Question 1

The duration of a coupon bond

Accepted Answer

A)  does not change after the bond is issued. 
B)  can accurately predict the price change of the bond for any interest rate change. 
C)  will decrease as the yield to maturity decreases. 
D)  all of these are true. 
E)  none of these are true. 
A)  does not change after the bond is issued. 
B)  can accurately predict the price change of the bond for any interest rate change. 
C)  will decrease as the yield to maturity decreases. 
D)  all of these are true. 
E)  none of these are true. E

Question 2

An 8%,15-year bond has a yield to maturity of 10% and a duration of 8.05 years.If the market yield changes by 25 basis points,how much change will there be in the bond's price?

Accepted Answer

A)  1.85% 
B)  2.01% 
C)  3.27% 
D)  6.44% 
E)  none of these 
A)  1.85% 
B)  2.01% 
C)  3.27% 
D)  6.44% 
E)  none of these A

Question 3

Discuss rate anticipation swaps as a bond portfolio management strategy.

Accepted Answer

Rate anticipation swap is an active bond portfolio management strategy,based on predicting future interest rates.If a portfolio manager believes that interest rates will decline,the manager will swap into bonds of greater duration.Conversely,if the portfolio manager believes that interest rates will increase,the portfolio manager will swap into bonds of shorter duration.This strategy is an active one,resulting in high transactions costs,and the success of this strategy is predicated on the bond portfolio manager's ability to predict correctly interest rate changes consistently over time (a difficult task,indeed).

Question 4

Contingent immunization

Accepted Answer

A)  is a mixed-active passive bond portfolio management strategy. 
B)  is a strategy whereby the portfolio may or may not be immunized. 
C)  is a strategy whereby if and when some trigger point value of the portfolio is reached,the portfolio is immunized to insure an minimum required return. 
D)  a and b. 
E)  a,b,and c. 
A)  is a mixed-active passive bond portfolio management strategy. 
B)  is a strategy whereby the portfolio may or may not be immunized. 
C)  is a strategy whereby if and when some trigger point value of the portfolio is reached,the portfolio is immunized to insure an minimum required return. 
D)  a and b. 
E)  a,b,and c.

Question 5

Discuss contingent immunization.Is this form of bond portfolio management strategy an active,passive,or combination of both,strategy?

Accepted Answer

Contingent immunization is portfolio man

Question 6

Identify the bond that has the longest duration (no calculations necessary).

Accepted Answer

A)  20-year maturity with an 8% coupon. 
B)  20-year maturity with a 12% coupon. 
C)  15-year maturity with a 0% coupon. 
D)  10-year maturity with a 15% coupon. 
E)  12-year maturity with a 12% coupon. 
A)  20-year maturity with an 8% coupon. 
B)  20-year maturity with a 12% coupon. 
C)  15-year maturity with a 0% coupon. 
D)  10-year maturity with a 15% coupon. 
E)  12-year maturity with a 12% coupon.

Question 7

You have an obligation to pay $1,488 in four years and 2 months.In which bond would you invest your $1,000 to accumulate this amount,with relative certainty,even if the yield on the bond declines to 9.5% immediately after you purchase the bond?

Accepted Answer

A)  a 6-year;10% coupon par value bond 
B)  a 5-year;10% coupon par value bond 
C)  a 5-year;zero-coupon bond 
D)  a 4-year;10% coupon par value bond 
E)  none of these 
A)  a 6-year;10% coupon par value bond 
B)  a 5-year;10% coupon par value bond 
C)  a 5-year;zero-coupon bond 
D)  a 4-year;10% coupon par value bond 
E)  none of these

Question 8

You manage a portfolio for Ms.Angel Foodcake,who has instructed you to be sure her portfolio has a value of at least $350,000 at the end of six years.The current value of Ms.Foodcake's portfolio is $250,000.You can invest the money at a current interest rate of 8%.You have decided to use a contingent immunization strategy.
• What amount would need to be invested today to achieve the goal,given the current interest rate?
• Suppose that four years have passed and the interest rate is 9%.What is the trigger point for Angel's portfolio at this time? (That is,how low can the value of the portfolio be before you will be forced to immunize to be assured of achieving the minimum acceptable return?)
• Illustrate the situation graphically.
• If the portfolio's value after 4 years is $291,437 what should you do?

