Question 1

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) conventional duration strategies assume a flat yield curve and immunization only protects the nominal value of terminal liabilities and does not allow for inflation adjustment. 
E) All of the options 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) conventional duration strategies assume a flat yield curve and immunization only protects the nominal value of terminal liabilities and does not allow for inflation adjustment. 
E) All of the options are true.

Question 2

Which of the following are false about the interest-rate sensitivity of bonds
I. Bond prices and yields are inversely related.
II. Prices of long-term bonds tend to be more sensitive to interest-rate changes than prices of short-term bonds.
III. Interest-rate risk is directly related to the bond's coupon rate.
IV. The sensitivity of a bond's price to a change in its yield to maturity is inversely related to the yield to maturity at which the bond is currently selling.

Accepted Answer

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

Question 3

Some of the problems with immunization are

Accepted Answer

A) duration assumes that the yield curve is flat. 
B) duration assumes that if shifts in the yield curve occur, these shifts are parallel. 
C) immunization is valid for one interest rate change only. 
D) durations and horizon dates change by the same amounts with the passage of time. 
E) immunization is valid for one interest rate change only, duration assumes that the yield curve is flat, and that if shifts in the yield curve occur, these shifts are parallel. 
A) duration assumes that the yield curve is flat. 
B) duration assumes that if shifts in the yield curve occur, these shifts are parallel. 
C) immunization is valid for one interest rate change only. 
D) durations and horizon dates change by the same amounts with the passage of time. 
E) immunization is valid for one interest rate change only, duration assumes that the yield curve is flat, and that if shifts in the yield curve occur, these shifts are parallel.

Question 4

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

Accepted Answer

A) time to maturity. 
B) coupon rate. 
C) yield to maturity. 
D) coupon rate and yield to maturity. 
E) None of the options 
A) time to maturity. 
B) coupon rate. 
C) yield to maturity. 
D) coupon rate and yield to maturity. 
E) None of the options

Question 5

A seven-year par value bond has a coupon rate of 9% (paid annually) and a modified duration of

Accepted Answer

A) 7 years. 
B) 5.49 years. 
C) 5.03 years. 
D) 4.87 years. 
A) 7 years. 
B) 5.49 years. 
C) 5.03 years. 
D) 4.87 years.

Question 6

Which of the following two bonds is more price sensitive to changes in interest rates
1) A par value bond, D, with a 2-year-to-maturity and a 8% coupon rate.
2) A zero-coupon bond, E, with a 2-year-to-maturity and a 8% yield to maturity.

Accepted Answer

A) Bond D because of the higher yield to maturity. 
B) Bond E because of the longer duration. 
C) Bond D because of the longer time to maturity. 
D) Both have the same sensitivity because both have the same yield to maturity. 
A) Bond D because of the higher yield to maturity. 
B) Bond E because of the longer duration. 
C) Bond D because of the longer time to maturity. 
D) Both have the same sensitivity because both have the same yield to maturity.

Question 7

Which one of the following is a correct 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 can be large 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) The higher the coupon, the shorter the duration; the difference in duration can be large between two bonds with different coupons each maturing in more than 15 years; and the duration is the same as term to maturity only in the case of zero-coupon bonds. 
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 can be large 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) The higher the coupon, the shorter the duration; the difference in duration can be large between two bonds with different coupons each maturing in more than 15 years; and the duration is the same as term to maturity only in the case of zero-coupon bonds.

Question 8

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. 
A) fixed rate mortgages. 
B) adjustable rate mortgages. 
C) certificates of deposit. 
D) short-term borrowing.

Question 9

An 8%, 15-year bond has a yield to maturity of 10% and 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) 1.83% 
B) 2.01% 
C) 3.27% 
D) 6.44% 
A) 1.83% 
B) 2.01% 
C) 3.27% 
D) 6.44%

Question 10

Discuss duration.Include in your discussion what duration measures, how duration relates to maturity, what variables affect duration, and how duration is used as a portfolio management tool (include some of the problems associated with the use of duration as a portfolio management tool).

