Exam 10: Managing Bond Portfolios

To create a portfolio with a duration of 4 years using a 5-year zero-coupon bond and a 3-year 8% annual coupon bond with a yield to maturity of 10%, one would have to invest ________ of the portfolio value in the zero-coupon bond.

When bonds sell above par, what is the relationship of price sensitivity to rising interest rates?

A bank has $50 million in assets, $47 million in liabilities and $3 million in shareholders' equity. If the duration of its liabilities are 1.3 and the bank wants to immunise its net worth against interest rate risk and thus set the duration of equity equal to zero, it should select assets with an average duration of ________.

A bond currently has a price of $1 050. The yield on the bond is 6.00%. If the yield increases 25 basis points, the price of the bond will go down to $1 030. The duration of this bond is ________ years.

A bond pays annual interest. Its coupon rate is 9%. Its value at maturity is $1 000. It matures in four years. Its yield to maturity is currently 6%. The duration of this bond is ________ years.

Immunisation of coupon paying bonds is not a passive strategy because ________. I. the portfolio must be rebalanced every time interest rates change II. the portfolio must be rebalanced over time even if interest rates don't change III. convexity implies duration based immunisation strategies don't work

Pension fund managers can generally best bring about an effective reduction in their interest rate risk by holding ________.

What strategy might an insurance company employ to ensure that it will be able to meet the obligations of annuity holders?

The duration of a bond normally increases with an increase in ________. I. term-to-maturity II. yield-to-maturity. III. coupon rate

Target date immunisation would primarily be of interest to ________.

You have a 25-year maturity 10% coupon, 10% yield bond with duration of 10 years and a convexity of 135.50. If the interest rate were to fall 125 basis points your predicted new price for the bond (including convexity) is ________.

You have an investment horizon of 6 years. You choose to hold a bond with a duration of 4 years. Your realised rate of return will be larger than the promised yield on the bond if ________.

All other things equal, which of the following has the longest duration?

Moving to higher yield bonds, usually with longer maturities is called ________.

The exchange of one bond for a bond with similar attributes but more attractively priced is called ________.

The duration is independent of the coupon rate only for which one of the following?

Compute the duration of an 8%, 5-year corporate bond with a par value of $1000 if yield to maturity is 10%.

A bond's price volatility ________ at a/an ________ rate as maturity increases.

The duration of a 5-year zero coupon bond is ________ years.

Convexity of a bond is ________.