Question 1

In the immunisation process:

Accepted Answer

In the immunization process, the goal is to set the Duration Gap (DGAP) to zero to ensure that the changes in interest rates do not affect the value of the portfolio.

Question 2

When we will calculate the change in price that occurs when the market yield increases by one basis point, it is known as:

Accepted Answer

PVBP (Price Value of a Basis Point) measures the change in the price of a bond for a one basis point change in yield.

Question 3

Suppose you are a bond portfolio manager and you expect interest rates to increase. You will_________ your duration by_________ long- term maturity bonds if you want to manage your risk.

Accepted Answer

B

Question 4

The average convexity of a dumbbell portfolio:

Accepted Answer

A dumbbell portfolio, which consists of bonds with short and long maturities, typically has higher convexity than a bullet portfolio, which consists of bonds with similar maturities.

Question 5

Modified duration is calculated as:

Accepted Answer

Modified duration is calculated by dividing the Macaulay duration by (1 + interest rate), which adjusts the duration for changes in interest rates.

Question 6

Which of the following statements is correct?

Accepted Answer

The duration of a zero-coupon bond is equal to its term because it pays all its cash flows at maturity.

Question 7

When we improve the accuracy of the approximation by taking account of the curvature of the price-yield curve, the concept is known as:

Accepted Answer

Convexity accounts for the curvature of the price-yield curve, improving the accuracy of the approximation beyond linear measures like duration.

Question 8

The sensitivity of the security price to its term.

Accepted Answer

The sensitivity of a security's price to its term, such as interest rate sensitivity, does not increase proportionally with the term. Longer-term securities are generally more sensitive to interest rate changes, but the relationship is not linear.

Question 9

The objective of the corporate risk manager is to:

Accepted Answer

The corporate risk manager aims to minimize the cost of funding while also ensuring that the cost is predictable, hence both A and B are correct.

Question 10

Convexity increases as:

Accepted Answer

Convexity increases as the term of the security increases. This is because the price of a bond is more sensitive to changes in interest rates when the bond has a longer term.

Question 11

The duration of a coupon bond_________ at a _________rate as its term .

Accepted Answer

The duration of a coupon bond increases at a diminishing rate as its term increases because the present value of future cash flows decreases as the term extends, reducing the impact of additional years on duration.

Question 12

The weighted average of the squares of the times to the receipt of cash flows where the weights are the present values of the corresponding elements of the cash flow plus the weighted average of the times to receipt of the cash flows. This is known as the:

Accepted Answer

The answer of The weighted average of the squares of...

Question 13

Kirkwood and Idil (2009) noted that, prior to the middle of 2007, approximately _________of corporate funding was obtained from retained earnings, while the remainder was obtained from banks, debt markets and equity markets.

Accepted Answer

Kirkwood and Idil (2009) indicated that before mid-2007, about two-thirds of corporate funding came from retained earnings, with the rest sourced from banks, debt markets, and equity markets.

Question 14

Insulating a portfolio from the effects of interest rate changes is known as:

Accepted Answer

Immunisation is a strategy used to shield a portfolio from interest rate fluctuations, ensuring that the portfolio's value remains stable despite changes in interest rates.

Question 15

Duration_________ as the yield _________.

Accepted Answer

Duration falls as the yield increases because the bond's price becomes less sensitive to interest rate changes.

Question 16

The sensitivity of a bond's price to a change in interest rates is known as:

Accepted Answer

Duration measures the sensitivity of a bond's price to changes in interest rates.

Question 17

As the term of the security increases, the sensitivity of its price to changes in interest rates:

Accepted Answer

As the term of the security increases, its duration also increases, making it more sensitive to changes in interest rates.

Question 18

'Duration' refers to:

Accepted Answer

Duration is a measure of the weighted average time until a bond's cash flows are received, reflecting the bond's sensitivity to interest rate changes.

Question 19

The convexity (CX) of a ZCB is given by:

Accepted Answer

The convexity of a zero-coupon bond (ZCB) is calculated as the square of the term (maturity) plus the term itself. This accounts for the curvature in the bond's price-yield relationship.

Question 20

The prices of the securities are more interest rate sensitive in _________interest rate environments than when interest rates are _________.

Accepted Answer

Securities are more sensitive to interest rate changes when rates are low because the relative change in interest rates is more significant, impacting the present value of future cash flows more substantially.

Quiz 14: Managing Interest Rate Risk