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| 1.
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The modified duration of a zero coupon bond with a maturity of 4 years and yield to maturity of 5% is ______________. |
| | A) | 4.2 |
| | B) | 4.0 |
| | C) | 3.8 |
| | D) | Cannot be determined. |
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| 2.
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Which of the following bonds would have the smallest price change when interest rates drop? |
| | A) | 10-year maturity, 8% coupon rate. |
| | B) | 10-year maturity, 5% coupon rate. |
| | C) | 15-year maturity, 8% coupon rate. |
| | D) | 15-year maturity, 5% coupon rate. |
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| 3.
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The price of a bond decreases by $19.6 when the yield on the bond changes from 8% to 8.5%. If the duration of the bond is 4.32 years, the current price of the bond is ______________. |
| | A) | $1,040 |
| | B) | $1,000 |
| | C) | $980 |
| | D) | $920 |
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| 4.
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What is the duration of an 8% annual coupon bond that has a 3 years maturity, a yield to maturity of 6%, and a par value of $1,000? |
| | A) | 3.27 |
| | B) | 3.00 |
| | C) | 2.79 |
| | D) | 2.46 |
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| 5.
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The approximate percent change of a bond's value obtained from using the duration concept is always ______________ the actual percentage change. |
| | A) | the same as |
| | B) | smaller than |
| | C) | greater than |
| | D) | Not enough information to determine. |
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| 6.
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A bond is currently selling at $1,100 with a yield to maturity of 6.0% and a modified duration of 3.02 years. If the yield changes from 6.0% to 6.5%, the percentage dollar change of the bond price is ______________. |
| | A) | -1.42% |
| | B) | 1.42% |
| | C) | -1.51% |
| | D) | 1.51% |
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| 7.
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Bond A has a duration of 3 years and a market value of $800 while bond B has a duration of 7 years and a current price of $1,200. Determine the duration of a bond portfolio that consists of one A and one B. |
| | A) | 4.6 years |
| | B) | 5.0 years |
| | C) | 5.4 years |
| | D) | 6.2 years |
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| 8.
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Which of the following bond has a greater price risk? The current market risk is 7%.
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| | A) | X and Y should have the same price risk. |
| | B) | Bond X. |
| | C) | Bond Y. |
| | D) | Cannot be determined. |
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| 9.
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Assuming no changes in interest rates, the duration of a coupon bond ______________. |
| | A) | does not change over time |
| | B) | decline more slowly than its maturity |
| | C) | decline more quickly than its maturity |
| | D) | increases over time |
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| 10.
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A substitution bond swap involves exchanging ______________. |
| | A) | a bond that is overpriced with a similar bond that is underpriced |
| | B) | a bond with a similar bond to realize capital loss |
| | C) | a bond with a similar bond with a higher coupon rate |
| | D) | a bond with a similar bond to reduce tax liabilities |
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| 11.
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You expect the Federal Reserve to lower interest rates in the next meeting, in order to maximize bond price appreciation, what type of bond would you invest? |
| | A) | A 20-year bond with 8% coupon rate. |
| | B) | A 15-year bond with 8% coupon rate. |
| | C) | A 12-year bond with 8% coupon rate. |
| | D) | A 10-year bond with 8% coupon rate. |
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| 12.
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You need to payoff a personal debt in 3 years. The current market interest is 8% and you just purchased a zero-coupon bond that has a duration of 3 years in the morning. Suppose the market interest rate increases to 9% in the afternoon. Is your bond investment still immunized at the new interest rate (9%) and why? |
| | A) | Yes; because duration = investment horizon. |
| | B) | No; facing more net reinvestment risk. |
| | C) | No; facing more net price risk. |
| | D) | Not enough information to determine. |
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| 13.
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To immunize a bond investment value, an investor should match the ______________ of the investment and the ______________ of a bond investment. |
| | A) | desired value; par value |
| | B) | investment horizon; duration |
| | C) | investment horizon; maturity |
| | D) | desired value; current value |
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| 14.
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The duration of a bond with a 7% coupon rate and 10 years maturity is ______________ the duration of a bond with an 8% coupon rate and 11 years maturity. |
| | A) | equal to |
| | B) | greater than |
| | C) | less than |
| | D) | Not enough information to determine. |
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| 15.
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The current price of a bond is $1,000 with a YTM of 8%. Which of the following will result in a larger change in its price? |
| | A) | A 1% decrease in the market interest rate. |
| | B) | A 1% increase in the market interest rate. |
| | C) | A 2% decrease in the market interest rate. |
| | D) | A 2% increase in the market interest rate. |
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