Question 1

Which of the following is true?

Accepted Answer

A) Holding other things constant,the duration of a bond decreases with time to maturity. 
B) Given time to maturity,the duration of a zero-coupon increases 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) C and D. 
A) Holding other things constant,the duration of a bond decreases with time to maturity. 
B) Given time to maturity,the duration of a zero-coupon increases 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) C and D.

Question 2

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

Accepted Answer

A) term-to-maturity is lower. 
B) coupon rate is higher. 
C) yield to maturity is lower. 
D) current yield is higher. 
E) none of the above. 
A) term-to-maturity is lower. 
B) coupon rate is higher. 
C) yield to maturity is lower. 
D) current yield is higher. 
E) none of the above.

Question 3

Which of the following are true about the interest-rate sensitivity of bonds?
I.Bond prices and yields are inversely related.
II.Prices of long-term bonds tend to be more sensitive to interest rate changes than prices of short-term bonds.
III.Interest-rate risk is directly related to the bond's coupon rate.
IV.The sensitivity of a bond's price to a change in its yield to maturity is inversely related to the yield to maturity at which the bond is currently selling.

Accepted Answer

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

Question 4

Some of the problems with immunization are

Accepted Answer

A) duration assumes that the yield curve is flat. 
B) duration assumes that if shifts in the yield curve occur,these shifts are parallel. 
C) immunization is valid for one interest rate change only. 
D) durations and horizon dates change by the same amounts with the passage of time. 
E) A,B,and C. 
A) duration assumes that the yield curve is flat. 
B) duration assumes that if shifts in the yield curve occur,these shifts are parallel. 
C) immunization is valid for one interest rate change only. 
D) durations and horizon dates change by the same amounts with the passage of time. 
E) A,B,and C.

Question 5

You have purchased a bond for $973.02.The bond has a coupon rate of 6.4%,pays interest annually,has a face value of $1,000,4 years to maturity,and a yield to maturity of 7.2%.The bond's duration is 3.6481 years.You expect that interest rates will fall by .3% later today.Use the modified duration to find the approximate percentage change in the bond's price.Find the new price of the bond from this calculation.Use your calculator to do the regular present value calculations to find the bond's new price at its new yield to maturity.What is the amount of the difference between the two answers? Why are your answers different? Explain the reason in words and illustrate it graphically.

Accepted Answer

Calculations are shown below.

Question 6

Which one of the following is a correct statement concerning duration?

Accepted Answer

A) The higher the yield to maturity, the greater the duration 
B) The higher the coupon, the shorter the duration. 
C) The difference in duration can be large between two bonds with different coupons each maturing in more than 15 years. 
D) The duration is the same as term to maturity only in the case of zero-coupon bonds. 
E) B,C,and D 
A) The higher the yield to maturity, the greater the duration 
B) The higher the coupon, the shorter the duration. 
C) The difference in duration can be large between two bonds with different coupons each maturing in more than 15 years. 
D) The duration is the same as term to maturity only in the case of zero-coupon bonds. 
E) B,C,and D

Question 7

The duration of a par value bond with a coupon rate of 8.7% and a remaining time to maturity of 6 years is

Accepted Answer

A) 6.0 years. 
B) 5.1 years. 
C) 4.27 years. 
D) 3.95 years. 
E) none of the above. 
A) 6.0 years. 
B) 5.1 years. 
C) 4.27 years. 
D) 3.95 years. 
E) none of the above.

Question 8

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) A and B. 
E) All of the above. 
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) A and B. 
E) All of the above.

Question 9

A 10%,30-year corporate bond was recently being priced to yield 12%.The Macaulay duration for the bond is 11.3 years.Given this information,the bond's modified duration would be

Accepted Answer

A) 8.05 
B) 10.09 
C) 9.27 
D) 11.22 
E) none of the above 
A) 8.05 
B) 10.09 
C) 9.27 
D) 11.22 
E) none of the above

Question 10

A 7%,14-year bond has a yield to maturity of 6% and duration of 7 years.If the market yield changes by 44 basis points,how much change will there be in the bond's price?

Accepted Answer

A) 1.85% 
B) 2.91% 
C) 3.27% 
D) 6.44% 
E) none of the above 
A) 1.85% 
B) 2.91% 
C) 3.27% 
D) 6.44% 
E) none of the above

Question 11

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

Accepted Answer

A) 7-year, 0% coupon bond 
B) 7-year, 12% coupon bond 
C) 7 year, 14% coupon bond 
D) 7-year, 10% coupon bond 
E) Cannot tell from the information given. 
A) 7-year, 0% coupon bond 
B) 7-year, 12% coupon bond 
C) 7 year, 14% coupon bond 
D) 7-year, 10% coupon bond 
E) Cannot tell from the information given.

