Question 1

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

Accepted Answer

A)  The duration of a 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 a 15% yield perpetuity that pays $200 annually. 
D)  The duration of a perpetuity cannot be calculated. 
A)  The duration of a 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 a 15% yield perpetuity that pays $200 annually. 
D)  The duration of a perpetuity cannot be calculated.

Question 2

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 options are correct. 
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 options are correct.

Question 3

The interest-rate risk of a bond is

Accepted Answer

A)  the risk related to the possibility of bankruptcy of the bond's issuer. 
B)  the risk that arises from the uncertainty of the bond's return caused by changes in interest rates. 
C)  the unsystematic risk caused by factors unique in the bond. 
D) the risk related to the possibility of bankruptcy of the bond's issuer, and the risk that arises from the uncertainty of the bond's return caused by changes in interest rates. 
E)  All of the options are correct. 
A)  the risk related to the possibility of bankruptcy of the bond's issuer. 
B)  the risk that arises from the uncertainty of the bond's return caused by changes in interest rates. 
C)  the unsystematic risk caused by factors unique in the bond. 
D) the risk related to the possibility of bankruptcy of the bond's issuer, and the risk that arises from the uncertainty of the bond's return caused by changes in interest rates. 
E)  All of the options are correct.

Question 4

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

Accepted Answer

A)  term to maturity is lower. 
B)  coupon rate is higher. 
C)  yield to maturity is higher. 
D)  term to maturity is lower and coupon rate is higher. 
E)  All of the options are correct. 
A)  term to maturity is lower. 
B)  coupon rate is higher. 
C)  yield to maturity is higher. 
D)  term to maturity is lower and coupon rate is higher. 
E)  All of the options are correct.

Question 5

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 options are correct. 
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 options are correct.

Question 6

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 options are correct. 
A)  6.0 years. 
B)  5.1 years. 
C)  4.27 years. 
D)  3.95 years. 
E)  None of the options are correct.

Question 7

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)  The duration of the higher coupon bond will be higher, and the duration of the higher coupon bond will equal the duration of the lower coupon bond. 
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)  The duration of the higher coupon bond will be higher, and the duration of the higher coupon bond will equal the duration of the lower coupon bond.

Question 8

An 8%, 30-year corporate bond was recently being priced to yield 10%. The Macaulay duration for the bond is 10.20 years. Given this information, the bond's modified duration would be

Accepted Answer

A)  8.05. 
B)  9.44. 
C)  9.27. 
D)  11.22. 
E)  None of the options are correct. 
A)  8.05. 
B)  9.44. 
C)  9.27. 
D)  11.22. 
E)  None of the options are correct.

Question 9

The duration of a perpetuity with a yield of 10% is

Accepted Answer

A)  13.50 years. 
B)  11 years. 
C)  6.66 years. 
D)  Cannot be determined 
A)  13.50 years. 
B)  11 years. 
C)  6.66 years. 
D)  Cannot be determined

Question 10

A substitution swap is an exchange of bonds undertaken to

Accepted Answer

A)  change the credit risk of a portfolio. 
B)  extend the duration of a portfolio. 
C)  reduce the duration of a portfolio. 
D)  profit from apparent mispricing between two bonds. 
E)  adjust for differences in the yield spread. 
A)  change the credit risk of a portfolio. 
B)  extend the duration of a portfolio. 
C)  reduce the duration of a portfolio. 
D)  profit from apparent mispricing between two bonds. 
E)  adjust for differences in the yield spread.

Question 11

The duration of a perpetuity with a yield of 6% is

Accepted Answer

A)  13.50 years. 
B)  12.11 years. 
C)  17.67 years. 
D)  Cannot be determined 
A)  13.50 years. 
B)  12.11 years. 
C)  17.67 years. 
D)  Cannot be determined

Question 12

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 options 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 options are true.

Question 13

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)  conventional duration strategies assume a flat yield curve, and immunization only protects the nominal value . of terminal liabilities and does not allow for inflation adjustment. 
E)  All of the options are correct. 
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)  conventional duration strategies assume a flat yield curve, and immunization only protects the nominal value . of terminal liabilities and does not allow for inflation adjustment. 
E)  All of the options are correct.

Question 14

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 15

Par-value-bond F has a modified duration of 9. 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 $90. 
B)  If the market yield increases by 1%, the bond's price will increase by $90. 
C)  If the market yield increases by 1%, the bond's price will decrease by $60. 
D)  If the market yield decreases by 1%, the bond's price will increase by $60. 
A)  If the market yield increases by 1%, the bond's price will decrease by $90. 
B)  If the market yield increases by 1%, the bond's price will increase by $90. 
C)  If the market yield increases by 1%, the bond's price will decrease by $60. 
D)  If the market yield decreases by 1%, the bond's price will increase by $60.

Question 16

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. 
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.

Question 17

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 options are correct. 
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 options are correct.

Question 18

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 options are correct. 
E)  None of the options are correct. 
A)  time to maturity. 
B)  coupon rate. 
C)  yield to maturity. 
D)  All of the options are correct. 
E)  None of the options are correct.

Question 19

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. 
A)  fixed-rate mortgages. 
B)  adjustable-rate mortgages. 
C)  certificates of deposit. 
D)  short-term borrowing.

Question 20

The "modified duration" used by practitioners is equal to ______ divided by (one plus the bond's yield to maturity).

Accepted Answer

A)  current yield 
B)  the Macaulay duration 
C)  yield to call 
D)  yield to maturity 
E)  None of the options are correct. 
A)  current yield 
B)  the Macaulay duration 
C)  yield to call 
D)  yield to maturity 
E)  None of the options are correct.

Exam 16: Managing Bond Portfolios

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

Which of the following is not true?

The interest-rate risk of a bond is

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

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

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

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%, 30-year corporate bond was recently being priced to yield 10%. The Macaulay duration for the bond is 10.20 years. Given this information, the bond's modified duration would be

The duration of a perpetuity with a yield of 10% is

A substitution swap is an exchange of bonds undertaken to

The duration of a perpetuity with a yield of 6% is

Indexing of bond portfolios is difficult because

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

According to the duration concept,

Par-value-bond F has a modified duration of 9. Which one of the following statements regarding the bond is true?

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

Immunization is not a strictly passive strategy because

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

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

The "modified duration" used by practitioners is equal to ______ divided by (one plus the bond's yield to maturity).

The Investment Environment

Asset Classes and Financial Instruments

How Securities Are Traded

Mutual Funds and Other Investment Companies

Risk, Return, and the Historical Record

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

Macroeconomic and Industry Analysis

Equity Valuation Models

Financial Statement Analysis

Options Markets: Introduction

Option Valuation

Futures Markets

Futures, Swaps, and Risk Management

Portfolio Performance Evaluation

International Diversification

Hedge Funds

The Theory of Active Portfolio Management

Investment Policy and the Framework of the Cfa Institute

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