Question 1

Horizon matching is a combination of

Accepted Answer

A)  Cash-matching dedication and interest rates swaps. 
B)  Cash-matching dedication and immunization. 
C)  Interest rate swaps and immunization. 
D)  Enhanced indexing and immunization. 
E)  Enhanced indexing and interest rate swaps. 
A)  Cash-matching dedication and interest rates swaps. 
B)  Cash-matching dedication and immunization. 
C)  Interest rate swaps and immunization. 
D)  Enhanced indexing and immunization. 
E)  Enhanced indexing and interest rate swaps.

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.Calculate the modified duration for Bond C.

Accepted Answer

A)  4.47 
B)  4.22 
C)  4.34 
D)  5 
E)  None of the above 
A)  4.47 
B)  4.22 
C)  4.34 
D)  5 
E)  None of the above

Question 3

The duration of a perpetual bond is always equal to its term to maturity.

Accepted Answer

A) True 
 B)False

Question 4

Coupon reinvestment risk arises because the yield to maturity computation implicitly assumes that all coupon flows will be reinvested at the

Accepted Answer

A)  Coupon rate. 
B)  Effective rate of interest. 
C)  Realized yield to maturity. 
D)  Promised yield to maturity. 
E)  Existing yield as the coupons are paid. 
A)  Coupon rate. 
B)  Effective rate of interest. 
C)  Realized yield to maturity. 
D)  Promised yield to maturity. 
E)  Existing yield as the coupons are paid.

Question 5

Investment horizon is the future time when an investor must begin an investment program to generate the required funds for a future liability.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following would not normally be a reason for a bond swap?

Accepted Answer

A)  Increasing current yield 
B)  Improving the quality of the portfolio 
C)  Taking advantage of interest rate shifts 
D)  Tax savings 
E)  Realigning the portfolio's duration 
A)  Increasing current yield 
B)  Improving the quality of the portfolio 
C)  Taking advantage of interest rate shifts 
D)  Tax savings 
E)  Realigning the portfolio's duration

Question 7

In a buy-and-hold strategy,bonds are purchased in light of the investor's objectives and constraints and then held until maturity.

Accepted Answer

A) True 
 B)False

Question 8

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 B.

Accepted Answer

A)  1.44 
B)  2.47 
C)  2.55 
D)  2.70 
E)  2.78 
A)  1.44 
B)  2.47 
C)  2.55 
D)  2.70 
E)  2.78

Question 9

Two common methods for constructing a bond index are

Accepted Answer

A)  Full replication and stratified sampling 
B)  Partial replication and overall market approach 
C)  ETFs and High Yield sampling 
D)  Multiple discriminant analysis and bond swaps 
E)  None of the above 
A)  Full replication and stratified sampling 
B)  Partial replication and overall market approach 
C)  ETFs and High Yield sampling 
D)  Multiple discriminant analysis and bond swaps 
E)  None of the above

Question 10

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 value of swap out of Bond X into Bond Y.

Accepted Answer

A)  0.38% 
B)  0.81% 
C)  1.94% 
D)  3.76% 
E)  4.12% 
A)  0.38% 
B)  0.81% 
C)  1.94% 
D)  3.76% 
E)  4.12%

Question 11

Exhibit 19.5
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 20 year, Aa 2 percent coupon bond priced to yield 9.5 percent. As a swap candidate you are considering a 20 year, Aa 14 percent coupon bond priced to yield 10.00. Assume a reinvestment rate of 11 percent, semiannual compounding, and a one-year workout period.
 $$\begin{array} { l c c } 
& \text { Wurrent Bond } & \text { Candidente Eand } \
\hline \text { Dollar Investrent } & \$ 1222 . [ 4 & 1343.18 \
\text { Caupan } & 110.00 & 140.00 \
\text { i an One Coupan } & 3.3 & ? \
\text { Principal Value at Year End } & 1218.04 & ? \
\text { Total Accrued } & 1341.34 & ? \
\text { Realized Campund Yield } 9.5351 \% & ? &
\end{array}$$
-Refer to Exhibit 19.5.The value of the swap is ____ basis points in one year.

Accepted Answer

A)  0.004921 
B)  0.4921 
C)  4.921 
D)  49.21 
E)  492.1 
A)  0.004921 
B)  0.4921 
C)  4.921 
D)  49.21 
E)  492.1

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.Assume that your investment horizon is 2 years and your portfolio consists only of bonds A and B.What proportion should be invested in each bond to immunize the portfolio?

