Question 1

Contingent immunization strategies

Accepted Answer

A)  Provide the bond portfolio manager to engage in various active portfolio strategies if the client is willing to accept a floor value. 
B)  Insure that the modified duration of the portfolio is always equal to the desired investment horizon. 
C)  Guarantee that the end of the holding period wealth will not be impacted by interest rate changes. 
D)  All of the above statements are true. 
E)  None of the above statements are true. 
A)  Provide the bond portfolio manager to engage in various active portfolio strategies if the client is willing to accept a floor value. 
B)  Insure that the modified duration of the portfolio is always equal to the desired investment horizon. 
C)  Guarantee that the end of the holding period wealth will not be impacted by interest rate changes. 
D)  All of the above statements are true. 
E)  None of the above statements are true.

Question 2

Exhibit 19.8
Use the Information Below for the Following Problem(S)
Consider two bonds, both pay annual interest. Bond C 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 D has a coupon of 8% per year, maturity of 15 years, yield to maturity of 6% per year, and a face value of $1000.
-Refer to Exhibit 19.8.Assume that your investment horizon is 6 years and your portfolio consists only of Bond C and Bond D.Indicate the proportions invested in each bond,so that the portfolio is immunized.

Accepted Answer

A)  50% in Bond C and 50% in Bond D 
B)  64% in Bond C and 36% in Bond D 
C)  36% in Bond C and 64% in Bond D 
D)  100% in Bond D 
E)  None of the above 
A)  50% in Bond C and 50% in Bond D 
B)  64% in Bond C and 36% in Bond D 
C)  36% in Bond C and 64% in Bond D 
D)  100% in Bond D 
E)  None of the above

Question 3

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 value of swap out of Bond A into Bond B.

Accepted Answer

A)  0.41% 
B)  1.73% 
C)  0.23% 
D)  0.00% 
E)  0.51% 
A)  0.41% 
B)  1.73% 
C)  0.23% 
D)  0.00% 
E)  0.51%

Question 4

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 Modified 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 5

Exhibit 19.4
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 8 percent coupon bond priced to yield 10 percent. As a swap candidate you are considering a 25 year, Aa 8 percent coupon bond priced to yield 10.50 percent. Assume a reinvestment rate of 10 percent, semiannual compounding, and a one-year workout period.
 $$\begin{array} { l c c } 
& \text { Current Bond } & \text { Candidate Bond } \
\hline \text { Dollar Investment } & \$ 817.44 & ? \
\text { Caupan } & 80.00 & 80.00 \
\text { i an One Coupon } & 2.00 & 2.20 \
\text { Principal Value at Year End } & 819.23 & 782.33 \
\text { Total Accrued } & 901.23 & 864.53 \
\text { Total Gain } & 83.79 & ? \
\text { Gain per Invested Dollar } & ? & ? \
\text { Realized Compound Yield } & ? & ?
\end{array}$$
-Refer to Exhibit 19.4.The dollar investment in the candidate bond is

Accepted Answer

A)  $780.34 
B)  $1483.25 
C)  $1361.54 
D)  $1413.95 
E)  $1000.00 
A)  $780.34 
B)  $1483.25 
C)  $1361.54 
D)  $1413.95 
E)  $1000.00

Question 6

A bond swap involves liquidating a current bond position,and later investing in a similar issue under more favorable conditions.

Accepted Answer

A) True 
 B)False

Question 7

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 realized compound yield on the current bond is

Accepted Answer

A)  15.50% 
B)  11.03% 
C)  10.30% 
D)  8.01% 
E)  9.00% 
A)  15.50% 
B)  11.03% 
C)  10.30% 
D)  8.01% 
E)  9.00%

Question 8

Altman-Nammacher (1987)create a modified Z-score model using a multiple regression analysis technique.

Accepted Answer

A) True 
 B)False

Question 9

In classical immunization the effect of a change in interest rates is effectively neutralized because

Accepted Answer

A)  Price risk and reinvestment risk offset each other. 
B)  Price risk and maturity risk offset each other. 
C)  Reinvestment risk and credit risk offset each other. 
D)  Reinvestment risk and maturity risk offset each other. 
E)  None of the above. 
A)  Price risk and reinvestment risk offset each other. 
B)  Price risk and maturity risk offset each other. 
C)  Reinvestment risk and credit risk offset each other. 
D)  Reinvestment risk and maturity risk offset each other. 
E)  None of the above.

Question 10

Indexing is an active portfolio management strategy that seeks to copy the composition and performance of a selected market index.

