Deck 13: Bond Analysis and Portfolio Management Strategies

Question 1

Bond price volatility varies directly with the term to maturity and directly with the coupon.

Answer 1

False

Question 2

The investment style of a bond portfolio can be summarized by its two most important characteristics: credit quality and interest rate sensitivity.

Answer 2

True

Question 3

The price-yield curve is a concave curve representing the relationship of bond prices and yields.

Answer 3

False

Question 4

For a given change in yield bond price, volatility is inversely related to coupon.

Question 5

Because you expect market interest rates to decline during the next four months, if you were offered two bonds with equal duration, you would select the one with the higher measure of convexity.

Question 6

Modified duration is determined by making small adjustments to the Macaulay duration.

Question 7

The breakeven yield is the same as the implied forward rate.

Question 8

In a buy-and-hold strategy, bonds are purchased in light of the investor's objectives and constraints and then held until maturity.

Question 9

Interest rate anticipation is the most conservative management strategy.

Question 10

In a ladder strategy, funds are invested equally among a wide range of maturities.

Question 11

There is an inverse relationship between duration and coupon.

Question 12

A pure yield pickup swap involves a switch from a low-coupon bond to a higher-coupon bond of similar quality and maturity.

Question 13

Convexity is a measure of how much a bond's price-yield curve deviates from the linear approximation of that curve.

Question 14

In valuation analysis, undervalued bonds are bonds in which the expected YTMs are lower than the prevailing YTM.

Question 15

A bond swap involves liquidating a current bond position and later investing in a similar issue under more favorable conditions.

Question 16

The lower a bond's yield to maturity, the greater its duration.

Question 17

For a given change in yield bond price, volatility is directly related to duration.

Question 18

Indexing is an active portfolio management strategy that seeks to copy the composition and performance of a selected market index.

Question 19

For a given change in yield bond price, volatility is inversely related to term to maturity.

Question 20

The longer the time to maturity, the greater the percentage change in a bond's price.

Question 21

Estimating forward rates from the spot rate curve is based on the assumption that the ____ hypothesis accurately describes the shape of the yield curve.

A) expectations
B) liquidity preference
C) liquidity preference
D) efficient market
E) None of these are correct.

Question 22

If you expected interest rates to rise, you would prefer to own bonds with

A) short maturities and low coupons.
B) long maturities and high coupons.
C) long maturities and low coupons.
D) short maturities and high coupons.
E) None of these are correct.

Question 23

A swap relies heavily on interest rate expectations.

Question 24

When applying active management techniques to a global portfolio, the additional concern is an expectation regarding exchange rates between countries.

Question 25

Altman-Nammacher (1987) created a modified Z-score model using a multiple regression analysis technique.

Question 26

With a matched funding technique, portfolio managers try to match specific liability obligations due at specific times to a portfolio of bonds that minimize the portfolio's interest rate risk.

Question 27

Investment horizon is the future time when an investor must begin an investment program to generate the required funds for a future liability.

Question 28

When applying active management techniques to a global portfolio, the additional concern is an expectation regarding exchange rates between countries.

Question 29

A bond portfolio is immunized from interest rate risk if the modified duration of the portfolio is always equal to the desired investment horizon.

Question 30

If you expected interest rates to fall, you would prefer to own bonds with

A) short maturities and low coupons.
B) long maturities and high coupons.
C) long maturities and low coupons.
D) short maturities and high coupons.
E) None of these are correct.

Question 31

The components of interest rate risk are price risk and maturity risk.

Question 32

A manager following an interest rate anticipation strategy would shorten portfolio duration if interest rates were expected to increase.

Question 33

If you expected interest rates to fall, you would prefer to own bonds with

A) long durations and high convexity.
B) long durations and low convexity.
C) short durations and high convexity.
D) short durations and high convexity.
E) None of these are correct.

Question 34

Interest rate anticipation is one of the matched funding techniques that matches anticipated interest rates with the required rates on a portfolio.

Question 35

Contingent procedures for managing bond portfolios are a form of what has come to be called structured active management.

Question 36

Contingent immunization is a strategy that allows the bond manager flexibility to actively manage the portfolio subject to an overriding constraint that the portfolio remains immunized at some predetermined yield level.

