Question 1

The highest duration and maximum price sensitivity relative to years to maturity are produced by:

Accepted Answer

A) a coupon rate equal to the market rate. 
B) a low coupon rate. 
C) a zero-coupon. 
D) None of the above 
A) a coupon rate equal to the market rate. 
B) a low coupon rate. 
C) a zero-coupon. 
D) None of the above

Question 2

Compute the duration for the data in this problem using a discount rate of 12%.

$\begin{array}{c}
\begin{array}{|c|}
\hline
\
\hline
\text {Year, t} \
\hline
1\
\hline
2\
\hline
3\
\hline
3\
\hline
\end{array}
\begin{array}{c|}
\hline 
\text{Cash}\
\hline
\text {Flow}\
\hline
90\
\hline
90\
\hline
90\
\hline
1000\
\hline
\end{array}
\end{array}$

Accepted Answer

A) 3.00 years 
B) 2.95 years 
C) 2.85 years 
D) 2.75 years 
E) 2.65 years 
A) 3.00 years 
B) 2.95 years 
C) 2.85 years 
D) 2.75 years 
E) 2.65 years

Question 3

The only difference between the simple weighted average life of a bond and duration of a bond is:

Accepted Answer

A) the timing of interest payments. 
B) that duration involves the present value of individual cash flows. 
C) that duration involves the using of the stated value of individual cash flows. 
D) None of the above 
A) the timing of interest payments. 
B) that duration involves the present value of individual cash flows. 
C) that duration involves the using of the stated value of individual cash flows. 
D) None of the above

Question 4

For all bonds of equal risk, the type of bond that had the greatest duration, and therefore the greatest price sensitivity, is:

Accepted Answer

A) Treasury bonds. 
B) zero-coupon bonds. 
C) corporate bonds. 
D) long-term government bonds. 
A) Treasury bonds. 
B) zero-coupon bonds. 
C) corporate bonds. 
D) long-term government bonds.

Question 5

The process of measuring the effect of a shift in market interest rates on the value of an investment is called:

Accepted Answer

A) duration analysis. 
B) immunization. 
C) terminal wealth analysis. 
D) None of the above 
A) duration analysis. 
B) immunization. 
C) terminal wealth analysis. 
D) None of the above

Question 6

Duration represents the weighted average life of a bond where the weights are based on the:

Accepted Answer

A) future value of the individual cash flows relative to the present value of the total cash flows. 
B) present value of the individual cash flows relative to the future value of the individual cash flows. 
C) present value of the individual cash flows relative to the present value of the total individual cash flows. 
D) future value of the individual cash flows relative to the future value of the individual cash flows. 
A) future value of the individual cash flows relative to the present value of the total cash flows. 
B) present value of the individual cash flows relative to the future value of the individual cash flows. 
C) present value of the individual cash flows relative to the present value of the total individual cash flows. 
D) future value of the individual cash flows relative to the future value of the individual cash flows.

Question 7

You are considering the purchase of two $1,000 bonds, both issued by Tranig Corp. Your expectation is that interest rates will drop, and you want to buy the bond which provides the maximum capital gains potential. The first Tranig bond has a coupon rate of 6% with five years to maturity, while the second has a coupon rate of 9% and comes due six years from now. If market rates of interest are 8% for both bonds, which bond has the best price potential? (Use duration to answer the question.)
Coupon rate 6%
 $\begin{array}{|c|c|c|r|r|r|}
\hline\text { (1) } & \text { (2) }&\text {(3) } & \text { (4) }&\text { (5) }&\text { (6) }\ 
\hline&& \text { PV Factor } & \text { PV of } &\text { Weights }&\ 
\hline\underline{ \text { Year } }&  \underline{ \text{ Cash Flow}} &\underline{ \text { @ } 10{\%}  }&\underline{ \text { Cash Flow } }&\underline{ (4) \text { Value }} &\underline{ (1) \times(5)} \
\hline1& \$ 60 & .926 & \$ 55.56 & .06035 & .06035 \
\hline 2 & 60 & .857 & 51.42 & .05585 & .11170 \
\hline 3 & 60 & .794 & 47.64 & .05175 & .15525 \
\hline 4 & 60 & .735 & 44.10 & .04790 & .19160 \
\hline 5 & 60 & .681 & 40.86 & .04438 & .22190 \
\hline 5 & 1,000 & .681 & \underline{681.00} & .73975 & \underline{3.69875} \
\hline
\end{array}$

