Chapter 11 - Managing Bond Portfolios
Chapter 11 Managing Bond Portfolios Multiple Choice Questions
1. All other things equal, which of the following has the longest duration? A. A 30 ear !ond with a 10" coupon B. A #0 ear !ond with a $" coupon C. A #0 ear !ond with a %" coupon &. A 10 ear 'ero coupon !ond
#. All other things equal, which of the following has the shortest duration? A. A 30 ear !ond with a 10" coupon B. A #0 ear !ond with a $" coupon C. A #0 ear !ond with a %" coupon &. A 10 ear 'ero coupon !ond
3. A pension fund (ust pa out )1 (illion ne*t ear, )# (illion the following ear and then )3 (illion the ear after that. +f the discount rate is " what is the duration of this set of pa(ents? A. #.00 ears B. #.1 ears C. #.#$ ears &. #.3 ears
. All other things equal, which of the following has the longest duration? A. A #0 ear !ond with a 10" coupon ielding 10" B. A #0 ear !ond with a 10" coupon ielding 11" C. A #0 ear 'ero coupon !ond ielding 10" &. A #0 ear 'ero coupon !ond ielding 11"
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Chapter 11 - Managing Bond Portfolios
. /he duration of a perpetuit aries with interest rates. A. directl B. inersel C. cone*l &. rando(l
2. Because of cone*it, when interest rates change the actual !ond price will the !ond price predicted ! duration. A. alwas !e higher than B. so(eti(es !e higher than C. alwas !e lower than &. so(eti(es !e lower than
%. ou find a ear AA 4ero* !ond priced to ield 2". ou find a si(ilar ris5 ear Canon !ond priced to ield 2.". /o ta5e adantage of this ou should do which of the following? A. 6hort the Canon !ond and !u the 4ero* !ond B. Bu the Canon !ond and short the 4ero* !ond C. 6hort !oth the Canon !ond and the 4ero* !ond &. Bu !oth the Canon !ond and the 4ero* !ond
. A forecast of !ond returns !ased largel on a prediction of the ield cure at the end of o f the inest(ent hori'on is called a . A. contingent i((uni'ation B. dedication strateg C. duration analsis &. hori'on analsis
$. A !ond7s price olatilit at a8an rate as (aturit increases. A. increases9 increasing B. increases9 decreasing C. decreases9 increasing &. decreases9 decreasing
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Chapter 11 - Managing Bond Portfolios
10. As a result of !ond cone*it co ne*it an increase in a !ond7s ! ond7s price when ield to (aturit falls is the price decrease resulting fro( an increase in ield of equal (agnitude. A. greater than B. equialent to C. s(aller than &. /he answer is indeter(inate.
11. All else equal, !ond price olatilit is greater for . A. higher coupon rates B. lower coupon rates C. shorter (aturit &. lower default ris5
1#. is an i(portant characteristic of the relationship !etween !ond prices and ields. A. Cone*it B. Concait C. Co(ple*it &. :inearit
13. Bond prices are sensitie to changes in ield when the !ond is selling at a initial ield to (aturit. A. (ore9 lower B. (ore9 higher C. less9 lower &. equall9 higher or lower
1. /he pioneer of the duration concept was . A. ;ugene
er'og C. arr Mar5owit'
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Chapter 11 - Managing Bond Portfolios
1. A portfolio (anager sells treasur !onds and !us corporate !onds !ecause the spread !etween corporate and /reasur !ond ields is higher than its historical aerage. /his is an e*a(ple of swap. A. a pure ield pic5 up B. a rate anticipation C. a su!stitution &. an inter(ar5et spread
12. /he duration of a -ear 'ero coupon !ond is ears. A. . B. .0 C. . &. 3.
1%. A portfolio (anager !eliees interest rates will drop and decides to sell short duration !onds and !u long duration !onds. /his is an e*a(ple of swap. A. a pure ield pic5 up B. a rate anticipation C. a su!stitution &. an inter-(ar5et spread
1. /arget date i((uni'ation would pri(aril !e of interest to . A. !an5s B. (utual funds C. pension funds &. indiidual inestors
1$. &uration is a concept that is useful in assessing a !ond7s . A. credit ris5 B. liquidit ris5 C. price olatilit &. cone*it ris5
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Chapter 11 - Managing Bond Portfolios
#0. A pension fund has an aerage duration of its lia!ilities equal to 1 ears. /he fund is loo5ing at ear (aturit 'ero coupon co upon !onds and " ield perpetuities to i((uni'e its interest rate ris5. >ow (uch of its portfolio should it allocate to the 'ero coupon !onds to i((uni'e if there are no other assets funding the plan? A. #" B. " C. 33" &. #"
#1. ou own a !ond that has a duration of o f 2 ears. +nterest rates are currentl %" !ut ou !eliee the
##. @ien its ti(e to (aturit the duration of a 'ero coupon !ond is . A. higher when the discount rate is higher B. higher when the discount rate is lower C. lowest when the discount rate is equal to the ris5 free rate &. the sa(e regardless of the discount rate
#3. An increase in a !ond7s ield to (aturit results in a price decline that is the price increase resulting fro( a decrease in ield of equal (agnitude. A. greater than B. equialent to C. s(aller than &. /he answer is indeter(inate
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Chapter 11 - Managing Bond Portfolios
#. All other things equal, a !ond7s duration is . A. higher when the ield to (aturit is higher B. lower when the ield to (aturit is higher C. the sa(e at all ield rates &. indeter(ina!le when the ield to (aturit is high
#. A !an5 has an aerage duration of its lia!ilities equal to # ears. /he !an57s aerage duration of its assets is 3. ears. /he !an57s (ar5et alue of equit is at ris5 if . A. interest rates fall B. credit spreads fall C. interest rates rise &. the price of all fi*ed inco(e securities rises
#2. All other things equal, a !ond7s duration is . A. higher when the coupon rate is higher B. lower when the coupon rate is higher C. the sa(e when the coupon rate is higher &. indeter(inate when the coupon rate is high
#%. Ban5s and other financial institutions can !est (anage interest rate ris5 ! . A. (a*i(i'ing the duration of assets and (ini(i'ing the duration of lia!ilities B. (ini(i'ing the duration of assets and (a*i(i'ing the duration of lia!ilities C. (atching the durations of their assets and lia!ilities &. (atching the (aturities of their assets and lia!ilities
#. +n the conte*t of a !ond portfolio, price ris5 and reinest(ent rate ris5 e*actl cancel out at a ti(e hori'on equal to . A. the aerage !ond (aturit in the portfolio B. the duration of the portfolio C. the difference !etween the shortest duration and longest duration of the indiidual !onds in the portfolio &. the aerage of the shortest duration and longest duration of the !onds in the portfolio
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Chapter 11 - Managing Bond Portfolios
#$. Bond portfolio i((uni'ation techniques !alance and ris5. A. price9 reinest(ent B. price9 liquidit C. credit9 reinest(ent &. credit9 liquidit
30. ou hae purchased a @uaranteed +nest(ent contracts @+Cs fro( an insurance fir( that pro(ises to pa ou a " " co(pound rate of return per ear for 2 ears. +f ou pa )10,000 for the @+C toda and receie no interest along the wa ou will get in 2 ears to the nearest dollar. A. )1#,2 B. )13,000 C. )13,01 &. )13,2%2
