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29
13) The duration of a bond will increase as the time to maturity ________ and/or as the YTM
on the bond ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
14) A $1,000 par value, 5% annual coupon bond matures in 4 years. The bond is currently
priced at $965.35 and has a YTM of 6.0%. What is the Macaulay duration?
A) .43 years
B) 3.68 years
C) 2.81 years
D) 4.00 years
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
15) A portfolio consists of three bonds as follows.
What is the duration of the bond portfolio?
A) 7.12 years
B) 8.07 years
C) 8.69 years
D) 11.4 years
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
30
16) A bond matures in 30 years, has a 20 year duration and a yield to maturity of 9.32%. The
market interest rate has increased by 0.47%. The modified duration is
A) 9.4 years.
B) 14.1 years.
C) 18.29 years.
D) 27.44 years.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
17) A bond matures in 30 years, has a 20 year duration and a yield to maturity of 9.32%. The
change in the level of the market interest rate is 0.47%. The modified duration is ________ and
the percentage change in price is ________.
A) 9.4 years; -.47%
B) 14. years; 4.7%
C) 18.29 years.; -8.6%
D) 18.29 years.; 8.6%
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
18) The mathematical link between a bond's price and interest rate changes is the
A) Macaulay duration.
B) modified duration.
C) yield to market.
D) yield-to-call.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
31
19) A bond has a YTM of 6.75%, a modified duration of 14.05 years, a duration of 15 years
and a 20 year maturity. By what percentage will the bond's price change if market interest rates
decrease by 0.75%?
A) -0.750 percent
B) +0.750 percent
C) +10.53 percent
D) -10.53 percent
prices change
AACSB: 3 Analytical thinking
Question Status: New Question
Learning Goal: Learning Goal 5
20) If the bond market undergoes a large change in yield (for example, more than 100 basis
points), then a bond's duration will
A) understate both the price appreciation when rates fall and the price decline when rates
increase.
B) overstate both the price appreciation when rates fall and the price decline when rates
increase.
C) overstate the price appreciation when rates fall and understate the price decline when rates
increase.
D) understate the price appreciation when rates fall and overstate the price decline when rates
increase.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
21) The practical application of bond portfolio immunization to investors is that immunization
A) allows aggressive traders to eliminate the price effects caused by interest rate changes.
B) allows investors to derive a specified rate of return from bond investments for a given
investment horizon.
C) eliminates the possibility of losing money due to a company defaulting on its bond
payments.
D) allows investors to passively manage their bond portfolio once it is initially immunized.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
32
22) Explain the basic concept of bond duration and why this measure is meaningful to
investors.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
23) Explain the concept of bond immunization and the benefits derived from using this
technique.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 5
11.6 Learning Goal 6
1) In building a bond ladder, an investor invests an equal amount in a series of bonds with
staggered maturities.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
2) A major advantage of passive bond strategies is low transaction costs.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
33
3) A major advantage of passive bond strategies is that the portfolio of bonds does not need to
be monitored and no actions are required beyond the initial purchase of bonds.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
4) When conducting a tax swap, an investor must use identical issues in order for the swap to
be allowed by the IRS.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
5) Buying bonds in anticipation of an expected decline in interest rates is a risky strategy.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
6) Once a bond portfolio is initially immunized, an investor should maintain the portfolio as it
is until the end of the investment horizon.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
7) The main purpose of a bond ladder is to
A) lessen the effects of changes in interest rates.
B) achieve the highest level of capital gains possible.
C) maintain a highly liquid portfolio.
D) offset the effects of bond duration.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
34
8) Active bond trading strategies include
I. buy and hold.
II. trading on forecasted interest rate behavior.
III. bond ladders.
IV. bond swaps.
A) I and III
B) II and IV
C) I, II and III
D) II, III and IV
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
9) Reasons for using a bond ladder strategy include
I. typically higher rates on long-term bonds.
II. uncertainty concerning future interest rates.
III. lower tax rates on bonds held to maturity.
IV. reducing the amount of time spent managing the bond portfolio.
A) I and III
B) II and IV
C) I, II and III
D) I, II and IV
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
35
10) Investors using a passive bond investment strategy will need to
I. buy or sell in anticipation of expected changes in interest rates.
II. replace bonds as they mature.
III. replace bonds as they are called.
IV. replace bonds when major changes in risk ratings occur.
A) I and III only
B) II, III and IV only
C) I, II and III only
D) I, II, III and IV
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
11) Some common types of bond swaps are
I. tax swaps.
II. yield pickup swaps.
III. substitution swaps.
IV. credit default swaps.
A) I and III
B) II and IV
C) I, II and III
D) I, II and IV
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
36
12) Suppose you sell the 10-year, A-rated 7 percent bonds you own, which are yielding 8
percent, and replace them with an equal amount of 10-year, A-rated 8 percent bonds that are
priced to yield 9 percent. In this situation, you are executing
A) an immunization deal.
B) a yield pickup swap.
C) a laddered bid.
D) a spread bid.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
13) In a tax swap, a bond investor typically
A) sells an issue which has a capital loss and replaces it with a comparable security.
B) sells an issue that has a capital gain and replaces it with a comparable security.
C) swaps a lower-yielding security for a higher-yielding security.
D) swaps a higher-yielding security for a lower-yielding security.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
14) Explain the technique and the purpose of building bond ladders.
prices change
AACSB: 3 Analytical thinking
Question Status: Previous Edition
Learning Goal: Learning Goal 6
