Question 1

Which form of interest rate forecasting involves evaluating bonds to determine which will perform best over a selected holding period?

Accepted Answer

A)  Horizon analysis 
B)  Yield-to-maturity analysis 
C)  Yield curve analysis 
D)  Bond immunization analysis 
A)  Horizon analysis 
B)  Yield-to-maturity analysis 
C)  Yield curve analysis 
D)  Bond immunization analysis

Question 2

Regardless of its maturity date, it is very unusual for a coupon-paying bond to have a duration greater than:

Accepted Answer

A)  2 years. 
B)  4 years. 
C)  7 years. 
D)  10 years. 
A)  2 years. 
B)  4 years. 
C)  7 years. 
D)  10 years.

Question 3

Buying a bond (for example, with fixed-rate coupon payments) and simultaneously selling another (for example, with variable rate interest payments) is an example of:

Accepted Answer

A)  a bond ladder strategy. 
B)  a bond swap. 
C)  an interest rate futures transaction. 
D)  an immunization strategy. 
A)  a bond ladder strategy. 
B)  a bond swap. 
C)  an interest rate futures transaction. 
D)  an immunization strategy.

Question 4

Holding maturity constant, a decrease in rates will raise bond prices on a percentage basis more than a corresponding increase in rates will lower bond prices.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following is considered to have the biggest impact on bond yields?

Accepted Answer

A)  Economic growth 
B)  Business cycles 
C)  Inflation 
D)  Federal Reserve actions 
A)  Economic growth 
B)  Business cycles 
C)  Inflation 
D)  Federal Reserve actions

Question 6

A coupon bond has 10-years to maturity and a YTM of 8%. If the YTM instantaneously increases to 9%, what happens to the bond's price and duration?

Accepted Answer

A)  The price decreases and the duration increases. 
B)  The price increases and the duration decreases. 
C)  The price decreases and the duration decreases. 
D)  The price decreases and the duration stays the same. 
A)  The price decreases and the duration increases. 
B)  The price increases and the duration decreases. 
C)  The price decreases and the duration decreases. 
D)  The price decreases and the duration stays the same.

Question 7

The term structure of interest rates shows the relationship between yields of several categories of bonds, such as municipals and corporates, and their maturities.

Accepted Answer

A) True 
 B)False

Question 8

James has a 10-year investment horizon. To achieve an immunized position, his bond portfolio will have an average duration that is:

Accepted Answer

A)  greater than 10 years and have an average maturity that is less than 10 years. 
B)  equal to 10 years and have an average maturity that is less than 10 years. 
C)  less than 10 years and have an average maturity that is equal to 10 years. 
D)  equal to 10 years and have an average maturity that is greater than 10 years. 
A)  greater than 10 years and have an average maturity that is less than 10 years. 
B)  equal to 10 years and have an average maturity that is less than 10 years. 
C)  less than 10 years and have an average maturity that is equal to 10 years. 
D)  equal to 10 years and have an average maturity that is greater than 10 years.

Question 9

Bond investors can avoid the losses caused by rising interest rates by:

Accepted Answer

A)  buying zero coupon bonds. 
B)  buying Treasury bonds with maturities of one year or longer. 
C)  holding bond funds until maturity. 
D)  holding individual bonds until maturity. 
A)  buying zero coupon bonds. 
B)  buying Treasury bonds with maturities of one year or longer. 
C)  holding bond funds until maturity. 
D)  holding individual bonds until maturity.

Question 10

The interest rate term structure shows the relation between bond return and maturity.

Accepted Answer

A) True 
 B)False

Question 11

Duration is a measure that relates a:

Accepted Answer

A)  bond's price to its time to maturity. 
B)  bond's price to its coupon rate. 
C)  bond's yield to maturity to its time to maturity. 
D)  bond's price to its yield to maturity. 
A)  bond's price to its time to maturity. 
B)  bond's price to its coupon rate. 
C)  bond's yield to maturity to its time to maturity. 
D)  bond's price to its yield to maturity.

Question 12

The yield curve is normally plotted using Treasury securities because:

Accepted Answer

A)  they have a wide range of maturities. 
B)  it is easier to obtain accurate and complete data on them. 
C)  they have no default risk. 
D)  it is easier to obtain historical data on them. 
A)  they have a wide range of maturities. 
B)  it is easier to obtain accurate and complete data on them. 
C)  they have no default risk. 
D)  it is easier to obtain historical data on them.

Question 13

Which of the following statements regarding classical immunization is false?

