Deck 16: Managing Bond Portfolios

Question 1

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.

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

Answer 1

D

Question 2

Given the time to maturity, the duration of a zero-coupon bond is higher when the discount rate is

A) higher.
B) lower.
C) equal to the risk-free rate.
D) The bond's duration is independent of the discount rate.
E) None of the options are correct.

Answer 2

D

Question 3

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

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.

Answer 3

A

Question 4

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

A) term to maturity is lower.
B) coupon rate is higher.
C) yield to maturity is lower.
D) term to maturity is lower and coupon rate is higher.
E) All of the options are correct.

Question 5

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

A) term to maturity is lower.
B) coupon rate is higher.
C) yield to maturity is higher.
D) term to maturity is lower and coupon rate is higher.
E) All of the options are correct.

Question 6

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

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 7

The duration of a 5-year zero-coupon bond is

A) smaller than 5.
B) larger than 5.
C) equal to 5.
D) equal to that of a 5-year 10% coupon bond.
E) None of the options are correct.

Question 8

Which of the following is not true?

A) Holding other things constant, the duration of a bond increases with time to maturity.
B) Given time to maturity, the duration of a zero-coupon decreases with yield to maturity.
C) Given time to maturity and yield to maturity, the duration of a bond is higher when the coupon rate is lower.
D) Duration is a better measure of price sensitivity to interest-rate changes than is time to maturity.
E) All of the options are correct.

Question 9

The basic purpose of immunization is to

A) eliminate default risk.
B) produce a zero net-interest-rate risk.
C) offset price and reinvestment risk.
D) eliminate default risk and produce a zero net-interest-rate risk.
E) produce a zero net-interest-rate risk and offset price and reinvestment risk.

Question 10

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

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

Question 11

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

A) 5-year, 0% coupon bond
B) 5-year, 12% coupon bond
C) 5 year, 14% coupon bond
D) 5-year, 10% coupon bond
E) Cannot tell from the information given

Question 12

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

A) term to maturity is higher.
B) coupon rate is lower.
C) yield to maturity is higher.
D) term to maturity is higher and coupon rate is lower.
E) All of the options are correct.

Question 13

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) 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.

Question 14

The "modified duration" used by practitioners is equal to ______ divided by (one plus the bond's yield to maturity).

A) current yield
B) the Macaulay duration
C) yield to call
D) yield to maturity
E) None of the options are correct.

Question 15

The interest-rate risk of a bond is

A) the risk related to the possibility of bankruptcy of the bond's issuer.
B) the risk that arises from the uncertainty of the bond's return caused by changes in interest rates.
C) the unsystematic risk caused by factors unique in the bond.
D) the risk related to the possibility of bankruptcy of the bond's issuer, and the risk that arises from the uncertainty of the bond's return caused by changes in interest rates.
E) All of the options are correct.

Question 16

The duration of a par-value bond with a coupon rate of 8% (paid annually) and a remaining time to maturity of 5 years is

A) 5 years.
B) 5.4 years.
C) 4.17 years.
D) 4.31 years.

Question 17

Ceteris paribus, the duration of a bond is positively correlated with the bond's

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

Question 18

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

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

Question 19

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

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

Question 20

Ceteris paribus, the duration of a bond is negatively correlated with the bond's

A) time to maturity.
B) coupon rate.
C) yield to maturity.
D) coupon rate and yield to maturity.
E) None of the options are correct.

Question 21

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

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

Question 22

Indexing of bond portfolios is difficult because

A) the number of bonds included in the major indexes is so large that it would be difficult to purchase them in the proper proportions.
B) many bonds are thinly traded, so it is difficult to purchase them at a fair market price.
C) the composition of bond indexes is constantly changing.
D) All of the options are true.

Question 23

Duration

A) assesses the time element of bonds in terms of both coupon and term to maturity.
B) allows structuring a portfolio to avoid interest-rate risk.
C) is a direct comparison between bond issues with different levels of risk.
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.
E) assesses the time element of bonds in terms of both coupon and term to maturity and is a direct comparison between bond issues with different levels of risk.

Question 24

Cash flow matching on a multiperiod basis is referred to as

A) immunization.
B) contingent immunization.
C) dedication.
D) duration matching.
E) rebalancing.

Question 25

Duration measures

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 investment.

Question 26

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) 1.83%
B) 2.01%
C) 3.27%
D) 6.44%

Question 27

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.
B) If the market yield increases by 1%, the bond's price will increase by $50.
C) If the market yield increases by 1%, the bond's price will decrease by $50.
D) If the market yield increases by 1%, the bond's price will increase by $60.

Question 28

A seven-year par value bond has a coupon rate of 9% (paid annually) and a modified duration of

A) 7 years.
B) 5.49 years.
C) 5.03 years.
D) 4.87 years.

Question 29

Which one of the following statements is true concerning the duration of a perpetuity?

A) The duration of a 15% yield perpetuity that pays $100 annually is longer than that of a 15% yield perpetuity that pays $200 annually.
B) The duration of a 15% yield perpetuity that pays $100 annually is shorter than that of a 15% yield perpetuity that pays $200 annually.
C) The duration of a 15% yield perpetuity that pays $100 annually is equal to that of a 15% yield perpetuity that pays $200 annually.
D) The duration of a perpetuity cannot be calculated.

