Essentials of Investments, 11e (Bodie)
1) All other things equal (YTM = 10%), which of the following has the longest duration?
A) a 30-year bond with a 10% coupon
B) a 20-year bond with a 9% coupon
C) a 20-year bond with a 7% coupon
D) a 10-year zero-coupon bond
2) All other things equal (YTM = 10%), which of the following has the shortest duration?
A) a 30-year bond with a 10% coupon
B) a 20-year bond with a 9% coupon
C) a 20-year bond with a 7% coupon
D) a 10-year zero-coupon bond
3) A pension fund must pay out $1 million next year, $2 million the following year, and then $3
million the year after that. If the discount rate is 8%, what is the duration of this set of payments?
A) 2 years
B) 2.15 years
C) 2.29 years
D) 2.53 years
4) All other things equal, which of the following has the longest duration?
A) A 20-year bond with a 10% coupon yielding 10%
B) A 20-year bond with a 10% coupon yielding 11%
C) A 20-year zero-coupon bond yielding 10%
D) A 21-year bond with a 10% coupon yielding 10%
5) The duration of a perpetuity varies ________ with interest rates.
A) directly
B) inversely
C) convexly
D) randomly
6) Because of convexity, when interest rates change, the actual bond price will ________ the
bond price predicted by duration.
A) always be higher than
B) sometimes be higher than
C) always be lower than
D) sometimes be lower than
7) You find a 5-year AA Xerox bond priced to yield 6%. You find a similar-risk 5-year Canon
bond priced to yield 6.5%. If you expect interest rates to rise, which of the following should you
do?
A) Short the Canon bond, and buy the Xerox bond.
B) Buy the Canon bond, and short the Xerox bond.
C) Short both the Canon bond and the Xerox bond.
D) Buy both the Canon bond and the Xerox bond.
8) A forecast of bond returns based largely on a prediction of the yield curve at the end of the
investment horizon is called a ________.
A) contingent immunization
B) dedication strategy
C) duration analysis
D) horizon analysis
9) A bond’s price volatility ________ at ________ rate as maturity increases.
A) increases; an increasing
B) increases; a decreasing
C) decreases; an increasing
D) decreases; a decreasing
10) As a result of bond convexity, an increase in a bond’s price when yield to maturity falls is
________ the price decrease resulting from an increase in yield of equal magnitude.
A) greater than
B) equivalent to
C) smaller than
D) The answer cannot be determined from the information given.
11) All else equal, bond price volatility is greater for ________.
A) higher coupon rates
B) lower coupon rates
C) shorter maturity
D) lower default risk
12) ________ is an important characteristic of the relationship between bond prices and yields.
A) Convexity
B) Concavity
C) Complexity
D) Linearity
13) Bond prices are ________ sensitive to changes in yield when the bond is selling at a
________ initial yield to maturity.
A) more; lower
B) more; higher
C) less; lower
D) equally; higher or lower
14) The pioneer of the duration concept was ________.
A) Eugene Fama
B) John Herzog
C) Frederick Macaulay
D) Harry Markowitz
15) A portfolio manager sells Treasury bonds and buys corporate bonds because the spread
between corporate- and Treasury-bond yields is higher than its historical average. This is an
example of ________ swap.
A) a pure yield pickup
B) a rate anticipation
C) a substitution
D) an intermarket spread
16) The duration of a 5-year zero-coupon bond is ________ years.
A) 4.5
B) 5
C) 5.5
D) 3.5
17) A portfolio manager believes interest rates will drop and decides to sell short-duration bonds
and buy long-duration bonds. This is an example of ________ swap.
A) a pure yield pickup
B) a rate anticipation
C) a substitution
D) an intermarket spread
18) Target date immunization would primarily be of interest to ________.
A) banks
B) mutual funds
C) pension funds
D) individual investors
19) Duration is a concept that is useful in assessing a bond’s ________.
A) credit risk
B) liquidity risk
C) price volatility
D) convexity risk
20) A pension fund has an average duration of its liabilities equal to 15 years. The fund is
looking at 5-year maturity zero-coupon bonds and 4% yield perpetuities to immunize its interest
rate risk. How much of its portfolio should it allocate to the zero-coupon bonds to immunize if
there are no other assets funding the plan?
A) 52.38%
B) 48.38%
C) 33.58%
D) 25.48%
21) You own a bond that has a duration of 6 years. Interest rates are currently 7%, but you
believe the Fed is about to increase interest rates by 25 basis points. Your predicted price change
on this bond is ________.
A) +1.4%
B) -1.4%
C) -2.51%
D) +2.51%
22) Given its time to maturity, the duration of a zero-coupon bond 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 risk-free rate
D) the same regardless of the discount rate
23) An increase in a bond’s yield to maturity results in a price decline that is ________ the price
increase resulting from a decrease in yield of equal magnitude.
A) greater than
B) equivalent to
C) smaller than
D) The answer cannot be determined.
24) All other things equal, a bond’s duration is ________.
A) higher when the yield to maturity is higher
B) lower when the yield to maturity is higher
C) the same at all yield rates
D) indeterminable when the yield to maturity is high
25) A bank has an average duration of its liabilities equal to 2 years. The bank’s average duration
of its assets is 3.5 years. The bank’s market value of equity is at risk if ________.
A) interest rates fall
B) credit spreads fall
C) interest rates rise
D) the price of all fixed-income securities rises
26) All other things equal, a bond’s duration is ________.
A) higher when the coupon rate is higher
B) lower when the coupon rate is higher
C) the same when the coupon rate is higher
D) indeterminable when the coupon rate is high
27) Banks and other financial institutions can best manage interest rate risk by ________.
