Deck 19: Bond Portfolio Management Strategies

Question 1

When applying active management techniques to a global portfolio the additional concern is expectations regarding exchange rates between countries.

Answer 1

True

Question 2

In a ladder strategy, funds are invested equally among a wide range of maturities.

Answer 2

True

Question 3

Investment horizon is the future time when an investor must begin an investment program to generate the required funds for a future liability.

Answer 3

False

Question 4

In a buy-and-hold strategy, bonds are purchased in light of the investor's objectives and constraints and then held until maturity.

Question 5

A substitution swap relies heavily on interest rate expectations.

Question 6

The bond management strategy intended to eliminate interest rate risk is immunization.

Question 7

Indexing is an active portfolio management strategy that seeks to copy the composition and performance of a selected market index.

Question 8

A manager following an interest rate anticipation strategy would shorten portfolio duration if interest rates were expected to increase.

Question 9

Interest rate anticipation is one of the matched funding techniques that matches anticipated interest rates with the required rates on a portfolio.

Question 10

The components of interest rate risk are: price risk and maturity risk.

Question 11

A pure yield pickup swap involves a switch from a low-coupon bond to a higher-coupon bond of similar quality and maturity.

Question 12

A portfolio of bonds is immunized from interest rate risk if the duration of the portfolio is always equal to the desired investment horizon.

Question 13

In valuation analysis, undervalued bonds are bonds where the expected YTMs are lower than the prevailing YTM.

Question 14

A bond portfolio is immunized from interest rate risk if the modified duration of the portfolio is always equal to the desired investment horizon.

Question 15

Credit analysis and core-plus management are examples of active bond portfolio management.

Question 16

With a matched funding technique portfolio managers try to match specific liability obligations due at specific times to a portfolio of bonds that minimize the portfolio's interest rate risk.

Question 17

Interest rate anticipation is the most conservative management strategy.

Question 18

The duration of a perpetual bond is always equal to its term to maturity.

Question 19

When applying active management techniques to a global portfolio the additional concern is expectations regarding exchange rates between countries.

Question 20

A bond swap involves liquidating a current bond position, and later investing in a similar issue under more favorable conditions.

Question 21

Altman-Nammacher (1987) create a modified Z-score model using a multiple regression analysis technique.

Question 22

Which of the following is a matched funding technique?

A)Classical immunization
B)Contingent immunization
C)Bond swaps
D)Valuation analysis
E)Interest rate anticipation

Question 23

For a bond investor selecting a buy-and-hold strategy, which of the following would be the least important consideration?

A)Term to maturity
B)Indenture provisions
C)Coupon levels
D)Liquidity
E)Quality

Question 24

Contingent immunization strategies

A)Provide the bond portfolio manager to engage in various active portfolio strategies if the client is willing to accept a floor value.
B)Insure that the modified duration of the portfolio is always equal to the desired investment horizon.
C)Guarantee that the end of the holding period wealth will not be impacted by interest rate changes.
D)All of the above statements are true.
E)None of the above statements are true.

Question 25

The substitution swap is generally long term and relies heavily on interest rate expectations.

Question 26

A pure yield pickup swap involves swapping out of a

A)Bond to realize capital losses, into a comparable bond.
B)Low coupon bond, into a comparable high coupon bond.
C)High coupon bond, into a comparable low coupon bond.
D)Bond that is underpriced, into a comparable bond that is overpriced.
E)Bond that is overpriced, into a comparable bond that is underpriced.

Question 27

If an investor swaps identical issues to establish a loss, the loss is disallowed and the transaction is known as a

A)Switch sale.
B)Wash sale.
C)Green shoe.
D)Flashback.
E)White knight.

Question 28

An investor in a pure yield pickup swap is most concerned about changes in interest rates.

Question 29

A tax swap involves swapping out of a

A)Bond to realize capital losses, into a comparable bond.
B)Low coupon bond, into a comparable high coupon bond.
C)High coupon bond, into a comparable low coupon bond.
D)Bond that is underpriced, into a comparable bond that is overpriced.
E)Bond that is overpriced, into a comparable bond that is underpriced.

