Question 1

Holding other factors constant,the interest-rate risk of a coupon bond is higher when the bond's:

Accepted Answer

A)  term-to-maturity is lower. 
B)  coupon rate is higher. 
C)  yield to maturity is lower. 
D)  current yield is higher. 
E)  none of these. 
A)  term-to-maturity is lower. 
B)  coupon rate is higher. 
C)  yield to maturity is lower. 
D)  current yield is higher. 
E)  none of these.

Question 2

One way that banks can reduce the duration of their asset portfolios is through the use of

Accepted Answer

A)  fixed rate mortgages. 
B)  adjustable rate mortgages. 
C)  certificates of deposit. 
D)  short-term borrowing. 
E)  none of these. 
A)  fixed rate mortgages. 
B)  adjustable rate mortgages. 
C)  certificates of deposit. 
D)  short-term borrowing. 
E)  none of these.

Question 3

Interest-rate risk is important to

Accepted Answer

A)  active bond portfolio managers. 
B)  passive bond portfolio managers. 
C)  both active and passive bond portfolio managers. 
D)  neither active nor passive bond portfolio managers. 
E)  obsessive bond portfolio managers. 
A)  active bond portfolio managers. 
B)  passive bond portfolio managers. 
C)  both active and passive bond portfolio managers. 
D)  neither active nor passive bond portfolio managers. 
E)  obsessive bond portfolio managers.

Question 4

According to the duration concept

Accepted Answer

A)  only coupon payments matter. 
B)  only maturity value matters. 
C)  the coupon payments made prior to maturity make the effective maturity of the bond greater than its actual time to maturity. 
D)  the coupon payments made prior to maturity make the effective maturity of the bond less than its actual time to maturity. 
E)  discount rates don't matter. 
A)  only coupon payments matter. 
B)  only maturity value matters. 
C)  the coupon payments made prior to maturity make the effective maturity of the bond greater than its actual time to maturity. 
D)  the coupon payments made prior to maturity make the effective maturity of the bond less than its actual time to maturity. 
E)  discount rates don't matter.

Question 5

Par value bond F has a modified duration of 9.Which one of the following statements regarding the bond is true?

Accepted Answer

A)  If the market yield increases by 1% the bond's price will decrease by $90. 
B)  If the market yield increases by 1% the bond's price will increase by $90. 
C)  If the market yield increases by 1% the bond's price will decrease by $60. 
D)  If the market yield decreases by 1% the bond's price will increase by $60. 
E)  None of these is true. 
A)  If the market yield increases by 1% the bond's price will decrease by $90. 
B)  If the market yield increases by 1% the bond's price will increase by $90. 
C)  If the market yield increases by 1% the bond's price will decrease by $60. 
D)  If the market yield decreases by 1% the bond's price will increase by $60. 
E)  None of these is true.

Question 6

Duration measures

Accepted Answer

A)  weighted average time until a bond's half-life. 
B)  weighted average time until cash flow payment. 
C)  the time required to recoup one's investment,assuming the bond was purchased for $1,000. 
D)  a and c. 
E)  b and c. 
A)  weighted average time until a bond's half-life. 
B)  weighted average time until cash flow payment. 
C)  the time required to recoup one's investment,assuming the bond was purchased for $1,000. 
D)  a and c. 
E)  b and c.

Question 7

The duration of a bond is a function of the bond's

Accepted Answer

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

Question 8

Holding other factors constant,which one of the following bonds has the smallest price volatility?

Accepted Answer

A)  5-year,0% coupon bond 
B)  5-year,12% coupon bond 
C)  5 year,14% coupon bond 
D)  5-year,10% coupon bond 
E)  Cannot tell from the information given. 
A)  5-year,0% coupon bond 
B)  5-year,12% coupon bond 
C)  5 year,14% coupon bond 
D)  5-year,10% coupon bond 
E)  Cannot tell from the information given.

Question 9

A contract between two parties to exchange a series of cash flows similar to those resulting from an exchange of different types of bonds is called a(n)

Accepted Answer

A)  interest rate swap. 
B)  yield curve swap. 
C)  credit spread. 
D)  notional spread. 
E)  none of these. 
A)  interest rate swap. 
B)  yield curve swap. 
C)  credit spread. 
D)  notional spread. 
E)  none of these.

Question 10

Two bonds are selling at par value and each has 17 years to maturity.The first bond has a coupon rate of 6% and the second bond has a coupon rate of 13%.Which of the following is true about the durations of these bonds?

Accepted Answer

A)  The duration of the higher-coupon bond will be higher. 
B)  The duration of the lower-coupon bond will be higher. 
C)  The duration of the higher-coupon bond will equal the duration of the lower-coupon bond. 
D)  There is no consistent statement that can be made about the durations of the bonds. 
E)  The bond's durations cannot be determined without knowing the prices of the bonds. 
A)  The duration of the higher-coupon bond will be higher. 
B)  The duration of the lower-coupon bond will be higher. 
C)  The duration of the higher-coupon bond will equal the duration of the lower-coupon bond. 
D)  There is no consistent statement that can be made about the durations of the bonds. 
E)  The bond's durations cannot be determined without knowing the prices of the bonds.

