Question 1

Immunization is not a strictly passive strategy because

Accepted Answer

A) it requires choosing an asset portfolio that matches an index. 
B) there is likely to be a gap between the values of assets and liabilities in most portfolios. 
C) it requires frequent rebalancing as maturities and interest rates change. 
D) durations of assets and liabilities fall at the same rate. 
E) none of the above. 
A) it requires choosing an asset portfolio that matches an index. 
B) there is likely to be a gap between the values of assets and liabilities in most portfolios. 
C) it requires frequent rebalancing as maturities and interest rates change. 
D) durations of assets and liabilities fall at the same rate. 
E) none of the above.

Question 2

Indexing of bond portfolios is difficult because

Accepted Answer

A) the number of bonds included in the major indexes is so large that it would be difficult to purchase them in the proper proportions. 
B) many bonds are thinly traded so it is difficult to purchase them at a fair market price. 
C) the composition of bond indexes is constantly changing. 
D) all of the above are true. 
E) both A and B are true. 
A) the number of bonds included in the major indexes is so large that it would be difficult to purchase them in the proper proportions. 
B) many bonds are thinly traded so it is difficult to purchase them at a fair market price. 
C) the composition of bond indexes is constantly changing. 
D) all of the above are true. 
E) both A and B are true.

Question 3

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

Accepted Answer

A) 5-year, 0% coupon bond 
B) 5-year, 12% coupon bond 
C) 5 year, 14% coupon bond 
D) 5-year, 10% coupon bond 
E) Cannot tell from the information given. 
A) 5-year, 0% coupon bond 
B) 5-year, 12% coupon bond 
C) 5 year, 14% coupon bond 
D) 5-year, 10% coupon bond 
E) Cannot tell from the information given.

Question 4

Given the time to maturity,the duration of a zero-coupon bond is higher when the discount rate is

Accepted Answer

A) higher. 
B) lower. 
C) equal to the risk free rate. 
D) The bond's duration is independent of the discount rate. 
E) none of the above. 
A) higher. 
B) lower. 
C) equal to the risk free rate. 
D) The bond's duration is independent of the discount rate. 
E) none of the above.

Question 5

The duration of a bond normally increases with an increase in

Accepted Answer

A) term to maturity. 
B) yield to maturity. 
C) coupon rate. 
D) all of the above. 
E) none of the above. 
A) term to maturity. 
B) yield to maturity. 
C) coupon rate. 
D) all of the above. 
E) none of the above.

Question 6

Duration is important in bond portfolio management because
I.it can be used in immunization strategies.
II.it provides a gauge of the effective average maturity of the portfolio.
III.it is related to the interest rate sensitivity of the portfolio.
IV.it is a good predictor of interest rate changes.

Accepted Answer

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

Question 7

A rate anticipation swap is an exchange of bonds undertaken to

Accepted Answer

A) shift portfolio duration in response to an anticipated change in interest rates. 
B) shift between corporate and government bonds when the yield spread is out of line with historical values. 
C) profit from apparent mispricing between two bonds. 
D) change the credit risk of the portfolio. 
E) increase return by shifting into higher yield bonds. 
A) shift portfolio duration in response to an anticipated change in interest rates. 
B) shift between corporate and government bonds when the yield spread is out of line with historical values. 
C) profit from apparent mispricing between two bonds. 
D) change the credit risk of the portfolio. 
E) increase return by shifting into higher yield bonds.

Question 8

The two components of interest-rate risk are

Accepted Answer

A) price risk and default risk. 
B) reinvestment risk and systematic risk. 
C) call risk and price risk. 
D) price risk and reinvestment risk. 
E) none of the above. 
A) price risk and default risk. 
B) reinvestment risk and systematic risk. 
C) call risk and price risk. 
D) price risk and reinvestment risk. 
E) none of the above.

Question 9

Which of the following offers a bond index?

Accepted Answer

A) Merrill Lynch 
B) Salomon 
C) Barclays Capital 
D) All of the above 
E) All but Merrill Lynch 
A) Merrill Lynch 
B) Salomon 
C) Barclays Capital 
D) All of the above 
E) All but Merrill Lynch

Question 10

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

Question 11

Which of the following bonds has the longest duration?

Accepted Answer

A) An 8-year maturity, 0% coupon bond. 
B) An 8-year maturity, 5% coupon bond. 
C) A 10-year maturity, 5% coupon bond. 
D) A 10-year maturity, 0% coupon bond. 
E) Cannot tell from the information given. 
A) An 8-year maturity, 0% coupon bond. 
B) An 8-year maturity, 5% coupon bond. 
C) A 10-year maturity, 5% coupon bond. 
D) A 10-year maturity, 0% coupon bond. 
E) Cannot tell from the information given.

Question 12

If a bond portfolio manager believes

Accepted Answer

A) in market efficiency,he or she is likely to be a passive portfolio manager. 
B) that he or she can accurately predict interest rate changes,he or she is likely to be an active portfolio manager. 
C) that he or she can identify bond market anomalies,he or she is likely to be a passive portfolio manager. 
D) A and B. 
E) A,B,and C. 
A) in market efficiency,he or she is likely to be a passive portfolio manager. 
B) that he or she can accurately predict interest rate changes,he or she is likely to be an active portfolio manager. 
C) that he or she can identify bond market anomalies,he or she is likely to be a passive portfolio manager. 
D) A and B. 
E) A,B,and C.