31. /he duration of a portfolio of !onds can !e calculated as . A. the coupon weighted aerage a erage of the durations of the indiidual !onds in the portfolio B. the ield weighted aerage of the durations of the indiidual !onds in the portfolio C. the alue weighed aerage of the durations of the indiidual !onds in the portfolio &. aerages of the durations of the longest and shortest duration !onds in the portfolio
3#. Pension fund (anagers can generall !est !ring a!out an effectie reduction in their interest rate ris5 ! holding . A. long (aturit !onds B. long duration !onds C. short (aturit !onds &. short duration !onds
33. hich of the following is not a tpe of !ond swap used in actie portfolio (anage(ent? A. +nter-(ar5et spread swap B. 6u!stitution swap C. Date anticipation swap &. Asset-lia!ilit swap
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Chapter 11 - Managing Bond Portfolios
3. /he e*change of one !ond for a !ond with si(ilar attri!utes !ut (ore attractiel priced is called . A. a su!stitution swap B. an inter(ar5et spread swap C. rate anticipation swap &. pure ield pic5up swap
3. Dan5 the interest sensitiit of the following fro( (ost sensitie to an interest rate cha nge to the least sensitie. +. " coupon, noncalla!le #0 ear (aturit, par !ond ++. $" coupon, currentl calla!le #0 ear (aturit, pre(iu( !ond +++. Eero coupon, 30 ear (aturit !ond A. +, ++, +++ B. ++, +++, + C. +++, +, ++ &. +++, ++, +
32. A !ond swap (ade in response to forecasts of interest rate changes is called . A. a su!stitution swap B. an inter(ar5et spread swap C. rate anticipation swap &. pure ield pic5up swap
3%. Moing to higher ield !onds, ! onds, usuall with longer (aturities is called . A. a su!stitution swap B. an inter(ar5et spread swap C. rate anticipation swap &. pure ield pic5up swap
3. +n a pure ield pic5up swap, !onds are e*changed for !onds. A. longer duration9 shorter duration B. shorter duration9 longer duration C. high coupon9 high ield &. low ield9 high ield
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Chapter 11 - Managing Bond Portfolios
3$. /he duration rule alwas the alue of a !ond following a change in its ield. A. under-esti(ates B. proides an un!iased esti(ate of C. oer-esti(ates &. /he esti(ated price (a !e !iased either upward or downward, depending on whether the !ond is trading at a discount or a pre(iu(
0. here F ield to (aturit, the duration of a perpetuit would !e . A. B. 81 C. 18 &. 1 8
1. A !ond currentl has a price of )1,00. /he ield on the !ond is 2.00". +f the ield increases # !asis points, the price of the !ond ! ond will go down to )1 )1,030. ,030. /he duration of this !ond is ears. A. %.2 B. .0 C. $.0# &. 10.11
#. A !ond has a current price of )1,030. /he ield on the !ond is .00". +f the ield changes fro( .00" to .10", the price of the !ond will go down to )1,0#.. /he (odified duration of this !ond is . A. .3# B. .00 C. 3.# &. 3.%
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Chapter 11 - Managing Bond Portfolios
3. A !an5 has )0 (illion in assets, )% (illion in lia!ilities and )3 (illion in shareholders7 equit. +f the duration of its lia!ilities are 1.3 and the !an5 wants to i((uni'e its net worth against interest rate ris5 and thus set the duration of equit equal to 'ero, it should select assets with an aerage duration of . A. 1.## B. 1.0 C. 1.20 &. #.00
. A perpetuit pas )100 each and eer ear foreer. /he duration of this perpetuit will !e if its ield is $". A. % B. $ C. $.3$ &. 1#.11
A !ond pas annual interest. +ts coupon rate is $". +ts alue at (aturit is )1,000. +t (atures in four ears. +ts ield to (aturit is currentl 2".
. /he duration of this !ond is ears. A. #. B. 3.#3 C. 3.2 &. .10
2. /he (odified duration of this !ond is ears. A. .00 B. 3.2 C. 3.32 &. 3.0
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Chapter 11 - Managing Bond Portfolios
%. A !ond has a (aturit of 1# ears, a duration of o f $. ears at a pro(ised ield rate of ". hat is the !ond7s (odified duration? A. 1# ears B. 11.1 ears C. $. ears &. . ears
. A #0-ear (aturit !ond pas interest of )$0 once per ear and has a face alue of )1,000. +ts ield to (aturit is 10". Ger the upco(ing ear, ou e*pect interest rates to decline and that the ield to (aturit on this !ond will onl !e " a ear fro( now. Hsing hori'on analsis, the return ou e*pect to earn ! holding this !ond oer the upco(ing ear is . A. 10.0" B. 1#.0" C. #1.2" &. #$.2"
$. A !ond with a $-ear duration is worth )1,00.00 and its ield to (aturit is ". +f the ield to (aturit falls to %.", ou would predict that the new alue of the !ond will !e . A. )1,03 B. )1,032 C. )1,0$ &. )1,1#
0. hen interest rates increase, the duration of a #0-ear !ond selling at a pre(iu( . A. increases B. decreases C. re(ains the sa(e &. increases at first, then declines
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Chapter 11 - Managing Bond Portfolios
1. &uration facilitates the co(parison of !onds with differing . A. default ris5 B. conersion ratios C. (aturities &. ields to (aturit
#. /he historical ield spread !etween the AA !ond and the AAA !ond has !een # !asis points. Currentl the spread is onl $ !asis points. +f ou ou !eliee the spread will soon return to its historical leels ou should . A. !u the AA and short the AAA B. !u !oth the AA and the AAA C. !u the AAA and short the AA &. short !oth the AA and the AAA
3. /he duration of a !ond nor(all increases with an increase in . +. ter(-to-(aturit ++. ield-to-(aturit. +++. coupon rate A. + onl B. + and ++ onl C. ++ and +++ onl &. +, ++ and +++
. A fi*ed inco(e portfolio (anager sets a (ini(u( accepta!le rate of return on the !ond portfolio at " per ear oer the ne*t ears. /he portfolio is currentl worth )10 (illion. (illion. Gne ear later interest rates are at 2". hat is the portfolio alue trigger point at this ti(e that would require hi( to i((uni'e the portfolio? A. )1#,1,023 B. )10,#0,2# C. )$,2#%,$ &. )10,00,000
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Chapter 11 - Managing Bond Portfolios
. Co(pute the duration of an ", -ear corporate !ond with a par alue of )1000 if ield to (aturit of 10". A. 3.$# B. .# C. . &. .00
2. Co(pute the (odified duration of a $" coupon, 3-ear corporate !ond with a ield to (aturit of 1#". A. #. B. #.% C. #. &. 3.00
%. An ", 30-ear !ond has a ield-to-(aturit of 10" and a (odified duration of .0 ears. +f the (ar5et ield drops ! 1 !asis points, there will !e a in the !ond7s price. A. 1.1" decrease B. 1.#0" increase C. 1.3" increase &. #.3" decrease
. /o create a portfolio with a duration of ears using a ear 'ero-coupon !ond and a 3 ear " annual coupon !ond with a ield to (aturit of 10", one would hae to inest of the portfolio alue in the 'ero-coupon !ond. A. 0" B. " C. 20" &. %"
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Chapter 11 - Managing Bond Portfolios
$. hich of the following set of conditions c onditions will result in a !ond with the greatest price olatilit? A. A high coupon and a short (aturit. B. A high coupon and a long (aturit. C. A low coupon and a short (aturit. &. A low coupon and a long (aturit.
