Yield } & ? & ?
\end{array}$$
-Refer to Exhibit 19.6.The dollar investment in the candidate bond is

Accepted Answer

A)  $1515.36 
B)  $853.50 
C)  $780.46 
D)  $779.13 
E)  $877.53 
A)  $1515.36 
B)  $853.50 
C)  $780.46 
D)  $779.13 
E)  $877.53

Question 9

Exhibit 19.11
Use the Information Below for the Following Problem(S)
Consider two bonds, both pay semiannual interest. Bond X has a coupon of 7% per year, maturity of 20 years, yield to maturity of 8% per year, and a face value of $1000. Bond Y has a coupon of 7% per year, maturity of 20 years, yield to maturity of 8.5% per year, and a face value of $1000.
-Refer to Exhibit 19.11.Calculate the percentage gain per invested dollar for Bond X assuming a one year horizon,and a reinvestment rate of 8% per year.

Accepted Answer

A)  2.35% 
B)  4.08% 
C)  7.92% 
D)  8.16% 
E)  8.32% 
A)  2.35% 
B)  4.08% 
C)  7.92% 
D)  8.16% 
E)  8.32%

Question 10

Interest rate risk is comprised of which of the following risks?

Accepted Answer

A)  Price risk. 
B)  Coupon reinvestment risk. 
C)  Default risk. 
D)  Both a and b only. 
E)  All of the above. 
A)  Price risk. 
B)  Coupon reinvestment risk. 
C)  Default risk. 
D)  Both a and b only. 
E)  All of the above.

Question 11

Exhibit 19.7
Use the Information Below for the Following Problem(S)
Consider two bonds, both pay semiannual interest. Bond A has a coupon of 8% per year, maturity of 30 years, yield to maturity of 9% per year, and a face value of $1000. Bond B has a coupon of 8% per year, maturity of 30 years, yield to maturity of 9.5% per year, and a face value of $1000.
-Refer to Exhibit 19.7.Calculate the percentage gain per invested dollar for Bond A assuming a one year horizon,and a reinvestment rate of 9% per year.

Accepted Answer

A)  9.73% 
B)  9.93% 
C)  9.20% 
D)  8.20% 
E)  9.50% 
A)  9.73% 
B)  9.93% 
C)  9.20% 
D)  8.20% 
E)  9.50%

Question 12

Exhibit 19.10
Use the Information Below for the Following Problem(S)
You are creating a portfolio that consists of the following two bonds. Bond A pays an annual 7% coupon, matures in two years, has a yield to maturity of 8%, and a face value of $1,000. Bond B pays an annual 8% coupon, matures in three years, has a yield to maturity of 9%, and a face value of $1,000.
-Refer to Exhibit 19.10.Calculate the Macaulay Duration for Bond A.

Accepted Answer

A)  0.98 
B)  1.79 
C)  1.90 
D)  1.93 
E)  2.31 
A)  0.98 
B)  1.79 
C)  1.90 
D)  1.93 
E)  2.31

Question 13

Exhibit 19.9
Use the Information Below for the Following Problem(S)
Consider two bonds, both pay annual interest. Bond Y has a coupon of 6% per year, maturity of 5 years, yield to maturity of 6% per year, and a face value of $1000. Bond X has a coupon of 7% per year, maturity of 10 years, yield to maturity of 4% per year, and a face value of $1000.
-Refer to Exhibit 19.9.Calculate the modified duration for Bond Y.

Accepted Answer

A)  7.8 
B)  4.22 
C)  4.34 
D)  7.5 
E)  9.8 
A)  7.8 
B)  4.22 
C)  4.34 
D)  7.5 
E)  9.8

Question 14

Exhibit 19.2
Use the Information Below for the Following Problem(S)
The following information is given concerning a substitution swap. You currently hold a 15 year, 7 percent coupon bond priced to yield 8 percent. As a swap candidate you are considering a 15 year, 7 percent coupon bond priced to yield 8.5 percent. Assume a reinvestment rate of 8.5 percent, semiannual compounding, and a one-year workout period.
 $$\begin{array} { l c c } 
& \text { Current Bond } & \text { Candidate Bond } \
\hline \text { Dollar Investment } & \$ 913.54 & ? \
\text { Caupan } & 70.00 & 70.00 \
\text { i an One Coupon } & 1.487 & 1.487 \
\text { Principal Value at Year End } & 916.68 & 878.55 \
\text { Total Accrued } & 988.17 & 950.04 \
\text { Total Gain } & 74.63 & ? \
\text { Gain per Invested Dollar } & ? & ? \
\text { Realized Compound Yield } & ? & ?
\end{array}$$
-Refer to Exhibit 19.2.The value of the swap is ____ basis points in one year.