Question 30

A substitution pickup swap involves swapping out of a

A)Bond to realize capital losses, into a comparable bond.
B)Low coupon bond, into a comparable high coupon bond.
C)High coupon bond, into a comparable low coupon bond.
D)Bond that is underpriced, into a comparable bond that is overpriced.
E)Bond that is overpriced, into a comparable bond that is underpriced.

Question 31

Which of the following is a passive bond portfolio strategy?

A)Indexing
B)Buy-and-Hold
C)Classical immunization
D)Choices a and b
E)None of the above

Question 32

The term dedication, used to describe portfolio management techniques, is referring to servicing a prescribed set of

A)Interest payments.
B)Assets.
C)Liabilities.
D)Pensioners.
E)Sinking fund payments.

Question 33

In core-plus bond management

A)Seventy five percent of the portfolio is allocated to an equity index, and the balance to a bond index.
B)Seventy five percent of the portfolio is allocated to a bond index, and the balance to an equity index.
C)Seventy five percent of the portfolio is allocated to a bond index, and the balance to actively managed bond sectors.
D)Seventy five percent of the portfolio is allocated to actively managed bond sectors, and the balance to a bond index.
E)None of the above.

Question 34

Coupon reinvestment risk arises because the yield to maturity computation implicitly assumes that all coupon flows will be reinvested at the

A)Coupon rate.
B)Effective rate of interest.
C)Realized yield to maturity.
D)Promised yield to maturity.
E)Existing yield as the coupons are paid.

Question 35

The active strategies for bond management include all of the following, except

A)Interest rate anticipation.
B)Credit analysis.
C)Spread analysis.
D)Classical immunization.
E)Bond swaps.

Question 36

Assuming no change in interest rates, the duration of a coupon bond

A)Stays constant.
B)Declines more slowly than the term to maturity.
C)Declines more quickly than the term to maturity
D)Increases at a slower rate than the term to maturity.
E)Changes in line with the term to maturity.

Question 37

In a barbell strategy

A)One half of funds are invested in short duration bonds and the test in long duration bonds.
B)Seventy five percent of funds are invested in short duration bonds and the test in long duration bonds.
C)Twenty five percent of funds are invested in short duration bonds and the test in long duration bonds.
D)An equal amount of funds are invested in a wide range of maturities.
E)None of the above.

Question 38

Which of the following would not normally be a reason for a bond swap?

A)Increasing current yield
B)Improving the quality of the portfolio
C)Taking advantage of interest rate shifts
D)Tax savings
E)Realigning the portfolio's duration

Question 39

Junk bonds are high yield bond bonds rated below

A)BBB.
B)BB.
C)B.
D)CCC.
E)CC.

Question 40

Historically the correlation between stocks and bonds has consistently remained between 0.20 and 0.45.

Question 41

Exhibit 19.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a pure yield pick-up swap: You currently hold a 10 year, 7 percent coupon bond priced to yield 8 percent. As a swap candidate you are considering a 10 year, 8 percent coupon bond priced to yield 9 percent. Assume a reinvestment at 9 percent, semiannual compounding, and a one-year workout period. $$\begin{array} { l c c } & \text { Current Bond } & \text { Candidate Bond } \\\hline \text { Dollar Investment } & \$ 932.05 & \$ 934.96 \\\text { Coupon } & \$ 70.00 & \$ 80.00 \\\text { i on One Coupon } & \$ 1.575 & ? \\\text { Principal Value at Year End } & \$ 936.70 & ? \\\text { Total Accrued } & \$ 1008.28 & ? \\\text { Realized Compound Yield } & 8.018 \% & ?\end{array}$$

-Refer to Exhibit 19.1. The interest on one coupon for the candidate bond is

A)$2.97
B)$2.03
C)$1.80
D)$1.37
E)$3.49

Question 42

Exhibit 19.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a substitution swap. You currently hold a 15 year, 7 percent coupon bond priced to yield 8 percent. As a swap candidate you are considering a 15 year, 7 percent coupon bond priced to yield 8.5 percent. Assume a reinvestment rate of 8.5 percent, semiannual compounding, and a one-year workout period. $\begin{array}{lcc} & \text { Current Bond } & \text { Candidate Bond } \\\hline \text { Dollar Investment } & \$ 913.54 & ? \\\text { Coupon } & 70.00 & 70.00 \\\text { i on One Coupon } & 1.487 & 1.487 \\\text { Principal Value at Year End } & 916.68 & 878.55 \\\text { Total Accrued } & 988.17 & 950.04 \\\text { Total Gain } & 74.63 & ? \\\text { Gain per Invested Dollar } & ? & ? \\\text { Realized Compound Yield } & ? & ?\end{array}$

