Question 1

Which of the following statements regarding classical immunization is false?
A) It is easy to implement.
B) It requires frequent rebalancing.
C) It is not a passive bond strategy.
D) It faces real-world problems in its implementation.

Accepted Answer

Classical immunization is a passive bond strategy that requires frequent rebalancing and faces real-world problems in its implementation. It is not easy to implement.

Question 2

Which of the following 10-year, 8% bonds will offer the highest YTM?
A) AAA-rated, callable bond
B) AAA-rated, non-callable bond
C) BBB-rated, callable bond
D) BBB-rated, non-callable bond

Accepted Answer

The answer of Which of the following 10-year, 8% bonds...

Question 3

James has a 10-year investment horizon. To achieve an immunized position, his bond portfolio will have an average duration that is:
A) greater than 10 years and have an average maturity that is less than 10 years.
B) equal to 10 years and have an average maturity that is less than 10 years.
C) less than 10 years and have an average maturity that is equal to 10 years.
D) equal to 10 years and have an average maturity that is greater than 10 years.

Accepted Answer

The answer of James has a 10-year investment horizon. To...

Question 4

Which of the following terms describes a change in investors' preferences away from risky assets towards safer bonds?
A) Immunization
B) Flight to safety
C) Laddering
D) Convexity

Accepted Answer

Flight to safety is a term used to describe a change in investors' preferences away from risky assets towards safer bonds.

Question 5

Buying a bond (for example, with fixed-rate coupon payments) and simultaneously selling another (for example, with variable rate interest payments) is an example of:
A) a bond ladder strategy.
B) a bond swap.
C) an interest rate futures transaction.
D) an immunization strategy.

Accepted Answer

A bond swap involves selling one bond and buying another, often to take advantage of different interest rate conditions or to improve the portfolio's yield or risk profile.

Question 6

If two coupon bonds are equivalent in all other respects, which will have the higher convexity?
A) The bond with the higher coupon.
B) The bond with the longer maturity.
C) The bond with the greater yield.
D) The bond with the lower credit rating.

Accepted Answer

Convexity is higher for bonds with longer maturities because they are more sensitive to interest rate changes, leading to a more pronounced curvature in the price-yield relationship.

Question 7

A bond strategy that attempts to immunize the portfolio from interest rate risk is based on the concept of:
A) buy and hold.
B) horizon analysis.
C) duration.
D) indexing.

Accepted Answer

Duration is a measure of a bond's sensitivity to interest rate changes, and using it to match the duration of assets and liabilities can help immunize a portfolio from interest rate risk.

Question 8

A coupon bond has 10-years to maturity and a YTM of 8%. If the YTM instantaneously increases to 9%, what happens to the bond's price and duration?
A) The price decreases and the duration increases.
B) The price increases and the duration decreases.
C) The price decreases and the duration decreases.
D) The price decreases and the duration stays the same.

Accepted Answer

When the YTM increases, the bond's price decreases because the present value of future cash flows is lower. The duration also decreases because the bond's sensitivity to interest rate changes is reduced as the bond's price falls.

Question 9

Using its modified duration, the price of a coupon bond is forecasted to change from $990 to $925 due to an increase in interest rates. If the bond's convexity is considered, the new forecasted price of the bond will be:
A) higher than $925.
B) lower than $925.
C) equal to $925.
D) Cannot be determined.

Accepted Answer

Convexity accounts for the curvature in the price-yield relationship of bonds, providing a more accurate price change estimate. When interest rates rise, convexity will adjust the price change to be less severe than predicted by duration alone, resulting in a higher price than $925.

Question 10

Relative to actively-managed bond funds, a major advantage of bond index funds is their:
A) higher performance.
B) ability to shelter income from taxes.
C) lower expense ratios.
D) lower duration.

Accepted Answer

Bond index funds typically have lower expense ratios compared to actively-managed bond funds because they passively track a bond index and do not require active management.

Question 11

A portfolio is said to be immunized if:
A) the present value of its cash flows equals its principal value.
B) the duration of the portfolio is equal to its maturity.
C) the present value of its cash flows is greater than its principal value.
D) the duration of the portfolio is equal to the investor's investment horizon.

Accepted Answer

A portfolio is immunized when its duration matches the investor's investment horizon, minimizing interest rate risk and ensuring that the portfolio's value is protected against changes in interest rates.

Question 12

A bond investor has $100,000 and has determined 5 years is his maximum term. He puts $20,000 in one-year bonds, $20,000 in two-year bonds, etc. up to $20,000 in five-year bonds. This is an example of:
A) a barbell strategy.
B) a laddering strategy.
C) an immunization strategy.
D) a term management strategy.