Question 37

An investor in a pure yield pickup swap is most concerned about changes in interest rates.

Question 38

The bond management strategy intended to eliminate interest rate risk is immunization.

Question 39

Credit analysis and core-plus management are examples of active bond portfolio management.

Question 40

A portfolio of bonds is immunized from interest rate risk if the duration of the portfolio is always equal to the desired investment horizon.

Question 41

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A $1000 par value bond with five years to maturity and a 6 percent coupon has a yield to maturity of 8 percent. Interest is paid semiannually.
Refer to Exhibit 13.1. Calculate the Macaulay duration for the bond.

A) 4.19 years
B) 4.36 years
C) 8.72 years
D) 8.38 years
E) 9.52 years

Question 42

Convexity is a desirable feature of bonds because as interest rates decline, the price of a low convexity bond

A) decreases at a decreasing rate.
B) decreases at an increasing rate.
C) increases at a decreasing rate.
D) increases at an increasing rate.
E) decreases at a decreasing rate.

Question 43

All of the following are one of Malkiel's stated relationships between yield changes and bond prices EXCEPT

A) bond prices move inversely to bond yields.
B) longer-maturity bonds experience larger price changes than shorter-maturity bonds.
C) bond price volatility increases at a diminishing rate as term to maturity increases.
D) bond price movements resulting from equal absolute increases or decreases in yield are symmetrical.
E) bond price volatility is inversely related to the coupon rate.

Question 44

The option adjusted duration will approach the duration to maturity, when

A) interest rates are significantly above the coupon rate because the option has very little chance of being called, and the call option will have very little value.
B) interest rates are significantly below the coupon rate because the option has very little chance of being called, and the call option will have very little value.
C) interest rates are significantly above the coupon rate because the option has a high chance of being called, and the call option will have significant value.
D) interest rates are significantly below the coupon rate because the option has a high chance of being called, and the call option will have significant value.
E) None of these are correct.

Question 45

Consider a bond with a duration of 8 years having a yield to maturity of 8 percent, and interest rates are expected to rise by 50 basis points. What is the percentage change in the price of the bond?

A) 3.85 percent
B) 3.45 percent
C) -4.02 percent
D) -3.45 percent
E) -3.85 percent

Question 46

When there are no embedded options, ____ duration can be used to provide an approximation of the interest rate sensitivity of the bond.

A) Macaulay
B) modified
C) effective
D) empirical
E) None of these are correct.

Question 47

Calculate the duration of a 6 percent, $1,000 par bond maturing in three years if the yield to maturity is 10 percent and interest is paid semiannually.

A) 1.35 years
B) 1.78 years
C) 2.50 years
D) 2.78 years
E) 2.95 years

Question 48

Consider a bond with a duration of 6 years having a yield to maturity of 8 percent, and interest rates are expected to rise by 50 basis points. What is the percentage change in the price of the bond?

A) 2.88 percent
B) 3.45 percent
C) -3.89 percent
D) -3.45 percent
E) -2.88 percent

Question 49

Suppose the current seven-year rate is 8 percent and the current six-year rate is 6 percent. What is the one year forward rate for six years?

A) 16.33 percent
B) 18.22 percent
C) 20.82 percent
D) 14.65 percent
E) 15.14 percent

Question 50

Suppose the current six-year rate is 9 percent and the current five-year rate is 7 percent. What is the one year forward rate for five years?

A) 19.57 percent
B) 18.62 percent
C) 15.80 percent
D) 14.65 percent
E) 12.67 percent

Question 51

Calculate the modified duration for a 10-year, 12 percent bond with a yield to maturity of 10 percent and a Macaulay duration of 7.2 years.

A) 6.43 years
B) 6.55 years
C) 6.79 years
D) 6.86 years
E) 7.01 years

Question 52

Consider a bond with a duration of 7 years having a yield to maturity of 7 percent, and interest rates are expected to rise by 50 basis points. What is the percentage change in the price of the bond?

A) 3.62 percent
B) 3.45 percent
C) -3.38 percent
D) 3.38 percent
E) -3.62 percent

Question 53

A graph of a bond's Price-Yield curve reveals all of the following EXCEPT

A) price moves inverse to yield.
B) the bond sells at a premium when the yield is below the coupon rate.
C) the bond sells at a discount when the yield is above the coupon rate.
D) the Price-Yield curve is concave.
E) All of these are correct.