-Refer to Exhibit 19.2. The realized compound yield on the current bond is

A)15.50%
B)11.03%
C)10.30%
D)8.01%
E)9.00%

Question 43

Studies by Reilly and Wright (1994, 2001) and Fabozzi (2005) suggest analysis of high-yield bonds should be expanded to include all of the following except

A)The firm's competitive position with respect to cost and pricing
B)The firm's cash flow relative to interest expense, research expenses, and growth needs
C)The firm's market share and growth in sales
D)The quality of the total management team
E)All of the above were suggested as important areas of expanded analysis by these studies

Question 44

Interest rate risk is comprised of which of the following risks?

A)Price risk.
B)Coupon reinvestment risk.
C)Default risk.
D)Both a and b only.
E)All of the above.

Question 45

Exhibit 19.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a pure yield pick-up swap: You currently hold a 20 year, Aa 8 percent coupon bond priced to yield 10 percent. As a swap candidate you are considering a 20 year, Aa 10 percent coupon bond priced to yield 10.75 percent. Assume a reinvestment rate of 12.00 percent, semiannual compounding, and a one-year workout period. $\begin{array}{lcc} & \text { Current Bond } & \text { Candidate Bond } \\\hline \text { Dollar Investment } & \$ 828.41 & \$ 938.83 \\\text { Coupon } & 80.00 & 100.00 \\\text { i on One Coupon } & 2.4 & ? \\\text { Principal Value at Year End } & 831.32 & ? \\\text { Total Accrued } & 913.72 & ? \\\text { Realized Compound Yield } & 10.5547 & ?\end{array}$

-Refer to Exhibit 19.3. The interest on one coupon for the candidate bond is

A)$2.40
B)$2.75
C)$9.60
D)$11.00
E)$50.00

Question 46

Exhibit 19.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a pure yield pick-up swap: You currently hold a 20 year, Aa 8 percent coupon bond priced to yield 10 percent. As a swap candidate you are considering a 20 year, Aa 10 percent coupon bond priced to yield 10.75 percent. Assume a reinvestment rate of 12.00 percent, semiannual compounding, and a one-year workout period. $\begin{array}{lcc} & \text { Current Bond } & \text { Candidate Bond } \\\hline \text { Dollar Investment } & \$ 828.41 & \$ 938.83 \\\text { Coupon } & 80.00 & 100.00 \\\text { i on One Coupon } & 2.4 & ? \\\text { Principal Value at Year End } & 831.32 & ? \\\text { Total Accrued } & 913.72 & ? \\\text { Realized Compound Yield } & 10.5547 & ?\end{array}$

-Refer to Exhibit 19.3. The value of the swap is ____ basis points in one year.

A)40.4
B)60.6
C)80.8
D)20.5
E)100.1

Question 47

Exhibit 19.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a pure yield pick-up swap: You currently hold a 10 year, 7 percent coupon bond priced to yield 8 percent. As a swap candidate you are considering a 10 year, 8 percent coupon bond priced to yield 9 percent. Assume a reinvestment at 9 percent, semiannual compounding, and a one-year workout period. $$\begin{array} { l c c } & \text { Current Bond } & \text { Candidate Bond } \\\hline \text { Dollar Investment } & \$ 932.05 & \$ 934.96 \\\text { Coupon } & \$ 70.00 & \$ 80.00 \\\text { i on One Coupon } & \$ 1.575 & ? \\\text { Principal Value at Year End } & \$ 936.70 & ? \\\text { Total Accrued } & \$ 1008.28 & ? \\\text { Realized Compound Yield } & 8.018 \% & ?\end{array}$$

-Refer to Exhibit 19.1. The realized compound yield on the candidate bond is

A)7.0%
B)11.0%
C)10.0%
D)9.0%
E)12.0%

Question 48

In a ladder strategy

A)One half of funds are invested in short duration bonds and the test in long duration bonds.
B)Seventy five percent of funds are invested in short duration bonds and the test in long duration bonds.
C)Twenty five percent of funds are invested in short duration bonds and the test in long duration bonds.
D)An equal amount of funds are invested in a wide range of maturities.
E)None of the above.

