Question 1

A portfolio of bonds is immunized from interest rate risk if the duration of the portfolio is always equal to the desired investment horizon.

Accepted Answer

A) True 
 B)False

Question 2

Exhibit 16-9
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Consider two bonds, both pay annual interest. Bond Y has a coupon of 6% per year, maturity of 5 years, yield to maturity of 6% per year, and a face value of $1000. Bond X has a coupon of 7% per year, maturity of 10 years, yield to maturity of 4% per year, and a face value of $1000.
-Refer to Exhibit 16-9. Assume that your investment horizon is 5 years and your portfolio consists only of Bond Y and Bond X. Indicate the proportions invested in each bond, so that the portfolio is immunized.

Accepted Answer

A)  50% in Bond Y and 50% in Bond X 
B)  76% in Bond Y and 24% in Bond X 
C)  36% in Bond Y and 64% in Bond X 
D)  100% in Bond X 
E)  100% in Bond Y 
A)  50% in Bond Y and 50% in Bond X 
B)  76% in Bond Y and 24% in Bond X 
C)  36% in Bond Y and 64% in Bond X 
D)  100% in Bond X 
E)  100% in Bond Y

Question 3

Assuming no change in interest rates the duration of a coupon bond

Accepted Answer

A)  Stays constant. 
B)  Declines more slowly than the term to maturity. 
C)  Declines more quickly than the term to maturity 
D)  Increases at a slower rate than the term to maturity. 
E)  Changes in line with the term to maturity. 
A)  Stays constant. 
B)  Declines more slowly than the term to maturity. 
C)  Declines more quickly than the term to maturity 
D)  Increases at a slower rate than the term to maturity. 
E)  Changes in line with the term to maturity.

Question 4

Exhibit 16-1
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
The following information is given concerning a pure yield pick-up swap: You currently hold a 10 year, 7% coupon bond priced to yield 8%. As a swap candidate you are considering a 10 year, 8% coupon bond priced to yield 9%. Assume a reinvestment at 9%, semiannual compounding, and a one-year workout period. $\begin{array}{lcc}
&\text { Current Band } & \text { Candidate Band } \
\hline  \text { Dollar Investment } & \$ 932.05 & \$ 934.96 \
\text { Coupon } & \$ 70.00 & \$ 80.00 \
\text { on One Coupon } & \$ 1.575 & ? \
\text { Principal Value at Year End } & \$ 936.70 & ? \
\text { Total Accrued } & \$ 1008.28 & ? \
\text { Realized Compound Yield } & 8.018 \% & ?
\end{array}$
-Refer to Exhibit 16-1. The interest on one coupon for the candidate bond is

Accepted Answer

A)  $2.97 
B)  $2.03 
C)  $1.80 
D)  $1.37 
E)  $3.49 
A)  $2.97 
B)  $2.03 
C)  $1.80 
D)  $1.37 
E)  $3.49

Question 5

Horizon matching is a combination of

Accepted Answer

A)  Cash-matching dedication and interest rates swaps. 
B)  Cash-matching dedication and immunization. 
C)  Interest rate swaps and immunization. 
D)  Enhanced indexing and immunization. 
E)  Enhanced indexing and interest rate swaps. 
A)  Cash-matching dedication and interest rates swaps. 
B)  Cash-matching dedication and immunization. 
C)  Interest rate swaps and immunization. 
D)  Enhanced indexing and immunization. 
E)  Enhanced indexing and interest rate swaps.

Question 6

In a barbell strategy

Accepted Answer

A)  One half of funds are invested in short duration bonds and the test in long duration bonds. 
B)  Seventy five percent of funds are invested in short duration bonds and the test in long duration bonds. 
C)  Twenty five percent of funds are invested in short duration bonds and the test in long duration bonds. 
D)  An equal amount of funds are invested in a wide range of maturities. 
E)  None of the above. 
A)  One half of funds are invested in short duration bonds and the test in long duration bonds. 
B)  Seventy five percent of funds are invested in short duration bonds and the test in long duration bonds. 
C)  Twenty five percent of funds are invested in short duration bonds and the test in long duration bonds. 
D)  An equal amount of funds are invested in a wide range of maturities. 
E)  None of the above.