Question 30

One way that banks can reduce the duration of their asset portfolios is through the use of

A) fixed-rate mortgages.
B) adjustable-rate mortgages.
C) certificates of deposit.
D) short-term borrowing.

Question 31

Immunization is not a strictly passive strategy because

A) it requires choosing an asset portfolio that matches an index.
B) there is likely to be a gap between the values of assets and liabilities in most portfolios.
C) it requires frequent rebalancing as maturities and interest rates change.
D) durations of assets and liabilities fall at the same rate.
E) None of the options are correct.

Question 32

Some of the problems with immunization are

A) duration assumes that the yield curve is flat.
B) duration assumes that if shifts in the yield curve occur, these shifts are parallel.
C) immunization is valid for one interest-rate change only.
D) durations and horizon dates change by the same amounts with the passage of time.
E) immunization is valid for one interest-rate change only, duration assumes that the yield curve is flat, and that if shifts in the yield curve occur, these shifts are parallel.

Question 33

The duration of a bond normally increases with an increase in

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

Question 34

The two components of interest-rate risk are

A) price risk and default risk.
B) reinvestment risk and systematic risk.
C) call risk and price risk.
D) price risk and reinvestment risk.
E) None of the options are correct.

Question 35

Which of the following bonds has the longest duration?

A) An 8-year maturity, 0% coupon bond
B) An 8-year maturity, 5% coupon bond
C) A 10-year maturity, 5% coupon bond
D) A 10-year maturity, 0% coupon bond
E) Cannot tell from the information given

Question 36

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

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

Question 37

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

A) 8.05.
B) 9.44.
C) 9.27.
D) 11.22.
E) None of the options are correct.

Question 38

If a bond portfolio manager believesI) 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.

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

Question 39

The duration of a coupon bond

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 40

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?

A) The bond with a duration of 6 years
B) The bond with a duration of 5 years
C) The bond with a duration of 2.7 years
D) The bond with a duration of 5.15 years

Question 41

Which of the following are true about the interest-rate sensitivity of bonds?I) Bond prices and yields are inversely related.II) Prices of long-term bonds tend to be more sensitive to interest-rate changes than prices of short-term bonds.III) Interest-rate risk is correlated with the bond's coupon rate.IV) The sensitivity of a bond's price to a change in its yield to maturity is inversely related to the yield to maturity at which the bond is currently selling.

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

Question 42

Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par-value bond, A, with a 12 year to maturity and a 12% coupon rate.
2) A zero-coupon bond, B, with a 12 year to maturity and a 12% yield to maturity.

A) Bond A because of the higher yield to maturity
B) Bond A because of the longer time to maturity
C) Bond B 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.

Question 43

Duration is important in bond portfolio management becauseI) it can be used in immunization strategies.II) it provides a gauge of the effective average maturity of the portfolio.III) it is related to the interest rate sensitivity of the portfolio.IV) it is a good predictor of interest-rate changes.

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

Question 44

Interest-rate risk is important to

A) active bond portfolio managers.
B) passive bond portfolio managers.
C) both active and passive bond portfolio managers.
D) neither active nor passive bond portfolio managers.
E) obsessive bond portfolio managers.

Question 45

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?

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.

Question 46

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 false about the durations of these 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 duration of the higher coupon bond will be higher, and the duration of the higher coupon bond will equal the duration of the lower coupon bond.

Question 47

Immunization through duration matching of assets and liabilities may be ineffective or inappropriate because

A) conventional duration strategies assume a flat yield curve.
B) duration matching can only immunize portfolios from parallel shifts in the yield curve.
C) immunization only protects the nominal value of terminal liabilities and does not allow for inflation adjustment.
D) None of the options are correct.
E) All of the options are correct.

Question 48

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

A) 7-year, 0% coupon bond
B) 7-year, 12% coupon bond
C) 7 year, 14% coupon bond
D) 7-year, 10% coupon bond
E) Cannot tell from the information given

Question 49

Which of the following researchers have contributed significantly to bond portfolio management theory?I) Sidney HomerII) Harry MarkowitzIII) Burton MalkielIV) Martin LiebowitzV) Frederick Macaulay

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

Question 50

Which of the following are false about the interest-rate sensitivity of bonds? I) Bond prices and yields are inversely related.II) Prices of long-term bonds tend to be more sensitive to interest-rate changes than prices of short-term bonds.III) Interest-rate risk is correlated with the bond's coupon rate.IV) The sensitivity of a bond's price to a change in its yield to maturity is inversely related to the yield to maturity at which the bond is currently selling.

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

Question 51

The duration of a 15-year zero-coupon bond is

A) smaller than 15.
B) larger than 15.
C) equal to 15.
D) equal to that of a 15-year 10% coupon bond.
E) None of the options are correct.

Question 52

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

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

Question 53

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?

