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Investments, 4th Canadian Edition, 4/e

Zvi Bodie, Boston University School of Management
Alex Kane, University of California, San Diego
Alan Marcus, Boston College
Stylianos Perrakis, Concordia University
Peter Ryan, University of Ottawa

Managing Bond Portfolios

Multiple Choice Quiz

Prepared by William Lim, University of New Brunswick.


1	The duration of a bond is a function of the bond's
		A)	coupon rate.
		B)	time to maturity.
		C)	yield to maturity.
		D)	all of the above.
		E)	none of the above.


2	The "modified duration" used by practitioners is equal to the Macaulay duration
		A)	times the change in interest rate.
		B)	times (one plus the bond's yield to maturity).
		C)	divided by (one plus the bond's yield to maturity).
		D)	divided by (one minus the bond's yield to maturity).
		E)	none of the above.


3	Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par value bond, X, with a 5-year-to-maturity and a 10% coupon rate. 2) A zero-coupon bond, Y, with a 5-year-to-maturity and a 10% yield-to-maturity.
		A)	Bond Y because of the longer duration.
		B)	Bond X because of the 10% coupon rate.
		C)	Bond X because the yield to maturity may be higher.
		D)	Both have the same sensitivity because both have the same yield to maturity.
		E)	None of the above


4	Active bond portfolio management strategies include all of the following except
		A)	immunization.
		B)	rate anticipation swap.
		C)	intermarket spread.
		D)	substitution swap.
		E)	none of the above.


5	Which of the following is not true?
		A)	Holding other things constant, the duration of a bond increases with time to maturity.
		B)	Given time to maturity and yield to maturity, the duration of a bond is higher when the coupon rate is lower.
		C)	Given time to maturity, the duration of a zero-coupon decreases with yield to maturity.
		D)	Duration is a better measure of price sensitivity to interest rate changes than is time to maturity.
		E)	None of the above.


6	The two components of interest-rate risk are
		A)	price risk and default risk.
		B)	price risk and reinvestment risk.
		C)	call risk and price risk.
		D)	reinvestment risk and systematic risk.
		E)	none of the above.


7	Indexing of bond portfolios is difficult because
		A)	the number of bonds included in the major indexes is so large that it would be difficult to purchase them in the proper proportions.
		B)	many bonds are thinly traded so it is difficult to purchase them at a fair market price.
		C)	the composition of bond indexes is constantly changing.
		D)	all of the above are true.
		E)	none of the above are true.


8	Duration
		A)	a. assesses the time element of bonds in terms of both coupon and term to maturity.
		B)	b. is a direct comparison between bond issues with different levels of risk.
		C)	c. allows structuring a portfolio to avoid interest-rate risk.
		D)	a and b.
		E)	a and c.


9	The duration of a bond normally increases with an increase in
		A)	yield to maturity.
		B)	term to maturity.
		C)	coupon rate.
		D)	all of the above.
		E)	none of the above.


10	Immunization is not a strictly passive strategy because
		A)	it requires choosing an asset portfolio that matches an index.
		B)	there is likely to be a gap between the values of assets and liabilities in most portfolios.
		C)	durations of assets and liabilities fall at the same rate.
		D)	it requires frequent rebalancing as maturities and interest rates change.
		E)	none of the above.

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