A) maximizing the duration of assets and minimizing the duration of liabilities
B) minimizing the duration of assets and maximizing the duration of liabilities
C) matching the durations of their assets and liabilities
D) matching the maturities of their assets and liabilities
28) In the context of a bond portfolio, price risk and reinvestment rate risk exactly cancel out at a
time horizon equal to the ________.
A) average bond maturity in the portfolio
B) duration of the portfolio
C) difference between the shortest duration and longest duration of the individual bonds in the
portfolio
D) average of the shortest duration and longest duration of the bonds in the portfolio
29) Bond portfolio immunization techniques balance ________ and ________ risk.
A) price; reinvestment
B) price; liquidity
C) credit; reinvestment
D) credit; liquidity
30) You have purchased a guaranteed investment contract (GIC) from an insurance firm that
promises to pay you a 5% compound rate of return per year for 6 years. If you pay $10,000 for
the GIC today and receive no interest along the way, you will get ________ in 6 years (to the
nearest dollar).
A) $12,565
B) $13,000
C) $13,401
D) $13,676
31) The duration of a portfolio of bonds can be calculated as ________.
A) the coupon weighted average of the durations of the individual bonds in the portfolio
B) the yield weighted average of the durations of the individual bonds in the portfolio
C) the value weighted average of the durations of the individual bonds in the portfolio
D) averages of the durations of the longest- and shortest-duration bonds in the portfolio
32) Pension fund managers can generally best bring about an effective reduction in their interest
rate risk by holding ________.
A) long-maturity bonds
B) long-duration bonds
C) short-maturity bonds
D) short-duration bonds
33) Which of the following is not a type of bond swap used in active portfolio management?
A) intermarket spread swap
B) substitution swap
C) rate anticipation swap
D) asset-liability swap
34) The exchange of one bond for a bond that has similar attributes but is more attractively
priced is called ________.
A) a substitution swap
B) an intermarket spread swap
C) a rate anticipation swap
D) a pure yield pickup swap
35) Rank the interest sensitivity of the following from the most sensitive to an interest rate
change to the least sensitive:
I. 8% coupon, noncallable 20-year maturity par bond
II. 9% coupon, currently callable 20-year maturity premium bond
III. Zero-coupon 30-year maturity bond
A) I, II, III
B) II, III, I
C) III, I, II
D) III, II, I
36) A bond swap made in response to forecasts of interest rate changes is called ________.
A) a substitution swap
B) an intermarket spread swap
C) a rate anticipation swap
D) a pure yield pickup swap
37) Moving to higher-yield bonds, usually with longer maturities, is called ________.
A) a substitution swap
B) an intermarket spread swap
C) a rate anticipation swap
D) a pure yield pickup swap
38) In a pure yield pickup swap, ________ bonds are exchanged for ________ bonds.
A) longer-duration; shorter-duration
B) shorter-duration; longer-duration
C) high-coupon; high-yield
D) low-yield; high-yield
39) The duration rule always ________ the value of a bond following a change in its yield.
A) underestimates
B) provides an unbiased estimate of
C) overestimates
D) The estimated price may be biased either upward or downward, depending on whether the
bond is trading at a discount or a premium.
40) Where y = yield to maturity, the duration of a perpetuity would be ________.
A) y
B) y/(1 + y)
C) 1/y
D) (1 + y)/y
41) A bond currently has a price of $1,050. The yield on the bond is 6%. If the yield increases 25
basis points, the price of the bond will go down to $1,030. The duration of this bond is ________
years.
A) 7.46
B) 8.08
C) 9.02
D) 10.11
42) A bond has a current price of $1,030. The yield on the bond is 8%. If the yield changes from
8% to 8.1%, the price of the bond will go down to $1,025.88. The modified duration of this bond
is ________.
A) 4.32
B) 4
C) 3.25
D) 3.75
43) A bank has $50 million in assets, $47 million in liabilities, and $3 million in shareholders’
equity. If the duration of its liabilities is 1.3 and the bank wants to immunize its net worth against
interest rate risk and thus set the duration of equity equal to zero, it should select assets with an
average duration of ________.
A) 1.22
B) 1.5
C) 1.6
D) 2
44) A perpetuity pays $100 each and every year forever. The duration of this perpetuity will be
________ if its yield is 9%.
A) 7
B) 9
C) 9.39
D) 12.11
45) A bond pays annual interest. Its coupon rate is 9%. Its value at maturity is $1,000. It matures
in 4 years. Its yield to maturity is currently 6%.
The duration of this bond is ________ years.
A) 2.44
B) 3.23
C) 3.56
D) 4.1
46) A bond pays annual interest. Its coupon rate is 9%. Its value at maturity is $1,000. It matures
in 4 years. Its yield to maturity is currently 6%.
The modified duration of this bond is ________ years.
A) 4
B) 3.56
C) 3.36
D) 3.05
47) A bond has a maturity of 12 years and a duration of 9.5 years at a promised yield rate of 8%.
What is the bond’s modified duration?
A) 12 years
B) 11.1 years
C) 9.5 years
D) 8.8 years
48) A 20-year maturity bond pays interest of $90 once per year and has a face value of $1,000.
Its yield to maturity is 10%. You expect that interest rates will decline over the upcoming year
and that the yield to maturity on this bond will be only 8% a year from now. Using horizon
analysis, the return you expect to earn by holding this bond over the upcoming year is ________.
A) 10%
B) 12%
C) 21.6%
D) 29.6%
49) A bond with a 9-year duration is worth $1,080, and its yield to maturity is 8%. If the yield to
maturity falls to 7.84%, you would predict that the new value of the bond will be approximately
________.
A) $1,035
B) $1,036
C) $1,094
D) $1,124