Accepted Answer

A)  18.4 
B)  23.3 
C)  49.1 
D)  46.5 
E)  46.8 
A)  18.4 
B)  23.3 
C)  49.1 
D)  46.5 
E)  46.8

Question 15

With a matched funding technique portfolio managers try to match specific liability obligations due at specific times to a portfolio of bonds that minimize the portfolio's interest rate risk.

Accepted Answer

A) True 
 B)False

Question 16

When applying active management techniques to a global portfolio the additional concern is expectations regarding exchange rates between countries.

Accepted Answer

A) True 
 B)False

Question 17

Studies by Reilly and Wright (1994,2001)and Fabozzi (2005)suggest analysis of high-yield bonds should be expanded to include all of the following except

Accepted Answer

A)  The firm's competitive position with respect to cost and pricing 
B)  The firm's cash flow relative to interest expense, research expenses, and growth needs 
C)  The firm's market share and growth in sales 
D)  The quality of the total management team 
E)  All of the above were suggested as important areas of expanded analysis by these studies 
A)  The firm's competitive position with respect to cost and pricing 
B)  The firm's cash flow relative to interest expense, research expenses, and growth needs 
C)  The firm's market share and growth in sales 
D)  The quality of the total management team 
E)  All of the above were suggested as important areas of expanded analysis by these studies

Question 18

In a ladder strategy,funds are invested equally among a wide range of maturities.

Accepted Answer

A) True 
 B)False

Question 19

A substitution swap relies heavily on interest rate expectations.

Accepted Answer

A) True 
 B)False

Question 20

If an investor swaps identical issues to establish a loss,the loss is disallowed and the transaction is known as a

Accepted Answer

A)  Switch sale. 
B)  Wash sale. 
C)  Green shoe. 
D)  Flashback. 
E)  White knight. 
A)  Switch sale. 
B)  Wash sale. 
C)  Green shoe. 
D)  Flashback. 
E)  White knight.

Exam 19: Bond Portfolio Management Strategies

Which factors indicate that in-depth credit analysis of high-yield bonds is important?

Assuming no change in interest rates,the duration of a coupon bond

The term dedication,used to describe portfolio management techniques,is referring to servicing a prescribed set of

Which of the following is a matched funding technique?

An investor in a pure yield pickup swap is most concerned about changes in interest rates.

The bond management strategy intended to eliminate interest rate risk is immunization.

Interest rate risk is comprised of which of the following risks?

With a matched funding technique portfolio managers try to match specific liability obligations due at specific times to a portfolio of bonds that minimize the portfolio's interest rate risk.

When applying active management techniques to a global portfolio the additional concern is expectations regarding exchange rates between countries.

Studies by Reilly and Wright (1994,2001)and Fabozzi (2005)suggest analysis of high-yield bonds should be expanded to include all of the following except

In a ladder strategy,funds are invested equally among a wide range of maturities.

A substitution swap relies heavily on interest rate expectations.

If an investor swaps identical issues to establish a loss,the loss is disallowed and the transaction is known as a

An Overview of the Investment Process

The Asset Allocation Decision

The Global Market Investment Decision

Securities Markets: Organization and Operation

Security-Market Indexes

Efficient Capital Markets

An Introduction to Portfolio Management

An Introduction to Asset Pricing Models

Multifactor Models of Risk and Return

Analysis of Financial Statements

Security Valuation Principles

Macroanalysis and Microvaluation of the Stock Market

Industry Analysis

Company Analysis and Stock Valuation

Equity Portfolio Management Stragtegies

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Forward and Futures Contracts

Option Contracts

Swap Contracts,convertible Securities,and Other Embedded Derivatives

Professional Money Management, alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Investment Return and Risk Analysis Questions

Investment and Retirement Plans

Calculating Covariance and Correlation Coefficient of Assets

Portfolio Variance and Stock Weight Calculations

Portfolio Optimization with Negative Correlation: Finding Minimum Variance and Weight Allocation

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