Exam 18: Duration and Bond Portfolio Management

Duration is used primarily as a measure of:

A terminal wealth table generates the ending value of the investment at the end of the year, assuming that the bond:

Volatile high interest rates have directly caused more emphasis on duration analysis because:

Factors which influence the relationship between duration and maturity include all of the following EXCEPT:

The duration of a bond is determined by a combination of the maturity date and value, and:

It is possible that a bond with a shorter maturity than another bond may actually have a longer duration and be more sensitive to interest rate changes.

What type of bond investor would probably be least concerned about a drop in market interest rates?

The value of a bond may be expressed as the sum of:

The duration of a ten-year, 10%, $1,000 bond at a market rate of 6% is exactly equal to the duration of the same bond at a 14% market rate.

As the yield to maturity on a bond increases, the duration also increases because of the effect of present value on duration.

Compute the duration for a bond with an 8% coupon rate, maturing in five years. A discount rate of 10% should be applied.

Terminal wealth analysis is the process of measuring the effects of shifting market rates on bond prices.

Immunization protects the portfolio value against upward movement in interest rates but not downward movement in interest rates.

High coupon bonds will usually have higher durations than low coupon bonds of the same maturity.

Macaulay duration is a bond's weighted average life based on present value of cash flows.

As the maturity or duration of a bond increases, the impact on price of any changes in interest rates increases at a decreasing rate.

For two bonds with equal coupons, duration would be higher for the bond with the shortest maturity.

One of the benefits of zero-coupon bonds is that they lock in a compound rate of return (or reinvestment rate) for the life of the bond, if held to maturity.

The duration of a 20-year zero-coupon bond is equal to the maturity, regardless of the market rate.

Duration is a useful number because it combines the effects of maturity, coupon, and market rates to indicate how the price of the bond will change with a change in interest rates.