Question 11

Cash flow matching on a multiperiod basis is referred to as a

Accepted Answer

A)  immunization 
B)  contingent immunization 
C)  dedication 
D)  duration matching 
E)  rebalancing 
A)  immunization 
B)  contingent immunization 
C)  dedication 
D)  duration matching 
E)  rebalancing

Question 12

A substitution swap is an exchange of bonds undertaken to

Accepted Answer

A)  change the credit risk of a portfolio. 
B)  extend the duration of a portfolio. 
C)  reduce the duration of a portfolio. 
D)  profit from apparent mispricing between two bonds. 
E)  adjust for differences in the yield spread. 
A)  change the credit risk of a portfolio. 
B)  extend the duration of a portfolio. 
C)  reduce the duration of a portfolio. 
D)  profit from apparent mispricing between two bonds. 
E)  adjust for differences in the yield spread.

Question 13

Which one of the following is an incorrect statement concerning duration?

Accepted Answer

A)  The higher the yield to maturity,the greater the duration 
B)  The higher the coupon,the shorter the duration. 
C)  The difference in duration is small between two bonds with different coupons each maturing in more than 15 years. 
D)  The duration is the same as term to maturity only in the case of zero-coupon bonds. 
E)  All of the statements are correct. 
A)  The higher the yield to maturity,the greater the duration 
B)  The higher the coupon,the shorter the duration. 
C)  The difference in duration is small between two bonds with different coupons each maturing in more than 15 years. 
D)  The duration is the same as term to maturity only in the case of zero-coupon bonds. 
E)  All of the statements are correct.

Question 14

Which of the following offers a bond index?

Accepted Answer

A)  Merrill Lynch 
B)  Salomon Smith Barney 
C)  Scotia Capital 
D)  All of these 
E)  All but Merrill Lynch 
A)  Merrill Lynch 
B)  Salomon Smith Barney 
C)  Scotia Capital 
D)  All of these 
E)  All but Merrill Lynch

Question 15

An analyst who selects a particular holding period and predicts the yield curve at the end of that holding period is engaging in

Accepted Answer

A)  a rate anticipation swap. 
B)  immunization. 
C)  horizon analysis. 
D)  an intermarket spread swap. 
E)  none of these. 
A)  a rate anticipation swap. 
B)  immunization. 
C)  horizon analysis. 
D)  an intermarket spread swap. 
E)  none of these.

Question 16

Which of the following researchers have contributed significantly to bond portfolio management theory?
I.Sidney Homer
II.Harry Markowitz
III.Burton Malkiel
IV.Martin Liebowitz
V.Frederick Macaulay

Accepted Answer

A)  I and II 
B)  III and V 
C)  III,IV,and V 
D)  I,III,IV,and V 
E)  I,II,III,IV,and V 
A)  I and II 
B)  III and V 
C)  III,IV,and V 
D)  I,III,IV,and V 
E)  I,II,III,IV,and V

Question 17

Given the time to maturity,the duration of a zero-coupon bond is higher when the discount rate is

Accepted Answer

A)  higher. 
B)  lower. 
C)  equal to the risk free rate. 
D)  The bond's duration is independent of the discount rate. 
E)  none of these. 
A)  higher. 
B)  lower. 
C)  equal to the risk free rate. 
D)  The bond's duration is independent of the discount rate. 
E)  none of these.

Question 18

The "modified duration" used by practitioners is equal to the Macaulay duration

Accepted Answer

A)  times the change in interest rate. 
B)  times (one plus the bond's yield to maturity). 
C)  divided by (one minus the bond's yield to maturity). 
D)  divided by (one plus the bond's yield to maturity). 
E)  none of these. 
A)  times the change in interest rate. 
B)  times (one plus the bond's yield to maturity). 
C)  divided by (one minus the bond's yield to maturity). 
D)  divided by (one plus the bond's yield to maturity). 
E)  none of these.

Question 19

The curvature of the price-yield curve for a given bond is referred to as the bond's

Accepted Answer

A)  modified duration. 
B)  immunization. 
C)  sensitivity. 
D)  convexity. 
E)  tangency. 
A)  modified duration. 
B)  immunization. 
C)  sensitivity. 
D)  convexity. 
E)  tangency.

Question 20

Ceteris paribus,the duration of a bond is positively correlated with the bond's

Accepted Answer

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

Exam 14: Financial Statement Analysis

Holding other factors constant,the interest-rate risk of a coupon bond is higher when the bond's:

One way that banks can reduce the duration of their asset portfolios is through the use of

Interest-rate risk is important to

According to the duration concept

Par value bond F has a modified duration of 9.Which one of the following statements regarding the bond is true?

Duration measures

The duration of a bond is a function of the bond's

Holding other factors constant,which one of the following bonds has the smallest price volatility?

A contract between two parties to exchange a series of cash flows similar to those resulting from an exchange of different types of bonds is called a(n)

Two bonds are selling at par value and each has 17 years to maturity.The first bond has a coupon rate of 6% and the second bond has a coupon rate of 13%.Which of the following is true about the durations of these bonds?

Cash flow matching on a multiperiod basis is referred to as a

A substitution swap is an exchange of bonds undertaken to

Which one of the following is an incorrect statement concerning duration?

Which of the following offers a bond index?

An analyst who selects a particular holding period and predicts the yield curve at the end of that holding period is engaging in

Which of the following researchers have contributed significantly to bond portfolio management theory? I.Sidney Homer II.Harry Markowitz III.Burton Malkiel IV.Martin Liebowitz V.Frederick Macaulay

Given the time to maturity,the duration of a zero-coupon bond is higher when the discount rate is

The "modified duration" used by practitioners is equal to the Macaulay duration

The curvature of the price-yield curve for a given bond is referred to as the bond's

Ceteris paribus,the duration of a bond is positively correlated with the bond's

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