20. An inestor who e*pects declining d eclining interest rates would (a*i(i'e their capital gain ! purchasing a !ond that has a coupon and a ter( to (aturit. A. low9 long B. high9 short C. high9 long &. 'ero9 long
21. +f ou choose a 'ero coupon !ond with a (aturit that (atches our inest(ent hori'on which of the following state(ents is8are correct? +. ou will hae no interest rate ris5 on this !ond. ++. A!sent default, ou can !e sure ou will earn the pro(ised ield rate. +++. /he duration of our !ond is less than the ti(e to our inest(ent hori'on. A. + onl B. + and ++ onl C. ++ and +++ onl &. +, ++ and +++
2#. As co(pared with equialent (aturit !onds selling at par, deep discount !onds !ond s will hae . A. greater reinest(ent ris5 B. greater price olatilit C. less call protection &. shorter aerage (aturit
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Chapter 11 - Managing Bond Portfolios
6teel Pier Co(pan has issued !onds !o nds that pa se(iannuall with the following characteristicsI
23. /he (odified duration for the 6teel Pier !ond is . A. 2.1 ears B. .$ ears C. 2.$ ears &. $.0$ ears
2. +f the !ond7s coupon was s(aller than 10", the (odified duration would !e co(pared to the original (odified duration. A. larger B. unchanged C. s(aller &. /here is not enough infor(ation to deter(ine the direction of change
2. +f the (aturit of the !ond was less than 10 ears, the (odified duration would !e co(pared to the original (odified duration. A. larger B. unchanged C. s(aller &. /here is not enough infor(ation to deter(ine the direction of change
22. +f the ield to (aturit decreases to .0" the e*pected percentage change in the price of the !ond using Macaule7s duration would !e , while the e*pected percentage change in the price of the !ond using (odified duration would !e . A. 11", 1#" B. 1#", 11" C. 1#", 1#" &. 11", 11"
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Chapter 11 - Managing Bond Portfolios
2%. A #0 ear (aturit corporate !ond has a 2." coupon rate the coupons are paid annuall. /he !ond currentl sells for )$#.0. A !ond (ar5et analst forecasts that in fie ears ield rates on these !onds will !e at %.0". ou !eliee that ou will !e a!le to reinest the coupons earned oer the ne*t fie ears at a 2" rate of return. hat is our e*pected annual co(pound rate of return if ou plan on selling the !ond in fie ears? A. %.3%" B. %.2" C. .1#" &. ."
2. hen !onds sell a!oe par, what is the relationship of price sensitiit to rising interest rates? A. Price olatilit increases at an increasing rate B. Price olatilit increases at a decreasing rate C. Price olatilit decreases at a decreasing rate &. Price olatilit decreases at an increasing rate
2$. A 'ero coupon !ond is selling at a deep discount price of )30.00. +t (atures in 13 ears. +f the ield to (aturit of the !ond is 2.%", what is the duration of the !ond? A. 2.% ears B. .0 ears C. 10 ears &. 13 ears
%0. ou hae an inest(ent that in toda7s dollars returns 1" of our inest(ent in ear 1, 1#" in ear two, $" in ear 3 and the re(ainder in ear . hat is the duration of this inest(ent? A. ears B. 3.0 ears C. 3.## ears &. #.$ ears
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Chapter 11 - Managing Bond Portfolios
%1. +f an inest(ent returns a higher percentage of our (one !ac5 sooner it will . A. !e less price olatile B. hae a higher credit rating C. !e less liquid &. hae a higher (odified duration
%#. hich one of the following state(ents correctl descri!es the weights used in the Macaula duration calculation? /he weight in ear t is equal to . A. the dollar a(ount of the inest(ent receied in ear t B. the percentage of the future alue of the inest(ent receied in ear t C. the present alue of the dollar a(ount of the inest(ent receied in ear t &. the percentage of the total present alue of the inest(ent receied in ear t
%3. /he duration is independent of the coupon rate onl for which one of the following? A. &iscount !onds B. Pre(iu( !onds C. Perpetuities &. 6hort ter( !onds
%. ou hae an inest(ent hori'on of 2 ears. ou choose to hold a !ond with a duration of 10 ears. our reali'ed rate of return will !e larger than the pro(ised ield on the !ond if . A. interest rates increase B. interest rates sta the sa(e C. interest rates fall &. one can7t tell with the infor(ation gien
%. A !ond portfolio (anager notices a hu(p in the ield cure at the fie ear point. >ow (ight a !ond (anager ta5e adantage of this eent? A. Bu the ear !onds and short the surrounding (aturit !onds B. Bu the ear !onds and !u the surrounding (aturit !onds C. 6hort the ear !onds !o nds and short the surrounding (aturit !onds &. 6hort the ear !onds and !u the surrounding (aturit !onds
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Chapter 11 - Managing Bond Portfolios
%2. Mar5et econo(ists all predict a rise in interest rates. An astute !ond (anager wishing to (a*i(i'e her capital gain (ight e(plo which strateg? A. 6witch fro( low duration to high duration du ration !onds. B. 6witch fro( high duration to low duration !onds. C. 6witch fro( high grade to low grade !onds. &. 6witch fro( low coupon to high coupon !onds.
