Question 1

According to the duration concept,

Accepted Answer

Duration considers that some of the cash flows are received prior to maturity, and this effectively makes the maturity less than the actual time to maturity.

Question 2

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

Accepted Answer

All of the options are correct statements about the limitations of immunization through duration matching.

Question 3

Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par-value bond, A, with a 12 year to maturity and a 12% coupon rate.
2) A zero-coupon bond, B, with a 12 year to maturity and a 12% yield to maturity.

Accepted Answer

Duration is the best measure of bond price sensitivity; the longer the duration the higher the price sensitivity.

Question 4

Cash flow matching on a multiperiod basis is referred to as

Accepted Answer

Cash flow matching on a multiperiod basis is referred to as a dedication strategy.

Question 5

The duration of a 20-year zero-coupon bond is

Accepted Answer

Duration of a zero-coupon bond equals the bond's maturity.

Question 6

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

In general, duration is negatively related to coupon rate. The greater the cash flows from coupon interest, the lower the duration will be. Since the bonds have the same time to maturity, that isn't a factor. The duration of the 6% coupon bond equals (1.06/.06) × (1 (1/1.06¹⁷)) = 11.10. The duration of the 13% coupon bond equals (1.13/.13) × (1 (1/1.13¹⁷)) = 7.60.

Question 7

Interest-rate risk is important to

Accepted Answer

Active managers try to identify interest-rate trends so they can move in the right direction before the changes. Passive managers try to minimize interest-rate risk by offsetting it with price changes in strategies such as immunization.

Question 8

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

Horizon analysis involves selecting a particular holding period and predicting the yield curve at the end of that holding period. The holding period return for the bond can then be predicted.

Question 9

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 correlated with 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

Number III is incorrect because interest-rate risk is inversely related to the bond's coupon rate.

Question 10

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 can be used to calculate the approximate effect of interest-rate changes on prices, but is not used to forecast interest rates.

Question 11

Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par-value bond, D, with a 2 year to maturity and an 8% coupon rate.
2) A zero-coupon bond, E, with a 2 year to maturity and an 8% yield to maturity.

Accepted Answer

Duration is the best measure of bond price sensitivity; the longer the duration the higher the price sensitivity.

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

In general, duration is negatively related to coupon rate. The greater the cash flows from coupon interest, the lower the duration will be. Since the bonds have the same time to maturity, that isn't a factor. The duration of the 6% coupon bond equals (1.06/.06) × (1 (1/1.06¹⁷)) = 11.10. The duration of the 13% coupon bond equals (1.13/.13) × (1 (1/1.13¹⁷)) = 7.60.

Question 13

A substitution swap is an exchange of bonds undertaken to

Accepted Answer

A substitution swap is an example of bond price arbitrage, undertaken when the portfolio manager attempts to profit from apparent mispricing.

Question 14

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

Harry Markowitz developed the mean-variance criterion, but not a theory of bond portfolio management.

Question 15

Holding other factors constant, which one of the following bonds has the smallest price volatility?

Accepted Answer

Duration (and thus price volatility) is lower when the coupon rates are higher.

Question 16

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 correlated with 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

Number III is incorrect because interest-rate risk is inversely related to the bond's coupon rate.

Question 17

Consider a bond selling at par with modified duration of 10.6 years and convexity of 210. A 2% 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

According to the duration-with-convexity rule, the percentage price change can be calculated as follows:

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

Substituting the given values, we get:

Percentage price change = -10.6 x (-2%) + (0.5 x 210 x (-2%)^2) = 25.4%

Therefore, the correct answer is choice B, as it represents the percentage price change according to the duration-with-convexity rule.

Question 18

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

Accepted Answer

Convexity measures the rate of change of the slope of the price-yield curve, expressed as a fraction of the bond's price.

Question 19

The duration of a 15-year zero-coupon bond is

Accepted Answer

Duration of a zero-coupon bond equals the bond's maturity.

Question 20

Holding other factors constant, which one of the following bonds has the smallest price volatility?

Accepted Answer

Duration (and thus price volatility) is lower when the coupon rates are higher.

Quiz 16: Managing Bond Portfolios

According to the duration concept,

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

Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par-value bond, A, with a 12 year to maturity and a 12% coupon rate. 2) A zero-coupon bond, B, with a 12 year to maturity and a 12% yield to maturity.

Cash flow matching on a multiperiod basis is referred to as

The duration of a 20-year zero-coupon bond is

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?

Interest-rate risk is important to

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

Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par-value bond, D, with a 2 year to maturity and an 8% coupon rate. 2) A zero-coupon bond, E, with a 2 year to maturity and an 8% yield to maturity.

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?

A substitution swap is an exchange of bonds undertaken to

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

Holding other factors constant, which one of the following bonds has the smallest price volatility?

Consider a bond selling at par with modified duration of 10.6 years and convexity of 210. A 2% 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?

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

The duration of a 15-year zero-coupon bond is

Holding other factors constant, which one of the following bonds has the smallest price volatility?