Question 13

A seven-year par value bond has a coupon rate of 9% and a modified duration of

Accepted Answer

A) 7 years. 
B) 5.49 years. 
C) 5.03 years. 
D) 4.87 years. 
E) none of the above. 
A) 7 years. 
B) 5.49 years. 
C) 5.03 years. 
D) 4.87 years. 
E) none of the above.

Question 14

Par value bond GE has a modified duration of 11.Which one of the following statements regarding the bond is true?

Accepted Answer

A) If the market yield increases by 1% the bond's price will decrease by $55. 
B) If the market yield increases by 1% the bond's price will increase by $55. 
C) If the market yield increases by 1% the bond's price will decrease by $110. 
D) If the market yield increases by 1% the bond's price will increase by $110. 
E) None of the above. 
A) If the market yield increases by 1% the bond's price will decrease by $55. 
B) If the market yield increases by 1% the bond's price will increase by $55. 
C) If the market yield increases by 1% the bond's price will decrease by $110. 
D) If the market yield increases by 1% the bond's price will increase by $110. 
E) None of the above.

Question 15

Duration

Accepted Answer

A) assesses the time element of bonds in terms of both coupon and term to maturity. 
B) allows structuring a portfolio to avoid interest-rate risk. 
C) is a direct comparison between bond issues with different levels of risk. 
D) A and B. 
E) A and C. 
A) assesses the time element of bonds in terms of both coupon and term to maturity. 
B) allows structuring a portfolio to avoid interest-rate risk. 
C) is a direct comparison between bond issues with different levels of risk. 
D) A and B. 
E) A and C.

Question 16

Which one of the following is an incorrect 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 is small 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) All of the statements are correct. 
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 is small 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) All of the statements are correct.

Question 17

Which of the following two bonds is more price sensitive to changes in interest rates?
1)A par value bond,A,with a 12-year-to-maturity and a 12% coupon rate.
2)A zero-coupon bond,B,with a 12-year-to-maturity and a 12% yield-to-maturity.

Accepted Answer

A) Bond A because of the higher yield to maturity. 
B) Bond A because of the longer time to maturity. 
C) Bond B because of the longer duration. 
D) Both have the same sensitivity because both have the same yield to maturity. 
E) None of the above 
A) Bond A because of the higher yield to maturity. 
B) Bond A because of the longer time to maturity. 
C) Bond B because of the longer duration. 
D) Both have the same sensitivity because both have the same yield to maturity. 
E) None of the above

Question 18

Which of the following two bonds is more price sensitive to changes in interest rates?
1)A par value bond,D,with a 2-year-to-maturity and a 8% coupon rate.
2)A zero-coupon bond,E,with a 2-year-to-maturity and a 8% yield-to-maturity.

Accepted Answer

A) Bond D because of the higher yield to maturity. 
B) Bond E because of the longer duration. 
C) Bond D because of the longer time to maturity. 
D) Both have the same sensitivity because both have the same yield to maturity. 
E) None of the above. 
A) Bond D because of the higher yield to maturity. 
B) Bond E because of the longer duration. 
C) Bond D because of the longer time to maturity. 
D) Both have the same sensitivity because both have the same yield to maturity. 
E) None of the above.

Question 19

Ceteris paribus,the duration of a bond is positively correlated with the bond's

Accepted Answer

A) time to maturity. 
B) coupon rate. 
C) yield to maturity. 
D) all of the above. 
E) none of the above. 
A) time to maturity. 
B) coupon rate. 
C) yield to maturity. 
D) all of the above. 
E) none of the above.

Question 20

Which of the following is not true?

Accepted Answer

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

Exam 16: Managing Bond Portfolios

Immunization is not a strictly passive strategy because

Indexing of bond portfolios is difficult because

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

Given the time to maturity,the duration of a zero-coupon bond is higher when the discount rate is

The duration of a bond normally increases with an increase in

Duration is important in bond portfolio management because I.it can be used in immunization strategies. II.it provides a gauge of the effective average maturity of the portfolio. III.it is related to the interest rate sensitivity of the portfolio. IV.it is a good predictor of interest rate changes.

A rate anticipation swap is an exchange of bonds undertaken to

The two components of interest-rate risk are

Which of the following offers a bond index?

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

Which of the following bonds has the longest duration?

If a bond portfolio manager believes

A seven-year par value bond has a coupon rate of 9% and a modified duration of

Par value bond GE has a modified duration of 11.Which one of the following statements regarding the bond is true?

Duration

Which one of the following is an incorrect statement concerning duration?

Which of the following two bonds is more price sensitive to changes in interest rates? 1)A par value bond,A,with a 12-year-to-maturity and a 12% coupon rate. 2)A zero-coupon bond,B,with a 12-year-to-maturity and a 12% yield-to-maturity.

Which of the following two bonds is more price sensitive to changes in interest rates? 1)A par value bond,D,with a 2-year-to-maturity and a 8% coupon rate. 2)A zero-coupon bond,E,with a 2-year-to-maturity and a 8% yield-to-maturity.

Ceteris paribus,the duration of a bond is positively correlated with the bond's

Which of the following is not true?

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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