Question 49

Horizon matching is a combination of

A)Cash-matching dedication and interest rates swaps.
B)Cash-matching dedication and immunization.
C)Interest rate swaps and immunization.
D)Enhanced indexing and immunization.
E)Enhanced indexing and interest rate swaps.

Question 50

Two common methods for constructing a bond index are

A)Full replication and stratified sampling
B)Partial replication and overall market approach
C)ETFs and High Yield sampling
D)Multiple discriminant analysis and bond swaps
E)None of the above

Question 51

A portfolio manager that attempts to select bonds based on their intrinsic value would be carrying out

A)Credit analysis
B)Valuation analysis
C)Yield-spread analysis
D)Horizon-matching analysis
E)Interest-rate analysis

Question 52

In classical immunization the effect of a change in interest rates is effectively neutralized because

A)Price risk and reinvestment risk offset each other.
B)Price risk and maturity risk offset each other.
C)Reinvestment risk and credit risk offset each other.
D)Reinvestment risk and maturity risk offset each other.
E)None of the above.

Question 53

Investment style for a bond portfolio is best characterized by

A)Beta and credit quality
B)Credit quality and duration
C)Interest rate risk and yield to maturity
D)Yield to maturity and beta
E)None of the above

Question 54

Exhibit 19.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a pure yield pick-up swap: You currently hold a 10 year, 7 percent coupon bond priced to yield 8 percent. As a swap candidate you are considering a 10 year, 8 percent coupon bond priced to yield 9 percent. Assume a reinvestment at 9 percent, semiannual compounding, and a one-year workout period. $$\begin{array} { l c c } & \text { Current Bond } & \text { Candidate Bond } \\\hline \text { Dollar Investment } & \$ 932.05 & \$ 934.96 \\\text { Coupon } & \$ 70.00 & \$ 80.00 \\\text { i on One Coupon } & \$ 1.575 & ? \\\text { Principal Value at Year End } & \$ 936.70 & ? \\\text { Total Accrued } & \$ 1008.28 & ? \\\text { Realized Compound Yield } & 8.018 \% & ?\end{array}$$

-Refer to Exhibit 19.1. The value of the swap is ____ basis points in one year.

A)32.3
B)48.7
C)75.8
D)98.2
E)104.3

Question 55

Horizon matching is a combination of

A)Immunization and valuation.
B)Cash matching and immunization.
C)Valuation and cash matching.
D)All of the above.
E)None of the above.

Question 56

Exhibit 19.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a substitution swap. You currently hold a 15 year, 7 percent coupon bond priced to yield 8 percent. As a swap candidate you are considering a 15 year, 7 percent coupon bond priced to yield 8.5 percent. Assume a reinvestment rate of 8.5 percent, semiannual compounding, and a one-year workout period. $\begin{array}{lcc} & \text { Current Bond } & \text { Candidate Bond } \\\hline \text { Dollar Investment } & \$ 913.54 & ? \\\text { Coupon } & 70.00 & 70.00 \\\text { i on One Coupon } & 1.487 & 1.487 \\\text { Principal Value at Year End } & 916.68 & 878.55 \\\text { Total Accrued } & 988.17 & 950.04 \\\text { Total Gain } & 74.63 & ? \\\text { Gain per Invested Dollar } & ? & ? \\\text { Realized Compound Yield } & ? & ?\end{array}$

-Refer to Exhibit 19.2. The dollar investment in the candidate bond is

A)$812.57
B)$803.22
C)$874.16
D)$746.83
E)$700.01

Question 57

Which factors indicate that in-depth credit analysis of high-yield bonds is important?

A)The large number of high-yield issues.
B)The overall decline in quality of these bonds.
C)The wide range of quality among these bonds.
D)The growing complexity of these bonds.
E)All of the above.

