Question 1

Immunization is not a strictly passive strategy because

Accepted Answer

Immunization requires frequent rebalancing as maturities and interest rates change, which means it's not strictly passive. Choice A is incorrect because choosing an asset portfolio that matches an index is not related to immunization. Choice B is partially correct, as there may be a gap between the values of assets and liabilities, but it's not the main reason why immunization is not passive. Choice D is incorrect because durations of assets and liabilities may fall at different rates.

Question 2

A rate anticipation swap is an exchange of bonds undertaken to

Accepted Answer

A rate anticipation swap is used to shift the portfolio duration in response to an anticipated change in interest rates. By exchanging bonds with different durations, the investor can adjust the overall duration of their portfolio, potentially mitigating the impact of changing interest rates on their investments. The other options are not accurate descriptions of a rate anticipation swap.

Question 3

Interest-rate risk is important to

Accepted Answer

Both active and passive bond portfolio managers are exposed to interest-rate risk because changes in interest rates can impact the value of bonds held in their portfolios. Active managers may have more flexibility to adjust their portfolios in response to interest-rate movements, but passive managers are still subject to interest-rate risk due to the fixed nature of their portfolios.

Question 4

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.

Accepted Answer

I is true as bond prices and yields are inversely related. When interest rates rise, bond prices fall and vice versa. 
II is true as long-term bonds have a longer time horizon for coupon payments and repayment of principal, making them more sensitive to changes in interest rates. 
III is false as the coupon rate is fixed and does not change, so it does not affect interest rate risk. 
IV is true as the price sensitivity of a bond is higher when the yield to maturity is lower. When a bond's yield to maturity is already low, a small change in the yield will have a greater impact on the price of the bond.

Question 5

The curvature of the price-yield curve for a given bond is referred to as the bond's

Accepted Answer

The curvature of the price-yield curve is referred to as the bond's convexity. Option A, modified duration, is a measure of a bond's sensitivity to changes in interest rates. Option B, immunization, is a strategy used to minimize the impact of interest rate changes on a portfolio of bonds. Option C, sensitivity, is a general term that can refer to various measures of a bond's responsiveness to changes in market conditions. Option E, tangency, refers to the point at which the price-yield curve touches the efficient frontier of possible portfolios.

Question 6

An analyst who selects a particular holding period and predicts the yield curve at the end of that holding period is engaging in

Accepted Answer

This type of analysis is known as horizon analysis, where an analyst selects a holding period and attempts to predict the yield curve at the end of that holding period. This is a common approach used in bond portfolio management to evaluate potential returns over a specific period. Rate anticipation swap involves exchanging fixed and floating rate payments, immunization is a risk management technique, and intermarket spread swap involves trading different types of bonds in different markets.

Question 7

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

Accepted Answer

The answer of Which of the following researchers have contributed...

Question 8

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

Accepted Answer

Higher coupon rates lead to shorter durations, duration differences can be significant for long-term bonds with different coupons, and zero-coupon bonds have durations equal to their maturity.

Question 9

Which of the following offers a bond index?

Accepted Answer

All the mentioned institutions, Merrill Lynch, Salomon, and Barclays Capital, offer bond indices.

Question 10

Cash flow matching on a multiperiod basis is referred to as

Accepted Answer

Cash flow matching on a multiperiod basis is referred to as dedication. Immunization refers to matching durations to offset interest rate risk, while contingent immunization introduces market timing considerations. Duration matching is a specific type of immunization strategy. Rebalancing involves buying and selling assets to maintain a desired asset allocation.

Question 11

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 false about the durations of these bonds?

Accepted Answer

The answer of Two bonds are selling at par value...

Question 12

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?

Accepted Answer

Duration measures the sensitivity of a bond's price to changes in interest rates, typically indicating how long it takes for a bond to pay back its true cost. A bond with a higher coupon rate will pay back its cost more quickly due to the higher interest payments. Therefore, the bond with the lower coupon rate (6% in this case) will have a higher duration because it pays back its cost more slowly compared to the bond with the higher coupon rate (13%).

Question 13

Immunization through duration matching of assets and liabilities may be ineffective or inappropriate because

Accepted Answer

Conventional duration strategies assume a flat yield curve and only protect against parallel shifts, not changes in the shape of the yield curve. Additionally, immunization does not account for inflation adjustments, only protecting the nominal value of liabilities.

Question 14

According to the duration concept

Accepted Answer

According to the duration concept, the coupon payments made prior to maturity make the effective maturity of the bond less than its actual time to maturity. This is because these payments reduce the investor's exposure to interest rate risk and therefore the effective maturity is shorter than the actual time to maturity.

Question 15

Which of the following are false 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.

Accepted Answer

Interest-rate risk is inversely related to the bond's coupon rate, not directly related as stated in option III. The other options are true statements.

Question 16

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.

Accepted Answer

Duration is an important measure in bond portfolio management because it can be used in immunization strategies, provides a gauge of the effective average maturity of the portfolio, and is related to the interest rate sensitivity of the portfolio. However, duration is not a good predictor of interest rate changes, so statement IV is false. Therefore, the best choice is D, which includes the correct statements about duration's importance in bond portfolio management.

Question 17

If a bond portfolio manager believes

Accepted Answer

A bond portfolio manager who believes in market efficiency and can accurately predict interest rate changes is likely to be an active portfolio manager.

Question 18

A substitution swap is an exchange of bonds undertaken to

Accepted Answer

A substitution swap is a type of trading strategy that seeks to profit from the mispricing between two bonds. By swapping one bond for another, the goal is to take advantage of any perceived market inefficiencies or discrepancies in pricing. Therefore, choice D is the best option. The other choices do not accurately describe the purpose of a substitution swap.

Question 19

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?

Accepted Answer

The duration-with-convexity rule can be used to estimate price changes that take into account both duration and convexity. The formula is:

% price change = -duration x % change in yield + 0.5 x convexity x (% change in yield)^2

Substituting the given values, we get:

% price change = -10.6 x (-2%) + 0.5 x 210 x (-2%)^2
% price change = 21.2% - 0.84%
% price change = 20.36%
Therefore, the percentage price change according to the duration-with-convexity rule is 20.36%, which is closest to choice (B) 25.4%.

Question 20

Some of the problems with immunization are

Accepted Answer

A and B are problems associated with duration, which is a measure used in immunization, and C is a limitation of the immunization strategy itself. Therefore, the correct answer is E, which includes all three options. D is not a problem with immunization or duration.

Quiz 16: Managing Bond Portfolios