Question 1

Duration is:

Accepted Answer

A) positively correlated with interest rates and coupon rates but moves in the opposite direction of maturity. 
B) negatively correlated with maturity but moves in the same direction as market rates of interest and coupon rates. 
C) positively correlated with maturity but moves in the opposite direction of market rates of interest and coupon rates. 
D) None of the above 
A) positively correlated with interest rates and coupon rates but moves in the opposite direction of maturity. 
B) negatively correlated with maturity but moves in the same direction as market rates of interest and coupon rates. 
C) positively correlated with maturity but moves in the opposite direction of market rates of interest and coupon rates. 
D) None of the above C

Question 2

One of the problems with duration is that it often assumes a parallel shift in yield curves.

Accepted Answer

A) True 
 B)False  True

Question 3

Duration is influenced by everything except:

Accepted Answer

A) maturity. 
B) market rate of interest. 
C) coupon rate on the bond. 
D) the issuer of the bonD. 
A) maturity. 
B) market rate of interest. 
C) coupon rate on the bond. 
D) the issuer of the bonD. D

Question 4

In general, duration is the number of years, on a future-value basis, that it takes to recover an initial investment in a bond.

Accepted Answer

A) True 
 B)False

Question 5

Immunization is the process of ________ to ensure an outcome.

Accepted Answer

A) measuring bond price sensitivity to interest rates 
B) tying all investment decisions to a particular market interest rate 
C) tying all investment decisions to a duration period 
D) none of the above 
A) measuring bond price sensitivity to interest rates 
B) tying all investment decisions to a particular market interest rate 
C) tying all investment decisions to a duration period 
D) none of the above

Question 6

A zero-coupon bond has a duration equal to its maturity.

Accepted Answer

A) True 
 B)False

Question 7

Immunization is the process of measuring bond price sensitivity to interest rate changes.

Accepted Answer

A) True 
 B)False

Question 8

Duration times the reinvestment rate will give the approximate change in bond price for a 1% change in interest rates.

Accepted Answer

A) True 
 B)False

Question 9

Under terminal wealth analysis, the greater the period to maturity,

Accepted Answer

A) the greater the shift in interest rates. 
B) the greater the effect of a decrease in interest rates. 
C) the greater the effect of any shift in interest rates. 
D) None of the above 
A) the greater the shift in interest rates. 
B) the greater the effect of a decrease in interest rates. 
C) the greater the effect of any shift in interest rates. 
D) None of the above

Question 10

Terminal wealth analysis for a zero-coupon bond is irrelevant.

Accepted Answer

A) True 
 B)False

Question 11

Duration analysis is subject to the assumption that all interest income can be reinvested at the market rate of interest.

Accepted Answer

A) True 
 B)False

Question 12

Under which of the following circumstances would terminal wealth analysis NOT be relevant?

Accepted Answer

A) When the bond is sold prior to maturity 
B) When market interest rates rise above the coupon rate 
C) Terminal wealth analysis is ALWAYS relevant 
D) None of the above 
A) When the bond is sold prior to maturity 
B) When market interest rates rise above the coupon rate 
C) Terminal wealth analysis is ALWAYS relevant 
D) None of the above

Question 13

The duration of a 40-year, $1,000 bond at a market rate of 4% is _________ the duration of an identical bond at a market rate of 6%.

Accepted Answer

A) greater than 
B) less than 
C) equal to 
D) there is not enough information to tell 
A) greater than 
B) less than 
C) equal to 
D) there is not enough information to tell

Question 14

You have invested $1,000 in a 12% coupon bond that matures in three years. You are investing the interest income in a fund earning 8%. At the end of three years, what will be your portfolio sum?

Accepted Answer

A) $1,120.00 
B) $1,249.60 
C) $1,360.00 
D) $1,389.57 
E) $1,540.73 
A) $1,120.00 
B) $1,249.60 
C) $1,360.00 
D) $1,389.57 
E) $1,540.73

Question 15

The actual yield to maturity an investor receives becomes more of a function of the reinvestment rate the shorter the maturity of the bond.

Accepted Answer

A) True 
 B)False

Question 16

Duration will not help international bond managers choose bonds for their portfolios because of the foreign exchange risk.

Accepted Answer

A) True 
 B)False

Question 17

Weighted average life refers to the time period over which the coupon payments and maturity payment on a bond are recovered.

Accepted Answer

A) True 
 B)False

Question 18

Terminal wealth analysis is one way of analyzing the effect of the reinvestment rate risk.

Accepted Answer

A) True 
 B)False

Question 19

Duration equals maturity if:

Accepted Answer

A) all cash flows are paid at the end of the year. 
B) the coupon rate equals the market rate. 
C) the bond is a zero-coupon bond. 
D) More than one of the above 
A) all cash flows are paid at the end of the year. 
B) the coupon rate equals the market rate. 
C) the bond is a zero-coupon bond. 
D) More than one of the above

Question 20

The duration of a 20-year, $1,000 bond at a COUPON rate of 8% is _________ the duration of an identical bond at a coupon rate of 6%.

Accepted Answer

A) greater than 
B) less than 
C) equal to 
D) there is not enough information to tell 
A) greater than 
B) less than 
C) equal to 
D) there is not enough information to tell

Exam 18: Duration and Bond Portfolio Management

Duration is:

One of the problems with duration is that it often assumes a parallel shift in yield curves.

Duration is influenced by everything except:

In general, duration is the number of years, on a future-value basis, that it takes to recover an initial investment in a bond.

Immunization is the process of ________ to ensure an outcome.

A zero-coupon bond has a duration equal to its maturity.

Immunization is the process of measuring bond price sensitivity to interest rate changes.

Duration times the reinvestment rate will give the approximate change in bond price for a 1% change in interest rates.

Under terminal wealth analysis, the greater the period to maturity,

Terminal wealth analysis for a zero-coupon bond is irrelevant.

Duration analysis is subject to the assumption that all interest income can be reinvested at the market rate of interest.

Under which of the following circumstances would terminal wealth analysis NOT be relevant?

The duration of a 40-year, $1,000 bond at a market rate of 4% is _________ the duration of an identical bond at a market rate of 6%.

You have invested $1,000 in a 12% coupon bond that matures in three years. You are investing the interest income in a fund earning 8%. At the end of three years, what will be your portfolio sum?

The actual yield to maturity an investor receives becomes more of a function of the reinvestment rate the shorter the maturity of the bond.

Duration will not help international bond managers choose bonds for their portfolios because of the foreign exchange risk.

Weighted average life refers to the time period over which the coupon payments and maturity payment on a bond are recovered.

Terminal wealth analysis is one way of analyzing the effect of the reinvestment rate risk.

Duration equals maturity if:

The duration of a 20-year, $1,000 bond at a COUPON rate of 8% is _________ the duration of an identical bond at a coupon rate of 6%.

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Industry Analysis

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Put and Call Options

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A Basic Look at Portfolio Management and Capital Market Theory

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