%%. ou hae an inest(ent hori'on of 2 ears. ou choose to hold a !ond with a duration of ears. our reali'ed rate of return will !e larger than the pro(ised ield on the !ond if . A. interest rates increase B. interest rates sta the sa(e C. interest rates fall &. one can7t tell with the infor(ation gien
%. hat strateg (ight an insurance co(pan e(plo to ensure that it will !e a!le to (eet the o!ligations of annuit holders? A. Cash flow (atching B. +nde* trac5ing C. ield pic5up swaps &. 6u!stitution swap
%$. ou hae an inest(ent hori'on of 2 ears. ou choose to hold a !ond with a duration of 2 ears and continue to (atch our inest(ent hori'on and duration throughout our holding period. our reali'ed rate of return will !e the sa(e as the pro(ised ield ield on the !ond if +. interest rates increase ++. interest rates sta the sa(e +++. interest rates fall A. + onl B. ++ onl C. + and ++ onl &. +, ++ and +++
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Chapter 11 - Managing Bond Portfolios
0. +((uni'ation of coupon paing !onds is not a passie strateg !ecause +. the portfolio (ust !e re!alanced eer ti(e interest rates change ++. the portfolio (ust !e re!alanced oer ti(e een if interest rates don7t change +++. cone*it i(plies duration !ased i((uni'ation strategies don7t wor5 A. + onl B. + and ++ onl C. ++ onl &. +, ++ and +++
1. Adantages of cash flow (atching and dedicated strategies include . +. once the cash flows are (atched there is no need for re!alancing ++. cash flow (atching tpicall earns a higher rate of return than actie !ond portfolio (anage(ent +++. financial institution7s lia!ilities lia!ilities often e*ceed the (aturit of aaila!le !onds, (a5ing cash (atching een (ore desira!le A. + onl B. ++ onl C. + and +++ onl &. +, ++ and +++
#. Cone*it i(plies that duration predictions . +. underesti(ate the " increase in !ond price when the ield falls ++. underesti(ate the " decrease in !ond price when the ield rises +++. oeresti(ates the " increase in !ond price when the ield falls +J. oeresti(ates the " decrease in !ond price when the ield rises A. + and +++ onl B. ++ and +J onl C. + and +J onl &. ++ and +++ onl
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Chapter 11 - Managing Bond Portfolios
3. ou hae a # ear (aturit 10" coupon, 10" ield !ond with duration of 10 ears and a cone*it of 13.0. +f interest rate were to fall 1# !asis points our predicted new price p rice for the !ond including cone*it is . A. )10$. B. )110.2 C. )1113.1 &. )11#.#0
. ou hae a 1 ear (aturit " coupon, 2" ield !ond with duration of 10. ears and a cone*it of 1#.%. /he !ond is currentl priced at )0.%2. +f interest rate were to increase #00 !asis points our predicted new price for the !ond including cone*it is . A. )23. B. )2#. C. )222. &. )%0.03
. Cone*it of a !ond is . A. the sa(e as hori'on analsis B. the rate of change of the price-ield cure diided ! !ond price C. a (easure of !ond duration &. none of the a!oe
Chapter 11 Managing Bond Portfolios Answer Ke
Multiple Choice Questions
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Chapter 11 - Managing Bond Portfolios
1. All other things equal, which of the following has the longest duration? A. A 30 ear !ond with a 10" coupon B. A B. A #0 ear !ond with a $" coupon C. A C. A #0 ear !ond with a %" coupon &. A &. A 10 ear 'ero coupon !ond
Difficulty: Medium
#. All other things equal, which of the following has the shortest duration? A. A A. A 30 ear !ond with a 10" coupon B. A B. A #0 ear !ond with a $" coupon C. A C. A #0 ear !ond with a %" coupon D. A 10 ear 'ero coupon !ond
Difficulty: Medium
3. A pension fund (ust pa out )1 (illion ne*t ear, )# (illion the following ear and then )3 (illion the ear after that. +f the discount rate is " what is the duration of this set of pa(ents? A. #.00 A. #.00 ears B. #.1 B. #.1 ears C. #.#$ ears &. #.3 &. #.3 ears
Difficulty: Hard
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Chapter 11 - Managing Bond Portfolios
. All other things equal, which of the following has the longest duration? A. A A. A #0 ear !ond with a 10" coupon ielding 10" B. A B. A #0 ear !ond with a 10" coupon ielding 11" C. A #0 ear 'ero coupon !ond ielding 10" &. A &. A #0 ear 'ero coupon !ond ielding 11"
Difficulty: Medium
. /he duration of a perpetuit aries with interest rates. A. directl A. directl B. inersel C. cone*l C. cone*l &. rando(l &. rando(l
Difficulty: Medium
2. Because of cone*it, when interest rates change the actual !ond price will the !ond price predicted ! duration. A. alwas !e higher than B. so(eti(es B. so(eti(es !e higher than C. alwas C. alwas !e lower than &. so(eti(es &. so(eti(es !e lower than
Difficulty: Easy
%. ou find a ear AA 4ero* !ond priced to ield 2". ou find a si(ilar ris5 ear Canon !ond priced to ield 2.". /o ta5e adantage of this ou should do which of the following? A. 6hort A. 6hort the Canon !ond and !u the 4ero* !ond B. Bu the Canon !ond and short the 4ero* !ond C. 6hort C. 6hort !oth the Canon !ond and the 4ero* !ond &. Bu &. Bu !oth the Canon !ond and the 4ero* !ond
Difficulty: Medium
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Chapter 11 - Managing Bond Portfolios
. A forecast of !ond returns !ased largel on a prediction of the ield cure at the end of o f the inest(ent hori'on is called a . A. contingent A. contingent i((uni'ation B. dedication B. dedication strateg C. duration C. duration analsis D. hori'on analsis
Difficulty: Easy
$. A !ond7s price olatilit at a8an rate as (aturit increases. A. increases9 A. increases9 increasing B. increases9 decreasing C. decreases9 C. decreases9 increasing &. decreases9 &. decreases9 decreasing
Difficulty: Easy
10. As a result of !ond cone*it co ne*it an increase in a !ond7s ! ond7s price when ield to (aturit falls is the price decrease resulting fro( an increase in ield of equal (agnitude. A. greater than B. equialent B. equialent to C. s(aller C. s(aller than &. /he &. /he answer is indeter(inate.
