Question 1

Which of the following statements are true?I) Holding other things constant, the duration of a bond decreases with time to maturity.II) Given time to maturity, the duration of a zero-coupon increases with yield to maturity.III) Given time to maturity and yield to maturity, the duration of a bond is higher when the coupon rate is lower.IV) Duration is a better measure of price sensitivity to interest-rate changes than is time to maturity.

Accepted Answer

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

Question 2

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.

Question 3

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.

Question 4

Which of the following bonds has the longest duration?

Accepted Answer

A)  A 12-year maturity, 0% coupon bond. 
B)  A 12-year maturity, 8% coupon bond. 
C)  A 4-year maturity, 8% coupon bond. 
D)  A 4-year maturity, 0% coupon bond. 
E)  Cannot tell from the information given

Question 5

Duration measures

Accepted Answer

A)  weighted-average time until a bond's half-life. 
B)  weighted-average time until cash flow payment. 
C)  the time required to make excessive profit from the investment. 
D)  weighted-average time until a bond's half-life and the time required to make excessive profit from the investment. 
E)  weighted-average time until cash flow payment and the time required to make excessive profit from the investment.

Question 6

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

Question 7

Cash flow matching on a multiperiod basis is referred to as

Accepted Answer

A)  immunization. 
B)  contingent immunization. 
C)  dedication. 
D)  duration matching. 
E)  rebalancing.

Question 8

A 9%, 16-year bond has a yield to maturity of 9% and duration of 7.25 years. If the market yield changes by 15 basis points, how much change will there be in the bond's price?

Accepted Answer

A)  1.00% 
B)  2.01% 
C)  2.67% 
D)  3.44%

Question 9

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.

Question 10

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

Question 11

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)  None of the options are correct. 
E)  All of the options are correct.

Question 12

Which one of the following par-value 12% coupon bonds experiences a price change of $23 when the market yield changes by 50 basis points?

Accepted Answer

A)  The bond with a duration of 6 years 
B)  The bond with a duration of 5 years 
C)  The bond with a duration of 2.7 years 
D)  The bond with a duration of 5.15 years

Question 13

Duration is important in bond portfolio management becauseI) 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

Question 14

The duration of a perpetuity with a yield of 6.5% is

Accepted Answer

A)  13.50 years. 
B)  12.11 years. 
C)  16.38 years. 
D)  Cannot be determined

Question 15

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 true 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 bond's durations cannot be determined without knowing the prices of the bonds.

Question 16

A 10%, 30-year corporate bond was recently being priced to a yieldof 11%. The Macaulay duration for the bond is 11.3 years. Given this information, the bond's modified duration would be

Accepted Answer

A)  9.05. 
B)  10.09. 
C)  10.18. 
D)  11.22.

Question 17

A 6%, 30-year corporate bond was recently being priced to a yield of 7%. The Macaulay duration for the bond is 9.4 years. Given this information, the bond's modified duration would be

Accepted Answer

A)  9.55. 
B)  9.24. 
C)  8.79. 
D)  7.78.

Question 18

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

Question 19

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.

Question 20

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.

Exam 16: Managing Bond Portfolios

A rate anticipation swap is an exchange of bonds undertaken to

A substitution swap is an exchange of bonds undertaken to

Which of the following bonds has the longest duration?

Duration measures

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

Cash flow matching on a multiperiod basis is referred to as

A 9%, 16-year bond has a yield to maturity of 9% and duration of 7.25 years. If the market yield changes by 15 basis points, how much change will there be in the bond's price?

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?

Which of the following bonds has the longest duration?

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

Which one of the following par-value 12% coupon bonds experiences a price change of $23 when the market yield changes by 50 basis points?

Duration is important in bond portfolio management becauseI) 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.

The duration of a perpetuity with a yield of 6.5% 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 true about the durations of these bonds?

A 10%, 30-year corporate bond was recently being priced to a yieldof 11%. The Macaulay duration for the bond is 11.3 years. Given this information, the bond's modified duration would be

A 6%, 30-year corporate bond was recently being priced to a yield of 7%. The Macaulay duration for the bond is 9.4 years. Given this information, the bond's modified duration would be

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

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