Question 1

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. Calculate the Macaulay Duration for Bond B.

Accepted Answer

A)  1.44 
B)  2.47 
C)  2.55 
D)  2.70 
E)  2.78

Question 2

Contingent procedures for managing bond portfolios are a form of what has come to be called structured active management.

Accepted Answer

A) True 
 B)False

Question 3

Suppose the current six-year rate is 9 percent and the current five-year rate is 7 percent. What is the one year forward rate for five years?

Accepted Answer

A)  19.57 percent 
B)  18.62 percent 
C)  15.80 percent 
D)  14.65 percent 
E)  12.67 percent

Question 4

Consider a bond with a duration of 7 years having a yield to maturity of 7 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)  3.62 percent 
B)  3.45 percent 
C)  -3.38 percent 
D)  3.38 percent 
E)  -3.62 percent

Question 5

With a matched funding technique, portfolio managers try to match specific liability obligations due at specific times to a portfolio of bonds that minimize the portfolio's interest rate risk.

Accepted Answer

A) True 
 B)False

Question 6

Altman-Nammacher (1987) created a modified Z-score model using a multiple regression analysis technique.

Accepted Answer

A) True 
 B)False

Question 7

Interest rate anticipation is the most conservative management strategy.

Accepted Answer

A) True 
 B)False

Question 8

All of the following are one of Malkiel's stated relationships between yield changes and bond prices EXCEPT

Accepted Answer

A)  bond prices move inversely to bond yields. 
B)  longer-maturity bonds experience larger price changes than shorter-maturity bonds. 
C)  bond price volatility increases at a diminishing rate as term to maturity increases. 
D)  bond price movements resulting from equal absolute increases or decreases in yield are symmetrical. 
E)  bond price volatility is inversely related to the coupon rate.

Question 9

Calculate the modified duration for a 10-year, 12 percent bond with a yield to maturity of 10 percent and a Macaulay duration of 7.2 years.

Accepted Answer

A)  6.43 years 
B)  6.55 years 
C)  6.79 years 
D)  6.86 years 
E)  7.01 years

Question 10

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 realized compound yield on the candidate bond is

Accepted Answer

A)  7.0%. 
B)  11.0%. 
C)  10.0%. 
D)  9.0%. 
E)  12.0%.

Question 11

Option adjusted duration can be calculated as

Accepted Answer

A)  duration of noncallable bond - duration of call option on the bond. 
B)  duration of noncallable bond + duration of call option on the bond. 
C)  duration of callable bond - duration of call option on the bond. 
D)  duration of callable bond + duration of call option on the bond. 
E)  None of these are correct.

Question 12

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider two bonds, both pay semiannual interest. Bond A has a coupon of 8 percent per year, maturity of 30 years, yield to maturity of 9 percent per year, and a face value of $1000. Bond B has a coupon of 8 percent per year, maturity of 30 years, yield to maturity of 9.5 percent per year, and a face value of $1000.
-Refer to Exhibit 13.10. Calculate the percentage gain per invested dollar for Bond A assuming a one-year horizon, and a reinvestment rate of 9 percent per year.

Accepted Answer

A)  9.73% 
B)  9.93 percent 
C)  9.20 percent 
D)  8.20 percent 
E)  9.50 percent

Question 13

In core-plus bond management,

Accepted Answer

A)  75 percent of the portfolio is allocated to an equity index and the balance is allocated to a bond index. 
B)  75 percent of the portfolio is allocated to a bond index, and the balance is allocated to an equity index. 
C)  75 percent of the portfolio is allocated to a bond index, and the balance is allocated to actively managed bond sectors. 
D)  75 percent of the portfolio is allocated to actively managed bond sectors, and the balance is allocated to a bond index. 
E)  75 percent of the portfolio is allocated to actively managed bond sectors, and the balance is allocated to a foreign bond index.

Question 14

If you expected interest rates to rise, 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 15

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider two bonds: both pay semiannual interest. Bond X has a coupon of 7 percent per year, maturity of 20 years, yield to maturity of 8 percent per year, and a face value of $1000. Bond Y has a coupon of 7 percent per year, maturity of 20 years, yield to maturity of 8.5 percent per year, and a face value of $1000.
-Refer to Exhibit 13.11. Calculate the percentage gain per invested dollar for Bond Y assuming a one-year horizon and a reinvestment rate of 8.5 percent per year.

Accepted Answer

A)  7.84 percent 
B)  7.97 percent 
C)  8.18 percent 
D)  8.34 percent 
E)  8.56 percent

Question 16

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. Calculate the price of Bond B.

Accepted Answer

A)  $974.69 
B)  $990.64 
C)  $995.22 
D)  $1,013.88 
E)  $1,025.77

Question 17

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 value of the swap is ____ basis points in one year.

Accepted Answer

A)  26.91 
B)  26.25 
C)  31.25 
D)  41.25 
E)  51.25

Question 18

In valuation analysis, undervalued bonds are bonds in which the expected YTMs are lower than the prevailing YTM.

Accepted Answer

A) True 
 B)False

Question 19

An example of an active strategy for bond management would be

Accepted Answer

A)  buy and hold. 
B)  credit analysis. 
C)  indexing. 
D)  classical immunization. 
E)  horizon matching.

Question 20

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A $1000 par value bond with five years to maturity and a 6 percent coupon has a yield to maturity of 8 percent. Interest is paid semiannually.
-Refer to Exhibit 13.1. Calculate the modified duration for the bond.

Accepted Answer

A)  4.19 years 
B)  4.36 years 
C)  8.72 years 
D)  8.38 years 
E)  9.52 years

Exam 13: Bond Analysis and Portfolio Management Strategies

Contingent procedures for managing bond portfolios are a form of what has come to be called structured active management.

Suppose the current six-year rate is 9 percent and the current five-year rate is 7 percent. What is the one year forward rate for five years?

Consider a bond with a duration of 7 years having a yield to maturity of 7 percent, and interest rates are expected to rise by 50 basis points. What is the percentage change in the price of the bond?

With a matched funding technique, portfolio managers try to match specific liability obligations due at specific times to a portfolio of bonds that minimize the portfolio's interest rate risk.

Altman-Nammacher (1987) created a modified Z-score model using a multiple regression analysis technique.

Interest rate anticipation is the most conservative management strategy.

All of the following are one of Malkiel's stated relationships between yield changes and bond prices EXCEPT

Calculate the modified duration for a 10-year, 12 percent bond with a yield to maturity of 10 percent and a Macaulay duration of 7.2 years.

Option adjusted duration can be calculated as

In core-plus bond management,

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

In valuation analysis, undervalued bonds are bonds in which the expected YTMs are lower than the prevailing YTM.

An example of an active strategy for bond management would be

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) A $1000 par value bond with five years to maturity and a 6 percent coupon has a yield to maturity of 8 percent. Interest is paid semiannually. -Refer to Exhibit 13.1. Calculate the modified duration for the bond.