Difficulty: Medium
11. All else equal, !ond price olatilit is greater for . A. higher A. higher coupon rates B. lower coupon rates C. shorter C. shorter (aturit &. lower &. lower default ris5
Difficulty: Easy
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Chapter 11 - Managing Bond Portfolios
1#. is an i(portant characteristic of the relationship !etween !ond prices and ields. A. Cone*it B. Concait B. Concait C. Co(ple*it C. Co(ple*it &. :inearit &. :inearit
Difficulty: Medium
13. Bond prices are sensitie to changes in ield when the !ond is selling at a initial ield to (aturit. A. (ore9 lower B. (ore9 B. (ore9 higher C. less9 C. less9 lower &. equall9 &. equall9 higher or lower
Difficulty: Easy
1. /he pioneer of the duration concept was . A. ;ugene A. ;ugene er'og C. arr &. >arr Mar5owit'
Difficulty: Easy
1. A portfolio (anager sells treasur !onds and !us corporate !onds !ecause the spread !etween corporate and /reasur !ond ields is higher than its historical aerage. /his is an e*a(ple of swap. A. a A. a pure ield pic5 up B. a B. a rate anticipation C. a C. a su!stitution D. an inter(ar5et spread
Difficulty: Easy
11-#
Chapter 11 - Managing Bond Portfolios
12. /he duration of a -ear 'ero coupon !ond is ears. A. . A. . B. .0 C. . C. . &. 3. &. 3.
Difficulty: Easy
1%. A portfolio (anager !eliees interest rates will drop and decides to sell short duration !onds and !u long duration !onds. /his is an e*a(ple of swap. A. a A. a pure ield pic5 up B. a rate anticipation C. a C. a su!stitution &. an &. an inter-(ar5et spread
Difficulty: Easy
1. /arget date i((uni'ation would pri(aril !e of interest to . A. !an5s A. !an5s B. (utual B. (utual funds C. pension funds &. indiidual &. indiidual inestors
Difficulty: Easy
1$. &uration is a concept that is useful in assessing a !ond7s . A. credit A. credit ris5 B. liquidit B. liquidit ris5 C. price olatilit &. cone*it &. cone*it ris5
Difficulty: Easy
11-#
Chapter 11 - Managing Bond Portfolios
#0. A pension fund has an aerage duration of its lia!ilities equal to 1 ears. /he fund is loo5ing at ear (aturit 'ero coupon co upon !onds and " ield perpetuities to i((uni'e its interest rate ris5. >ow (uch of its portfolio should it allocate to the 'ero coupon !onds to i((uni'e if there are no other assets funding the plan? A. #" B. " B. " C. 33" C. 33" &. #" &. #"
&ur perpetuit F F #2 ears 1 F w' 1 - w ' #29 w' F #.3"
Difficulty: Hard
#1. ou own a !ond that has a duration of o f 2 ears. +nterest rates are currentl %" !ut ou !eliee the
"∆P F -2
F -1.0"
Difficulty: Medium
##. @ien its ti(e to (aturit the duration of a 'ero coupon !ond is . A. higher A. higher when the discount rate is higher B. higher B. higher when the discount rate is lower C. lowest C. lowest when the discount rate is equal to the ris5 free rate D. the sa(e regardless of the discount rate
Difficulty: Easy
11-#2
Chapter 11 - Managing Bond Portfolios
#3. An increase in a !ond7s ield to (aturit results in a price decline that is the price increase resulting fro( a decrease in ield of equal (agnitude. A. greater A. greater than B. equialent B. equialent to C. s(aller than &. /he &. /he answer is indeter(inate
Difficulty: Medium
#. All other things equal, a !ond7s duration is . A. higher A. higher when the ield to (aturit is higher B. lower when the ield to (aturit is higher C. the C. the sa(e at all ield rates &. indeter(ina!le &. indeter(ina!le when the ield to (aturit is high
Difficulty: Medium
#. A !an5 has an aerage duration of its lia!ilities equal to # ears. /he !an57s aerage duration of its assets is 3. ears. /he !an57s (ar5et alue of equit is at ris5 if . A. interest A. interest rates fall B. credit B. credit spreads fall C. interest rates rise &. the &. the price of all fi*ed inco(e securities rises
Difficulty: Medium
#2. All other things equal, a !ond7s duration is . A. higher A. higher when the coupon rate is higher B. lower when the coupon rate is higher C. the C. the sa(e when the coupon rate is higher &. indeter(inate &. indeter(inate when the coupon rate is high
Difficulty: Easy
11-#%
Chapter 11 - Managing Bond Portfolios
#%. Ban5s and other financial institutions can !est (anage interest rate ris5 ! . A. (a*i(i'ing A. (a*i(i'ing the duration of assets and (ini(i'ing the duration of lia!ilities B. (ini(i'ing B. (ini(i'ing the duration of assets and (a*i(i'ing the duration of lia!ilities C. (atching the durations of their assets and lia!ilities &. (atching &. (atching the (aturities of their assets and lia!ilities
Difficulty: Medium
#. +n the conte*t of a !ond portfolio, price ris5 and reinest(ent rate ris5 e*actl cancel out at a ti(e hori'on equal to . A. the A. the aerage !ond (aturit in the portfolio B. the duration of the portfolio C. the C. the difference !etween the shortest duration and longest duration of the indiidual !onds in the portfolio &. the &. the aerage of the shortest duration and longest duration of the !onds in the portfolio
Difficulty: Easy
#$. Bond portfolio i((uni'ation techniques !alance and ris5. A. price9 reinest(ent B. price9 B. price9 liquidit C. credit9 C. credit9 reinest(ent &. credit9 &. credit9 liquidit
Difficulty: Easy
11-#
Chapter 11 - Managing Bond Portfolios
30. ou hae purchased a @uaranteed +nest(ent contracts @+Cs fro( an insurance fir( that pro(ises to pa ou a " " co(pound rate of return per ear for 2 ears. +f ou pa )10,000 for the @+C toda and receie no interest along the wa ou will get in 2 ears to the nearest dollar. A. )1#,2 A. )1#,2 B. )13,000 B. )13,000 C. )13,01 &. )13,2%2 &. )13,2%2 10,0001.02 F )13,01
Difficulty: Easy
31. /he duration of a portfolio of !onds can !e calculated as . A. the A. the coupon weighted aerage a erage of the durations of the indiidual !onds in the portfolio B. the B. the ield weighted aerage of the durations of the indiidual !onds in the portfolio C. the alue weighed aerage of the durations of the indiidual !onds in the portfolio &. aerages &. aerages of the durations of the longest and shortest duration !onds in the portfolio
