Question 1

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. 
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.

Question 2

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) coupon 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) coupon rates don't matter.

Question 3

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

Accepted Answer

A) term to maturity is higher. 
B) coupon rate is lower. 
C) yield to maturity is higher. 
D) term to maturity is higher and coupon rate is lower. 
E) All of the options 
A) term to maturity is higher. 
B) coupon rate is lower. 
C) yield to maturity is higher. 
D) term to maturity is higher and coupon rate is lower. 
E) All of the options

Question 4

A rate anticipation swap is an exchange of bonds undertaken to

Accepted Answer

A) shift portfolio duration in response to an anticipated change in interest rates. 
B) shift between corporate and government bonds when the yield spread is out of line with historical values. 
C) profit from apparent mispricing between two bonds. 
D) change the credit risk of the portfolio. 
E) increase return by shifting into higher yield bonds. 
A) shift portfolio duration in response to an anticipated change in interest rates. 
B) shift between corporate and government bonds when the yield spread is out of line with historical values. 
C) profit from apparent mispricing between two bonds. 
D) change the credit risk of the portfolio. 
E) increase return by shifting into higher yield bonds.

Question 5

Which one of the following statements is false 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 15% yield perpetuity that pays $100 annually is longer than that of a 15% yield perpetuity that pays $200 annually, and the duration of a 15% yield perpetuity that pays $100 annually is shorter than that of a 15% yield perpetuity that pays $200 annually 
E) All of the options 
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 15% yield perpetuity that pays $100 annually is longer than that of a 15% yield perpetuity that pays $200 annually, and the duration of a 15% yield perpetuity that pays $100 annually is shorter than that of a 15% yield perpetuity that pays $200 annually 
E) All of the options

Question 6

The "modified duration" used by practitioners is equal to ______ divided by (one plus the bond's yield to maturity).

Accepted Answer

A) current yield 
B) the Macaulay duration 
C) yield to call 
D) yield to maturity 
E) None of the options 
A) current yield 
B) the Macaulay duration 
C) yield to call 
D) yield to maturity 
E) None of the options

Question 7

Duration is important in bond portfolio management because I) it can be used in immunization strategies.
II) it provides a gauge of the effective average maturity of the portfolio.
III) it is related to the interest rate sensitivity of the portfolio.
IV) it is a good predictor of interest-rate changes.

Accepted Answer

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

Question 8

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 9

Which of the following bonds has the longest duration

Accepted Answer

A) A 15-year maturity, 0% coupon bond. 
B) A 15-year maturity, 9% coupon bond. 
C) A 20-year maturity, 9% coupon bond. 
D) A 20-year maturity, 0% coupon bond. 
E) Cannot tell from the information given 
A) A 15-year maturity, 0% coupon bond. 
B) A 15-year maturity, 9% coupon bond. 
C) A 20-year maturity, 9% coupon bond. 
D) A 20-year maturity, 0% coupon bond. 
E) Cannot tell from the information given

Question 10

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

Question 11

Consider a bond selling at par with modified duration of 12 years and convexity of 265.A 1% decrease in yield would cause the price to increase by 12%, 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) 13.3% 
A) 21.2% 
B) 25.4% 
C) 17.0% 
D) 13.3%

Question 12

Cash flow matching on a multiperiod basis is referred to as

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 13

Which one of the following par value 12% coupon bonds experiences a price change of $23 when the market yield changes by 50 basis points

Accepted Answer

A) The bond with a duration of 6 years 
B) The bond with a duration of 5 years 
C) The bond with a duration of 2.7 years 
D) The bond with a duration of 5.15 years 
A) The bond with a duration of 6 years 
B) The bond with a duration of 5 years 
C) The bond with a duration of 2.7 years 
D) The bond with a duration of 5.15 years

Question 14

The duration of a perpetuity with a yield of 10% is

Accepted Answer

A) 13.50 years. 
B) 11 years. 
C) 6.66 years. 
D) Cannot be determined 
A) 13.50 years. 
B) 11 years. 
C) 6.66 years. 
D) Cannot be determined

Question 15

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 make excessive profit from the investment. 
D) weighted average time until a bond's half-life and the time required to make excessive profit from the investment. 
E) weighted average time until cash flow payment and the time required to make excessive profit from the investment. 
A) weighted average time until a bond's half-life. 
B) weighted average time until cash flow payment. 
C) the time required to make excessive profit from the investment. 
D) weighted average time until a bond's half-life and the time required to make excessive profit from the investment. 
E) weighted average time until cash flow payment and the time required to make excessive profit from the investment.

