Deck 6: Bonds

Question 1

The value of a bond measured at a duration date will vary with a change in the yield.

Answer 1

False
Explanation: Duration is a measure of the 'pivotal time to maturity' of a bond,or bond portfolio.Assuming the yield curve is flat,and allowing a one-off parallel shift in the yield curve,the value of the bond measured at the duration time will not vary with the shift in the yield curve.

Question 2

Given a bond with a duration measure of 2 and a convexity measure of 3.5,then the approximate percentage change in price predicted from a proportional change in 1 plus the yield of 0.005 (i.e.(1 + y))is 0.991%.

Answer 2

True
Explanation: Using equation 6.12,page 178,the percentage change in bond price ² = -0.00991 or 0.991%.Hence the answer is true.

Question 3

Index-linked bonds are necessarily linked to the Consumer Price Index.

Answer 3

False
Explanation: CPI-linked bonds work by giving protection against inflation to investors by providing a set level of real return.The most common form of these securities is capital-indexed bonds.

Question 4

Calculate the price of a coupon-paying bond maturing in 15 years,where the bond has a face value of $100 000,yield of 7% p.a.and coupon rate of 9% p.a.Assume interest rates are paid half yearly.

Question 5

Suppose a two-year 9% p.a.bond with a face value of $100 000 has a yield of 8% p.a.What is the price of this bond provided it pays semi-annual coupons?

Question 6

What is the purchase price of a bond bought on 1 March 2005,paying semi-annual coupons of 6.0% p.a.and maturing on 15 June 2007? The coupons are paid on 15 June and 15 December each year,and each compounding period has 181 days.The bond has a face value of $100 000 and a yield of 7% p.a.

Question 7

Calculate the price of a coupon-paying bond maturing in two years,where the bond has a face value of $100 000,yield of 6% p.a.and coupon rate of 8% p.a.Assume interest rates are paid half yearly and the last coupon payment has just been made.

Question 8

Calculate the convexity (measured in six-monthly periods)for a coupon-paying bond maturing in two years,where the bond has a face value of $100 000,yield of 5% p.a.and coupon rate of 7% p.a.Assume interest rates are paid half yearly and the last coupon payment has just been made.

Question 9

Bond A has a price of $97 635 and a duration of 1.93.Bond B has a price of $54 696 and has a duration of 3.46.Calculate the duration of a portfolio comprised of one of Bond A and one of Bond B.

Question 10

Duration is a concept that is useful in assessing a bond's credit risk.

Question 11

Duration takes into account the non-linearity in the relationship between bond price and yield.

Question 12

Consider a bond with a current price of $98 320,a duration measure of 2 and a convexity measure of 3.5.The approximate dollar change in price predicted from proportional change in 1 plus the yield (i.e.(1 + y))of 0.005 is more than $1000.

Question 13

The common type of bonds involves varying coupon payments over time.

Question 14

Calculate the price of a coupon-paying bond maturing in two years,where the bond has a face value of $100 000,yield of 7.5% p.a.and coupon rate of 7.5% p.a.Assume interest rates are paid half yearly and the last coupon payment has just been made.

Question 15

When estimating a price change for a bond due to a change in the yield,incorporating convexity does not improve the estimate.

Question 16

For index-linked bonds,which of the following changes in alignment with the CPI?

Question 17

Calculate the duration (measured in six-monthly periods)for a coupon-paying bond maturing in two years,where the bond has a face value of $100 000,yield of 7% p.a.and coupon rate of 9% p.a.Assume interest rates are paid half yearly and the last coupon payment has just been made.

Question 18

Call risk refers to the uncertainty associated with future reinvestment rates.

Question 19

The following statement,"investors must forgo some yield when compared with straight bonds because of the lower risk,and the market should price these accordingly",refers to index-linked bonds.

Question 20

Suppose a 5 year 8% p.a.bond with a yield of 6.5% and principal of $100 000 pays coupon payments semi-annually.What is the present value of this bond?