Question 58

Which of the following statements is true?

A)If Duration > Investment Horizon, the investor faces Net Reinvestment Risk.
B)If Duration < Investment Horizon, the investor faces Net Price Risk.
C)If Duration = Investment Horizon, the investor is immunized.
D)All of the above statements are true.
E)None of the above statements are true.

Question 59

Exhibit 19.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a substitution swap. You currently hold a 15 year, 7 percent coupon bond priced to yield 8 percent. As a swap candidate you are considering a 15 year, 7 percent coupon bond priced to yield 8.5 percent. Assume a reinvestment rate of 8.5 percent, semiannual compounding, and a one-year workout period. $\begin{array}{lcc} & \text { Current Bond } & \text { Candidate Bond } \\\hline \text { Dollar Investment } & \$ 913.54 & ? \\\text { Coupon } & 70.00 & 70.00 \\\text { i on One Coupon } & 1.487 & 1.487 \\\text { Principal Value at Year End } & 916.68 & 878.55 \\\text { Total Accrued } & 988.17 & 950.04 \\\text { Total Gain } & 74.63 & ? \\\text { Gain per Invested Dollar } & ? & ? \\\text { Realized Compound Yield } & ? & ?\end{array}$

-Refer to Exhibit 19.2. The value of the swap is ____ basis points in one year.

A)18.4
B)23.3
C)49.1
D)46.5
E)46.8

Question 60

An example of an active strategy for bond management would be

A)Buy and hold.
B)Credit analysis.
C)Indexing.
D)Classical immunization.
E)Horizon matching.

Question 61

Exhibit 19.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a substitution swap. You currently hold a 25 year, Aa 10 percent coupon bond priced to yield 12 percent. As a swap candidate you are considering a 25 year, Aa 10 percent coupon bond priced to yield 13 percent. Assume a reinvestment rate of 12 percent, semiannual compounding, and a one-year workout period. $$\begin{array}{l}\text { Current Bond Candidate Bond }\\\begin{array} { l c c } \hline \text { Dollar Investment } & \$ 842.38 & ? \\\text { Coupon } & 100.00 & 100.00 \\\text { i on One Coupon } & 3.0 & 2.75 \\\text { Frincipal Value at Year End } & 843.50 & 780.46 \\\text { Total Accrued } & 946.50 & 883.21 \\\text { Total Gain } & 104.12 & ? \\\text { Gain per Invested Dollar } & ? & ? \\\text { Realized Compound Yield } & ? & ?\end{array}\end{array}$$

-Refer to Exhibit 19.6. The value of the swap is ____ basis points in one year.

A)94.14
B)0.9414
C)9.414
D)941.4
E)0.09414

Question 62

Exhibit 19.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider two bonds, both pay annual interest. Bond C has a coupon of 6% per year, maturity of 5 years, yield to maturity of 6% per year, and a face value of $1000. Bond D has a coupon of 8% per year, maturity of 15 years, yield to maturity of 6% per year, and a face value of $1000.
Refer to Exhibit 19.8. Calculate the modified duration for Bond D.

A)9.5
B)9.8
C)9.2
D)15
E)None of the above

Question 63

Exhibit 19.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a substitution swap. You currently hold a 25 year, Aa 8 percent coupon bond priced to yield 10 percent. As a swap candidate you are considering a 25 year, Aa 8 percent coupon bond priced to yield 10.50 percent. Assume a reinvestment rate of 10 percent, semiannual compounding, and a one-year workout period. $$\begin{array}{l}\text { Current Bond Candidate Bond }\\\begin{array} { l r c } \hline \text { Dollar Investment } & \$ 817.44 & ? \\\text { Coupon } & 80.00 & 80.00 \\\text { i on One Coupon } & 2.00 & 2.20 \\\text { Principal Value at Year End } & 819.23 & 782.33 \\\text { Total Accrued } & 901.23 & 864.53 \\\text { Total Gain } & 83.79 & ? \\\text { Gain per Invested Dollar } & ? & ? \\\text { Realized Compound Yield } & ? & ?\end{array}\end{array}$$

-Refer to Exhibit 19.4. The realized compound yield on the current bond is

A)6.00%
B)7.00%
C)8.00%
D)10.00%
E)12.00%

Question 64

Exhibit 19.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider two bonds, both pay semiannual interest. Bond A has a coupon of 8% per year, maturity of 30 years, yield to maturity of 9% per year, and a face value of $1000. Bond B has a coupon of 8% per year, maturity of 30 years, yield to maturity of 9.5% per year, and a face value of $1000.
Refer to Exhibit 19.7. Calculate the value of swap out of Bond A into Bond B.

