Deck 22: Bond Portfolio Management

Question 1

Evidence on the efficiency of the bond market is consistent with the idea that it is highly, but not perfectly, ________ efficient.

A) Semistrong-form
B) weak-form
C) strong-form
D) market

Answer 1

A

Question 2

The length of time until a bond will make its last payment is its

A) coupon rate.
B) yield-to-maturity.
C) promised yield-to-maturity.
D) term-to-maturity.

Answer 2

D

Question 3

A pricing theorem for the bond market states that if a bond's yield does not change over its life, then the size of its discount or premium will __ as its life gets shorter.

A) increase
B) slightly increase
C) decrease
D) stay the same

Answer 3

C

Question 4

A pricing theorem for the bond market states that if a bond's yield does not change over its life, then the size of its discount or premium will ___ at an increasing rate as its life gets shorter.

A) slightly increase
B) increase
C) slightly decrease
E) decrease

Question 5

___ management of a bond portfolio is based on the belief that the bond market is not perfectly efficient.

A) Passive
B) Buy-and-hold
C) Dynamic
D) Active

Question 6

Passive bond portfolio managers assume the bond market is

A) semistrong form efficient.
B) inefficient.
C) strong form efficient.
D) not correlated with the stock market.

Question 7

A pricing theorem for the bond market states that the percentage change in a bond's price owing to a change in its yield will be ____ if its coupon rate is higher.

A) higher
B) smaller
C) the same
D) zero

Question 8

Holding maturity constant, a bond's duration is ______ when the coupon rate is lower.

A) lower
B) higher
C) the same
D) slightly higher

Question 9

Studies of Treasury bill price movements indicate their market is

A) strong form efficient.
B) predictable using a 6 month history of rates.
C) semistrong form efficient.
D) weak-form efficient.

Question 10

If a bond's market price decreases, its

A) yield-to-maturity increases.
B) coupon rate decreases.
C) yield-to-maturity decreases.
D) coupon rate increases.

Question 11

A pricing theorem for the bond market states that a decrease in a bond's yield will raise the bond's ___ by an amount that is greater in size than the corresponding fall in the bond's price that would occur if there were an equal-sized increase in the bond's yield

A) price
B) coupon rate
C) yield-to-maturity rate
D) promised yield

Question 12

If a bond's price is above its par value, its coupon rate will be

A) equal to its term-to-maturity.
B) greater than its yield-to-maturity.
C) equal to its yield-to-maturity.
D) greater than its term-to-maturity.

Question 13

Two bonds have the same coupon rate, par value, anBoth have Their comparative market prices are

A) the bond with the longer life will have a higher price.
B) the bond with the shorter life will have a higher price.
C) dependent on the size of the coupon rate.
D) must be the same.

Question 14

Each Thursday the Federal Reserve BoarThe effect of changes is reflected in bond prices

A) prior to the announcement.
B) by being ignored.
C) within one day.
D) with no consistency.

Question 15

A pricing theorem for the bond market states that if a bond's market price increases, then its yield must

A) increase
B) decrease
C) stay the same
D) slightly decrease

Question 16

Immunization is accomplished by calculating the duration of the promised outflows and then investing in a portfolio of bonds that has a(n) _____ duration.

A) longer
B) shorter
C) identical
D) slightly shorter

Question 17

___ is the tendency for bond prices to change asymmetrically relative to yield changes.

A) Immunization
B) Concavity
C) Convexity
D) Rebalancing

Question 18

____ is a measure of the average maturity of the stream of payments associated with a bond.

A) Cash flow matching
B) Pure yield pickup
C) Contingent immunization
D) Duration

Question 19

A $1,000 bond has a market price of $850. During year one its discount decreased by $10. If the yield-to-maturity remains fixed, during year five its discount will likely decrease by

A) $7.
B) $2.
C) must know size of coupon rate.
D) $15.

Question 20

Duration is a ______ of the lengths of time until the remaining payments are made.

A) weighted average
B) moving average
C) sensitivity measure
D) arithmetic average

Question 21

A dedicated portfolio lacks _____ risk.

A) political
B) purchasing power
C) reinvestment-rate
D) exchange-rate

Question 22

The graph relating bonds' yield-to-maturity to price is

A) perpendicular to the yield-to-maturity axis.
B) concave.
C) a flat line.
D) convex.

Question 23

An immunized bond portfolio has

A) a short duration.
B) a duration for cash outflows greater than for cash inflows.
C) an equal duration for cash inflows and outflows.
D) a duration for cash outflows less than for cash inflows.

Question 24

A drop in a bond's yield results compared to a comparable rise in a bond yields

A) the same price change.
B) a larger price increase.
C) a larger price decrease.
D) a smaller price decrease.

Question 25

When forecasting a bond's overall rate of return for a holding period, the most uncertain element is the

A) interest on coupons.
B) year of maturity.
C) time effect.
D) yield change effect.

Question 26

An immunized portfolio is an attempt to eliminate

A) default risk.
B) reinvestment-rate risk.
C) business risk.
D) leverage risk.

