Deck 18: Managing Bond Portfolios: Some Issues Affect All Investors

Question 1

We can think of duration as the slope of a line that is tangent to the convex:

A) price-yield curve at the expected future price and expected yield of the bond.
B) price-yield curve at the current price and expected yield of the bond.
C) price-yield curve at the current price of the bond.
D) price-yield curve at the current price and yield of the bond.

Answer 1

D

Question 2

Active bond management strategies include:

A) Forecasting changes in interest rates, identifying abnormal yield spreads between bond sectors, and identifying relative mispricing between fixed income securities.
B) Passive bond index investing.
C) Buy-and-hold bond investing.
D) Ladder investing.

Answer 2

A

Question 3

Bond investors can avoid the risk that interest rates will rise and incur capital losses by:

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

Answer 3

D

Question 4

The introduction of the Euro is expected to:

A) increase the transactions cost of trading foreign bonds.
B) decrease the transactions cost of trading foreign bonds.
C) have no effect on the transactions cost of trading foreign bonds.
D) have a minimal effect on the transactions cost of trading foreign bonds.

Question 5

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

A) 3 years.
B) 5 years.
C) 10 years.
D) 15 years.

Question 6

Yield spreads tend to____ during recessions and ________ during times of economic prosperity.

A) narrow . . . widen
B) widen . . . narrow
C) stay constant . . . widen
D) widen . . . stay constant

Question 7

Which of the following statements concerning yield spreads is not true?

A) Yield spreads may be positive or negative.
B) Yield spreads are often calculated by changing the maturity of the different bonds.
C) Yield spreads are influenced by the level of interest rates in the market.
D) Yield spreads can change over time.

Question 8

The term structure of interest rates is also known as the:

A) yield to maturity.
B) probability distribution.
C) yield differential.
D) yield curve.

Question 9

Under the expectations theory, investors expecting interest rates to rise will:
A) invest more now in long term bonds rather than in short term bonds.

A) invest more now in short term bonds rather than in long term bonds.
B) invest more now in Treasury bonds rather than in corporate bonds.
C) invest more now in corporate bonds rather than in Treasury bonds.

Question 10

Investors would expect a higher yield on a smaller, regional corporate bond than on a large, national corporate bond mainly due to:

A) differences in coupon rates.
B) differences in quality.
C) differences in tax treatments.
D) differences in marketability.

Question 11

One form of interest rate forecasting is:

A) horizon analysis, which requires projections of bond performance over a planned investment period.
B) yield-to-maturity analysis, which requires expectations about reinvestment rates and future market rates to be calculated in expected returns.
C) yield curve analysis, which requires comparisons of different yield curves at different times to maturity.
D) bond immunization analysis, which requires the use of barbells to protect against interest rate risk.

Question 12

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

A) economic growth
B) business cycles
C) inflation
D) Federal Reserve actions

Question 13

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

A) shorter maturities should return more than longer maturities, in general
B) Treasury bonds should return more than corporate bonds of the same maturity
C) longer maturities should return more than shorter maturities, in general
D) lower-rated issues should return less than higher rated issues at maturity.

Question 14

During periods of economic expansion, the spread between corporate bonds and U.S. Treasury generally:

A) widens.
B) narrows.
C) stays the same.
D) is always negative.

Question 15

Since the 1930s, the yield curve has most often been:

A) upward sloping yield curve.
B) downward sloping yield curve.
C) flat yield curve.
D) skewed yield curve.

Question 16

Under a laddering approach, investors can mitigate the effects of an increase in interest rates by:

A) purchasing bonds with the same maturity dates and selling short bonds with other maturity dates.
B) purchasing bonds with the same maturity date but different coupon rates.
C) purchasing bonds with different maturity dates.
D) purchasing bonds with different yield to maturity.

Question 17

Floating rate bonds often have yields tied to:

A) London Interbank Offered Rate (LIBOR) plus some percentage yield amount.
B) London Interbank Offered Rate (LIBOR).
C) European Central Bank (ECB) borrowing rate.
D) Federal Funds overnight lending rate.

Question 18

Yield spreads between corporates and Treasuries will not widen as a result of:

A) accounting scandals, such as those involving WorldCom, Enron, and Tyco in 2002.
B) changes in maturity.
C) financial crisis, such as occurred in 2008.
D) litigation, such as that involving Halliburton and other companies with asbestos exposure.

Question 19

The yield curve is normally plotted using Treasury securities because:

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 20

Which of the following is NOT true regarding bond maturities?

A) Short maturities sacrifice price appreciation opportunities.
B) Longer maturities have greater price fluctuations.
C) Short maturities serve to protect the investor when rates are rising.
D) Long term interest rates are more volatile than short term interest rates.

Question 21

Which of the following statements regarding duration is INCORRECT?

A) Yield to Maturity is inversely related to duration, holding coupon and maturity constant.
B) Coupon is inversely related to duration, holding maturity and YTM constant.
C) For all coupon-paying bonds, duration equals time to maturity.
D) Duration expands with time to maturity at a decreasing rate, holding coupon and YTM constant.