A)0.41%
B)1.73%
C)0.23%
D)0.00%
E)0.51%

Question 65

Exhibit 19.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a substitution swap. You currently hold a 25 year, Aa 8 percent coupon bond priced to yield 10 percent. As a swap candidate you are considering a 25 year, Aa 8 percent coupon bond priced to yield 10.50 percent. Assume a reinvestment rate of 10 percent, semiannual compounding, and a one-year workout period. $$\begin{array}{l}\text { Current Bond Candidate Bond }\\\begin{array} { l r c } \hline \text { Dollar Investment } & \$ 817.44 & ? \\\text { Coupon } & 80.00 & 80.00 \\\text { i on One Coupon } & 2.00 & 2.20 \\\text { Principal Value at Year End } & 819.23 & 782.33 \\\text { Total Accrued } & 901.23 & 864.53 \\\text { Total Gain } & 83.79 & ? \\\text { Gain per Invested Dollar } & ? & ? \\\text { Realized Compound Yield } & ? & ?\end{array}\end{array}$$

-Refer to Exhibit 19.4. The dollar investment in the candidate bond is

A)$780.34
B)$1483.25
C)$1361.54
D)$1413.95
E)$1000.00

Question 66

Exhibit 19.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider two bonds, both pay semiannual interest. Bond A has a coupon of 8% per year, maturity of 30 years, yield to maturity of 9% per year, and a face value of $1000. Bond B has a coupon of 8% per year, maturity of 30 years, yield to maturity of 9.5% per year, and a face value of $1000.
Refer to Exhibit 19.7. Calculate the percentage gain per invested dollar for Bond A assuming a one year horizon, and a reinvestment rate of 9% per year.

A)9.73%
B)9.93%
C)9.20%
D)8.20%
E)9.50%

Question 67

Exhibit 19.10
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are creating a portfolio that consists of the following two bonds. Bond A pays an annual 7% coupon, matures in two years, has a yield to maturity of 8%, and a face value of $1,000. Bond B pays an annual 8% coupon, matures in three years, has a yield to maturity of 9%, and a face value of $1,000.
Refer to Exhibit 19.10. Calculate the Macaulay Duration for Bond A.

A)0.98
B)1.79
C)1.90
D)1.93
E)2.31

Question 68

Exhibit 19.7
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider two bonds, both pay semiannual interest. Bond A has a coupon of 8% per year, maturity of 30 years, yield to maturity of 9% per year, and a face value of $1000. Bond B has a coupon of 8% per year, maturity of 30 years, yield to maturity of 9.5% per year, and a face value of $1000.
Refer to Exhibit 19.7. Calculate the percentage gain per invested dollar for Bond B assuming a one year horizon, and a reinvestment rate of 9.5% per year.

A)9.73%
B)9.93%
C)9.20%
D)8.20%
E)9.50%

Question 69

Exhibit 19.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a pure yield pick-up swap: You currently hold a 20 year, Aa 2 percent coupon bond priced to yield 9.5 percent. As a swap candidate you are considering a 20 year, Aa 14 percent coupon bond priced to yield 10.00. Assume a reinvestment rate of 11 percent, semiannual compounding, and a one-year workout period. $\begin{array}{lcc} & \text { Current Bond } & \text { Candidate Bond } \\\hline \text { Dollar Investment } & \$ 1222.04 & \$ 1343.18 \\\text { Coupon } & 110.00 & 140.00 \\\text { i on One Coupon } & 3.3 & ? \\\text { Principal Value at Year End } & 1218.04 & ? \\\text { Total Accrued } & 1341.34 & ? \\\text { Realized Compound Yield } 9.5351 \% & ? &\end{array}$

-Refer to Exhibit 19.5. The interest on one coupon for the candidate bond is

A)$70.00
B)$3.58
C)$3.85
D)$8.35
E)$5.38

Question 70

Exhibit 19.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider two bonds, both pay annual interest. Bond C has a coupon of 6% per year, maturity of 5 years, yield to maturity of 6% per year, and a face value of $1000. Bond D has a coupon of 8% per year, maturity of 15 years, yield to maturity of 6% per year, and a face value of $1000.
Refer to Exhibit 19.8. Calculate the modified duration for Bond C.