Accepted Answer

This is a laddering strategy, where the investor staggers the maturities of the bonds over different time periods to manage interest rate risk and provide liquidity.

Question 13

Which of the following is not a passive bond strategy?
A) A barbell strategy
B) A bond swap strategy
C) A buy and hold strategy
D) An indexing strategy

Accepted Answer

A bond swap strategy involves actively trading bonds to take advantage of market conditions, which is not a passive approach.

Question 14

Immunization is a strategy in which bond investors:
A) buy only high-quality bonds.
B) attempt to avoid default risk.
C) attempt to avoid call and convertible risk.
D) attempt to avoid reinvestment and price risk.

Accepted Answer

Immunization is a strategy used by bond investors to minimize the impact of interest rate changes on the value of their bond portfolio, specifically targeting reinvestment and price risk.

Question 15

Which form of duration should be used when evaluating a floating-rate bond?
A) Macaulay duration
B) Modified duration
C) Effective duration
D) Convexity duration

Accepted Answer

Effective duration is used for bonds with embedded options or floating-rate bonds, as it accounts for changes in interest rates and the bond's cash flows.

Question 16

Interest rate risk is composed of:
A) market risk and default risk.
B) price risk and credit risk.
C) price risk and reinvestment risk.
D) default risk and liquidity risk.

Accepted Answer

Interest rate risk is primarily composed of price risk, which is the risk of a change in the price of a bond due to interest rate changes, and reinvestment risk, which is the risk that cash flows from an investment will be reinvested at a lower interest rate.

Question 17

For a bond, Macaulay duration represents the time period where:
A) duration equals convexity.
B) reinvestment risk equals price risk.
C) time to maturity equals investment horizon.
D) the coupon rate equals the required return.

Accepted Answer

Macaulay duration is the weighted average time to receive the bond's cash flows and is the point where the bond's price risk and reinvestment risk offset each other.

Question 18

Which of the following statements regarding the duration of a coupon bond is false?
A) YTM and duration are inversely related.
B) Coupon rate and duration are inversely related.
C) Duration is a weighted average time to recovery of all coupon payments.
D) Duration increases with time to maturity but at a decreasing rate.

Accepted Answer

Duration is not the weighted average time to recovery of all coupon payments; it is the weighted average time to receive the bond's cash flows, including both coupon payments and the principal repayment.

Question 19

Which of the following European countries experienced a debt crisis post-2008?
A) Germany
B) Great Britain
C) Greece
D) France

Accepted Answer

Greece experienced a severe debt crisis post-2008, requiring multiple bailouts from the European Union and the International Monetary Fund.

Question 20

A zero-coupon bond has 10-years to maturity and a YTM of 8%. If the YTM instantaneously increases to 9%, what happens to the bond's price and duration?
A) The price decreases and the duration increases.
B) The price increases and the duration decreases.
C) The price decreases and the duration decreases.
D) The price decreases and the duration stays the same.

Accepted Answer

The answer of A zero-coupon bond has 10-years to maturity...

Quiz 18: Bonds: Analysis and Strategy

Which of the following statements regarding classical immunization is false?

Which of the following 10-year, 8% bonds will offer the highest YTM?

James has a 10-year investment horizon. To achieve an immunized position, his bond portfolio will have an average duration that is:

Which of the following terms describes a change in investors' preferences away from risky assets towards safer bonds?

Buying a bond (for example, with fixed-rate coupon payments) and simultaneously selling another (for example, with variable rate interest payments) is an example of:

If two coupon bonds are equivalent in all other respects, which will have the higher convexity?

A bond strategy that attempts to immunize the portfolio from interest rate risk is based on the concept of:

A coupon bond has 10-years to maturity and a YTM of 8%. If the YTM instantaneously increases to 9%, what happens to the bond's price and duration?

Using its modified duration, the price of a coupon bond is forecasted to change from $990 to $925 due to an increase in interest rates. If the bond's convexity is considered, the new forecasted price of the bond will be:

Relative to actively-managed bond funds, a major advantage of bond index funds is their:

A portfolio is said to be immunized if:

A bond investor has $100,000 and has determined 5 years is his maximum term. He puts $20,000 in one-year bonds, $20,000 in two-year bonds, etc. up to $20,000 in five-year bonds. This is an example of:

Which of the following is not a passive bond strategy?

Immunization is a strategy in which bond investors:

Which form of duration should be used when evaluating a floating-rate bond?

Interest rate risk is composed of:

For a bond, Macaulay duration represents the time period where:

Which of the following statements regarding the duration of a coupon bond is false?

Which of the following European countries experienced a debt crisis post-2008?

A zero-coupon bond has 10-years to maturity and a YTM of 8%. If the YTM instantaneously increases to 9%, what happens to the bond's price and duration?