Question 22

Which of the following statements regarding classical immunization is false?

A) It is 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 23

A portfolio is said to be immunized if:

A) the present value of the cashflows equals the principal.
B) the duration of the portfolio is equal to the term.
C) the present value of the cashflows is greater than the principal.
D) the duration of the portfolio is equal to the investment horizon.

Question 24

If interest rates rise, reinvestment rates rise, whereas bond prices decline.

Question 25

Which of the following European countries experienced a debt crisis in recent years?

A) Germany.
B) Great Britain.
C) Greece.
D) France.

Question 26

Immunization is a strategy in which bond investors:

A) buy only high-quality bonds.
B) attempt to avoid default risk.
C) attempt to avoid call and convertible risk.
D) attempt to avoid reinvestment and price risk.

Question 27

Consider Example 18-11 and Table 18-1. What happens to the duration if the coupon rate was 6%, rather than the 5% shown? a No change - duration is based time to maturity
B The duration increases to 4.57, as the YTM increases
C The duration decreases to 4.38, as more payments come earlier
D The YTM is set by the market, so it will not change.

Question 28

Which of the following terms describes a change in investors' preferences away from risky assets towards safer bonds?

A) immunization
B) flight to safety
C) laddering
D) Convexity

Question 29

A bond strategy attempting to immunize the portfolio from interest rate risk is based on the concept of:

A) buy and hold.
B) horizon.
C) duration.
D) indexing.

Question 30

A weaker dollar increases the value of dollar-denominated assets to foreign investors.

Question 31

A major advantage of bond index funds is their:

A) higher performance than regular bond funds.
B) ability to shelter income from taxes.
C) relatively low expense ratios.
D) all of the above are true.

Question 32

A bond investor has $100,000 to invest and has determined 10 years is his maximum term. He puts $10,000 in one-year bonds, $10,000 in two-year bonds, $10,000 in three-year bonds, etc. all the way to $10,000 in ten-year bonds. This is an example of:

A) bond equality
B) bond laddering
C) bond blending
D) bond term management

Question 33

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

Question 34

Consider Example 18-11 and Table 18-1. Let's say the price is $950.00 rather $974.17 (so the YTM goes to 6.1% from 5.6%). What happens to duration?

A) It increases substantially.
B) It increases only a little amount.
C) It decreases substantially.
D) It decreases only a little amount

Question 35

Which of the following is not a passive bond strategy?

A) an immunization strategy
B) a bond swap strategy
C) a buy and hold strategy
D) an indexing strategy

Question 36

One form of interest rate forecasting has the investor evaluating bonds being considered for purchase over a selected holding period in order to determine which will perform the best and is known as:

A) holding-period analysis.
B) time-series analysis.
C) horizon analysis.
D) duration planning.

Question 37

Interest rate risk is composed of:

A) market risk and default risk.
B) price risk and credit risk.
C) price risk and reinvestment risk.
D) default risk and money risk.

Question 38

James wants to invest in bonds and has a 10 year investment horizon. To immunize his portfolio, he must buy bonds with durations of ________ 10 years. These bonds will have maturities ________ 10 years.

A) greater than; less than
B) equal to; less than
C) less than; equal to
D) equal to; greater than

Question 39

An increase in expected inflation tends to decrease bond prices and bond yields.

Question 40

An example of simultaneous buying of one bond (for example, with fixed rate coupon payments) and selling of another (for example, with variable rate interest payments) occurs when one participates in a:

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

Question 41

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

Question 42

What are the advantages and disadvantages of index funds for an individual bond investor?

Question 43

What are two passive management strategies? Two active strategies?

Question 44

Yield spreads were at their widest during the Great Depression.

Question 45

Immunization is intended to protect a portfolio against interest rate risk. What should be done? How does it work?

Question 46

A commercial bank that always invested in short-term bonds in order to meet deposit withdrawals is a good example of the liquidity preference theory.

Question 47

A client tells you that he strongly believes that interest rates in general will fall abruptly over the next six months. He asks you to recommend bonds for a portfolio to provide capital gains on the interest rate move. Generally, what would you suggest? What if he expected rates to rise?

Question 48

An investor desiring a bond investment that changes as little as possible as interest rates change should seek a bond with long duration rather than a strip.

Question 49

Why is immunization considered to be a hybrid strategy?

Question 50

What are the two components of interest-rate risk? How do they work to immunize a portfolio?

Question 51

Convexity is used to correct the approximate percentage change in bond value, calculated using modified duration.

Question 52

The size of yield spreads tends to remain constant over time.

Question 53

One of the most cost-effective methods of passive bond investing is buying into a bond ETF.

Question 54

The term structure of interest rates consists of a set of forward rates and a current known rate.

Question 55

A noncallable bond would be expected to have a higher yield to maturity than a comparable callable bond.

Question 56

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.

Question 57

Under the ladder approach, bond investors purchase bonds with different maturities in order to gain some protection from default risk.

Question 58

For a zero coupon bond, duration is the same as time to maturity.

Question 59

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