Question 7

A manager following an interest rate anticipation strategy would shorten portfolio duration if interest rates were expected to increase.

Accepted Answer

A) True 
 B)False

Question 8

Exhibit 16-5
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
The following information is given concerning a pure yield pick-up swap: You currently hold a 20 year, Aa 2% coupon bond priced to yield 9.5%. As a swap candidate you are considering a 20 year, Aa 14% coupon bond priced to yield 10.00. Assume a reinvestment rate of 11%, semiannual compounding, and a one-year workout period. $\begin{array}{lcc}
&\text { Current Band } & \text { Candidate Band } \
\hline\text { Dollar Investment } & \$ 1222.04 & \$ 1343.18 \
\text { Coupon } & 110.00 & 140.00 \
\text { i on One Coupon } & 3.3 & ? \
\text { Principal Value at Year End } & 1218.04 & ? \
\text { Total Accrued } & 1341.34 & ? \
\text { Realized Compound Yield } & 9.5351 \% & ?
\end{array}$

-Refer to Exhibit 16-5. The interest on one coupon for the candidate bond is

Accepted Answer

A)  $70.00 
B)  $3.58 
C)  $3.85 
D)  $8.35 
E)  $5.38 
A)  $70.00 
B)  $3.58 
C)  $3.85 
D)  $8.35 
E)  $5.38

Question 9

Exhibit 16-10
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
You are creating a portfolio that consists of the following two bonds. Bond A pays an annual 7% coupon, matures in two years, has a yield to maturity of 8%, and a face value of $1,000. Bond B pays an annual 8% coupon, matures in three years, has a yield to maturity of 9%, and a face value of $1,000.
-Refer to Exhibit 16-10. Calculate the Modified Duration for Bond A.

Accepted Answer

A)  0.98 
B)  1.79 
C)  1.90 
D)  1.93 
E)  2.31 
A)  0.98 
B)  1.79 
C)  1.90 
D)  1.93 
E)  2.31

Question 10

Exhibit 16-6
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
The following information is given concerning a substitution swap: You currently hold a 25 year, Aa 10% coupon bond priced to yield 12%. As a swap candidate you are considering a 25 year, Aa 10% coupon bond priced to yield 13%. Assume a reinvestment rate of 12%, semiannual compounding, and a one-year workout period. $\begin{array}{lcc}
&\text { Current Band } & \text { Candidate Band } \
\hline\text { Dollar Investment } & \$ 842.38 & ? \
\text { Coupon } & 100.00 & 100.00 \
\text { i on One Coupon } & 3.0 & 2.75 \
\text { Principal Value at Year End } & 843.50 & 780.46 \
\text { Total Accrued } & 946.50 & 883.21 \
\text { Total Gain } & 104.12 & ? \
\text { Gain per Invested Dollar } & ? & ? \
\text { Realized Compound Yield } & ? & ?
\end{array}$

-Refer to Exhibit 16-6. The value of the swap is ____ basis points in one year.

Accepted Answer

A)  94.14 
B)  0.9414 
C)  9.414 
D)  941.4 
E)  0.09414 
A)  94.14 
B)  0.9414 
C)  9.414 
D)  941.4 
E)  0.09414

Question 11

Exhibit 16-2
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
The following information is given concerning a substitution swap: You currently hold a 15 year, 7% coupon bond priced to yield 8%. As a swap candidate you are considering a 15 year, 7% coupon bond priced to yield 8.5%. Assume a reinvestment rate of 8.5%, semiannual compounding, and a one-year workout period. $\begin{array}{lcc}
&\text { Current Band } & \text { Candidate Band } \
\hline  \text { Dollar Investment } & \$ 913.54 & ? \
\text { Coupon } & 70.00 & 70.00 \
\text { i on One Coupon } & 1.487 & 1.487 \
\text { Principal Value at Year End } & 916.68 & 878.55 \
\text { Total Accrued } & 988.17 & 950.04 \
\text { Total Gain } & 74.63 & ? \
\text { Gain per Invested Dollar } & ? & ? \
\text { Realized Compound Yield } & ? & ?
\end{array}$
-Refer to Exhibit 16-2. The dollar investment in the candidate bond is