A)4.47
B)4.22
C)4.34
D)5
E)None of the above

Question 71

Exhibit 19.10
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are creating a portfolio that consists of the following two bonds. Bond A pays an annual 7% coupon, matures in two years, has a yield to maturity of 8%, and a face value of $1,000. Bond B pays an annual 8% coupon, matures in three years, has a yield to maturity of 9%, and a face value of $1,000.
Refer to Exhibit 19.10. Calculate the price of Bond A.

A)$975.62
B)$982.17
C)$990.57
D)$1,009.50
E)$1,018.08

Question 72

Exhibit 19.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider two bonds, both pay annual interest. Bond Y has a coupon of 6% per year, maturity of 5 years, yield to maturity of 6% per year, and a face value of $1000. Bond X has a coupon of 7% per year, maturity of 10 years, yield to maturity of 4% per year, and a face value of $1000.
Refer to Exhibit 19.9. Calculate the modified duration for Bond X.

A)4.22
B)7.8
C)7.5
D)9.2
E)4.34

Question 73

Exhibit 19.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a pure yield pick-up swap: You currently hold a 20 year, Aa 2 percent coupon bond priced to yield 9.5 percent. As a swap candidate you are considering a 20 year, Aa 14 percent coupon bond priced to yield 10.00. Assume a reinvestment rate of 11 percent, semiannual compounding, and a one-year workout period. $\begin{array}{lcc} & \text { Current Bond } & \text { Candidate Bond } \\\hline \text { Dollar Investment } & \$ 1222.04 & \$ 1343.18 \\\text { Coupon } & 110.00 & 140.00 \\\text { i on One Coupon } & 3.3 & ? \\\text { Principal Value at Year End } & 1218.04 & ? \\\text { Total Accrued } & 1341.34 & ? \\\text { Realized Compound Yield } 9.5351 \% & ? &\end{array}$

-Refer to Exhibit 19.5. The value of the swap is ____ basis points in one year.

A)0.004921
B)0.4921
C)4.921
D)49.21
E)492.1

Question 74

Exhibit 19.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a substitution swap. You currently hold a 25 year, Aa 10 percent coupon bond priced to yield 12 percent. As a swap candidate you are considering a 25 year, Aa 10 percent coupon bond priced to yield 13 percent. Assume a reinvestment rate of 12 percent, semiannual compounding, and a one-year workout period. $$\begin{array}{l}\text { Current Bond Candidate Bond }\\\begin{array} { l c c } \hline \text { Dollar Investment } & \$ 842.38 & ? \\\text { Coupon } & 100.00 & 100.00 \\\text { i on One Coupon } & 3.0 & 2.75 \\\text { Frincipal Value at Year End } & 843.50 & 780.46 \\\text { Total Accrued } & 946.50 & 883.21 \\\text { Total Gain } & 104.12 & ? \\\text { Gain per Invested Dollar } & ? & ? \\\text { Realized Compound Yield } & ? & ?\end{array}\end{array}$$

-Refer to Exhibit 19.6. The realized compound yield on the current bond is

A)10.00%
B)11.9985%
C)12.9397%
D)13.9399%
E)12.3585%

Question 75

Exhibit 19.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider two bonds, both pay annual interest. Bond C has a coupon of 6% per year, maturity of 5 years, yield to maturity of 6% per year, and a face value of $1000. Bond D has a coupon of 8% per year, maturity of 15 years, yield to maturity of 6% per year, and a face value of $1000.
Refer to Exhibit 19.8. Assume that your investment horizon is 6 years and your portfolio consists only of Bond C and Bond D. Indicate the proportions invested in each bond, so that the portfolio is immunized.