Difficulty: Medium
3#. Pension fund (anagers can generall !est !ring a!out an effectie reduction in their interest rate ris5 ! holding . A. long A. long (aturit !onds B. long duration !onds C. short C. short (aturit !onds &. short &. short duration !onds
Difficulty: Medium
11-#$
Chapter 11 - Managing Bond Portfolios
33. hich of the following is not a tpe of !ond swap used in actie portfolio (anage(ent? A. +nter-(ar5et A. +nter-(ar5et spread swap B. 6u!stitution B. 6u!stitution swap C. Date C. Date anticipation swap D. Asset-lia!ilit swap
Difficulty: Easy
3. /he e*change of one !ond for a !ond with si(ilar attri!utes !ut (ore attractiel priced is called . A. a su!stitution swap B. an B. an inter(ar5et spread swap C. rate C. rate anticipation swap &. pure &. pure ield pic5up swap
Difficulty: Easy
3. Dan5 the interest sensitiit of the following fro( (ost sensitie to an interest rate cha nge to the least sensitie. +. " coupon, noncalla!le #0 ear (aturit, par !ond ++. $" coupon, currentl calla!le #0 ear (aturit, pre(iu( !ond +++. Eero coupon, 30 ear (aturit !ond A. +, A. +, ++, +++ B. ++, B. ++, +++, + C. +++, +, ++ &. +++, &. +++, ++, +
Difficulty: Hard
32. A !ond swap (ade in response to forecasts of interest rate changes is called . A. a A. a su!stitution swap B. an B. an inter(ar5et spread swap C. rate anticipation swap &. pure &. pure ield pic5up swap
Difficulty: Easy
11-30
Chapter 11 - Managing Bond Portfolios
3%. Moing to higher ield !onds, ! onds, usuall with longer (aturities is called . A. a A. a su!stitution swap B. an B. an inter(ar5et spread swap C. rate C. rate anticipation swap D. pure ield pic5up swap
Difficulty: Easy
3. +n a pure ield pic5up swap, !onds are e*changed for !onds. A. longer A. longer duration9 shorter duration B. shorter duration9 longer duration C. high C. high coupon9 high ield &. low &. low ield9 high ield
Difficulty: Easy
3$. /he duration rule alwas the alue of a !ond following a change in its ield. A. under-esti(ates B. proides B. proides an un!iased esti(ate of C. oer-esti(ates C. oer-esti(ates &. /he &. /he esti(ated price (a !e !iased either upward or downward, depending on whether the !ond is trading at a discount or a pre(iu(
Difficulty: Medium
0. here F ield to (aturit, the duration of a perpetuit would !e . A. A. B. 81 B. 81 C. 18 C. 18 D. 1 8
Difficulty: Medium
11-31
Chapter 11 - Managing Bond Portfolios
1. A !ond currentl has a price of )1,00. /he ield on the !ond is 2.00". +f the ield increases # !asis points, the price of the !ond ! ond will go down to )1 )1,030. ,030. /he duration of this !ond is ears. A. %.2 A. %.2 B. .0 C. $.0# C. $.0# &. 10.11 &. 10.11
∆P
F
F -0.01$
∆P
F -0.01$ F -&ur
9 &ur F .0
Difficulty: Medium
#. A !ond has a current price of )1,030. /he ield on the !ond is .00". +f the ield changes fro( .00" to .10", the price of the !ond will go down to )1,0#.. /he (odified duration of this !ond is . A. .3# A. .3# B. .00 C. 3.# C. 3.# &. 3.% &. 3.%
∆P
F
∆P
F -0.00 F -&ur
&ur MG& MG& F
F -0.00 9 &ur F .3#
F
Difficulty: Hard
11-3#
Chapter 11 - Managing Bond Portfolios
3. A !an5 has )0 (illion in assets, )% (illion in lia!ilities and )3 (illion in shareholders7 equit. +f the duration of its lia!ilities are 1.3 and the !an5 wants to i((uni'e its net worth against interest rate ris5 and thus set the duration of equit equal to 'ero, it should select assets with an aerage duration of . A. 1.## B. 1.0 B. 1.0 C. 1.20 C. 1.20 &. #.00 &. #.00 0,000,000&A F %,000,000 1.39 &A F 1.##
Difficulty: Medium
. A perpetuit pas )100 each and eer ear foreer. /he duration of this perpetuit will !e if its ield is $". A. % A. % B. $ B. $ C. $.3$ C. $.3$ D. 1#.11
Difficulty: Medium
A !ond pas annual interest. +ts coupon rate is $". +ts alue at (aturit is )1,000. +t (atures in four ears. +ts ield to (aturit is currentl 2".
11-33
Chapter 11 - Managing Bond Portfolios
. /he duration of this !ond is ears. A. #. A. #. B. 3.#3 B. 3.#3 C. 3.2 &. .10 &. .10
&uration F 3.2
Difficulty: Hard
2. /he (odified duration of this !ond is ears. A. .00 A. .00 B. 3.2 B. 3.2 C. 3.32 &. 3.0 &. 3.0 &ur MG& MG& F 3.281.02 F 3.32 ears
Difficulty: Hard
%. A !ond has a (aturit of 1# ears, a duration of o f $. ears at a pro(ised ield rate of ". hat is the !ond7s (odified duration? A. 1# A. 1# ears B. 11.1 B. 11.1 ears C. $. C. $. ears D. . ears &ur MG& MG& F $.81.0 F . ears
Difficulty: Easy
11-3
Chapter 11 - Managing Bond Portfolios
. A #0-ear (aturit !ond pas interest of )$0 once per ear and has a face alue of )1,000. +ts ield to (aturit is 10". Ger the upco(ing ear, ou e*pect interest rates to decline and that the ield to (aturit on this !ond will onl !e " a ear fro( now. Hsing hori'on analsis, the return ou e*pect to earn ! holding this !ond oer the upco(ing ear is . A. 10.0" A. 10.0" B. 1#.0" B. 1#.0" C. #1.2" C. #1.2" D. #$.2"
use financial calculator to calculate PJ10", #0 and PJ", 1$
Difficulty: Hard
$. A !ond with a $-ear duration is worth )1,00.00 and its ield to (aturit is ". +f the ield to (aturit falls to %.", ou would predict that the new alue of the !ond will !e . A. )1,03 A. )1,03 B. )1,032 B. )1,032 C. )1,0$ &. )1,1# &. )1,1#
Difficulty: Hard
0. hen interest rates increase, the duration of a #0-ear !ond selling at a pre(iu( . A. increases A. increases B. decreases C. re(ains C. re(ains the sa(e &. increases &. increases at first, then declines
Difficulty: Easy
11-3
Chapter 11 - Managing Bond Portfolios
1. &uration facilitates the co(parison of !onds with differing . A. default A. default ris5 B. conersion B. conersion ratios C. (aturities &. ields &. ields to (aturit
Difficulty: Easy
