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| 1 | |
A zero-coupon bond with a maturity of 4 years has a yield to maturity of 5%. What is the modified duration of the bond? |
| | A) | 4.20 |
| | B) | 4.00 |
| | C) | 3.85 |
| | D) | 3.81 |
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| 2 | |
Which of the following bonds would have the largest price change when interest rates increase? Assume that the bonds each have the same yield to maturity. |
| | 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 | |
A 10-year bond has a yield to maturity of 6.00%. The current price of the bond is $926.40 and the duration is 8.02 years. Use the duration rule to estimate the price of the bond if the yield to maturity decreases to 5.90%. |
| | A) | $919.39 |
| | B) | $933.41 |
| | C) | $933.83 |
| | D) | $996.49 |
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| 4 | |
An 8% annual-coupon bond has 3 years to maturity, a yield to maturity of 6%, and a par value of $1,000. What is the duration of this bond? |
| | A) | 3.00 |
| | B) | 2.94 |
| | C) | 2.79 |
| | D) | 2.46 |
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| 5 | |
The estimated percentage change in the value of a bond derived from the duration rule is _____________. |
| | A) | less than the actual price change when the yield decreases |
| | B) | less than the actual price change when the yield increases |
| | C) | greater than the actual price change when the yield decreases |
| | D) | always greater than the actual price change |
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| 6 | |
A bond is currently selling for $1,100 with a yield to maturity of 6.0% and a modified duration of 3.02 years. Suppose the yield of the bond changes from 6.0% to 6.5%. Use the modified duration to estimate the percentage change in the price of the bond. |
| | A) | -1.42% |
| | B) | 1.42% |
| | C) | -1.51% |
| | D) | 1.51% |
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| 7 | |
An insurance company has liabilities with a duration of 7.2 years. The insurance company wants to immunize its position with 3-year zero-coupon bonds and perpetuities. The market interest rate is 8%. What portion of the company's portfolio should be allocated to the zero-coupon bonds? |
| | A) | 40% |
| | B) | 50% |
| | C) | 60% |
| | D) | 70% |
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| 8 | |
The sensitivity of a coupon bond's price to a change in its yield ____________. |
| | A) | is directly related to the bond's yield to maturity |
| | B) | is inversely related to the bond's yield to maturity |
| | C) | is greater for increases in yield to maturity than it is for decreases in yield to maturity |
| | D) | is the same regardless of whether the yield to maturity increases or decreases |
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| 9 | |
If market interest rates remain constant, then the duration of a coupon bond selling at par ______________. |
| | A) | does not change over time |
| | B) | decreases more slowly than its maturity over time |
| | C) | decreases more rapidly than its maturity over time |
| | D) | decreases at a decreasing rate over time |
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| 10 | |
A substitution bond swap involves an exchange of______________. |
| | A) | a bond that is overpriced for a similar bond that is underpriced |
| | B) | bonds in different sectors of the bond market, based on yield spreads between the sectors |
| | C) | a bond with a short maturity for a bond with a long maturity when the investor believes market rates will fall |
| | D) | a short-duration bond for a long-duration bond in order to increase yield |
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| 11 | |
An insurance company issues a guaranteed investment contract (GIC) with a ten-year maturity. The insurance company elects to fund this obligation with a coupon bond that also has a ten-year maturity. Therefore, the insurance company is subject to ____________ in the event that market interest rates increase and to ____________ in the event that market interest rates decrease. |
| | A) | losses resulting from duration risk; losses resulting from price risk |
| | B) | losses resulting from convexity risk; losses resulting from reinvestment rate risk |
| | C) | losses resulting from reinvestment rate risk; losses resulting from price risk |
| | D) | losses resulting from price risk; losses resulting from reinvestment rate risk |
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| 12 | |
A 20-year maturity, 6% coupon bond, making annual coupon payments has a modified duration of 10.4 years and convexity of 160.4. The current price of the bond is $803.64 and the yield to maturity is 8%. Suppose the yield to maturity increases to 9%. What is the predicted percentage change in price using the duration-with-convexity rule? |
| | A) | -7.0% |
| | B) | -0.7% |
| | C) | -9.6% |
| | D) | 9.6% |
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| 13 | |
The two sources of potential value in active bond management are ______________ and ______________. |
| | A) | identifying relative mispricing;immunization |
| | B) | a dedication strategy;immunization |
| | C) | identifying relative mispricing;interest rate forecasting |
| | D) | cash flow matching;interest rate forecasting |
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| 14 | |
Rebalancing of an immunized bond portfolio ____________. |
| | A) | is necessary only when market interest rates change |
| | B) | is unnecessary because rebalancing incurs transaction costs |
| | C) | is necessary because, as time passes, the duration of a liability can change at a different rate than the duration of an asset |
| | D) | is necessary because, as time passes, the duration of liabilities generally decreases while the duration of assets generally increases |
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| 15 | |
A 10-year maturity bond has a 7% coupon rate, paid annually, and a yield to maturity of 6%. The current price of the bond is $1,073.60. A portfolio manager with a two-year horizon forecasts that, two years from today, 8-year bonds will sell at a yield to maturity of 7%, and that coupon payments can be reinvested in short-term securities over the coming two years at 5%. What is the two-year return for this bond? |
| | A) | 3.2% |
| | B) | 3.3% |
| | C) | 6.0% |
| | D) | 6.5% |
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