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

Question 54

A rate anticipation swap is an exchange of bonds undertaken to

A) shift portfolio duration in response to an anticipated change in interest rates.
B) shift between corporate and government bonds when the yield spread is out of line with historical values.
C) profit from apparent mispricing between two bonds.
D) change the credit risk of the portfolio.
E) increase return by shifting into higher yield bonds.

Question 55

The duration of a 20-year zero-coupon bond is

A) equal to 20.
B) larger than 20.
C) smaller than 20.
D) equal to that of a 20-year 10% coupon bond.

Question 56

A substitution swap is an exchange of bonds undertaken to

A) change the credit risk of a portfolio.
B) extend the duration of a portfolio.
C) reduce the duration of a portfolio.
D) profit from apparent mispricing between two bonds.
E) adjust for differences in the yield spread.

Question 57

According to the duration concept,

A) only coupon payments matter.
B) only maturity value matters.
C) the coupon payments made prior to maturity make the effective maturity of the bond greater than its actual time to maturity.
D) the coupon payments made prior to maturity make the effective maturity of the bond less than its actual time to maturity.
E) coupon rates don't matter.

Question 58

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

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 59

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.

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 60

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

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

Question 61

Consider a six yearannual bond paying a 7% coupon, with a yield to maturity of 5.0%. What is the duration of the bond?

A) 4.925
B) 5.148
C) 5.236
D) 5.687

Question 62

A 7%, 14-year bond has a yield to maturity of 4.4% and duration of 8.5 years. If the market yield changes by 54 basis points, how much change will there be in the bond's price?

A) 1.85%
B) 2.91%
C) 4.40%
D) 6.44%

Question 63

The duration of a par-valueannual bond with a coupon rate of 8.7% and a remaining time to maturity of 6 years is

A) 6.0 years.
B) 5.1 years.
C) 4.27 years.
D) 3.95 years.
E) None of the options are correct.

Question 64

A 10%, 30-year corporate bond was recently being priced to a yieldof 11%. The Macaulay duration for the bond is 11.3 years. Given this information, the bond's modified duration would be

A) 9.05.
B) 10.09.
C) 10.18.
D) 11.22.

Question 65

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?

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

Question 66

A 9%, 16-year bond has a yield to maturity of 9% and duration of 7.25 years. If the market yield changes by 15 basis points, how much change will there be in the bond's price?

A) 1.00%
B) 2.01%
C) 2.67%
D) 3.44%

Question 67

Consider a bond selling at par with modified duration of 22 years and convexity of 415. A 2% 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?

A) 21.2%
B) 25.4%
C) 17.0%
D) 52.3%

Question 68

A 6%, 30-year corporate bond was recently being priced to a yield of 7%. The Macaulay duration for the bond is 9.4 years. Given this information, the bond's modified duration would be

A) 9.55.
B) 9.24.
C) 8.79.
D) 7.78.

Question 69

Par-value-bond GE has a modified duration of 11. 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 $55.
B) If the market yield increases by 1%, the bond's price will increase by $55.
C) If the market yield increases by 1%, the bond's price will decrease by $110.
D) If the market yield increases by 1%, the bond's price will increase by $110.

Question 70

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.
B) If the market yield increases by 1%, the bond's price will increase by $90.
C) If the market yield increases by 1%, the bond's price will decrease by $60.
D) If the market yield decreases by 1%, the bond's price will increase by $60.

Question 71

Consider a four year, zero-coupon bond, with a yield to maturity of 7.2%. What is the duration of the bond?

A) 4.000
B) 3.785
C) 3.614
D) 3.548

Question 72

Which of the following bonds has the longest duration?

A) A 12-year maturity, 0% coupon bond.
B) A 12-year maturity, 8% coupon bond.
C) A 4-year maturity, 8% coupon bond.
D) A 4-year maturity, 0% coupon bond.
E) Cannot tell from the information given

Question 73

The duration of a par-valueannual bond with a coupon rate of 7% and a remaining time to maturity of 3 years is

A) 3 years.
B) 2.71 years.
C) 2.81 years.
D) 2.91 years.

Question 74

Which of the following bonds has the longest duration?

A) A 15-year maturity, 0% coupon bond.
B) A 15-year maturity, 9% coupon bond.
C) A 20-year maturity, 9% coupon bond.
D) A 20-year maturity, 0% coupon bond.
E) Cannot tell from the information given

Question 75

Consider a four yearannual bond paying a 7% coupon, with a yield to maturity of 6.0%. What is the duration of the bond?

A) 3.631
B) 3.785
C) 3.814
D) 3.965

Question 76

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

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

Question 77

Consider a four yearannual bond paying a 8.5% coupon, with a yield to maturity of 9.3%. What is the duration of the bond?

A) 3.831
B) 3.785
C) 3.614
D) 3.548

Question 78

Consider a six yearannual bond paying a 5% coupon, with a yield to maturity of 4.5%. What is the duration of the bond?

A) 4.925
B) 5.152
C) 5.339
D) 5.787

Question 79

The duration of a perpetuity with a yield of 9.0% is

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

Question 80

The duration of a perpetuity with a yield of 6.5% is

A) 13.50 years.
B) 12.11 years.
C) 16.38 years.
D) Cannot be determined