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FIN Ch. 16
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Key Concepts:
Terms in this set (81)
1. The duration of a bond is a function of the bond's
D. All of these are correct.
2. Ceteris paribus, the duration of a bond is positively correlated with the bond's
A. time to maturity.
3. Ceteris paribus, the duration of a bond is negatively correlated with the bond's
D. coupon rate and yield to maturity.
4. Holding other factors constant, the interest-rate risk of a coupon bond is higher when the bond's:
C. yield to maturity is lower.
5. Holding other factors constant, the interest-rate risk of a coupon bond is higher when the bond's:
A. term-to-maturity is higher.
6. Holding other factors constant, the interest-rate risk of a coupon bond is higher when the bond's:
B. coupon rate is lower.
7. Holding other factors constant, the interest-rate risk of a coupon bond is lower when the bond's:
D. term-to-maturity is lower and coupon rate is higher.
8. Holding other factors constant, the interest-rate risk of a coupon bond is lower when the bond's:
E. All of these are correct.
9. Holding other factors constant, the interest-rate risk of a coupon bond is lower when the bond's:
C. yield to maturity is higher.
10. The "modified duration" used by practitioners is equal to the Macaulay duration
D. divided by (one plus the bond's yield to maturity).
11. The "modified duration" used by practitioners is equal to ______ divided by (one plus the bond's yield to maturity).
B. the Macaulay duration
12. Given the time to maturity, the duration of a zero-coupon bond is higher when the discount rate is
D. The bond's duration is independent of the discount rate.
13. The interest-rate risk of a bond is
B. the risk that arises from the uncertainty of the bond's return caused by changes in interest rates.
14. Which of the following two bonds is more price sensitive to changes in interest rates?
C. Bond Y because of the longer duration.
15. Holding other factors constant, which one of the following bonds has the smallest price volatility?
C. 5 year, 14% coupon bond
16. Which of the following is not true?
B. Given time to maturity, the duration of a zero-coupon decreases with yield to maturity.
17. Which of the following is true?
E. Given time to maturity and yield to maturity, the duration of a bond is higher when the coupon rate is lower, and duration is a better measure of price sensitivity to interest rate changes than is time to maturity.
18. The duration of a 5-year zero-coupon bond is
C. equal to 5.
19. The basic purpose of immunization is to
E. produce a zero net interest-rate risk and offset price and reinvestment risk.
20. The duration of a par value bond with a coupon rate of 8% and a remaining time to maturity of 5 years is
D. 4.31 years.
21. The duration of a perpetuity with a yield of 8% is
A. 13.50 years.
22. A seven-year par value bond has a coupon rate of 9% and a modified duration of
C. 5.03 years.
23. Par value bond XYZ has a modified duration of 6. Which one of the following statements regarding the bond is true?
A. If the market yield increases by 1% the bond's price will decrease by $60.
24. Which of the following bonds has the longest duration?
D. A 10-year maturity, 0% coupon bond.
25. 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?
D. The bond with a duration of 5.15 years.
26. Which one of the following statements is true concerning the duration of a perpetuity?
C. The duration of a 15% yield perpetuity that pays $100 annually is equal to that of 15% yield perpetuity that pays $200 annually.
27. Which one of the following statements is false concerning the duration of a perpetuity?
D. The duration of 15% yield perpetuity that pays $100 annually is longer than that of a 15% yield perpetuity that pays $200 annually, and the duration of a 15% yield perpetuity that pays $100 annually is shorter than that of a 15% yield perpetuity that pays $200 annually.
28. The two components of interest-rate risk are
D. price risk and reinvestment risk.
29. The duration of a coupon bond
E. None of these is correct.
30. Indexing of bond portfolios is difficult because
D. All of these are correct.
31. You have an obligation to pay $1,488 in four years and 2 months. In which bond would you invest your $1,000 to accumulate this amount, with relative certainty, even if the yield on the bond declines to 9.5% immediately after you purchase the bond?
B. a 5-year; 10% coupon par value bond
32. Duration measures
B. weighted average time until cash flow payment.
33. Duration
D. assesses the time element of bonds in terms of both coupon and term to maturity and allows structuring a portfolio to avoid interest-rate risk.
34. Identify the bond that has the longest duration (no calculations necessary).
C. 20-year maturity with a 0% coupon.
35. When interest rates decline, the duration of a 10-year bond selling at a premium
A. increases.
36. An 8%, 30-year corporate bond was recently being priced to yield 10%. The Macaulay duration for the bond is 10.20 years. Given this information, the bond's modified duration would be ________.
C. 9.27
37. An 8%, 15-year bond has a yield to maturity of 10% and duration of 8.05 years. If the market yield changes by 25 basis points, how much change will there be in the bond's price?
A. 1.85%
38. One way that banks can reduce the duration of their asset portfolios is through the use of
B. adjustable rate mortgages.
39. The duration of a bond normally increases with an increase in
A. term to maturity.
40. Which one of the following is an incorrect statement concerning duration?
A. The higher the yield to maturity, the greater the duration.
41. Which one of the following is a correct statement concerning duration?
E. The higher the coupon, the shorter the duration; the difference in duration can be large between two bonds with different coupons each maturing in more than 15 years; and the duration is the same as term to maturity only in the case of zero-coupon bonds
42. Immunization is not a strictly passive strategy because
C. it requires frequent rebalancing as maturities and interest rates change.
43. Some of the problems with immunization are
E. duration assumes that the yield curve is flat, duration assumes that if shifts in the yield curve occur, these shifts are parallel, and immunization is valid for one interest rate change only.