A)50% in Bond C and 50% in Bond D
B)64% in Bond C and 36% in Bond D
C)36% in Bond C and 64% in Bond D
D)100% in Bond D
E)None of the above

Question 76

Exhibit 19.4
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a substitution swap. You currently hold a 25 year, Aa 8 percent coupon bond priced to yield 10 percent. As a swap candidate you are considering a 25 year, Aa 8 percent coupon bond priced to yield 10.50 percent. Assume a reinvestment rate of 10 percent, semiannual compounding, and a one-year workout period. $$\begin{array}{l}\text { Current Bond Candidate Bond }\\\begin{array} { l r c } \hline \text { Dollar Investment } & \$ 817.44 & ? \\\text { Coupon } & 80.00 & 80.00 \\\text { i on One Coupon } & 2.00 & 2.20 \\\text { Principal Value at Year End } & 819.23 & 782.33 \\\text { Total Accrued } & 901.23 & 864.53 \\\text { Total Gain } & 83.79 & ? \\\text { Gain per Invested Dollar } & ? & ? \\\text { Realized Compound Yield } & ? & ?\end{array}\end{array}$$

-Refer to Exhibit 19.4. The value of the swap is ____ basis points in one year.

A)26.91
B)26.25
C)31.25
D)41.25
E)51.25

Question 77

Exhibit 19.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider two bonds, both pay annual interest. Bond Y has a coupon of 6% per year, maturity of 5 years, yield to maturity of 6% per year, and a face value of $1000. Bond X has a coupon of 7% per year, maturity of 10 years, yield to maturity of 4% per year, and a face value of $1000.
Refer to Exhibit 19.9. Assume that your investment horizon is 5 years and your portfolio consists only of Bond Y and Bond X. Indicate the proportions invested in each bond, so that the portfolio is immunized.

A)50% in Bond Y and 50% in Bond X
B)76% in Bond Y and 24% in Bond X
C)36% in Bond Y and 64% in Bond X
D)100% in Bond X
E)100% in Bond Y

Question 78

Exhibit 19.10
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are creating a portfolio that consists of the following two bonds. Bond A pays an annual 7% coupon, matures in two years, has a yield to maturity of 8%, and a face value of $1,000. Bond B pays an annual 8% coupon, matures in three years, has a yield to maturity of 9%, and a face value of $1,000.
Refer to Exhibit 19.10. Calculate the price of Bond B.

A)$974.69
B)$990.64
C)$995.22
D)$1,013.88
E)$1,025.77

Question 79

Exhibit 19.6
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The following information is given concerning a substitution swap. You currently hold a 25 year, Aa 10 percent coupon bond priced to yield 12 percent. As a swap candidate you are considering a 25 year, Aa 10 percent coupon bond priced to yield 13 percent. Assume a reinvestment rate of 12 percent, semiannual compounding, and a one-year workout period. $$\begin{array}{l}\text { Current Bond Candidate Bond }\\\begin{array} { l c c } \hline \text { Dollar Investment } & \$ 842.38 & ? \\\text { Coupon } & 100.00 & 100.00 \\\text { i on One Coupon } & 3.0 & 2.75 \\\text { Frincipal Value at Year End } & 843.50 & 780.46 \\\text { Total Accrued } & 946.50 & 883.21 \\\text { Total Gain } & 104.12 & ? \\\text { Gain per Invested Dollar } & ? & ? \\\text { Realized Compound Yield } & ? & ?\end{array}\end{array}$$

-Refer to Exhibit 19.6. The dollar investment in the candidate bond is

A)$1515.36
B)$853.50
C)$780.46
D)$779.13
E)$877.53

Question 80

Exhibit 19.9
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider two bonds, both pay annual interest. Bond Y has a coupon of 6% per year, maturity of 5 years, yield to maturity of 6% per year, and a face value of $1000. Bond X has a coupon of 7% per year, maturity of 10 years, yield to maturity of 4% per year, and a face value of $1000.
Refer to Exhibit 19.9. Calculate the modified duration for Bond Y.

A)7.8
B)4.22
C)4.34
D)7.5
E)9.8