Question 1

A bond pays annual interest. Its coupon rate is 9%. Its value at maturity is $1,000. It matures in 4 years. Its yield to maturity is currently 6%.
The duration of this bond is ________ years.

Accepted Answer

A)  2.44 
B)  3.23 
C)  3.56 
D)  4.1

Question 2

If an investment returns a higher percentage of your money back sooner, it will ________.

Accepted Answer

A)  be less price-volatile 
B)  have a higher credit rating 
C)  be less liquid 
D)  have a higher modified duration

Question 3

When bonds sell above par, what is the relationship of price sensitivity to rising interest rates?

Accepted Answer

A)  Price volatility increases at an increasing rate. 
B)  Price volatility increases at a decreasing rate. 
C)  Price volatility decreases at a decreasing rate. 
D)  Price volatility decreases at an increasing rate.

Question 4

Steel Pier Company has issued bonds that pay semiannually with the following characteristics:

If the bond's coupon was smaller than 10%, the modified duration would be ________ compared to the original modified duration.

Accepted Answer

A)  larger 
B)  unchanged 
C)  smaller 
D)  The answer cannot be determined from the information given.

Question 5

The historical yield spread between the AA bond and the AAA bond has been 25 basis points. Currently the spread is only 9 basis points. If you believe the spread will soon return to its historical levels, you should ________.

Accepted Answer

A)  buy the AA and short the AAA 
B)  buy both the AA and the AAA 
C)  buy the AAA and short the AA 
D)  short both the AA and the AAA

Question 6

The duration of a perpetuity varies ________ with interest rates.

Accepted Answer

A)  directly 
B)  inversely 
C)  convexly 
D)  randomly

Question 7

Which of the following is not a type of bond swap used in active portfolio management?

Accepted Answer

A)  intermarket spread swap 
B)  substitution swap 
C)  rate anticipation swap 
D)  asset-liability swap

Question 8

Immunization of coupon-paying bonds does not imply that the portfolio manager is inactive because:
I. The portfolio must be rebalanced every time interest rates change.
II. The portfolio must be rebalanced over time even if interest rates don't change.
III. Convexity implies duration-based immunization strategies don't work.

Accepted Answer

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

Question 9

The duration rule always ________ the value of a bond following a change in its yield.

Accepted Answer

A)  underestimates 
B)  provides an unbiased estimate of 
C)  overestimates 
D)  The estimated price may be biased either upward or downward, depending on whether the bond is trading at a discount or a premium.

Question 10

Which of the following statements is false?

Accepted Answer

A)  Bond prices and yields are inversely related. 
B)  An increase in a bond's YTM results in a smaller price change than a decrease in yield of equal magnitude. 
C)  Prices of short-term bonds tend to be more sensitive to interest rate changes than prices of long-term bonds. 
D)  Interest rate risk is inversely related to the bond's coupon rate.

Question 11

A bond currently has a price of $1,050. The yield on the bond is 6%. If the yield increases 25 basis points, the price of the bond will go down to $1,030. The duration of this bond is ________ years.

Accepted Answer

A)  7.46 
B)  8.08 
C)  9.02 
D)  10.11

Question 12

The exchange of one bond for a bond that has similar attributes but is more attractively priced is called ________.

Accepted Answer

A)  a substitution swap 
B)  an intermarket spread swap 
C)  a rate anticipation swap 
D)  a pure yield pickup swap

Question 13

Duration facilitates the comparison of bonds with differing ________.

Accepted Answer

A)  default risks 
B)  conversion ratios 
C)  maturities 
D)  yields to maturity

Question 14

Rank the interest sensitivity of the following from the most sensitive to an interest rate change to the least sensitive:
I. 8% coupon, noncallable 20-year maturity par bond
II. 9% coupon, currently callable 20-year maturity premium bond
III. Zero-coupon 30-year maturity bond

Accepted Answer

A)  I, II, III 
B)  II, III, I 
C)  III, I, II 
D)  III, II, I

Question 15

Steel Pier Company has issued bonds that pay semiannually with the following characteristics:

If the yield to maturity decreases to 8.045%, the expected percentage change in the price of the bond using modified duration would be ________.

Accepted Answer

A)  11% 
B)  13% 
C)  12% 
D)  10%

Question 16

A perpetuity pays $100 each and every year forever. The duration of this perpetuity will be ________ if its yield is 9%.

Accepted Answer

A)  7 
B)  9 
C)  9.39 
D)  12.11

Question 17

The duration of a 5-year zero-coupon bond is ________ years.

Accepted Answer

A)  4.5 
B)  5 
C)  5.5 
D)  3.5

Question 18

Duration measures

Accepted Answer

A)  the effective maturity of a bond. 
B)  the weighted average of the time until each payment is received, with weights proportional to the present value of the payment. 
C)  the average maturity of the bond's promised cash flows. 
D)  all of the options.

Question 19

An 8%, 30-year bond has a yield to maturity of 10% and a modified duration of 8 years. If the market yield drops by 15 basis points, there will be a ________ in the bond's price.

Accepted Answer

A)  1.15% decrease 
B)  1.2% increase 
C)  1.53% increase 
D)  2.43% decrease

Question 20

Which one of the following statements correctly describes the weights used in the Macaulay duration calculation? The weight in year t is equal to ________.

Accepted Answer

A)  the dollar amount of the investment received in year t 
B)  the percentage of the future value of the investment received in year t 
C)  the present value of the dollar amount of the investment received in year t 
D)  the percentage of the total present value of the investment received in year t

Exam 11: Managing Bond Portfolios

A bond pays annual interest. Its coupon rate is 9%. Its value at maturity is $1,000. It matures in 4 years. Its yield to maturity is currently 6%. The duration of this bond is ________ years.