Accepted Answer

A)  $812.57 
B)  $803.22 
C)  $874.16 
D)  $746.83 
E)  $700.01 
A)  $812.57 
B)  $803.22 
C)  $874.16 
D)  $746.83 
E)  $700.01

Question 12

Exhibit 16-7
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Consider two bonds, both pay semiannual interest. Bond A has a coupon of 8% per year, maturity of 30 years, yield to maturity of 9% per year, and a face value of $1000. Bond B has a coupon of 8% per year, maturity of 30 years, yield to maturity of 9.5% per year, and a face value of $1000.
-Refer to Exhibit 16-7. Calculate the value of swap out of Bond A into Bond B.

Accepted Answer

A)  0.41% 
B)  1.73% 
C)  0.23% 
D)  0.00% 
E)  0.51% 
A)  0.41% 
B)  1.73% 
C)  0.23% 
D)  0.00% 
E)  0.51%

Question 13

In a buy-and-hold strategy, bonds are purchased in light of the investor's objectives and constraints and then held until maturity.

Accepted Answer

A) True 
 B)False

Question 14

Exhibit 16-4
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
The following information is given concerning a substitution swap: You currently hold a 25 year, Aa 8% coupon bond priced to yield 10%. As a swap candidate you are considering a 25 year, Aa 8% coupon bond priced to yield 10.50%. Assume a reinvestment rate of 10%, semiannual compounding, and a one-year workout period. $\begin{array}{lcc}
&\text { Current Band } & \text { Candidate Band } \
\hline\text { Dollar Investment } & \$ 817.44 & ? \
\text { Coupon } & 80.00 & 80.00 \
\text { on One Coupon } & 2.00 & 2.20 \
\text { Principal Value at Year End } & 819.23 & 782.33 \
\text { Total Accrued } & 901.23 & 864.53 \
\text { Total Gain } & 83.79 & ? \
\text { Gain per Invested Dollar } & ? & ? \
\text { Realized Compound Yield } & ? & ?
\end{array}$

-Refer to Exhibit 16-4. The dollar investment in the candidate bond is

Accepted Answer

A)  $780.34 
B)  $1483.25 
C)  $1361.54 
D)  $1413.95 
E)  $1000.00 
A)  $780.34 
B)  $1483.25 
C)  $1361.54 
D)  $1413.95 
E)  $1000.00

Question 15

Exhibit 16-3
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
The following information is given concerning a pure yield pick-up swap: You currently hold a 20 year, Aa 8% coupon bond priced to yield 10%. As a swap candidate you are considering a 20 year, Aa 10% coupon bond priced to yield 10.75%. Assume a reinvestment rate of 12.00%, semiannual compounding, and a one-year workout period. $\begin{array}{lcc}
&\text { Current Band } & \text { Candidate Band } \
\hline\text { Dollar Investment } & \$ 828.41 & \$ 938.83 \
\text { Coupon } & 80.00 & 100.00 \
\text { i on One Coupon } & 2.4 & ? \
\text { Principal Value at Year End } & 831.32 & ? \
\text { Total Accrued } & 913.72 & ? \
\text { Realized Compound Yield } & 10.5547 & ?
\end{array}$
-Refer to Exhibit 16-3. The value of the swap is ____ basis points in one year

Accepted Answer

A)  40.4 
B)  60.6 
C)  80.8 
D)  20.5 
E)  100.1 
A)  40.4 
B)  60.6 
C)  80.8 
D)  20.5 
E)  100.1

Question 16

The term dedication, used to describe portfolio management techniques, is referring to servicing a prescribed set of

Accepted Answer

A)  Interest payments. 
B)  Assets. 
C)  Liabilities. 
D)  Pensioners. 
E)  Sinking fund payments. 
A)  Interest payments. 
B)  Assets. 
C)  Liabilities. 
D)  Pensioners. 
E)  Sinking fund payments.