44. If a bond portfolio manager believes
D. in market efficiency, he or she is likely to be a passive portfolio manager; and that he or she can accurately predict interest rate changes, he or she is likely to be an active portfolio manager.
45. Cash flow matching on a multiperiod basis is referred to as
C. dedication.
46. Immunization through duration matching of assets and liabilities may be ineffective or inappropriate because
E. All of these are correct.
47. The curvature of the price-yield curve for a given bond is referred to as the bond's
D. convexity.
48. Consider a bond selling at par with modified duration of 10.6 years and convexity of 210. A 2 percent decrease in yield would cause the price to increase by 21.2%, according to the duration rule. What would be the percentage price change according to the duration-with-convexity rule?
B. 25.4%
49. A substitution swap is an exchange of bonds undertaken to
D. profit from apparent mispricing between two bonds.
50. A rate anticipation swap is an exchange of bonds undertaken to
A. shift portfolio duration in response to an anticipated change in interest rates.
51. An analyst who selects a particular holding period and predicts the yield curve at the end of that holding period is engaging in
C. horizon analysis.
52. Interest-rate risk is important to
C. both active and passive bond portfolio managers.
53. Which of the following are true about the interest-rate sensitivity of bonds?
C. I, II, and IV
54. Which of the following are false about the interest-rate sensitivity of bonds?
B. III
55. Which of the following researchers have contributed significantly to bond portfolio management theory?
D. I, III, IV, and V
56. According to the duration concept
D. the coupon payments made prior to maturity make the effective maturity of the bond less than its actual time to maturity.
57. Duration is important in bond portfolio management because
D. I, II, and III
58. 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?
B. The duration of the lower-coupon bond will be higher.
59. 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 most false about the durations of these bonds?
E. The duration of the higher-coupon bond will be higher and will equal the duration of the lower-coupon bond; and there is no consistent statement that can be made about the durations of the bonds
60. Which of the following offers a bond index?
D. All of these are correct.
61. Which of the following two bonds is more price sensitive to changes in interest rates?
C. Bond B because of the longer duration.
62. Which of the following two bonds is more price sensitive to changes in interest rates?
B. Bond E because of the longer duration.
63. Holding other factors constant, which one of the following bonds has the smallest price volatility?
C. 7 year, 14% coupon bond
64. Holding other factors constant, which one of the following bonds has the smallest price volatility?
D. 20-year, 9% coupon bond
65. The duration of a 15-year zero-coupon bond is
C. equal to 15.
66. The duration of a 20-year zero-coupon bond is
A. equal to 20.
67. The duration of a perpetuity with a yield of 10% is
B. 11 years.
68. The duration of a perpetuity with a yield of 6% is
C. 17.67 years.
69. Par value bond F has a modified duration of 9. Which one of the following statements regarding the bond is true?
A. If the market yield increases by 1% the bond's price will decrease by $90.
70. Par value bond GE has a modified duration of 11. Which one of the following statements regarding the bond is true?
C. If the market yield increases by 1% the bond's price will decrease by $110.
71. Which of the following bonds has the longest duration?
D. A 20-year maturity, 0% coupon bond.
72. Which of the following bonds has the longest duration?
A. A 12-year maturity, 0% coupon bond.
73. A 10%, 30-year corporate bond was recently being priced to yield 12%. The Macaulay duration for the bond is 11.3 years. Given this information, the bond's modified duration would be
B. 10.09
74. A 6%, 30-year corporate bond was recently being priced to yield 8%. The Macaulay duration for the bond is 8.4 years. Given this information, the bond's modified duration would be
D. 7.78
75. A 9%, 16-year bond has a yield to maturity of 11% and duration of 9.25 years. If the market yield changes by 32 basis points, how much change will there be in the bond's price?
C. 2.67%
76. A 7%, 14-year bond has a yield to maturity of 6% and duration of 7 years. If the market yield changes by 44 basis points, how much change will there be in the bond's price?
B. 2.91%
77. Consider a bond selling at par with modified duration of 12 years and convexity of 265. A 1 percent decrease in yield would cause the price to increase by 12%, according to the duration rule. What would be the percentage price change according to the duration-with-convexity rule?
D. 13.3%
78. Consider a bond selling at par with modified duration of 22-years and convexity of 415. A 2 percent decrease in yield would cause the price to increase by 44%, according to the duration rule. What would be the percentage price change according to the duration-with-convexity rule?
D. 52.3%
79. The duration of a par value bond with a coupon rate of 6.5% and a remaining time to maturity of 4 years is
A. 3.65 years.
80. The duration of a par value bond with a coupon rate of 7% and a remaining time to maturity of 3 years is
C. 2.81 years.
81. The duration of a par value bond with a coupon rate of 8.7% and a remaining time to maturity of 6 years is
E. None of these is correct.
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