Question 16

Which of the following is not true

Accepted Answer

A) Holding other things constant, the duration of a bond increases with time to maturity. 
B) Given time to maturity, the duration of a zero-coupon decreases with yield to maturity. 
C) Given time to maturity and yield to maturity, the duration of a bond is higher when the coupon rate is lower. 
D) Duration is a better measure of price sensitivity to interest rate changes than is time to maturity. 
E) All of the options 
A) Holding other things constant, the duration of a bond increases with time to maturity. 
B) Given time to maturity, the duration of a zero-coupon decreases with yield to maturity. 
C) Given time to maturity and yield to maturity, the duration of a bond is higher when the coupon rate is lower. 
D) Duration is a better measure of price sensitivity to interest rate changes than is time to maturity. 
E) All of the options

Question 17

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

Accepted Answer

A) 20-year, 0% coupon bond 
B) 20-year, 6% coupon bond 
C) 20 year, 7% coupon bond 
D) 20-year, 9% coupon bond 
E) Cannot tell from the information given 
A) 20-year, 0% coupon bond 
B) 20-year, 6% coupon bond 
C) 20 year, 7% coupon bond 
D) 20-year, 9% coupon bond 
E) Cannot tell from the information given

Question 18

Which of the following two bonds is more price sensitive to changes in interest rates
1) A par value bond, A, with a 12-year-to-maturity and a 12% coupon rate.
2) A zero-coupon bond, B, with a 12-year-to-maturity and a 12% yield to maturity.

Accepted Answer

A) Bond A because of the higher yield to maturity. 
B) Bond A because of the longer time to maturity. 
C) Bond B 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 A because of the higher yield to maturity. 
B) Bond A because of the longer time to maturity. 
C) Bond B 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 19

You have an obligation to pay $1,488 in four years and two 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 the options 
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 the options

Question 20

A 9%, 16-year bond has a yield to maturity of 11% and duration of 9.25 years.If the market yield changes by 32 basis points, how much change will there be in the bond's price

Accepted Answer

A) 1.85% 
B) 2.01% 
C) 2.67% 
D) 6.44% 
A) 1.85% 
B) 2.01% 
C) 2.67% 
D) 6.44%

Exam 16: Managing Bond Portfolios

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

According to the duration concept

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

A rate anticipation swap is an exchange of bonds undertaken to

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

The "modified duration" used by practitioners is equal to ______ divided by (one plus the bond's yield to maturity).

A substitution swap is an exchange of bonds undertaken to

Which of the following bonds has the longest duration

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

Consider a bond selling at par with modified duration of 12 years and convexity of 265.A 1% decrease in yield would cause the price to increase by 12%, according to the duration rule.What would be the percentage price change according to the duration-with-convexity rule

Cash flow matching on a multiperiod basis is referred to as

Which one of the following par value 12% coupon bonds experiences a price change of $23 when the market yield changes by 50 basis points

The duration of a perpetuity with a yield of 10% is

Duration measures

Which of the following is not true

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

Which of the following two bonds is more price sensitive to changes in interest rates 1) A par value bond, A, with a 12-year-to-maturity and a 12% coupon rate. 2) A zero-coupon bond, B, with a 12-year-to-maturity and a 12% yield to maturity.

You have an obligation to pay $1,488 in four years and two 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

A 9%, 16-year bond has a yield to maturity of 11% and duration of 9.25 years.If the market yield changes by 32 basis points, how much change will there be in the bond's price

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