Deck 14: Financial Statement Analysis

Question 1

The duration of a bond is a function of the bond's

A) coupon rate.
B) yield to maturity.
C) time to maturity.
D) all of these.
E) none of these.

Answer 1

D

Question 2

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.
E) none of these.

Answer 2

A

Question 3

The duration of a par value bond with a coupon rate of 8% 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.
E) none of these.

Answer 3

D

Question 4

Active bond portfolio management strategies include all of the following except

A) substitution swap.
B) rate anticipation swap.
C) intermarket spread.
D) immunization.
E) none of these.

Question 5

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.
E) None of these.

Question 6

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) a and b.
E) b and c.

Question 7

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 8

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 these.

Question 9

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 10

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 these.

Question 11

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 these.
E) none of these.

Question 12

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

A) The duration of 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 15% yield perpetuity that pays $200 annually.
D) the duration of a perpetuity cannot be calculated.
E) None of these.

Question 13

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 these.

Question 14

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-to-maturity and a 10% coupon rate.
2)A zero-coupon bond,Y,with a 5-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 these

Question 15

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 these is correct.

Question 16

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 these.

Question 17

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

A) 7 years.
B) 5.49 years.
C) 5.03 years.
D) 4.87 years.
E) none of these.

Question 18

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 decreases by 1% the bond's price will increase by $60.
E) None of these.

Question 19

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 these.

Question 20

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) a and b above.
E) a,b,and c above.

Question 21

According to experts,most pension funds are underfunded because

A) their liabilities are of shorter duration than their assets.
B) their assets are of shorter duration than their liabilities.
C) they continually adjust the duration of their liabilities.
D) they continually adjust the duration of their assets.
E) they are too heavily invested in stocks.

Question 22

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 23

Which one of the following is a correct statement concerning duration?

A) The higher the yield to maturity,the greater the duration
B) The higher the coupon,the shorter the duration.
C) The difference in duration can be large between two bonds with different coupons each maturing in more than 15 years.
D) The duration is the same as term to maturity only in the case of zero-coupon bonds.
E) The higher the coupon,the shorter the duration;the difference in duration can be large between two bonds with different coupons each maturing in more than 15 years;and the duration is the same as term to maturity only in the case of zero-coupon bonds

Question 24

Contingent immunization

A) is a mixed-active passive bond portfolio management strategy.
B) is a strategy whereby the portfolio may or may not be immunized.
C) is a strategy whereby if and when some trigger point value of the portfolio is reached,the portfolio is immunized to insure an minimum required return.
D) a and b.
E) a,b,and c.

Question 25

Calculate the duration of a ten-year level annuity with annual yield of 9%.

A) 9.00 years
B) 10.00 years
C) 12.11 years
D) 4.87 years.
E) 4.79 years.

Question 26

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 recoup one's investment,assuming the bond was purchased for $1,000.
D) a and c.
E) b and c.

Question 27

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) a and b.
E) a and c.

Question 28

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 these.

Question 29

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 these

Question 30

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 these are true.
E) none of these are true.

Question 31

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 these.
E) none of these.

Question 32

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) 15-year maturity with a 0% coupon.
D) 10-year maturity with a 15% coupon.
E) 12-year maturity with a 12% coupon.

Question 33

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) a,b,and c.

Question 34

An 8%,15-year bond has a yield to maturity of 10% and a 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) 1.85%
B) 2.01%
C) 3.27%
D) 6.44%
E) none of these

Question 35

If a bond portfolio manager believes

A) in market efficiency,he or she is likely to be a passive portfolio manager.
B) that he or she can accurately predict interest rate changes,he or she is likely to be an active portfolio manager.
C) that he or she can identify bond market anomalies,he or she is likely to be a passive portfolio manager.
D) a and b.
E) a,b,and c.

Question 36

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 these.

Question 37

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.
E) none of these.

Question 38

You have an obligation to pay $1,488 in four years and 2 months.In which bond would you invest your $1,000 to accumulate this amount,with relative certainty,even if the yield on the bond declines to 9.5% immediately after you purchase the bond?

A) a 6-year;10% coupon par value bond
B) a 5-year;10% coupon par value bond
C) a 5-year;zero-coupon bond
D) a 4-year;10% coupon par value bond
E) none of these

Question 39

Which one of the following is an incorrect statement concerning duration?

A) The higher the yield to maturity,the greater the duration
B) The higher the coupon,the shorter the duration.
C) The difference in duration is small between two bonds with different coupons each maturing in more than 15 years.
D) The duration is the same as term to maturity only in the case of zero-coupon bonds.
E) All of the statements are correct.

Question 40

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 these are true.
E) both a and b are true.

Question 41

Duration is important in bond portfolio management because
I)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 42

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) both a and c are true.
E) all of these are true.

Question 43

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 44

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.
E) None of these is true.

Question 45

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) discount rates don't matter.

Question 46

Which of the following offers a bond index?

A) Merrill Lynch
B) Salomon Smith Barney
C) Scotia Capital
D) All of these
E) All but Merrill Lynch

Question 47

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 most 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 will equal the duration of the lower-coupon bond;and there is no consistent statement that can be made about the durations of the bonds

Question 48

The process of unbundling and repackaging the cash flows from one or more bonds into new securities is called

A) speculation.
B) immunization.
C) reverse hedging.
D) interest rate arbitrage.
E) financial engineering.

Question 49

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 50

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 directly related to 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 51

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 these is correct.

Question 52

Cash flow matching on a multiperiod basis is referred to as a

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

Question 53

Which of the following researchers have contributed significantly to bond portfolio management theory?
I)Sidney Homer
II)Harry Markowitz
III)Burton Malkiel
IV)Martin Liebowitz
V)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 54

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 55

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 these.

Question 56

A contract between two parties to exchange a series of cash flows similar to those resulting from an exchange of different types of bonds is called a(n)

A) interest rate swap.
B) yield curve swap.
C) credit spread.
D) notional spread.
E) none of these.

Question 57

Consider a bond selling at par with modified duration of 12 years and convexity of 265.A 1 percent 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%
E) None of these is correct.

Question 58

Consider a bond selling at par with modified duration of 10.6 years and convexity of 210.A 2 percent 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%
E) none of these.

Question 59

An active investment strategy

A) implies that market prices are fairly set.
B) attempts to achieve returns greater than those commensurate with the risk borne.
C) attempts to achieve the proper return that is commensurate with the risk borne.
D) requires portfolio managers,while a passive investment strategy does not.
E) occurs when bond portfolio managers are hyperactive.

Question 60

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 61

Discuss rate anticipation swaps as a bond portfolio management strategy.

Question 62

You manage a portfolio for Ms.Angel Foodcake,who has instructed you to be sure her portfolio has a value of at least $350,000 at the end of six years.The current value of Ms.Foodcake's portfolio is $250,000.You can invest the money at a current interest rate of 8%.You have decided to use a contingent immunization strategy.
• What amount would need to be invested today to achieve the goal,given the current interest rate?
• Suppose that four years have passed and the interest rate is 9%.What is the trigger point for Angel's portfolio at this time? (That is,how low can the value of the portfolio be before you will be forced to immunize to be assured of achieving the minimum acceptable return?)
• Illustrate the situation graphically.
• If the portfolio's value after 4 years is $291,437 what should you do?

Question 63

Discuss contingent immunization.Is this form of bond portfolio management strategy an active,passive,or combination of both,strategy?

Question 64

Discuss duration.Include in your discussion what duration measures,how duration relates to maturity,what variables affect duration,and how duration is used as a portfolio management tool (include some of the problems associated with the use of duration as a portfolio management tool).