Question 1

The duration of a 20-year zero-coupon bond is

Accepted Answer

A) equal to 20. 
B) larger than 20. 
C) smaller than 20. 
D) equal to that of a 20-year 10% coupon bond. 
A) equal to 20. 
B) larger than 20. 
C) smaller than 20. 
D) equal to that of a 20-year 10% coupon bond.

Question 2

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) 20-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) 20-year maturity with a 0% coupon 
D) 10-year maturity with a 15% coupon 
E) 12-year maturity with a 12% coupon

Question 3

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 4

Which of the following bonds has the longest duration

Accepted Answer

A) A 12-year maturity, 0% coupon bond. 
B) A 12-year maturity, 8% coupon bond. 
C) A 4-year maturity, 8% coupon bond. 
D) A 4-year maturity, 0% coupon bond. 
E) Cannot tell from the information given 
A) A 12-year maturity, 0% coupon bond. 
B) A 12-year maturity, 8% coupon bond. 
C) A 4-year maturity, 8% coupon bond. 
D) A 4-year maturity, 0% coupon bond. 
E) Cannot tell from the information given

Question 5

A 7%, 14-year bond has a yield to maturity of 6% and duration of 7 years.If the market yield changes by 44 basis points, how much change will there be in the bond's price

Accepted Answer

A) 1.85% 
B) 2.91% 
C) 3.27% 
D) 6.44% 
A) 1.85% 
B) 2.91% 
C) 3.27% 
D) 6.44%

Question 6

The basic purpose of immunization is to

Accepted Answer

A) eliminate default risk. 
B) produce a zero net-interest-rate risk. 
C) offset price and reinvestment risk. 
D) eliminate default risk and produce a zero net-interest-rate risk. 
E) produce a zero net-interest-rate risk and offset price and reinvestment risk. 
A) eliminate default risk. 
B) produce a zero net-interest-rate risk. 
C) offset price and reinvestment risk. 
D) eliminate default risk and produce a zero net-interest-rate risk. 
E) produce a zero net-interest-rate risk and offset price and reinvestment risk.

Question 7

The duration of a perpetuity with a yield of 6% is

Accepted Answer

A) 13.50 years. 
B) 12.11 years. 
C) 17.67 years. 
D) Cannot be determined 
A) 13.50 years. 
B) 12.11 years. 
C) 17.67 years. 
D) Cannot be determined

Question 8

Consider a bond selling at par with modified duration of 22 years and convexity of 415.A 2% decrease in yield would cause the price to increase by 44%, 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) 52.3% 
A) 21.2% 
B) 25.4% 
C) 17.0% 
D) 52.3%

Question 9

If a bond portfolio manager believes I) in market efficiency, he or she is likely to be a passive portfolio manager.
II) that he or she can accurately predict interest rate changes, he or she is likely to be an active portfolio manager.
III) that he or she can identify bond market anomalies, he or she is likely to be a passive portfolio manager.

Accepted Answer

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

Question 10

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 11

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 the options 
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 the options

Question 12

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. 
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.

Question 13

Discuss rate anticipation swaps as a bond portfolio management strategy.

Accepted Answer

A rate anticipation swap is an active bo

Question 14

You have purchased a bond for $973.02.The bond has a coupon rate of 6.4%, pays interest annually, has a face value of $1,000, 4 years to maturity, and a yield to maturity of 7.2%.The bond's duration is 3.6481 years.You expect that interest rates will fall by .3% later today.
Use the modified duration to find the approximate percentage change in the bond's price.Find the new price of the bond from this calculation.
Use your calculator to do the regular present-value calculations to find the bond's new price at its new yield to maturity.
What is the amount of the difference between the two answers
 Why are your answers different
 Explain the reason in words and illustrate it graphically.

Accepted Answer

Calculations are shown below.
Find new p

Question 15

Which of the following two bonds is more price sensitive to changes in interest rates
1) A par value bond, X, with a 5-year-to-maturity and a 10% coupon rate.
2) A zero-coupon bond, Y, with a 5-year-to-maturity and a 10% yield to maturity.

Accepted Answer

A) Bond X because of the higher yield to maturity. 
B) Bond X because of the longer time to maturity. 
C) Bond Y because of the longer duration. 
D) Both have the same sensitivity because both have the same yield to maturity. 
E) None of the options 
A) Bond X because of the higher yield to maturity. 
B) Bond X because of the longer time to maturity. 
C) Bond Y because of the longer duration. 
D) Both have the same sensitivity because both have the same yield to maturity. 
E) None of the options

Question 16

The duration of a par value bond with a coupon rate of 8.7% and a remaining time to maturity of 6 years is

Accepted Answer

A) 6.0 years. 
B) 5.1 years. 
C) 4.27 years. 
D) 3.95 years. 
E) None of the options 
A) 6.0 years. 
B) 5.1 years. 
C) 4.27 years. 
D) 3.95 years. 
E) None of the options

Question 17

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 the options are true. 
E) None of the options is 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 the options are true. 
E) None of the options is true.

Question 18

Indexing of bond portfolios is difficult because

Accepted Answer

A) the number of bonds included in the major indexes is so large that it would be difficult to purchase them in the proper proportions. 
B) many bonds are thinly traded so it is difficult to purchase them at a fair market price. 
C) the composition of bond indexes is constantly changing. 
D) All of the options are true. 
A) the number of bonds included in the major indexes is so large that it would be difficult to purchase them in the proper proportions. 
B) many bonds are thinly traded so it is difficult to purchase them at a fair market price. 
C) the composition of bond indexes is constantly changing. 
D) All of the options are true.

Question 19

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) the risk related to the possibility of bankruptcy of the bond's issuer and the risk that arises from the uncertainty of the bond's return caused by changes in interest rates. 
E) All of the options 
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) the risk related to the possibility of bankruptcy of the bond's issuer and the risk that arises from the uncertainty of the bond's return caused by changes in interest rates. 
E) All of the options

Question 20

The duration of a 15-year zero-coupon bond is

Accepted Answer

A) smaller than 15. 
B) larger than 15. 
C) equal to 15. 
D) equal to that of a 15-year 10% coupon bond. 
E) None of the options 
A) smaller than 15. 
B) larger than 15. 
C) equal to 15. 
D) equal to that of a 15-year 10% coupon bond. 
E) None of the options

Exam 16: Managing Bond Portfolios

The duration of a 20-year zero-coupon bond is

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

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

Which of the following bonds has the longest duration

A 7%, 14-year bond has a yield to maturity of 6% and duration of 7 years.If the market yield changes by 44 basis points, how much change will there be in the bond's price

The basic purpose of immunization is to

The duration of a perpetuity with a yield of 6% is

Consider a bond selling at par with modified duration of 22 years and convexity of 415.A 2% decrease in yield would cause the price to increase by 44%, according to the duration rule.What would be the percentage price change according to the duration-with-convexity rule

Interest-rate risk is important to

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

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

Discuss rate anticipation swaps as a bond portfolio management strategy.

Which of the following two bonds is more price sensitive to changes in interest rates 1) A par value bond, X, with a 5-year-to-maturity and a 10% coupon rate. 2) A zero-coupon bond, Y, with a 5-year-to-maturity and a 10% yield to maturity.

The duration of a par value bond with a coupon rate of 8.7% and a remaining time to maturity of 6 years is

The duration of a coupon bond

Indexing of bond portfolios is difficult because

The interest-rate risk of a bond is

The duration of a 15-year zero-coupon bond is

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