#. /he historical ield spread !etween the AA !ond and the AAA !ond has !een # !asis points. Currentl the spread is onl $ !asis points. +f ou ou !eliee the spread will soon return to its historical leels ou should . A. !u A. !u the AA and short the AAA B. !u B. !u !oth the AA and the AAA C. !u the AAA and short the AA &. short &. short !oth the AA and the AAA
Difficulty: Medium
3. /he duration of a !ond nor(all increases with an increase in . +. ter(-to-(aturit ++. ield-to-(aturit. +++. coupon rate A. + onl B. + B. + and ++ onl C. ++ C. ++ and +++ onl &. +, &. +, ++ and +++
Difficulty: Medium
11-32
Chapter 11 - Managing Bond Portfolios
. A fi*ed inco(e portfolio (anager sets a (ini(u( accepta!le rate of return on the !ond portfolio at " per ear oer the ne*t ears. /he portfolio is currentl worth )10 (illion. (illion. Gne ear later interest rates are at 2". hat is the portfolio alue trigger point at this ti(e that would require hi( to i((uni'e the portfolio? A. )1#,1,023 A. )1#,1,023 B. )10,#0,2# C. )$,2#%,$ C. )$,2#%,$ &. )10,00,000 &. )10,00,000 Mini(u( ter(inal alue F )10 (ill.1.0 F )1#,1,02#.0 /rigger point alue F )1#,1,02#.081.023 F )10,#0,2#
Difficulty: Hard
. Co(pute the duration of an ", -ear corporate !ond with a par alue of )1000 if ield to (aturit of 10". A. 3.$# A. 3.$# B. .# C. . C. . &. .00 &. .00
Difficulty: Medium
11-3%
Chapter 11 - Managing Bond Portfolios
2. Co(pute the (odified duration of a $" coupon, 3-ear corporate !ond with a ield to (aturit of 1#". A. #. B. #.% B. #.% C. #. C. #. &. 3.00 &. 3.00
Difficulty: Medium
%. An ", 30-ear !ond has a ield-to-(aturit of 10" and a (odified duration of .0 ears. +f the (ar5et ield drops ! 1 !asis points, there will !e a in the !ond7s price. A. 1.1" A. 1.1" decrease B. 1.#0" increase C. 1.3" C. 1.3" increase &. #.3" &. #.3" decrease ∆P8P F - .0 0.001 F - 0.01#
Difficulty: Medium
11-3
Chapter 11 - Managing Bond Portfolios
. /o create a portfolio with a duration of ears using a ear 'ero-coupon !ond and a 3 ear " annual coupon !ond with a ield to (aturit of 10", one would hae to inest of the portfolio alue in the 'ero-coupon !ond. A. 0" A. 0" B. " C. 20" C. 20" &. %" &. %"
Difficulty: Hard
$. hich of the following set of conditions c onditions will result in a !ond with the greatest price olatilit? A. A A. A high coupon and a short (aturit. B. A B. A high coupon and a long (aturit. C. A C. A low coupon and a short (aturit. D. A low coupon and a long (aturit.
Difficulty: Easy
20. An inestor who e*pects declining d eclining interest rates would (a*i(i'e their capital gain ! purchasing a !ond that has a coupon and a ter( to (aturit. A. low9 A. low9 long B. high9 B. high9 short C. high9 C. high9 long D. 'ero9 long
Difficulty: Easy
11-3$
Chapter 11 - Managing Bond Portfolios
21. +f ou choose a 'ero coupon !ond with a (aturit that (atches our inest(ent hori'on which of the following state(ents is8are correct? +. ou will hae no interest rate ris5 on this !ond. ++. A!sent default, ou can !e sure ou will earn the pro(ised ield rate. +++. /he duration of our !ond is less than the ti(e to our inest(ent hori'on. A. + A. + onl B. + and ++ onl C. ++ C. ++ and +++ onl &. +, &. +, ++ and +++
Difficulty: Easy
2#. As co(pared with equialent (aturit !onds selling at par, deep discount !onds !ond s will hae . A. greater A. greater reinest(ent ris5 B. greater price olatilit C. less C. less call protection &. shorter &. shorter aerage (aturit
Difficulty: Easy
6teel Pier Co(pan has issued !onds that pa se(iannuall with the following characteristicsI
11-0
Chapter 11 - Managing Bond Portfolios
23. /he (odified duration for the 6teel Pier !ond is . A. 2.1 ears B. .$ B. .$ ears C. 2.$ C. 2.$ ears &. $.0$ &. $.0$ ears &ur MG& MG& F 2.%281.10 F 2.1 ears
Difficulty: Medium
2. +f the !ond7s coupon was s(aller than 10", the (odified duration would !e co(pared to the original (odified duration. A. larger B. unchanged B. unchanged C. s(aller C. s(aller &. /here &. /here is not enough infor(ation to deter(ine the direction of change
Difficulty: Easy
2. +f the (aturit of the !ond was less than 10 ears, the (odified duration would !e co(pared to the original (odified duration. A. larger A. larger B. unchanged B. unchanged C. s(aller &. /here &. /here is not enough infor(ation to deter(ine the direction of change
Difficulty: Easy
11-1
Chapter 11 - Managing Bond Portfolios
22. +f the ield to (aturit decreases to .0" the e*pected percentage change in the price of the !ond using Macaule7s duration would !e , while the e*pected percentage change in the price of the !ond using (odified duration would !e . A. 11", A. 11", 1#" B. 1#", B. 1#", 11" C. 1#", 1#" &. 11", &. 11", 11"
"∆P F
9 "∆P is the sa(e using &ur MG& MG&
Difficulty: Hard
2%. A #0 ear (aturit corporate !ond has a 2." coupon rate the coupons are paid annuall. /he !ond currentl sells for )$#.0. A !ond (ar5et analst forecasts that in fie ears ield rates on these !onds will !e at %.0". ou !eliee that ou will !e a!le to reinest the coupons earned oer the ne*t fie ears at a 2" rate of return. hat is our e*pected annual co(pound rate of return if ou plan on selling the !ond in fie ears? A. %.3%" B. %.2" B. %.2" C. .1#" C. .1#" &. ." &. ."
PBond F /otal
Difficulty: Hard
11-#
Chapter 11 - Managing Bond Portfolios
2. hen !onds sell a!oe par, what is the relationship of price sensitiit to rising interest rates? A. Price A. Price olatilit increases at an increasing rate B. Price B. Price olatilit increases at a decreasing rate C. Price olatilit decreases at a decreasing rate &. Price &. Price olatilit decreases at an increasing rate
Difficulty: Medium
2$. A 'ero coupon !ond is selling at a deep discount price of )30.00. +t (atures in 13 ears. +f the ield to (aturit of the !ond is 2.%", what is the duration of the !ond? A. 2.% A. 2.% ears B. .0 B. .0 ears C. 10 C. 10 ears D. 13 ears &uration of a 'ero-coupon !ond is equal to its (aturit.