Question 21

Suppose a two-year 9% p.a.bond with a face value of $100 000 has a yield of 8% p.a.What is the Macaulay duration measure of this bond?

Question 22

The duration of a 5-year zero-coupon bond is ____ years.

A)4.5
B)5
C)5.5
D)3.5

Question 23

Bond A has a price of $94 500 and a duration of 1.96.Bond B has a price of $44 327 and has a duration of 3.78.Calculate the duration of a portfolio comprised of two of Bond A and three of Bond B.

Question 24

Assume a three-year bond has a duration of 4.102 semi-annual compounding periods and a value of $105 991.21.Further,the yield on the bond instantaneously increases from 6.5% to 6.7%.What is the proportional decrease in the bond price?

Question 25

A $500 000 bond has a term to maturity of one year,with half-yearly coupons set at 8% p.a.Calculate the duration of the bond in periods if the yield is 8%.

Question 26

A $100 000 bond has a term to maturity of two years,with half-yearly coupons set at 4% p.a.Calculate the duration of the bond in periods if the yield is 5%.

Question 27

A $100 000 bond has a term to maturity of one year,with half-yearly coupons set at 12% p.a.Calculate the convexity of the bond in periods if the yield is 9%.

Question 28

A $500 000 bond has a term to maturity of one year,with half-yearly coupons set at 8% p.a.Calculate the convexity of the bond in periods if the yield is 8%.

Question 29

______________ is an important characteristic of the relationship between bond prices and yields.

A)Convexity
B)Concavity
C)Complexity
D)Linearity

Question 30

A $50 000 bond has a term to maturity of 20 years with half-yearly coupons set at 7% p.a.Calculate the change in bond price if the yield changes from 8.5% to 8%.

Question 31

What is the Fisher-Weil duration for a $100 000 bond with 24 months to maturity and 12% p.a.coupon? Assume that the four consecutive semi-annual yields are 4% p.a. ,5% p.a. ,7% p.a.and 8% p.a.respectively.

Question 32

A $100 000 bond has a term to maturity of one year,with half-yearly coupons set at 10% p.a.Calculate the duration of the bond in periods if the yield is 9%.

Question 33

Suppose a two-year 9% p.a.bond with a face value of $100 000 has a yield of 8% p.a.Assume the yield on this bond decreases instantaneously from 8% p.a.to 7.75% p.a.What would be the expected increase in the bond price?

Question 34

A $100 000 bond has a term to maturity of six years with half-yearly coupons set at 6% p.a.Calculate the bond price if the yield is 7.5%.

Question 35

What is the price of a $100 000 bond with 24 months to maturity and 12% p.a.coupon? Assume that the four consecutive semi-annual yields are 4% p.a. ,5% p.a. ,7% p.a.and 8% p.a.respectively.

Question 36

Calculate the duration (measured in six-monthly periods)of a bond with a price of $100,two years to maturity,and yield and coupon rates of 5% and 10% p.a.respectively.

Question 37

All other things equal,a bond's duration is _________.

A)higher when the coupon rate is higher
B)lower when the coupon rate is higher
C)the same when the coupon rate is higher
D)indeterminable when the coupon rate is high

Question 38

Assume you currently hold a one-year bond with a face value of $100 000,which has a coupon rate of 8% p.a.If the yield changes from 12% p.a.to 14% p.a. ,what is the change in the duration of the bond?

Question 39

A $100 000 bond has a term to maturity of two years,with half-yearly coupons set at 13% p.a.Calculate the duration of the bond in periods if the yield is 9%.

Question 40

Suppose a two-year 9% p.a.bond with a face value of $100 000 has a yield of 8% p.a.What is the convexity of this bond?

Question 41

You have purchased a guaranteed investment contract (GIC)from an insurance firm that promises to pay you a 5% compound rate of return per year for 6 years.If you pay $10,000 for the GIC today and receive no interest along the way,you will get __________ in 6 years (to the nearest dollar).

A)$12,565
B)$13,000
C)$13,401
D)$13,676