Question 27

FASB 87

A) requires a company to report a pension surplus as an asset.
B) has led to less emphasis on immunizing pension portfolios.
C) has led to a higher percentage of pensions to be placed in fixed-income securities.
D) has moved pension reporting from the balance sheet to the footnotes.

Question 28

The standard bond portfolio immunization method assumes a current yield curve that is

A) flat.
B) downward with a steep slope.
C) downward with a slight slope.
D) upward with a slight slope.

Question 29

A 20 year, $2,000, 6% coupon rate bond will experience an 8% price increase if the yield-to-maturity drops by 1%. The price change for a comparable 8% bond would be from $900 to

A) $945.
B) $972.
C) $855.
D) $870.

Question 30

The reason for an active bond portfolio manager to swap a bond he owns is when he feels

A) the present bond is underpriced.
B) the yield curve will shift upward.
C) he needs a shorter duration.
D) the present bond is overpriced.

Question 31

If we assume there is no change in interest rates, the duration of a coupon bond

A) remains the same
B) decreases more slowly that the term to maturity
C) decreases more quickly that the term to maturity
D) increases at a slower rate than the term to maturity

Question 32

The concepts of immunization and duration are limited by the assumption that the bonds will

A) default at some future date.
B) not default or be called before maturity.
C) not be callable bonds
D) have a realized yield that equals the coupon rate.

Question 33

Bonds may experience coupon reinvestment risk because the yield to maturity computation assumes that the reinvestment rate will always equal the

A) coupon rate
B) realized yield to maturity
C) promised yield to maturity
D) the effective interest rate

Question 34

All of the following statements about duration are true EXCEPT

A) Duration and the coupon rate are directly related .
B) Duration is a measure of the average maturity of a bond relative to its payment stream.
C) Duration is directly related to the bond's yield to maturity.
D) Duration is an indicator of a bond portfolio's risk.

Question 35

A ten year, $1,000 bond pays interest of $70 at the end of each year. The present yield-to-maturity is 9%, and the bond's market price if $871.65. If the yield-to-maturity remains at 9%, in two years the bond's market price increase will be

A) $19.84.
B) $ 6.45.
C) -$8.15
D) $17.65.

Question 36

A bond's sensitivity yield changes can be depicted on the price-yield -to-maturity graph as a _____ curve.

A) positively-sloped linear
B) negatively-sloped linear
C) concave
D) convex

Question 37

Which bond has the longest duration?

A) 30-year maturity; 6% coupon
B) 30-year maturity, 8% coupon
C) 25-year maturity, 11% coupon
D) 25-year maturity, 3% coupon

Question 38

Contingent immunization

A) uses the immunization amount as a benchmark to see if the manager can continue to actively manager.
B) allows the manager to actively manage at all times.
C) combines active and passive bond management at the same time.
D) requires duration matching at all times.

Question 39

A dedicated portfolio

A) matches the timing of cash inflows and outflows.
B) is subject to interest-rate risk.
C) invests only in zero-coupon bonds.
D) is subject to reinvestment-rate risk.

Question 40

A $1,000 bond has a present market price of $900 and a yield-to-maturity of 8%. If the yield-to-maturity rose to 9%, its market price would be $875. If its yield-to-maturity were 7%, its price would likely be

A) $920.
B) $880.
C) $930.
D) $900.

Question 41

Positive convexity on a bond implies that

A) prices increase at a faster rate as yields drop, than they decrease as yields rise.
B) the direction of change in yield is directly related to change in price
C) price changes are the same for both increase and decrease in yields
D) prices increase and decrease at a faster rate than the change in yield

Question 42

A bond has a duration of 8 years and a present yield-to-maturity of 8%. If the yield-to-maturity rises to 10%, the approximate bond price change would be

A) +7.9%.
B) -25%.
C) -14.8%.
D) -12.9%.

Question 43

A bond has a duration of 6 years and a present yield-to-maturity of 7%. If the yield-to-maturity falls to 5%, the approximate bond price change would be

A) +28.6%.
B) +22.3%.
C) +11.2%.
D) +17.4%.

Question 44

A $1,000 bond has a market price of $1,100. Over the next three years, an analyst forecasts a time effect of -$22, yield change effect of -$60, coupons of $270, and interest on coupons of $41. Its overall rate of return

A) 31.7%.
B) 20.8%.
C) 24.8%.
D) 34.9%.

Question 45

Overall dollar return bond analysis tends to ignore

A) time effect on price change.
B) the holding period.
C) interest earned on coupons.
D) changes in reinvestment rates for coupon received.

Question 46

You have a cash outflow to make at the end of year 4. You can invest in zero coupon bonds maturing in year 3 and in year 8. To immunize the portfolio, the proportion in the 3 year bonds would be

A) .8.
B) .2.
C) .6.
D) .4.

Question 47

For a bond manager to choose to "ride the yield curve,"

A) the curve is upward sloping and expected to remain upward sloping.
B) is flat but expected to have an upward slope.
C) the curve is upward sloping but expected to become downward sloping.
D) is flat but expected to have a downward slope.

Question 48

A bond with a 12 year duration will have a 24% price increase if the yield curve shifts downward. A bond with an 8 year duration should have a price change of

A) +16%.
B) +24%.
C) +28%.
D) +12%.