Question 54

Suppose the current six-year spot rate is 8 percent and the current five-year spot rate is 7 percent. What is the one year forward rate in five years?

A) 12.62 percent
B) 11.58 percent
C) 13.14 percent
D) 14.65 percent
E) 15.14 percent

Question 55

Which duration is computed by discounting flows using the yield to maturity of the bond?

A) effective duration
B) Macaulay duration
C) modified duration
D) present value duration
E) cash flow duration

Question 56

A 12-year, 8 percent bond with a YTM of 12 percent has a Macaulay duration of 9.5 years. If interest rates decline by 50 basis points, what will be the percent change in price for this bond?

A) +4.48 percent
B) +4.61 percent
C) +8.48 percent
D) +8.96 percent
E) +17.92 percent

Question 57

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A $1000 par value bond with five years to maturity and a 6 percent coupon has a yield to maturity of 8 percent. Interest is paid semiannually.
Refer to Exhibit 13.1. Calculate the current price of the bond.

A) $1579.46
B) $918.89
C) $789.29
D) $1000
E) $743.29

Question 58

Calculate the Macaulay duration for a five-year, $1,000 par value bond, with a 6 percent coupon and a yield to maturity of 8 percent. Interest is paid annually.

A) 6.44 years
B) 5.25 years
C) 4.44 years
D) 2.50 years
E) 1.25 years

Question 59

The position of a bondholder that is long a callable bond is equal to being

A) long a noncallable bond + long a call option on the bond.
B) long a noncallable bond + short a call option on the bond.
C) short a noncallable bond + long a call option on the bond.
D) short a noncallable bond + short a call option on the bond.
E) None of these are correct.

Question 60

Option adjusted duration can be calculated as

A) duration of noncallable bond - duration of call option on the bond.
B) duration of noncallable bond + duration of call option on the bond.
C) duration of callable bond - duration of call option on the bond.
D) duration of callable bond + duration of call option on the bond.
E) None of these are correct.

Question 61

Assuming no change in interest rates, the duration of a coupon bond

A) stays constant.
B) declines more slowly than the term to maturity.
C) declines more quickly than the term to maturity
D) increases at a slower rate than the term to maturity.
E) changes in line with the term to maturity.

Question 62

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A $1000 par value bond with five years to maturity and a 6 percent coupon has a yield to maturity of 8 percent. Interest is paid semiannually.
Refer to Exhibit 13.1. Calculate the modified duration for the bond.

A) 4.19 years
B) 4.36 years
C) 8.72 years
D) 8.38 years
E) 9.52 years

Question 63

Calculate the modified duration of a bond that has a Macaulay duration of 7.6 and the bond pays interest semi-annually with a coupon rate of 6 percent and a required rate of return of 8 percent.

A) 7.04
B) 7.17
C) 7.31
D) 7.38
E) 8.12

Question 64

Zappo Corporation just issued $1,000 face value bonds that will mature in 20 years and have a 7 percent coupon rate. Interest is paid semi-annually, and the required rate of return is 9 percent for these bonds. The bonds have a five-year call provision that will pay a call premium of $1,050 if they are called in. What is the price of the Zappo Corporation bond?

A) $815.98
B) $817.43
C) $826.35
D) $920.87
E) $953.07

Question 65

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A $1000 par value bond with five years to maturity and a 6 percent coupon has a yield to maturity of 8 percent. Interest is paid semiannually.

-Refer to Exhibit 13.1. Estimate the percentage price change for this five-year, $1,000 par value bond, with a 6 percent coupon, if the yield rises from 8 percent to 8.5 percent. Interest is paid semiannually.

A) 2.1 percent
B) -2.1 percent
C) 4.4 percent
D) -4.4 percent
E) 0 percent

Question 66

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Talmart Corporation bonds have a $1,000 face value and will mature in four years. The bonds have a 7 percent coupon rate. Interest is paid annually, and the required rate of return is 6 percent for these bonds.
Refer to Exhibit 13.2. What is the price of the Talmart corporate bonds?