Accepted Answer

Answer
Calculations are shown below.
• A

Question 9

The duration of a 5-year zero-coupon bond is

Accepted Answer

A)  smaller than 5. 
B)  larger than 5. 
C)  equal to 5. 
D)  equal to that of a 5-year 10% coupon bond 
E)  none of these. 
A)  smaller than 5. 
B)  larger than 5. 
C)  equal to 5. 
D)  equal to that of a 5-year 10% coupon bond 
E)  none of these.

Question 10

If a bond portfolio manager believes

Accepted Answer

A)  in market efficiency,he or she is likely to be a passive portfolio manager. 
B)  that he or she can accurately predict interest rate changes,he or she is likely to be an active portfolio manager. 
C)  that he or she can identify bond market anomalies,he or she is likely to be a passive portfolio manager. 
D)  a and b. 
E)  a,b,and c. 
A)  in market efficiency,he or she is likely to be a passive portfolio manager. 
B)  that he or she can accurately predict interest rate changes,he or she is likely to be an active portfolio manager. 
C)  that he or she can identify bond market anomalies,he or she is likely to be a passive portfolio manager. 
D)  a and b. 
E)  a,b,and c.

Question 11

According to experts,most pension funds are underfunded because

Accepted Answer

A)  their liabilities are of shorter duration than their assets. 
B)  their assets are of shorter duration than their liabilities. 
C)  they continually adjust the duration of their liabilities. 
D)  they continually adjust the duration of their assets. 
E)  they are too heavily invested in stocks. 
A)  their liabilities are of shorter duration than their assets. 
B)  their assets are of shorter duration than their liabilities. 
C)  they continually adjust the duration of their liabilities. 
D)  they continually adjust the duration of their assets. 
E)  they are too heavily invested in stocks.

Question 12

Consider a bond selling at par with modified duration of 10.6 years and convexity of 210.A 2 percent decrease in yield would cause the price to increase by 21.2%,according to the duration rule.What would be the percentage price change according to the duration-with-convexity rule?

Accepted Answer

A)  21.2% 
B)  25.4% 
C)  17.0% 
D)  10.6% 
E)  none of these. 
A)  21.2% 
B)  25.4% 
C)  17.0% 
D)  10.6% 
E)  none of these.

Question 13

Immunization through duration matching of assets and liabilities may be ineffective or inappropriate because

Accepted Answer

A)  conventional duration strategies assume a flat yield curve. 
B)  duration matching can only immunize portfolios from parallel shifts in the yield curve. 
C)  immunization only protects the nominal value of terminal liabilities and does not allow for inflation adjustment. 
D)  both a and c are true. 
E)  all of these are true. 
A)  conventional duration strategies assume a flat yield curve. 
B)  duration matching can only immunize portfolios from parallel shifts in the yield curve. 
C)  immunization only protects the nominal value of terminal liabilities and does not allow for inflation adjustment. 
D)  both a and c are true. 
E)  all of these are true.

Question 14

When interest rates decline,the duration of a 10-year bond selling at a premium

Accepted Answer

A)  increases 
B)  decreases 
C)  remains the same 
D)  increases at first,then declines 
E)  decreases at first,then increases 
A)  increases 
B)  decreases 
C)  remains the same 
D)  increases at first,then declines 
E)  decreases at first,then increases

Question 15

Active bond portfolio management strategies include all of the following except

Accepted Answer

A)  substitution swap. 
B)  rate anticipation swap. 
C)  intermarket spread. 
D)  immunization. 
E)  none of these. 
A)  substitution swap. 
B)  rate anticipation swap. 
C)  intermarket spread. 
D)  immunization. 
E)  none of these.

Question 16

The interest-rate risk of a bond is

Accepted Answer

A)  the risk related to the possibility of bankruptcy of the bond's issuer. 
B)  the risk that arises from the uncertainty of the bond's return caused by changes in interest rates. 
C)  the unsystematic risk caused by factors unique in the bond. 
D)  a and b above. 
E)  a,b,and c above. 
A)  the risk related to the possibility of bankruptcy of the bond's issuer. 
B)  the risk that arises from the uncertainty of the bond's return caused by changes in interest rates. 
C)  the unsystematic risk caused by factors unique in the bond. 
D)  a and b above. 
E)  a,b,and c above.