Question 49

For a 6 year bond, the investor will receive $40 of interest at the end of each 6 months. The interest can be reinvested at a 6 month rate of 4%. The total interest earned on coupons would be

A) $121.
B) $134.
C) $108.
D) $ 92.

Question 50

Which of the following statements about yield measures is true?

A) Nominal yield measures the current income rate.
B) Realized yield measures the expected rate of return for a bond likely to be sold before maturity.
C) Current yield measures the coupon rate.
D) If the bond sells at a price in excess of its par value, the yield to maturity and the current yield are equal.

Question 51

The yield to maturity and current yield on a bond are equal

A) if the bond sells at a price in excess of its par value.
B) when market interest rates begin to level off.
C) if the bond's coupon rate is equal to market interest rates for similar risk.
D) when the expected holding period is greater than one year.

Question 52

A corporate bond has 3 years remaining to maturity. An 8% coupon is paid annually on a par of $1,000. If the yield to maturity is 10%, the duration for the bond is

A) 2.62 years
B) 2.71 years
C) 3 years
D) 2.78 years

Question 53

The most prominent bond index published in the Wall Street Journal is

A) Salomon Brothers.
B) Dow Jones.
C) Lehman Brothers Treasury.
D) E.F. Hutton.

Question 54

A will have a cash outflow in 90 days. It may be beneficial to purchase 180 Treasury bills and sell them after 90 days if

A) the yield curve is flat.
B) the yield curve will shift from downward to upward sloping.
C) the manager wishes to avoid transaction costs.
D) the yield curve is upward sloping.

Question 55

A bond portfolio manager sees that the yield curve will shift upward. She swaps her long-term for short-term bonds. This is an example of a

A) pure yield pickup swap.
B) substitution swap.
C) rate anticipation swap.
D) short sale swap.

Question 56

A 5 year, zero-coupon bond has a maturity of $1,000 and a present market price of $713. Its duration in years is

A) 4.7.
B) 5.
C) 4.2.
D) 3.9.

Question 57

From 1926-1985, a comparison of the stock and bond market shows

A) a coefficient of correlation of +.9 on their annual returns.
B) annual bond price changes were more frequently negative than positive.
C) bonds had a higher average annual return.
D) bonds had a higher average standard deviation of their annual return.

Question 58

An investor buys and holds a 90 day, $10,000 Treasury bill to yield 8%. The annualized rate of return is

A) 8.7%.
B) 8.3%.
C) 8.5%.
D) 7.7%.

Question 59

Among several studies of forecasting future interest rates, the conclusion is that the best forecasting method is

A) use the no-change method.
B) no method dominated.
C) liquidity premium model.
D) the autoregressive method.

Question 60

A bond with a 6 year duration will have a 15% price decrease if the yield curve shifts upward. A bond with a 10 year duration should have an approximate price decrease of

A) 50%.
B) 15%.
C) 10%.
D) 25%.

Question 61

A 90 Day $10,000 Treasury bill sells to yield 6%. A 180 day, $10,000 Treasury bill sells to yield 8%. If the yield curve remains fixed, an investor buying the 180 day and selling after 90 days would earn an annualized rate of

A) 10.6%.
B) 8.2%.
C) 9.8%.
D) 8.9%.

Question 62

A three-year, $1,000 bond will pay $100 in interest at the end of each year. With a yield-to-maturity of 8%, its present market price is $1,052. Its duration is

A) 2.74 years.
B) 3.12 years.
C) 2.52 years.
D) 1.45 years.

Question 63

A pension plan will have a cash outflow in 3 years. They can invest in 2 year bonds with duration of 1.7 years and 4 year bonds with a duration of 3.5 years. To immunize the portfolio, the proportion invested in the 4 year bonds should be

A) .44.
B) .28.
C) .5.
D) .72.

Question 64

A pension plan needs to make a $3,000,000 payment in 3 years. They can buy 1 year bonds with a duration of 1 and 5 year bonds with a duration of 4.2 years. With a 10% yield-to-maturity, the immunized amount invested in 1 year bonds should be

A) $1,875,000.
B) $ 845,300.
C) $ 528,800.
D) $ 976,500.

Question 65

Which of the following statements about duration characteristics are true?

A) There is an inverse relationship between yield to maturity and duration.
B) There is generally an inverse relationship between term to maturity and duration.
C) There is a positive relationship between coupon and duration.
D) The duration of a coupon bond will always be greater than its term to maturity.

Question 66

Which of the following statements about the Macaulay duration of a zero-coupon bond is true? The Macaulay duration of a zero-coupon bond

A) is equal to one-half the bond's maturity in years.
B) is equal to the bond's maturity in years divided by its yield to maturity.
C) cannot be calculated because of the lack of coupons.
D) is equal to the bond's maturity in years.

Question 67

A four-year $1,000 bond will pay $60 in interest at the end of each year. With a yield-to-maturity of 8%, its present market price is $934. Its duration is

A) 1.88 years.
B) 3.66 years.
C) 3.28 years.
D) 4.32 years.