Difficulty: Easy
%0. ou hae an inest(ent that in toda7s dollars returns 1" of our inest(ent in ear 1, 1#" in ear two, $" in ear 3 and the re(ainder in ear . hat is the duration of this inest(ent? A. A. ears B. 3.0 B. 3.0 ears C. 3.## ears &. #.$ &. #.$ ears &ur F 1"1 1#"# $"3 2" F 3.## ears
Difficulty: Medium
11-3
Chapter 11 - Managing Bond Portfolios
%1. +f an inest(ent returns a higher percentage of our (one !ac5 sooner it will . A. !e less price olatile B. hae B. hae a higher credit rating C. !e C. !e less liquid &. hae &. hae a higher (odified duration
Difficulty: Easy
%#. hich one of the following state(ents correctl descri!es the weights used in the Macaula duration calculation? /he weight in ear t is equal to . A. the A. the dollar a(ount of the inest(ent receied in ear t B. the B. the percentage of the future alue of the inest(ent receied in ear t C. the C. the present alue of the dollar a(ount of the inest(ent receied in ear t D. the percentage of the total present alue of the inest(ent receied in ear t
Difficulty: Hard
%3. /he duration is independent of the coupon rate onl for which one of the following? A. &iscount A. &iscount !onds B. Pre(iu( B. Pre(iu( !onds C. Perpetuities &. 6hort &. 6hort ter( !onds
Difficulty: Medium
%. ou hae an inest(ent hori'on of 2 ears. ou choose to hold a !ond with a duration of 10 ears. our reali'ed rate of return will !e larger than the pro(ised ield on the !ond if . A. interest A. interest rates increase B. interest B. interest rates sta the sa(e C. interest rates fall &. one &. one can7t tell with the infor(ation gien
Difficulty: Medium
11-
Chapter 11 - Managing Bond Portfolios
%. A !ond portfolio (anager notices a hu(p in the ield cure at the fie ear point. >ow (ight a !ond (anager ta5e adantage of this eent? A. Bu the ear !onds and short the surrounding (aturit !onds B. Bu B. Bu the ear !onds and !u the surrounding (aturit !onds C. 6hort C. 6hort the ear !onds !o nds and short the surrounding (aturit !onds &. 6hort &. 6hort the ear !onds and !u the surrounding (aturit !onds
Difficulty: Medium
%2. Mar5et econo(ists all predict a rise in interest rates. An astute !ond (anager wishing to (a*i(i'e her capital gain (ight e(plo which strateg? A. 6witch A. 6witch fro( low duration to high duration du ration !onds. B. 6witch fro( high duration to low duration !onds. C. 6witch C. 6witch fro( high grade to low grade !onds. &. 6witch &. 6witch fro( low coupon to high coupon !onds.
Difficulty: Medium
%%. ou hae an inest(ent hori'on of 2 ears. ou choose to hold a !ond with a duration of ears. our reali'ed rate of return will !e larger than the pro(ised ield on the !ond if . A. interest rates increase B. interest B. interest rates sta the sa(e C. interest C. interest rates fall &. one &. one can7t tell with the infor(ation gien
Difficulty: Medium
%. hat strateg (ight an insurance co(pan e(plo to ensure that it will !e a!le to (eet the o!ligations of annuit holders? A. Cash flow (atching B. +nde* B. +nde* trac5ing C. ield C. ield pic5up swaps &. 6u!stitution &. 6u!stitution swap
Difficulty: Medium
11-
Chapter 11 - Managing Bond Portfolios
%$. ou hae an inest(ent hori'on of 2 ears. ou choose to hold a !ond with a duration of 2 ears and continue to (atch our inest(ent hori'on and duration throughout our holding period. our reali'ed rate of return will !e the sa(e as the pro(ised ield ield on the !ond if +. interest rates increase ++. interest rates sta the sa(e +++. interest rates fall A. + A. + onl B. ++ B. ++ onl C. + C. + and ++ onl D. +, ++ and +++
Difficulty: Medium
0. +((uni'ation of coupon paing !onds is not a passie strateg !ecause +. the portfolio (ust !e re!alanced eer ti(e interest rates change ++. the portfolio (ust !e re!alanced oer ti(e een if interest rates don7t change +++. cone*it i(plies duration !ased i((uni'ation strategies don7t wor5 A. + A. + onl B. + and ++ onl C. ++ C. ++ onl &. +, &. +, ++ and +++
Difficulty: Medium
1. Adantages of cash flow (atching and dedicated strategies include . +. once the cash flows are (atched there is no need for re!alancing ++. cash flow (atching tpicall earns a higher rate of return than actie !ond portfolio (anage(ent +++. financial institution7s lia!ilities lia!ilities often e*ceed the (aturit of aaila!le !onds, (a5ing cash (atching een (ore desira!le A. + onl B. ++ B. ++ onl C. + C. + and +++ onl &. +, &. +, ++ and +++
Difficulty: Medium
11-2
Chapter 11 - Managing Bond Portfolios
#. Cone*it i(plies that duration predictions . +. underesti(ate the " increase in !ond price when the ield falls ++. underesti(ate the " decrease in !ond price when the ield rises +++. oeresti(ates the " increase in !ond price when the ield falls +J. oeresti(ates the " decrease in !ond price when the ield rises A. + A. + and +++ onl B. ++ B. ++ and +J onl C. + and +J onl &. ++ &. ++ and +++ onl
Difficulty: Hard
3. ou hae a # ear (aturit 10" coupon, 10" ield !ond with duration of 10 ears and a cone*it of 13.0. +f interest rate were to fall 1# !asis points our predicted new price p rice for the !ond including cone*it is . A. )10$. A. )10$. B. )110.2 B. )110.2 C. )1113.1 C. )1113.1 D. )11#.#0 PJ0 F )1,000 "∆P F P Lew F )1,0001 0.1## F )1,1#.#0
Difficulty: Hard
11-%
Chapter 11 - Managing Bond Portfolios
. ou hae a 1 ear (aturit " coupon, 2" ield !ond with duration of 10. ears and a cone*it of 1#.%. /he !ond is currentl priced at )0.%2. +f interest rate were to increase #00 !asis points our predicted new price for the !ond including cone*it is . A. )23. A. )23. B. )2#. B. )2#. C. )222. &. )%0.03 &. )%0.03 PJ0 F )0.%2 "∆P F P Lew F )0.%21 -0.1%# F )222.
Difficulty: Hard
. Cone*it of a !ond is . A. the A. the sa(e as hori'on analsis B. the rate of change of the price-ield cure diided ! !ond price C. a C. a (easure of !ond duration &. none &. none of the a!oe
Difficulty: Medium
11-
