Question 1

The following information relates to Problems 
an investor purchases a nine-year, 7% annual coupon payment bond at a price equal to par value. after the bond is purchased and before the first coupon is received, interest rates increase to 8%. The investor sells the bond after five years. assume that interest rates remain unchanged at 8% over the five-year holding period.
-Per 100 of par value, the future value of the reinvested coupon payments at the end of the holding period is closest to:

Accepted Answer

A)   35.00.
B)   40.26.
C)   41.07. C

Question 2

assuming no change in the credit risk of a bond, the presence of an embedded put option:

Accepted Answer

A)   reduces the effective duration of the bond.
B)   increases the effective duration of the bond.
C)   does not change the effective duration of the bond. A

Question 3

an investor purchases an annual coupon bond with a 6% coupon rate and exactly 20 years remaining until maturity at a price equal to par value. The investor's investment horizon is Eight years. The approximate modified duration of the bond is 11.470 years. The duration Gap at the time of purchase is closest to:

Accepted Answer

A)   −7.842.
B)   3.470.
C)   4.158. C

Question 4

Which of the following is most appropriate for measuring a bond's sensitivity to shaping risk?

Accepted Answer

A)   key rate duration
B)   effective duration
C)   modified duration

Question 5

The "second-order" effect on a bond's percentage price change given a change in yield-to-maturity can be best described as:

Accepted Answer

A)   duration.
B)   convexity.
C)   yield volatility.

Question 6

an investor buys a 6% annual payment bond with three years to maturity. The bond has a yield-to-maturity of 8% and is currently priced at 94.845806 per 100 of par. The bond's Macaulay duration is closest to:

Accepted Answer

A)   2.62.
B)   2.78.
C)   2.83.

Question 7

a "buy-and-hold" investor purchases a fixed-rate bond at a discount and holds the securi- ty until it matures. Which of the following sources of return is least likely to contribute to The investor's total return over the investment horizon, assuming all payments are made as Scheduled?

Accepted Answer

A)   Capital gain
B)   Principal payment
C)   reinvestment of coupon payments

Question 8

an investor buys a three-year bond with a 5% coupon rate paid annually. The bond, with a yield-to-maturity of 3%, is purchased at a price of 105.657223 per 100 of par value. Assuming a 5-basis point change in yield-to-maturity, the bond's approximate modified Duration is closest to:

Accepted Answer

A)   2.78.
B)   2.86.
C)   5.56.

Question 9

an investor purchases a bond at a price above par value. two years later, the investor sells the bond. The resulting capital gain or loss is measured by comparing the price at which
The bond is sold to the:

Accepted Answer

A)   carrying value.
B)   original purchase price.
C)   original purchase price value plus the amortized amount of the premium.

Question 10

a bond portfolio consists of the following three fixed-rate bonds. assume annual coupon payments and no accrued interest on the bonds. Prices are per 100 of par value. $$\begin{array} { l r c c c c r } 
\text { Bond } & \text { Maturity } & \begin{array} { c } 
\text { Market } \
\text { Value }
\end{array} & \text { Price } & \text { Coupon } & \begin{array} { c } 
\text { Yield-to- } \
\text { Maturity }
\end{array} & \begin{array} { r } 
\text { Modified } \
\text { Duration }
\end{array} \
\hline \text { A } & \text { 6 years } & 170,000 & 85.0000 & 2.00 \% & 4.95 \% & 5.42 \
\text { B } & 10 \text { years } & 120,000 & 80.0000 & 2.40 \% & 4.99 \% & 8.44 \
\text { C } & 15 \text { years } & 100,000 & 100.0000 & 5.00 \% & 5.00 \% & 10.38 \
\hline
\end{array}$$ The bond portfolio's modified duration is closest to:

Accepted Answer

A)   7.62.
B)   8.08.
C)   8.20.

Question 11

a bond has an annual modified duration of 7.140 and annual convexity of 66.200. The bond's yield-to-maturity is expected to increase by 50 basis points. The expected percent-Age price change is closest to:

Accepted Answer

A)   −3.40%.
B)   −3.49%.
C)   −3.57%

Question 12

a bond with exactly nine years remaining until maturity offers a 3% coupon rate with annual coupons. The bond, with a yield-to-maturity of 5%, is priced at 85.784357 per 100 of par value. The estimated price value of a basis point for the bond is closest to:

Accepted Answer

A)   0.0086.
B)   0.0648.
C)   0.1295.

Question 13

Which of the following statements about duration is correct? a bond's:

Accepted Answer

A)   effective duration is a measure of yield duration.
B)   modified duration is a measure of curve duration.
C)   modified duration cannot be larger than its Macaulay duration (assuming a positive yield-to-maturity) .

Question 14

When the investor's investment horizon is less than the Macaulay duration of the bond she owns:

Accepted Answer

A)   the investor is hedged against interest rate risk.
B)   reinvestment risk dominates, and the investor is at risk of lower rates.
C)   market price risk dominates, and the investor is at risk of higher rates.

Question 15

The holding period for a bond at which the coupon reinvestment risk offsets the market price risk is best approximated by:

Accepted Answer

A)   duration gap.
B)   modified duration.
C)   Macaulay duration.

Question 16

a limitation of calculating a bond portfolio's duration as the weighted average of the yield durations of the individual bonds that compose the portfolio is that it:

Accepted Answer

A)   assumes a parallel shift to the yield curve.
B)   is less accurate when the yield curve is less steeply sloped.
C)   is not applicable to portfolios that have bonds with embedded options.

Question 17

a manufacturing company receives a ratings upgrade and the price increases on its fixed- rate bond. The price increase was most likely caused by a(n):

Accepted Answer

A)   decrease in the bond's credit spread.
B)   increase in the bond's liquidity spread.
C)   increase of the bond's underlying benchmark rate.

Question 18

Which of the following sources of return is most likely exposed to interest rate risk for an investor of a fixed-rate bond who holds the bond until maturity?

Accepted Answer

A)   Capital gain or loss
B)   redemption of principal
C)   reinvestment of coupon payments

Question 19

The following information relates to Problems 
an investor purchases a nine-year, 7% annual coupon payment bond at a price equal to par value. after the bond is purchased and before the first coupon is received, interest rates increase to 8%. The investor sells the bond after five years. assume that interest rates remain unchanged at 8% over the five-year holding period.
-assuming that all coupons are reinvested over the holding period, the investor's five-year horizon yield is closest to:

Accepted Answer

A)   5.66%.
B)   6.62%.
C)   7.12%.

Question 20

a bond is currently trading for 98.722 per 100 of par value. if the bond's yield-to-matu- rity (YtM) rises by 10 basis points, the bond's full price is expected to fall to 98.669. if The bond's YtM decreases by 10 basis points, the bond's full price is expected to increase To 98.782. The bond's approximate convexity is closest to:

Accepted Answer

A)   0.071.
B)   70.906.
C)   1,144.628.

Exam 5: Understanding Fixed Income Risk and Return