Question 1

Identify the bond that has the longest duration (no calculations necessary).

Accepted Answer

A)  20-year maturity with an 8% coupon 
B)  20-year maturity with a 12% coupon 
C)  20-year maturity with a 0% coupon 
D)  10-year maturity with a 15% coupon 
E)  12-year maturity with a 12% coupon 
A)  20-year maturity with an 8% coupon 
B)  20-year maturity with a 12% coupon 
C)  20-year maturity with a 0% coupon 
D)  10-year maturity with a 15% coupon 
E)  12-year maturity with a 12% coupon C

Question 2

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?

Accepted Answer

A)  The duration of the higher coupon bond will be higher. 
B)  The duration of the lower coupon bond will be higher. 
C)  The duration of the higher coupon bond will equal the duration of the lower coupon bond. 
D)  There is no consistent statement that can be made about the durations of the bonds. 
E)  The bond's durations cannot be determined without knowing the prices of the bonds. 
A)  The duration of the higher coupon bond will be higher. 
B)  The duration of the lower coupon bond will be higher. 
C)  The duration of the higher coupon bond will equal the duration of the lower coupon bond. 
D)  There is no consistent statement that can be made about the durations of the bonds. 
E)  The bond's durations cannot be determined without knowing the prices of the bonds. B

Question 3

Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par value bond, X, with a 5-year year to maturity and a 10% coupon rate.
2) A zero-coupon bond, Y, with a 5-year year to maturity and a 10% yield to maturity.

Accepted Answer

A)  Bond X because of the higher yield to maturity 
B)  Bond X because of the longer time to maturity 
C)  Bond Y because of the longer duration 
D)  Both have the same sensitivity because both have the same yield to maturity. 
E)  None of the options are correct. 
A)  Bond X because of the higher yield to maturity 
B)  Bond X because of the longer time to maturity 
C)  Bond Y because of the longer duration 
D)  Both have the same sensitivity because both have the same yield to maturity. 
E)  None of the options are correct. C

Question 4

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

Accepted Answer

A)  8.05. 
B)  10.09. 
C)  9.27. 
D)  11.22. 
A)  8.05. 
B)  10.09. 
C)  9.27. 
D)  11.22.

Question 5

Holding other factors constant, which one of the following bonds has the smallest price volatility?

Accepted Answer

A)  20-year, 0% coupon bond 
B)  20-year, 6% coupon bond 
C)  20 year, 7% coupon bond 
D)  20-year, 9% coupon bond 
E)  Cannot tell from the information given 
A)  20-year, 0% coupon bond 
B)  20-year, 6% coupon bond 
C)  20 year, 7% coupon bond 
D)  20-year, 9% coupon bond 
E)  Cannot tell from the information given

Question 6

If a bond portfolio manager believes I) in market efficiency, he or she is likely to be a passive portfolio manager.
II) that he or she can accurately predict interest-rate changes, he or she is likely to be an active portfolio manager.
III) that he or she can identify bond-market anomalies, he or she is likely to be a passive portfolio manager.

Accepted Answer

A)  I only 
B)  II only 
C)  III only 
D)  I and II 
E)  I, II, and III 
A)  I only 
B)  II only 
C)  III only 
D)  I and II 
E)  I, II, and III

Question 7

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?

Accepted Answer

A)  1.85% 
B)  2.01% 
C)  2.67% 
D)  6.44% 
A)  1.85% 
B)  2.01% 
C)  2.67% 
D)  6.44%

Question 8

The duration of a perpetuity with a yield of 8% is

Accepted Answer

A)  13.50 years. 
B)  12.11 years. 
C)  6.66 years. 
D)  Cannot be determined 
A)  13.50 years. 
B)  12.11 years. 
C)  6.66 years. 
D)  Cannot be determined

Question 9

Which of the following statements are true? I) Holding other things constant, the duration of a bond decreases with time to maturity.
II) Given time to maturity, the duration of a zero-coupon increases with yield to maturity.
III) Given time to maturity and yield to maturity, the duration of a bond is higher when the coupon rate is lower.
IV) Duration is a better measure of price sensitivity to interest-rate changes than is time to maturity.

Accepted Answer

A)  I only 
B)  I and II 
C)  III only 
D)  III and IV 
E)  I, II, and IV 
A)  I only 
B)  I and II 
C)  III only 
D)  III and IV 
E)  I, II, and IV

Question 10

Holding other factors constant, the interest-rate risk of a coupon bond is higher when the bond's

Accepted Answer

A)  term to maturity is higher. 
B)  coupon rate is higher. 
C)  yield to maturity is higher. 
D)  All of the options are correct. 
E)  None of the options are correct. 
A)  term to maturity is higher. 
B)  coupon rate is higher. 
C)  yield to maturity is higher. 
D)  All of the options are correct. 
E)  None of the options are correct.

Question 11

Consider a bond selling at par with modified duration of 10.6 years and convexity of 210. A 2% 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?

Accepted Answer

A)  21.2% 
B)  25.4% 
C)  17.0% 
D)  10.6% 
A)  21.2% 
B)  25.4% 
C)  17.0% 
D)  10.6%

Question 12

When interest rates decline, the duration of a 10-year bond selling at a premium

Accepted Answer

A)  increases. 
B)  decreases. 
C)  remains the same. 
D)  increases at first, then declines. 
E)  decreases at first, then increases. 
A)  increases. 
B)  decreases. 
C)  remains the same. 
D)  increases at first, then declines. 
E)  decreases at first, then increases.

