Deck 19: Managing the Fixed Income Portfolio

Question 1

Bond investors are least concerned with _____ risk.

A) default
B) interest rate
C) reinvestment rate
D) market

Answer 1

market

Question 2

A basis point is

A) .001%
B) .01%
C) .1%
D) 1.0%

Answer 2

.01%

Question 3

Standard and Poor's rates firms on _____ risk.

A) default
B) interest rate
C) reinvestment rate
D) market

Answer 3

default

Question 4

Bond prices move _____with yields.

A) inversely
B) directly
C) exponentially
D) randomly

Question 5

Which of the following statements is most accurate?

A) Short-term bonds are more volatile than intermediate term bonds.
B) Short-term bonds are more volatile than long-term bonds.
C) Short-term bonds are less volatile than long-term bonds.
D) Short-term bonds have no interest rate risk.

Question 6

Which of the following bonds would be least volatile?

A) 9% coupon, 10 year term
B) 7% coupon, 15 year term
C) 10% coupon, 5 year term
D) 8% coupon, 6 year term

Question 7

A set of theorems describing bond-pricing behavior is associated with

A) Fama
B) Malkiel
C) Ross
D) Miller

Question 8

"As perhaps their primary responsibility, fixed-income managers control the _____ of their portfolios."

A) default risk
B) reinvestment rate risk
C) durations
D) call features

Question 9

Duration is a direct measure of _____risk.

A) default
B) interest rate
C) reinvestment
D) convexity

Question 10

A bond has Macaulay duration of 7.5. Which of the following is the best estimate of its modified duration?

A) 7.4
B) 7.7
C) 8.0
D) 9.5

Question 11

An 8% bond sells for par and has a modified duration of 11.0. If market interest rates rise by 50 basis points, the new price of the bond will be about

A) 92.5%
B) 94.5%
C) 100.0%
D) 105.0%

Question 12

An 8.5% bond sells for 90% of par and has a modified duration of 11.0. If market interest rates fall by 30 basis points, the new price of the bond will be about

A) 93%
B) 95%
C) 100.0%
D) 105.0%

Question 13

_____ duration is especially useful with a callable security like a mortgage.

A) Modified
B) Macaulay
C) Effective
D) Partial

Question 14

Dollar duration is the product of

A) modified duration and bond price
B) Macaulay duration and coupon rate
C) modified duration and bond discount
D) Macaulay duration and bond discount

Question 15

A concept related to dollar duration is

A) yield to call
B) price value of a basis point
C) protective covenants
D) option adjusted spread

Question 16

Duration _____as yield to maturity _____ .

A) rises, rises
B) rises, declines
C) declines, declines
D) declines, becomes instable

Question 17

Convexity measures

A) bond price changes for small changes in yield.
B) the impact of changes in default risk.
C) the inaccuracy of duration.
D) the effects of changes in bond coupon.

Question 18

In general, a bond investor

A) wants high convexity.
B) wants high duration.
C) wants high duration but low convexity.
D) wants a low coupon and low convexity.

Question 19

A bond portfolio with an even distribution of funds across maturities is a _____ portfolio.

A) barbell
B) duration matched
C) constant duration
D) laddered

Question 20

A barbell strategy

A) invests exactly twice as much in long maturities as in middle maturities
B) invests exactly twice as much in middle maturities as in long maturities.
C) contains no bonds with maturities from six to 20 years.
D) none of the above.

Question 21

Duration as a pure measure of interest rate risk only works for

A) parallel shifts in the yield curve.
B) small increases in interest rates.
C) small decreases in interest rates.
D) a steepening of the yield curve.

Question 22

Bank immunization is concerned with

A) credit risk.
B) asset-liability management.
C) investment management.
D) convexity risk.

Question 23

_____is a special case of bullet immunization.

A) Duration matching
B) Cash matching
C) Horizon shifting
D) Establishing a sinking fund

Question 24

During a period of rising interest rates, the _____ portfolio will perform better than the _____ portfolio.

A) laddered bond; barbell bond
B) barbell bond; laddered bond
C) long-term bond; short-term bond
D) zero-coupon bond; coupon bond

Question 25

The Macaulay duration for a $1000 three-year zero-coupon bond priced to yield 8% yield to maturity is:

A) 2.67
B) 2.87
C) 3.00
D) 3.20

Question 26

Malkiel's theorems are associated with

A) duration measurement
B) bond pricing
C) bond portfolio rebalancing
D) yield curve applications

Question 27

Credit risk is also known as

A) Interest rate risk
B) Reinvestment rate risk
C) Default risk
D) Speculative risk

Question 28

A basis point is 0.1%.

Question 29

Bond prices move inversely with bond yields.

Question 30

Everything else being equal, high coupon bonds have more interest rate risk than low coupon bonds.

Question 31

To calculate Macaulay duration, you need to know the current bond price.

Question 32

With a callable bond, you should not think of duration as a measure of time.

Question 33

If interest rates are positive, modified duration will always exceed Macaulay duration.

Question 34

If a bond, selling for 98, has a modified duration of 10.0 and interest rates fall by 50 basis points, the new bond price will be about 102.9.

Question 35

Modified duration is actually negative, but in practice the minus sign is often dropped.

Question 36

The bond price/bond yield to maturity relationship is linear.

Question 37

Duration declines as yield to maturity rises.

Question 38

Convexity is a measure of the inaccuracy of duration.

Question 39

The two classic passive bond management strategies are laddered portfolios and indexing.

Question 40

With a laddered portfolio, each year the portfolio manager must buy long-term bonds.

Question 41

A barbell portfolio is heavily weighted in the middle maturities.

Question 42

Duration as a pure measure of interest rate risk only works for parallel shifts in the yield curve.

Question 43

Duration matching is the simplest form of a structured portfolio.

Question 44

In bank immunization, the key is to get the duration of the bank's assets equal to the duration of the bank's liabilities.

Question 45

In a duration-matched portfolio, the present value of the assets must exceed the present value of the associated liabilities.

Question 46

In an immunized portfolio, the effects of interest rate risk and default risk largely cancel.

Question 47

The most common type of profitable bond swap is a substitution swap.

Question 48

Active bond portfolio strategies always earn higher rates of return.

Question 49

Reinvestment risk is present in U.S. Treasury coupon bonds.

Question 50

A bullet immunized bond portfolio locks in the expected rate of return.

Question 51

U.S. Treasury bonds are risk free securities.

Question 52

The Macaulay duration of a zero-coupon bond equals the maturity of the bond.

Question 53

The major problem with duration measurement is that it is constant for all interest rates.