Accepted Answer

A)  It is easy to implement. 
B)  It requires frequent rebalancing. 
C)  It is not a passive bond strategy. 
D)  It faces real-world problems in its implementation. 
A)  It is easy to implement. 
B)  It requires frequent rebalancing. 
C)  It is not a passive bond strategy. 
D)  It faces real-world problems in its implementation.

Question 14

Which of the following statements is true regarding investments in bonds?

Accepted Answer

A)  Shorter maturity bonds generally return more than longer maturity bonds. 
B)  Treasury bonds generally return more than corporate bonds of the same maturity. 
C)  Longer maturity bonds generally return more than shorter maturity bonds. 
D)  Higher-rated bonds generally return more than lower-rated bonds. 
A)  Shorter maturity bonds generally return more than longer maturity bonds. 
B)  Treasury bonds generally return more than corporate bonds of the same maturity. 
C)  Longer maturity bonds generally return more than shorter maturity bonds. 
D)  Higher-rated bonds generally return more than lower-rated bonds.

Question 15

A bond swap involves the simultaneous selling of one bond and buying another.

Accepted Answer

A) True 
 B)False

Question 16

What are two passive management strategies? Two active strategies?

Accepted Answer

Passive - buy and hold and ind

Question 17

Why are upward sloping yield curves more consistent with the usual risk-return tradeoff than downward sloping yield curves?

Accepted Answer

Long-term bonds have more inte

Question 18

A 9% semi-annual RXP callable bond is selling for $1,090 and has 15 years to maturity. The bond has five years of call protection and is callable at 105% of par value. What is the yield to maturity on the bond? What is the bond's yield to first call (YTFC)? What measure should an investor use to represent the interest rate risk of the RXP bond?

Accepted Answer

YTM: FV=1,000; N=30; PMT=45; PV=1,090; C

Question 19

Which of the following statements regarding the duration of a coupon bond is false?

Accepted Answer

A)  YTM and duration are inversely related. 
B)  Coupon rate and duration are inversely related. 
C)  Duration is a weighted average time to recovery of all coupon payments. 
D)  Duration increases with time to maturity but at a decreasing rate. 
A)  YTM and duration are inversely related. 
B)  Coupon rate and duration are inversely related. 
C)  Duration is a weighted average time to recovery of all coupon payments. 
D)  Duration increases with time to maturity but at a decreasing rate.

Question 20

A Pfizer bond has a YTM of 7%, it is selling for $980, and its Macaulay duration is 5 years. Assume the required yield increases to 7.4%. What is the new price predicted by modified duration? Is the actual estimated price higher or lower than that predicted by modified duration?

Accepted Answer

D* = 10 / 1.035 = 9.66184 / 2 = 4.83092

Exam 18: Bonds: Analysis and Strategy

Which form of interest rate forecasting involves evaluating bonds to determine which will perform best over a selected holding period?

Regardless of its maturity date, it is very unusual for a coupon-paying bond to have a duration greater than:

Buying a bond (for example, with fixed-rate coupon payments) and simultaneously selling another (for example, with variable rate interest payments) is an example of:

Holding maturity constant, a decrease in rates will raise bond prices on a percentage basis more than a corresponding increase in rates will lower bond prices.

Which of the following is considered to have the biggest impact on bond yields?

A coupon bond has 10-years to maturity and a YTM of 8%. If the YTM instantaneously increases to 9%, what happens to the bond's price and duration?

The term structure of interest rates shows the relationship between yields of several categories of bonds, such as municipals and corporates, and their maturities.

James has a 10-year investment horizon. To achieve an immunized position, his bond portfolio will have an average duration that is:

Bond investors can avoid the losses caused by rising interest rates by:

The interest rate term structure shows the relation between bond return and maturity.

Duration is a measure that relates a:

The yield curve is normally plotted using Treasury securities because:

Which of the following statements regarding classical immunization is false?

Which of the following statements is true regarding investments in bonds?

A bond swap involves the simultaneous selling of one bond and buying another.

What are two passive management strategies? Two active strategies?

Why are upward sloping yield curves more consistent with the usual risk-return tradeoff than downward sloping yield curves?

Which of the following statements regarding the duration of a coupon bond is false?

A Pfizer bond has a YTM of 7%, it is selling for $980, and its Macaulay duration is 5 years. Assume the required yield increases to 7.4%. What is the new price predicted by modified duration? Is the actual estimated price higher or lower than that predicted by modified duration?

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