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FI414 CHAPTER 10 FINAL
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Terms in this set (10)
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.
A. II only
B. I only
C. I, II, and III
D. I and II only
D. I and II only
A bank has an average duration of its liabilities equal to 2 years. The bank's average duration of its assets is 3.5 years. The bank's market value of equity is at risk if ________.
A. interest rates fall
B. credit spreads fall
C. the price of all fixed-income securities rises
D. interest rates rise
D. interest rates rise
A pension fund has an average duration of its liabilities equal to 15 years. The fund is looking at 5-year maturity zero-coupon bonds and 4% yield perpetuities to immunize its interest rate risk. How much of its portfolio should it allocate to the zero-coupon bonds to immunize if there are no other assets funding the plan?
A. 48%
B. 25%
C. 33%
D. 52%
D. 52%
You own a bond that has a duration of 6 years. Interest rates are currently 7%, but you believe the Fed is about to increase interest rates by 25 basis points. Your predicted price change on this bond is ________.
A. -2.51%
B. -1.4%
C. +1.4%
D. +2.51%
B. -1.4%
Because of convexity, when interest rates change, the actual bond price will ________ the bond price predicted by duration.
A. always be lower than
B. sometimes be lower than
C. sometimes be higher than
D. always be higher than
D. always be higher than
In the context of a bond portfolio, price risk and reinvestment rate risk exactly cancel out at a time horizon equal to the ________.
A. difference between the shortest duration and longest duration of the individual bonds in the portfolio
B. average bond maturity in the portfolio
C. duration of the portfolio
D. average of the shortest duration and longest duration of the bonds in the portfolio
C. duration of the portfolio
Which of the following set of conditions will result in a bond with the greatest price volatility?
A. a high coupon and a long maturity
B. a low coupon and a short maturity
C. a high coupon and a short maturity
D. a low coupon and a long maturity
D. a low coupon and a long maturity
Advantages of cash flow matching and dedicated strategies include:
I. Once the cash flows are matched, there is no need for rebalancing.
II. Cash flow matching typically earns a higher rate of return than active bond portfolio management.
III. Financial institutions' liabilities often exceed the maturity of available bonds, making cash matching even more desirable.
A. I and III only
B. I, II, and III
C. I only
D. II only
C. I only
You have a 15-year maturity, 4% coupon, 6% yield bond with duration of 10.5 years and a convexity of 128.75. The bond is currently priced at $805.76. If the interest rate were to increase 200 basis points, your predicted new price for the bond (including convexity) is ________.
A. $642.54
B. $666.88
C. $638.85
D. $705.03
B. $666.88
All other things equal, which of the following has the longest duration?
A. a 20-year zero-coupon bond yielding 10%
B. a 20-year bond with a 10% coupon yielding 10%
C. a 20-year bond with a 10% coupon yielding 11%
D. a 20-year zero-coupon bond yielding 11%
A. a 20-year zero-coupon bond yielding 10%
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