Accepted Answer

Duration is a measure of the time it tak

Question 11

The duration of a perpetuity with a yield of 8% is

Accepted Answer

A) 13.50 years. 
B) 12.11 years. 
C) 6.66 years. 
D) Cannot be determined 
A) 13.50 years. 
B) 12.11 years. 
C) 6.66 years. 
D) Cannot be determined

Question 12

Par value bond GE has a modified duration of 11.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 $55. 
B) If the market yield increases by 1% the bond's price will increase by $55. 
C) If the market yield increases by 1% the bond's price will decrease by $110. 
D) If the market yield increases by 1% the bond's price will increase by $110. 
A) If the market yield increases by 1% the bond's price will decrease by $55. 
B) If the market yield increases by 1% the bond's price will increase by $55. 
C) If the market yield increases by 1% the bond's price will decrease by $110. 
D) If the market yield increases by 1% the bond's price will increase by $110.

Question 13

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 false 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 duration of the higher-coupon bond will be higher, and the duration of the higher-coupon bond will equal the duration of the lower-coupon bond. 
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 duration of the higher-coupon bond will be higher, and the duration of the higher-coupon bond will equal the duration of the lower-coupon bond.

Question 14

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

Accepted Answer

A) 7-year, 0% coupon bond 
B) 7-year, 12% coupon bond 
C) 7 year, 14% coupon bond 
D) 7-year, 10% coupon bond 
E) Cannot tell from the information given 
A) 7-year, 0% coupon bond 
B) 7-year, 12% coupon bond 
C) 7 year, 14% coupon bond 
D) 7-year, 10% coupon bond 
E) Cannot tell from the information given

Question 15

The duration of a par value bond with a coupon rate of 7% and a remaining time to maturity of 3 years is

Accepted Answer

A) 3 years. 
B) 2.71 years. 
C) 2.81 years. 
D) 2.91 years. 
A) 3 years. 
B) 2.71 years. 
C) 2.81 years. 
D) 2.91 years.

Question 16

Par value bond XYZ has a modified duration of 6.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 $60. 
B) If the market yield increases by 1%, the bond's price will increase by $50. 
C) If the market yield increases by 1%, the bond's price will decrease by $50. 
D) If the market yield increases by 1%, the bond's price will increase by $60. 
A) If the market yield increases by 1%, the bond's price will decrease by $60. 
B) If the market yield increases by 1%, the bond's price will increase by $50. 
C) If the market yield increases by 1%, the bond's price will decrease by $50. 
D) If the market yield increases by 1%, the bond's price will increase by $60.

Question 17

A 10%, 30-year corporate bond was recently being priced to yield 12%.The Macaulay duration for the bond is 11.3 years.Given this information, the bond's modified duration would be

Accepted Answer

A) 8.05. 
B) 10.09. 
C) 9.27. 
D) 11.22. 
A) 8.05. 
B) 10.09. 
C) 9.27. 
D) 11.22.

Question 18

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 the options 
E) None of the options 
A) coupon rate. 
B) yield to maturity. 
C) time to maturity. 
D) All of the options 
E) None of the options

Question 19

The two components of interest-rate risk are

Accepted Answer

A) price risk and default risk. 
B) reinvestment risk and systematic risk. 
C) call risk and price risk. 
D) price risk and reinvestment risk. 
E) None of the options 
A) price risk and default risk. 
B) reinvestment risk and systematic risk. 
C) call risk and price risk. 
D) price risk and reinvestment risk. 
E) None of the options

Question 20

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.

Exam 16: Managing Bond Portfolios

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

Some of the problems with immunization are

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

A seven-year par value bond has a coupon rate of 9% (paid annually) and a modified duration of

Which of the following two bonds is more price sensitive to changes in interest rates 1) A par value bond, D, with a 2-year-to-maturity and a 8% coupon rate. 2) A zero-coupon bond, E, with a 2-year-to-maturity and a 8% yield to maturity.

Which one of the following is a correct statement concerning duration

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

An 8%, 15-year bond has a yield to maturity of 10% and 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 duration.Include in your discussion what duration measures, how duration relates to maturity, what variables affect duration, and how duration is used as a portfolio management tool (include some of the problems associated with the use of duration as a portfolio management tool).

The duration of a perpetuity with a yield of 8% is

Par value bond GE has a modified duration of 11.Which one of the following statements regarding the bond is true

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 false about the durations of these bonds

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

The duration of a par value bond with a coupon rate of 7% and a remaining time to maturity of 3 years is

Par value bond XYZ has a modified duration of 6.Which one of the following statements regarding the bond is true

A 10%, 30-year corporate bond was recently being priced to yield 12%.The Macaulay duration for the bond is 11.3 years.Given this information, the bond's modified duration would be

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

The two components of interest-rate risk are

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

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