Accepted Answer

A) True 
 B)False

Question 11

Investment style for a bond portfolio is best characterized by

Accepted Answer

A)  Beta and credit quality 
B)  Credit quality and duration 
C)  Interest rate risk and yield to maturity 
D)  Yield to maturity and beta 
E)  None of the above 
A)  Beta and credit quality 
B)  Credit quality and duration 
C)  Interest rate risk and yield to maturity 
D)  Yield to maturity and beta 
E)  None of the above

Question 12

Exhibit 19.4
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 8 percent coupon bond priced to yield 10 percent. As a swap candidate you are considering a 25 year, Aa 8 percent coupon bond priced to yield 10.50 percent. Assume a reinvestment rate of 10 percent, semiannual compounding, and a one-year workout period.
 $$\begin{array} { l c c } 
& \text { Current Bond } & \text { Candidate Bond } \
\hline \text { Dollar Investment } & \$ 817.44 & ? \
\text { Caupan } & 80.00 & 80.00 \
\text { i an One Coupon } & 2.00 & 2.20 \
\text { Principal Value at Year End } & 819.23 & 782.33 \
\text { Total Accrued } & 901.23 & 864.53 \
\text { Total Gain } & 83.79 & ? \
\text { Gain per Invested Dollar } & ? & ? \
\text { Realized Compound Yield } & ? & ?
\end{array}$$
-Refer to Exhibit 19.4.The value of the swap is ____ basis points in one year.

Accepted Answer

A)  26.91 
B)  26.25 
C)  31.25 
D)  41.25 
E)  51.25 
A)  26.91 
B)  26.25 
C)  31.25 
D)  41.25 
E)  51.25

Question 13

The components of interest rate risk are: price risk and maturity risk.

Accepted Answer

A) True 
 B)False

Question 14

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 price of Bond A.

Accepted Answer

A)  $975.62 
B)  $982.17 
C)  $990.57 
D)  $1,009.50 
E)  $1,018.08 
A)  $975.62 
B)  $982.17 
C)  $990.57 
D)  $1,009.50 
E)  $1,018.08

Question 15

The substitution swap is generally long term and relies heavily on interest rate expectations.

Accepted Answer

A) True 
 B)False

Question 16

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 interest on one coupon for the candidate bond is

Accepted Answer

A)  $2.97 
B)  $2.03 
C)  $1.80 
D)  $1.37 
E)  $3.49 
A)  $2.97 
B)  $2.03 
C)  $1.80 
D)  $1.37 
E)  $3.49

Question 17

Which of the following is a passive bond portfolio strategy?

Accepted Answer

A)  Indexing 
B)  Buy-and-Hold 
C)  Classical immunization 
D)  Choices a and b 
E)  None of the above 
A)  Indexing 
B)  Buy-and-Hold 
C)  Classical immunization 
D)  Choices a and b 
E)  None of the above

Question 18

In core-plus bond management

Accepted Answer

A)  Seventy five percent of the portfolio is allocated to an equity index, and the balance to a bond index. 
B)  Seventy five percent of the portfolio is allocated to a bond index, and the balance to an equity index. 
C)  Seventy five percent of the portfolio is allocated to a bond index, and the balance to actively managed bond sectors. 
D)  Seventy five percent of the portfolio is allocated to actively managed bond sectors, and the balance to a bond index. 
E)  None of the above. 
A)  Seventy five percent of the portfolio is allocated to an equity index, and the balance to a bond index. 
B)  Seventy five percent of the portfolio is allocated to a bond index, and the balance to an equity index. 
C)  Seventy five percent of the portfolio is allocated to a bond index, and the balance to actively managed bond sectors. 
D)  Seventy five percent of the portfolio is allocated to actively managed bond sectors, and the balance to a bond index. 
E)  None of the above.

Question 19

Interest rate anticipation is the most conservative management strategy.

Accepted Answer

A) True 
 B)False

Question 20

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 Y assuming a one year horizon,and a reinvestment rate of 8.5% per year.

Accepted Answer

A)  7.84% 
B)  7.97% 
C)  8.18% 
D)  8.34% 
E)  8.56% 
A)  7.84% 
B)  7.97% 
C)  8.18% 
D)  8.34% 
E)  8.56%

Exam 19: Bond Portfolio Management Strategies

Contingent immunization strategies

A bond swap involves liquidating a current bond position,and later investing in a similar issue under more favorable conditions.

Altman-Nammacher (1987)create a modified Z-score model using a multiple regression analysis technique.

In classical immunization the effect of a change in interest rates is effectively neutralized because

Indexing is an active portfolio management strategy that seeks to copy the composition and performance of a selected market index.

Investment style for a bond portfolio is best characterized by

The components of interest rate risk are: price risk and maturity risk.

The substitution swap is generally long term and relies heavily on interest rate expectations.

Which of the following is a passive bond portfolio strategy?

In core-plus bond management

Interest rate anticipation is the most conservative management strategy.

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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