Question 17

An active investment strategy

Accepted Answer

A)  implies that market prices are fairly set. 
B)  attempts to achieve returns greater than those commensurate with the risk borne. 
C)  attempts to achieve the proper return that is commensurate with the risk borne. 
D)  requires portfolio managers,while a passive investment strategy does not. 
E)  occurs when bond portfolio managers are hyperactive. 
A)  implies that market prices are fairly set. 
B)  attempts to achieve returns greater than those commensurate with the risk borne. 
C)  attempts to achieve the proper return that is commensurate with the risk borne. 
D)  requires portfolio managers,while a passive investment strategy does not. 
E)  occurs when bond portfolio managers are hyperactive.

Question 18

Calculate the duration of a ten-year level annuity with annual yield of 9%.

Accepted Answer

A)  9.00 years 
B)  10.00 years 
C)  12.11 years 
D)  4.87 years. 
E)  4.79 years. 
A)  9.00 years 
B)  10.00 years 
C)  12.11 years 
D)  4.87 years. 
E)  4.79 years.

Question 19

The duration of a bond normally increases with an increase in

Accepted Answer

A)  term to maturity. 
B)  yield to maturity. 
C)  coupon rate. 
D)  all of these. 
E)  none of these. 
A)  term to maturity. 
B)  yield to maturity. 
C)  coupon rate. 
D)  all of these. 
E)  none of these.

Question 20

Which one of the following statements is true concerning the duration of a perpetuity?

Accepted Answer

A)  The duration of 15% yield perpetuity that pays $100 annually is longer than that of a 15% yield perpetuity that pays $200 annually. 
B)  The duration of a 15% yield perpetuity that pays $100 annually is shorter than that of a 15% yield perpetuity that pays $200 annually. 
C)  The duration of a 15% yield perpetuity that pays $100 annually is equal to that of 15% yield perpetuity that pays $200 annually. 
D)  the duration of a perpetuity cannot be calculated. 
E)  None of these. 
A)  The duration of 15% yield perpetuity that pays $100 annually is longer than that of a 15% yield perpetuity that pays $200 annually. 
B)  The duration of a 15% yield perpetuity that pays $100 annually is shorter than that of a 15% yield perpetuity that pays $200 annually. 
C)  The duration of a 15% yield perpetuity that pays $100 annually is equal to that of 15% yield perpetuity that pays $200 annually. 
D)  the duration of a perpetuity cannot be calculated. 
E)  None of these.

Exam 14: Financial Statement Analysis

The duration of a coupon bond

An 8%,15-year bond has a yield to maturity of 10% and a duration of 8.05 years.If the market yield changes by 25 basis points,how much change will there be in the bond's price?

Discuss rate anticipation swaps as a bond portfolio management strategy.

Contingent immunization

Discuss contingent immunization.Is this form of bond portfolio management strategy an active,passive,or combination of both,strategy?

Identify the bond that has the longest duration (no calculations necessary).

You have an obligation to pay $1,488 in four years and 2 months.In which bond would you invest your $1,000 to accumulate this amount,with relative certainty,even if the yield on the bond declines to 9.5% immediately after you purchase the bond?

The duration of a 5-year zero-coupon bond is

If a bond portfolio manager believes

According to experts,most pension funds are underfunded because

Consider a bond selling at par with modified duration of 10.6 years and convexity of 210.A 2 percent decrease in yield would cause the price to increase by 21.2%,according to the duration rule.What would be the percentage price change according to the duration-with-convexity rule?

Immunization through duration matching of assets and liabilities may be ineffective or inappropriate because

When interest rates decline,the duration of a 10-year bond selling at a premium

Active bond portfolio management strategies include all of the following except

The interest-rate risk of a bond is

An active investment strategy

Calculate the duration of a ten-year level annuity with annual yield of 9%.

The duration of a bond normally increases with an increase in

Which one of the following statements is true concerning the duration of a perpetuity?

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