A) $965.63
B) $966.13
C) $1,034.65
D) $1,135.10
E) $1,051.97

Question 67

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Talmart Corporation bonds have a $1,000 face value and will mature in four years. The bonds have a 7 percent coupon rate. Interest is paid annually, and the required rate of return is 6 percent for these bonds.

-Refer to Exhibit 13.2. If interest rates increase 50 basis points, what will be the approximate price change for the Talmart bond?

A) -17.0 percent
B) -1.7 percent
C) 1.7 percent
D) 1.8 percent
E) 17.0 percent

Question 68

A pure yield pickup swap involves swapping out of a

A) bond to realize capital losses into a comparable bond.
B) low coupon bond into a comparable high coupon bond.
C) high coupon bond into a comparable low coupon bond.
D) bond that is underpriced into a comparable bond that is overpriced.
E) bond that is overpriced into a comparable bond that is underpriced.

Question 69

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A $1000 par value bond with four years to maturity and a 5 percent coupon has a yield to maturity of 6 percent. Interest is paid annually.
Refer to Exhibit 13.3. Calculate the current price of the bond.

A) $964.90
B) $965.35
C) $981.41
D) $1035.45
E) $1035.85

Question 70

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A $1000 par value bond with four years to maturity and a 5 percent coupon has a yield to maturity of 6 percent. Interest is paid annually.
Refer to Exhibit 13.3. Calculate the Macaulay duration for the bond.

A) 3.19 years
B) 3.36 years
C) 3.57 years
D) 3.72 years
E) 3.84 years

Question 71

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Talmart Corporation bonds have a $1,000 face value and will mature in four years. The bonds have a 7 percent coupon rate. Interest is paid annually, and the required rate of return is 6 percent for these bonds.
Refer to Exhibit 13.2. What is the Macaulay duration of the Talmart corporate bonds?

A) 3.43
B) 3.64
C) 3.76
D) 3.85
E) 4.11

Question 72

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A $1000 par value bond with four years to maturity and a 5 percent coupon has a yield to maturity of 6 percent. Interest is paid annually.
Refer to Exhibit 13.3. Calculate the modified duration for the bond.

A) 3.51 years
B) 3.61 years
C) 3.72 years
D) 4.38 years
E) 7.44 years

Question 73

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A $1000 par value bond with four years to maturity and a 5 percent coupon has a yield to maturity of 6 percent. Interest is paid annually.

-Refer to Exhibit 13.3. Estimate the percentage price change for this four-year, $1,000 par value bond, with an annual 5 percent coupon, if the yield falls from 6 percent to 5.5 percent.

A)-3.50 percent
B) -1.75 percent
C) 1.75 percent
D) 3.50 percent
E) 0 percent

Question 74

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Talmart Corporation bonds have a $1,000 face value and will mature in four years. The bonds have a 7 percent coupon rate. Interest is paid annually, and the required rate of return is 6 percent for these bonds.
Refer to Exhibit 13.2. What is the Modified duration of the Talmart corporate bonds?

A) 3.43
B) 3.64
C) 3.76
D) 3.85
E) 4.11

Question 75

An example of an active strategy for bond management would be

A) buy and hold.
B) credit analysis.
C) indexing.
D) classical immunization.
E) horizon matching.

Question 76

For a bond investor selecting a buy-and-hold strategy, which of the following would be the least important consideration?

A) term to maturity
B) indenture provisions
C) coupon levels
D) liquidity
E) quality

Question 77

Two common methods for constructing a bond index are

A) full replication and stratified sampling.
B) partial replication and overall market approach.
C) ETFs and High Yield sampling.
D) multiple discriminant analysis and bond swaps.
E) High Yield sampling and partial replication.

Question 78

Reinvestment risk is greatest for bonds that have

A) short maturities and low coupon rates.
B) long maturities and high coupon rates.
C) short maturities and high coupon rates.
D) long maturities and low coupon rates.
E) None of these are correct.

Question 79

Which of the following would NOT normally be a reason for a bond swap?

A) increasing current yield
B) improving the quality of the portfolio
C) taking advantage of interest rate shifts
D) tax savings
E) realigning the portfolio's duration

Question 80

Investment style for a bond portfolio is best characterized by

A) beta and credit quality.
B) credit quality and duration.
C) interest rate risk and yield to maturity.
D) yield to maturity and beta.
E) beta and duration.