$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\text { PV of Bond }=\$ 920.58 \quad \text { Duration }=4.43955$ Coupon rate 9% $\begin{array}{|l|l|l|l|l|l|}
\hline\text { (1) } & \text { (2) }&\text {(3) } & \text { (4) }&\text { (5) }&\text { (6) }\ 
\hline&& \text { PV Factor } & \text { PV of } &\text { Weights }&\ 
\hline\underline{ \text { Year } }&  \underline{ \text{ Cash Flow}} &\underline{ \text { @ } 8{\%}  }&\underline{ \text { Cash Flow } }&\underline{ (4) \text { Value }} &\underline{ (1) \times(5)} \
\hline 1 & \$ 90 & .926 & \$ 83.34 & .07967 & .07967 \
\hline 2 & 90 & .857 & 77.13 & .07373 & .14746 \
\hline 3 & 90 & .794 & 71.46 & .06831 & .20493 \
\hline 4 & 90 & .735 & 66.15 & .06325 & .25292 \
\hline 5 & 90 & .681 & 61.29 & .05859 & .29295 \
\hline 6 & 90 & .630 & 56.70 & .05421 & .32526 \
\hline 6 & 1,000 & .630 & 630.00 & .60225 & .3 .61350 \
\hline
\end{array}$
$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\quad $$\text { PV of Bond } = \$ 1046.07 \quad \text { Duration } = 4.91669$

Accepted Answer

We would choose the 9% coupon bond.
Expl

Question 8

Weighted average life is the most representative value for effective bond life.

Accepted Answer

A) True 
 B)False

Question 9

Assume you buy a 20-year, $1,000 par value zero-coupon bond that provides a 12% yield to maturity. Almost immediately after you buy the bond, yields decrease to 9%. What will be the percentage gain on the investment?

Accepted Answer

71.15%
Explanation: 
n = 20 ye

Question 10

One of the major criticisms of duration analysis is:

Accepted Answer

A) the difficulty of measuring the market rate of interest. 
B) the assumption that long-term and short-term interest rates move by equal amounts. 
C) the assumption that long-duration bonds are more price-sensitive than short-duration bonds. 
D) None of the above 
A) the difficulty of measuring the market rate of interest. 
B) the assumption that long-term and short-term interest rates move by equal amounts. 
C) the assumption that long-duration bonds are more price-sensitive than short-duration bonds. 
D) None of the above

Question 11

When duration of a coupon paying bond is plotted against years to maturity on the X axis, the line:

Accepted Answer

A) is linear. 
B) is concave. 
C) is convex. 
D) is linear at a 45 degree angle. 
A) is linear. 
B) is concave. 
C) is convex. 
D) is linear at a 45 degree angle.

Question 12

Duration is:

Accepted Answer

A) always longer than maturity. 
B) always the same as maturity. 
C) normally shorter than maturity. 
D) always shorter than maturity. 
A) always longer than maturity. 
B) always the same as maturity. 
C) normally shorter than maturity. 
D) always shorter than maturity.

Question 13

The duration on an 8%, 25-year bond is ______ the duration on a 9%, 30-year bond.

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

There is an inverse relationship between interest rates and bond values, and between the amount of coupon payments and weighted average life.