Question 17

A substitution swap relies heavily on interest rate expectations.

Accepted Answer

A) True 
 B)False

Question 18

If an investor swaps identical issues to establish a loss, the loss is disallowed and the transaction is known as a

Accepted Answer

A)  Switch sale. 
B)  Wash sale. 
C)  Green shoe. 
D)  Flashback. 
E)  White knight. 
A)  Switch sale. 
B)  Wash sale. 
C)  Green shoe. 
D)  Flashback. 
E)  White knight.

Question 19

Which of the following statements is true?

Accepted Answer

A) If Duration > Investment Horizon, the investor faces Net Reinvestment Risk. B) If Duration < Investment Horizon, the investor faces Net Price Risk. C) If Duration = Investment Horizon, the investor is immunized. D) All of the above statements are true. E) None of the above statements are true. A) If Duration > Investment Horizon, the investor faces Net Reinvestment Risk. B) If Duration < Investment Horizon, the investor faces Net Price Risk. C) If Duration = Investment Horizon, the investor is immunized. D) All of the above statements are true. E) None of the above statements are true.

Question 20

A portfolio manager that attempts to select bonds based on their intrinsic value would be carrying out

Accepted Answer

A)  Credit analysis 
B)  Valuation analysis 
C)  Yield-spread analysis 
D)  Horizon-matching analysis 
E)  Interest-rate analysis 
A)  Credit analysis 
B)  Valuation analysis 
C)  Yield-spread analysis 
D)  Horizon-matching analysis 
E)  Interest-rate analysis

A portfolio of bonds is immunized from interest rate risk if the duration of the portfolio is always equal to the desired investment horizon.

Assuming no change in interest rates the duration of a coupon bond

Horizon matching is a combination of

In a barbell strategy

A manager following an interest rate anticipation strategy would shorten portfolio duration if interest rates were expected to increase.

In a buy-and-hold strategy, bonds are purchased in light of the investor's objectives and constraints and then held until maturity.

The term dedication, used to describe portfolio management techniques, is referring to servicing a prescribed set of

A substitution swap relies heavily on interest rate expectations.

If an investor swaps identical issues to establish a loss, the loss is disallowed and the transaction is known as a

Which of the following statements is true?

A portfolio manager that attempts to select bonds based on their intrinsic value would be carrying out

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Asset Pricing Models: Capm and Apt

Economic and Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Derivatives: Analysis and Valuation

Equity Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

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Exam 16: Bond Portfolio Management Strategies

A portfolio of bonds is immunized from interest rate risk if the duration of the portfolio is always equal to the desired investment horizon.

Assuming no change in interest rates the duration of a coupon bond

Horizon matching is a combination of

In a barbell strategy

A manager following an interest rate anticipation strategy would shorten portfolio duration if interest rates were expected to increase.

In a buy-and-hold strategy, bonds are purchased in light of the investor's objectives and constraints and then held until maturity.

The term dedication, used to describe portfolio management techniques, is referring to servicing a prescribed set of

A substitution swap relies heavily on interest rate expectations.

If an investor swaps identical issues to establish a loss, the loss is disallowed and the transaction is known as a

Which of the following statements is true?

A portfolio manager that attempts to select bonds based on their intrinsic value would be carrying out

The Investment Setting

The Asset Allocation Decision

Selecting Investments in a Global Market

Securities Markets and the Economy

Efficient Capital Markets

An Introduction to Portfolio Management

Asset Pricing Models: Capm and Apt

Economic and Industry Analysis

Company Analysis and Stock Valuation

Technical Analysis

Bond Fundamentals

The Analysis and Valuation of Bonds

An Introduction to Derivative Markets and Securities

Derivatives: Analysis and Valuation

Equity Portfolio Management Strategies

Professional Money Management, Alternative Assets, and Industry Ethics

Evaluation of Portfolio Performance

Analysis of Financial Statements

An Introduction to Security Valuation

Web Appendix: A Review of Statistics and the Security Market Line

Web Appendix: A Review of Statistics and the Security Market Line

Appendix: Objectives and Constraints of Institutional Investors

Filters