Question 13

Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par-value bond, D, with a 2 year to maturity and an 8% coupon rate.
2) A zero-coupon bond, E, with a 2 year to maturity and an 8% yield to maturity.

Accepted Answer

A)  Bond D because of the higher yield to maturity 
B)  Bond E because of the longer duration 
C)  Bond D because of the longer time to maturity 
D)  Both have the same sensitivity because both have the same yield to maturity. 
A)  Bond D because of the higher yield to maturity 
B)  Bond E because of the longer duration 
C)  Bond D because of the longer time to maturity 
D)  Both have the same sensitivity because both have the same yield to maturity.

Question 14

Duration measures

Accepted Answer

A)  weighted-average time until a bond's half-life. 
B)  weighted-average time until cash flow payment. 
C)  the time required to make excessive profit from the investment. 
D)  weighted-average time until a bond's half-life and the time required to make excessive profit from the investment. 
E)  weighted-average time until cash flow payment and the time required to make excessive profit from the 
A)  weighted-average time until a bond's half-life. 
B)  weighted-average time until cash flow payment. 
C)  the time required to make excessive profit from the investment. 
D)  weighted-average time until a bond's half-life and the time required to make excessive profit from the investment. 
E)  weighted-average time until cash flow payment and the time required to make excessive profit from the

Question 15

The duration of a par-value bond with a coupon rate of 6.5% and a remaining time to maturity of 4 years is

Accepted Answer

A)  3.65 years. 
B)  3.45 years. 
C)  3.85 years. 
D)  4.00 years. 
A)  3.65 years. 
B)  3.45 years. 
C)  3.85 years. 
D)  4.00 years.

Question 16

The curvature of the price yield curve for a given bond is referred to as the bond's

Accepted Answer

A)  modified duration. 
B)  immunization. 
C)  sensitivity. 
D)  convexity. 
E)  tangency. 
A)  modified duration. 
B)  immunization. 
C)  sensitivity. 
D)  convexity. 
E)  tangency.

Question 17

An analyst who selects a particular holding period and predicts the yield curve at the end of that holding period is engaging in

Accepted Answer

A)  a rate anticipation swap. 
B)  immunization. 
C)  horizon analysis. 
D)  an intermarket spread swap. 
E)  None of the options are correct. 
A)  a rate anticipation swap. 
B)  immunization. 
C)  horizon analysis. 
D)  an intermarket spread swap. 
E)  None of the options are correct.

Question 18

The "modified duration" used by practitioners is equal to the Macaulay duration

Accepted Answer

A)  times the change in interest rate. 
B)  times (one plus the bond's yield to maturity). 
C)  divided by (one minus the bond's yield to maturity). 
D)  divided by (one plus the bond's yield to maturity). 
E)  None of the options are correct. 
A)  times the change in interest rate. 
B)  times (one plus the bond's yield to maturity). 
C)  divided by (one minus the bond's yield to maturity). 
D)  divided by (one plus the bond's yield to maturity). 
E)  None of the options are correct.

Question 19

The duration of a coupon bond

Accepted Answer

A)  does not change after the bond is issued. 
B)  can accurately predict the price change of the bond for any interest-rate change. 
C)  will decrease as the yield to maturity decreases. 
D)  All of the options are true. 
E)  None of the options are true. 
A)  does not change after the bond is issued. 
B)  can accurately predict the price change of the bond for any interest-rate change. 
C)  will decrease as the yield to maturity decreases. 
D)  All of the options are true. 
E)  None of the options are true.

Question 20

Consider a bond selling at par with modified duration of 12 years and convexity of 265. A 1% 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?

Accepted Answer

A)  21.2% 
B)  25.4% 
C)  17.0% 
D)  13.3% 
A)  21.2% 
B)  25.4% 
C)  17.0% 
D)  13.3%

Exam 16: Managing Bond Portfolios

Identify the bond that has the longest duration (no calculations necessary).

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?

Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par value bond, X, with a 5-year year to maturity and a 10% coupon rate. 2) A zero-coupon bond, Y, with a 5-year year to maturity and a 10% yield to maturity.

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

Holding other factors constant, which one of the following bonds has the smallest price volatility?

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?

The duration of a perpetuity with a yield of 8% is

Holding other factors constant, the interest-rate risk of a coupon bond is higher when the bond's

Consider a bond selling at par with modified duration of 10.6 years and convexity of 210. A 2% 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?

When interest rates decline, the duration of a 10-year bond selling at a premium

Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par-value bond, D, with a 2 year to maturity and an 8% coupon rate. 2) A zero-coupon bond, E, with a 2 year to maturity and an 8% yield to maturity.

Duration measures

The duration of a par-value bond with a coupon rate of 6.5% and a remaining time to maturity of 4 years is

The curvature of the price yield curve for a given bond is referred to as the bond's

An analyst who selects a particular holding period and predicts the yield curve at the end of that holding period is engaging in

The "modified duration" used by practitioners is equal to the Macaulay duration

The duration of a coupon bond

Consider a bond selling at par with modified duration of 12 years and convexity of 265. A 1% 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?

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