Accepted Answer

A) True 
 B)False

Question 15

Duration is affected primarily by:

Accepted Answer

A) the maturity of the bond. 
B) the market rate of interest. 
C) the coupon rate. 
D) All of the above 
A) the maturity of the bond. 
B) the market rate of interest. 
C) the coupon rate. 
D) All of the above

The highest duration and maximum price sensitivity relative to years to maturity are produced by:

Compute the duration for the data in this problem using a discount rate of 12%. Year, t 1 2 3 3 Cash Flow 90 90 90 1000

The only difference between the simple weighted average life of a bond and duration of a bond is:

For all bonds of equal risk, the type of bond that had the greatest duration, and therefore the greatest price sensitivity, is:

The process of measuring the effect of a shift in market interest rates on the value of an investment is called:

Duration represents the weighted average life of a bond where the weights are based on the:

Weighted average life is the most representative value for effective bond life.

Assume you buy a 20-year, $1,000 par value zero-coupon bond that provides a 12% yield to maturity. Almost immediately after you buy the bond, yields decrease to 9%. What will be the percentage gain on the investment?

One of the major criticisms of duration analysis is:

When duration of a coupon paying bond is plotted against years to maturity on the X axis, the line:

Duration is:

The duration on an 8%, 25-year bond is ______ the duration on a 9%, 30-year bond.

There is an inverse relationship between interest rates and bond values, and between the amount of coupon payments and weighted average life.

Duration is affected primarily by:

The Investment Setting

Security Markets

Participating in the Market

Investment Companies: Mutual Funds, Exchange-Traded Funds, Closed-End Funds, and Unit Investment Trusts

Economic Activity

Industry Analysis

Valuation of the Individual Firm

Financial Statement Analysis

Efficient Markets and Anomalies

Behavioral Finance and Technical Analysis

Bond and Fixed-Income Fundamentals

Principles of Bond Valuation and Investment

Convertible Securities and Warrants

Put and Call Options

Commodities and Financial Futures

Stock Index Futures and Options

A Basic Look at Portfolio Management and Capital Market Theory

International Securities Markets

Investments in Real Assets

Alternative Investments: Private Equity and Hedge Funds

Measuring Risks and Returns of Portfolio Managers

A Comprehensive Analysis for Real Estate Investment Decisions

The Makeup of Institutional Investors

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Exam 18: Duration and Bond Portfolio Management

The highest duration and maximum price sensitivity relative to years to maturity are produced by:

Compute the duration for the data in this problem using a discount rate of 12%. Year, t 1 2 3 3 Cash Flow 90 90 90 1000

The only difference between the simple weighted average life of a bond and duration of a bond is:

For all bonds of equal risk, the type of bond that had the greatest duration, and therefore the greatest price sensitivity, is:

The process of measuring the effect of a shift in market interest rates on the value of an investment is called:

Duration represents the weighted average life of a bond where the weights are based on the:

Weighted average life is the most representative value for effective bond life.

Assume you buy a 20-year, $1,000 par value zero-coupon bond that provides a 12% yield to maturity. Almost immediately after you buy the bond, yields decrease to 9%. What will be the percentage gain on the investment?

One of the major criticisms of duration analysis is:

When duration of a coupon paying bond is plotted against years to maturity on the X axis, the line:

Duration is:

The duration on an 8%, 25-year bond is ______ the duration on a 9%, 30-year bond.

There is an inverse relationship between interest rates and bond values, and between the amount of coupon payments and weighted average life.

Duration is affected primarily by:

The Investment Setting

Security Markets

Participating in the Market

Investment Companies: Mutual Funds, Exchange-Traded Funds, Closed-End Funds, and Unit Investment Trusts

Economic Activity

Industry Analysis

Valuation of the Individual Firm

Financial Statement Analysis

Efficient Markets and Anomalies

Behavioral Finance and Technical Analysis

Bond and Fixed-Income Fundamentals

Principles of Bond Valuation and Investment

Convertible Securities and Warrants

Put and Call Options

Commodities and Financial Futures

Stock Index Futures and Options

A Basic Look at Portfolio Management and Capital Market Theory

International Securities Markets

Investments in Real Assets

Alternative Investments: Private Equity and Hedge Funds

Measuring Risks and Returns of Portfolio Managers

A Comprehensive Analysis for Real Estate Investment Decisions

The Makeup of Institutional Investors

Filters