Accepted Answer

A)  Invest 72.4% in bond A and 27.6% in bond B. 
B)  Invest 68.3% in bond A and 31.7% in bond B. 
C)  Invest 58.5% in bond A and 41.5% in bond B. 
D)  Invest 31.7% in bond A and 68.3% in bond B. 
E)  Invest 27.6% in bond A and 72.4% in bond B. 
A)  Invest 72.4% in bond A and 27.6% in bond B. 
B)  Invest 68.3% in bond A and 31.7% in bond B. 
C)  Invest 58.5% in bond A and 41.5% in bond B. 
D)  Invest 31.7% in bond A and 68.3% in bond B. 
E)  Invest 27.6% in bond A and 72.4% in bond B.

Question 13

Interest rate anticipation is one of the matched funding techniques that matches anticipated interest rates with the required rates on a portfolio.

Accepted Answer

A) True 
 B)False

Question 14

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 value of the swap is ____ basis points in one year.

Accepted Answer

A)  94.14 
B)  0.9414 
C)  9.414 
D)  941.4 
E)  0.09414 
A)  94.14 
B)  0.9414 
C)  9.414 
D)  941.4 
E)  0.09414

Question 15

A substitution pickup swap involves swapping out of a

Accepted Answer

A)  Bond to realize capital losses, into a comparable bond. 
B)  Low coupon bond, into a comparable high coupon bond. 
C)  High coupon bond, into a comparable low coupon bond. 
D)  Bond that is underpriced, into a comparable bond that is overpriced. 
E)  Bond that is overpriced, into a comparable bond that is underpriced. 
A)  Bond to realize capital losses, into a comparable bond. 
B)  Low coupon bond, into a comparable high coupon bond. 
C)  High coupon bond, into a comparable low coupon bond. 
D)  Bond that is underpriced, into a comparable bond that is overpriced. 
E)  Bond that is overpriced, into a comparable bond that is underpriced.

Question 16

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 B.

Accepted Answer

A)  $974.69 
B)  $990.64 
C)  $995.22 
D)  $1,013.88 
E)  $1,025.77 
A)  $974.69 
B)  $990.64 
C)  $995.22 
D)  $1,013.88 
E)  $1,025.77

Question 17

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.Calculate the modified duration for Bond D.

Accepted Answer

A)  9.5 
B)  9.8 
C)  9.2 
D)  15 
E)  None of the above 
A)  9.5 
B)  9.8 
C)  9.2 
D)  15 
E)  None of the above

Question 18

Historically the correlation between stocks and bonds has consistently remained between 0.20 and 0.45.

Accepted Answer

A) True 
 B)False

Question 19

A bond portfolio is immunized from interest rate risk if the modified duration of the portfolio is always equal to the desired investment horizon.

Accepted Answer

A) True 
 B)False

Question 20

A pure yield pickup swap involves swapping out of a

Accepted Answer

A)  Bond to realize capital losses, into a comparable bond. 
B)  Low coupon bond, into a comparable high coupon bond. 
C)  High coupon bond, into a comparable low coupon bond. 
D)  Bond that is underpriced, into a comparable bond that is overpriced. 
E)  Bond that is overpriced, into a comparable bond that is underpriced. 
A)  Bond to realize capital losses, into a comparable bond. 
B)  Low coupon bond, into a comparable high coupon bond. 
C)  High coupon bond, into a comparable low coupon bond. 
D)  Bond that is underpriced, into a comparable bond that is overpriced. 
E)  Bond that is overpriced, into a comparable bond that is underpriced.

Exam 19: Bond Portfolio Management Strategies

Horizon matching is a combination of

The duration of a perpetual bond is always equal to its term to maturity.

Coupon reinvestment risk arises because the yield to maturity computation implicitly assumes that all coupon flows will be reinvested at the

Investment horizon is the future time when an investor must begin an investment program to generate the required funds for a future liability.

Which of the following would not normally be a reason for a bond swap?

In a buy-and-hold strategy,bonds are purchased in light of the investor's objectives and constraints and then held until maturity.

Two common methods for constructing a bond index are

Interest rate anticipation is one of the matched funding techniques that matches anticipated interest rates with the required rates on a portfolio.

A substitution pickup swap involves swapping out of a

Historically the correlation between stocks and bonds has consistently remained between 0.20 and 0.45.

A bond portfolio is immunized from interest rate risk if the modified duration of the portfolio is always equal to the desired investment horizon.

A pure yield pickup swap involves swapping out of 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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