Question 1

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a substitution swap. You currently hold a 15-year, 7 percent coupon bond priced to yield 8 percent. As a swap candidate you are considering a 15-year, 7 percent coupon bond priced to yield 8.5 percent. Assume a reinvestment rate of 8.5 percent, semiannual compounding, and a one-year workout period.
 
-Refer to Exhibit 13.5. The value of the swap is ____ basis points in one year.

Accepted Answer

A)  18.4 
B)  23.3 
C)  49.1 
D)  46.5 
E)  46.8

Question 2

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a substitution swap. You currently hold a 25-year, Aa 8 percent coupon bond priced to yield 10 percent. As a swap candidate you are considering a 25-year, Aa 8 percent coupon bond priced to yield 10.50 percent. Assume a reinvestment rate of 10 percent, semiannual compounding, and a one-year workout period.
 
-Refer to Exhibit 13.7. The realized compound yield on the current bond is

Accepted Answer

A)  6.00%. 
B)  7.00%. 
C)  8.00%. 
D)  10.00%. 
E)  12.00%.

Question 3

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 4

If you expected interest rates to fall, you would prefer to own bonds with

Accepted Answer

A)  short maturities and low coupons. 
B)  long maturities and high coupons. 
C)  long maturities and low coupons. 
D)  short maturities and high coupons. 
E)  None of these are correct.

Question 5

For a given change in yield bond price, volatility is inversely related to term to maturity.

Accepted Answer

A) True 
 B)False

Question 6

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A $1000 par value bond with four years to maturity and a 5 percent coupon has a yield to maturity of 6 percent. Interest is paid annually.
-Refer to Exhibit 13.3. Calculate the current price of the bond.

Accepted Answer

A)  $964.90 
B)  $965.35 
C)  $981.41 
D)  $1035.45 
E)  $1035.85

Question 7

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Talmart Corporation bonds have a $1,000 face value and will mature in four years. The bonds have a 7 percent coupon rate. Interest is paid annually, and the required rate of return is 6 percent for these bonds.
-Refer to Exhibit 13.2. What is the price of the Talmart corporate bonds?

Accepted Answer

A)  $965.63 
B)  $966.13 
C)  $1,034.65 
D)  $1,135.10 
E)  $1,051.97

Question 8

The position of a bondholder that is long a callable bond is equal to being

Accepted Answer

A)  long a noncallable bond + long a call option on the bond. 
B)  long a noncallable bond + short a call option on the bond. 
C)  short a noncallable bond + long a call option on the bond. 
D)  short a noncallable bond + short a call option on the bond. 
E)  None of these are correct.

Question 9

In a ladder strategy,

Accepted Answer

A)  one-half of funds are invested in short duration bonds, and the rest are invested in long duration bonds. 
B)  75 percent of funds are invested in short duration bonds, and the rest are invested in long duration bonds. 
C)  25 percent of funds are invested in short duration bonds, and the rest are invested in long duration bonds. 
D)  an equal amount of funds is invested in a wide range of maturities. 
E)  all the funds are invested in long duration bonds.

Question 10

Because you expect market interest rates to decline during the next four months, if you were offered two bonds with equal duration, you would select the one with the higher measure of convexity.

Accepted Answer

A) True 
 B)False

Question 11

Consider a bond with a duration of 8 years having a yield to maturity of 8 percent, and interest rates are expected to rise by 50 basis points. What is the percentage change in the price of the bond?

Accepted Answer

A)  3.85 percent 
B)  3.45 percent 
C)  -4.02 percent 
D)  -3.45 percent 
E)  -3.85 percent

Question 12

Assume that you purchase a five-year, $1,000 par value bond, with a 6 percent coupon and a yield of 7 percent. Immediately after you purchase the bond, yields rise to 8 percent and remain at that level to maturity. Calculate the realized horizon yield if you hold the bond to maturity. Interest is paid annually.

Accepted Answer

A)  6.0 percent 
B)  7.11 percent 
C)  8.0 percent 
D)  15.25 percent 
E)  8.18 percent

Question 13

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a pure yield pick-up swap: You currently hold a 10-year, 7 percent coupon bond priced to yield 8 percent. As a swap candidate, you are considering a 10-year, 8 percent coupon bond priced to yield 9 percent. Assume a reinvestment at 9 percent, semiannual compounding, and a one-year workout period.
 
-Refer to Exhibit 13.4. The value of the swap is ____ basis points in one year.

Accepted Answer

A)  32.3 
B)  48.7 
C)  75.8 
D)  98.2 
E)  104.3

Question 14

There is an inverse relationship between duration and coupon.

Accepted Answer

A) True 
 B)False

Question 15

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are creating a portfolio that consists of the following two bonds. Bond A pays an annual 7 percent coupon, matures in two years, has a yield to maturity of 8 percent, and a face value of $1,000. Bond B pays an annual 8 percent coupon, matures in three years, has a yield to maturity of 9 percent, and a face value of $1,000.
-Refer to Exhibit 13.14. Assume that your investment horizon is two years and your portfolio consists only of bonds A and B. What proportion should be invested in each bond to immunize the portfolio?

Accepted Answer

A)  Invest 72.4 percent in bond A and 27.6 percent in bond B. 
B)  Invest 68.3 percent in bond A and 31.7 percent in bond B. 
C)  Invest 58.5 percent in bond A and 41.5 percent in bond B. 
D)  Invest 31.7 percent in bond A and 68.3 percent in bond B. 
E)  Invest 27.6 percent in bond A and 72.4 percent in bond B.

Question 16

A pure yield pickup swap involves a switch from a low-coupon bond to a higher-coupon bond of similar quality and maturity.

Accepted Answer

A) True 
 B)False

Question 17

Bond price volatility varies directly with the term to maturity and directly with the coupon.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following would NOT normally be a reason for a bond swap?

Accepted Answer

A)  increasing current yield 
B)  improving the quality of the portfolio 
C)  taking advantage of interest rate shifts 
D)  tax savings 
E)  realigning the portfolio's duration

Question 19

Calculate the modified duration of a bond that has a Macaulay duration of 7.6 and the bond pays interest semi-annually with a coupon rate of 6 percent and a required rate of return of 8 percent.

Accepted Answer

A)  7.04 
B)  7.17 
C)  7.31 
D)  7.38 
E)  8.12

Question 20

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.

Exam 13: Bond Analysis and Portfolio Management Strategies

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

If you expected interest rates to fall, you would prefer to own bonds with

For a given change in yield bond price, volatility is inversely related to term to maturity.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) A $1000 par value bond with four years to maturity and a 5 percent coupon has a yield to maturity of 6 percent. Interest is paid annually. -Refer to Exhibit 13.3. Calculate the current price of the bond.

The position of a bondholder that is long a callable bond is equal to being

In a ladder strategy,

Because you expect market interest rates to decline during the next four months, if you were offered two bonds with equal duration, you would select the one with the higher measure of convexity.

Consider a bond with a duration of 8 years having a yield to maturity of 8 percent, and interest rates are expected to rise by 50 basis points. What is the percentage change in the price of the bond?

There is an inverse relationship between duration and coupon.

A pure yield pickup swap involves a switch from a low-coupon bond to a higher-coupon bond of similar quality and maturity.

Bond price volatility varies directly with the term to maturity and directly with the coupon.

Which of the following would NOT normally be a reason for a bond swap?

Calculate the modified duration of a bond that has a Macaulay duration of 7.6 and the bond pays interest semi-annually with a coupon rate of 6 percent and a required rate of return of 8 percent.

Horizon matching is a combination of