Question 12

The duration of a 15-year zero-coupon bond is

Accepted Answer

A) smaller than 15. 
B) larger than 15. 
C) equal to 15. 
D) equal to that of a 15-year 10% coupon bond. 
E) none of the above. 
A) smaller than 15. 
B) larger than 15. 
C) equal to 15. 
D) equal to that of a 15-year 10% coupon bond. 
E) none of the above.

Question 13

The curvature of the price-yield curve for a given bond is referred to as the bond's

Accepted Answer

A) modified duration. 
B) immunization. 
C) sensitivity. 
D) convexity. 
E) tangency. 
A) modified duration. 
B) immunization. 
C) sensitivity. 
D) convexity. 
E) tangency.

Question 14

You have an obligation to pay $1,488 in four years and 2 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 above 
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 above

Question 15

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 16

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 17

One way that banks can reduce the duration of their asset portfolios is through the use of

Accepted Answer

A) fixed rate mortgages. 
B) adjustable rate mortgages. 
C) certificates of deposit. 
D) short-term borrowing. 
E) none of the above. 
A) fixed rate mortgages. 
B) adjustable rate mortgages. 
C) certificates of deposit. 
D) short-term borrowing. 
E) none of the above.

Question 18

Immunization through duration matching of assets and liabilities may be ineffective or inappropriate because

Accepted Answer

A) conventional duration strategies assume a flat yield curve. 
B) duration matching can only immunize portfolios from parallel shifts in the yield curve. 
C) immunization only protects the nominal value of terminal liabilities and does not allow for inflation adjustment. 
D) both A and C are true. 
E) all of the above are true. 
A) conventional duration strategies assume a flat yield curve. 
B) duration matching can only immunize portfolios from parallel shifts in the yield curve. 
C) immunization only protects the nominal value of terminal liabilities and does not allow for inflation adjustment. 
D) both A and C are true. 
E) all of the above are true.

Question 19

Two bonds are selling at par value and each has 17 years to maturity.The first bond has a coupon rate of 6% and the second bond has a coupon rate of 13%.Which of the following is false about the durations of these bonds?

Accepted Answer

A) The duration of the higher-coupon bond will be higher. 
B) The duration of the lower-coupon bond will be higher. 
C) The duration of the higher-coupon bond will equal the duration of the lower-coupon bond. 
D) There is no consistent statement that can be made about the durations of the bonds. 
E) A,C,and D 
A) The duration of the higher-coupon bond will be higher. 
B) The duration of the lower-coupon bond will be higher. 
C) The duration of the higher-coupon bond will equal the duration of the lower-coupon bond. 
D) There is no consistent statement that can be made about the durations of the bonds. 
E) A,C,and D

Question 20

An 8%,15-year bond has a yield to maturity of 10% and duration of 8.05 years.If the market yield changes by 25 basis points,how much change will there be in the bond's price?

Accepted Answer

A) 1.85% 
B) 2.01% 
C) 3.27% 
D) 6.44% 
E) none of the above 
A) 1.85% 
B) 2.01% 
C) 3.27% 
D) 6.44% 
E) none of the above

Exam 16: Managing Bond Portfolios

Which of the following is true?

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

Some of the problems with immunization are

Which one of the following is a correct statement concerning duration?

The duration of a par value bond with a coupon rate of 8.7% and a remaining time to maturity of 6 years is

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

A 10%,30-year corporate bond was recently being priced to yield 12%.The Macaulay duration for the bond is 11.3 years.Given this information,the bond's modified duration would be

A 7%,14-year bond has a yield to maturity of 6% and duration of 7 years.If the market yield changes by 44 basis points,how much change will there be in the bond's price?

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

The duration of a 15-year zero-coupon bond is

The curvature of the price-yield curve for a given bond is referred to as the bond's

You have an obligation to pay $1,488 in four years and 2 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?

Which of the following bonds has the longest duration?

According to the duration concept

One way that banks can reduce the duration of their asset portfolios is through the use of

Immunization through duration matching of assets and liabilities may be ineffective or inappropriate because

Two bonds are selling at par value and each has 17 years to maturity.The first bond has a coupon rate of 6% and the second bond has a coupon rate of 13%.Which of the following is false about the durations of these bonds?

An 8%,15-year bond has a yield to maturity of 10% and duration of 8.05 years.If the market yield changes by 25 basis points,how much change will there be in the bond's price?

The Investment Environment

Asset Classes and Financial Instruments

How Securities are Traded

Mutual Funds and Other Investment Companies

Introduction to Risk,return,and the Historical Record

Risk Aversion and Capital Allocation to Risky Assets

Optimal Risky Portfolios

Index Models

The Capital Asset Pricing Model

Arbitrage Pricing Theory and Multifactor Models of Risk and Return

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Empirical Evidence on Security Returns

Bond Prices and Yields

The Term Structure of Interest Rates

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, swaps, and Risk Management

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the CFA Institute Appendices

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