50) When interest rates increase, the duration of a 20-year bond selling at a premium ________.
A) increases
B) decreases
C) remains the same
D) increases at first and then declines
51) Duration facilitates the comparison of bonds with differing ________.
A) default risks
B) conversion ratios
C) maturities
D) yields to maturity
52) The historical yield spread between the AA bond and the AAA bond has been 25 basis
points. Currently the spread is only 9 basis points. If you believe the spread will soon return to its
historical levels, you should ________.
A) buy the AA and short the AAA
B) buy both the AA and the AAA
C) buy the AAA and short the AA
D) short both the AA and the AAA
53) The duration of a bond normally increases with an increase in:
I. Term to maturity
II. Yield to maturity
III. Coupon rate
A) I only
B) I and II only
C) II and III only
D) I, II, and III
54) Compute the duration of an 8%, 5-year corporate bond with a par value of $1,000 and yield
to maturity of 10%.
A) 3.92
B) 4.28
C) 4.55
D) 5
55) Compute the modified duration of a 9% coupon, 3-year corporate bond with a yield to
maturity of 12%.
A) 2.45
B) 2.75
C) 2.88
D) 3
56) An 8%, 30-year bond has a yield to maturity of 10% and a modified duration of 8 years. If
the market yield drops by 15 basis points, there will be a ________ in the bond’s price.
A) 1.15% decrease
B) 1.2% increase
C) 1.53% increase
D) 2.43% decrease
57) To create a portfolio with a duration of 4 years using a 5-year zero-coupon bond and a 3-year
8% annual coupon bond with a yield to maturity of 10%, one would have to invest ________ of
the portfolio value in the zero-coupon bond.
A) 50%
B) 55%
C) 60%
D) 75%
58) Which of the following set of conditions will result in a bond with the greatest price
volatility?
A) a high coupon and a short maturity
B) a high coupon and a long maturity
C) a low coupon and a short maturity
D) a low coupon and a long maturity
59) An investor who expects declining interest rates would maximize her capital gain by
purchasing a bond that has a ________ coupon and a ________ term to maturity.
A) low; long
B) high; short
C) high; long
D) zero; long
60) If you choose a zero-coupon bond with a maturity that matches your investment horizon,
which of the following statements is (are) correct?
I. You will have no interest rate risk on this bond.
II. In the absence of default, you can be sure you will earn the promised yield rate.
III. The duration of your bond is less than the time to your investment horizon.
A) I only
B) I and II only
C) II and III only
D) I, II, and III
61) As compared with equivalent maturity bonds selling at par, deep discount bonds will have
________.
A) greater reinvestment risk
B) greater price volatility
C) less call protection
D) shorter average maturity
62) Steel Pier Company has issued bonds that pay semiannually with the following
characteristics:
Coupon
Yield to Maturity
Maturity
Macaulay Duration
10%
10%
10 years
6.76 years
The modified duration for the Steel Pier bond is ________.
A) 6.15 years
B) 5.95 years
C) 6.49 years
D) 9.09 years
63) Steel Pier Company has issued bonds that pay semiannually with the following
characteristics:
Coupon
Yield to Maturity
Maturity
Macaulay Duration
10%
10%
10 years
6.76 years
If the bond’s coupon was smaller than 10%, the modified duration would be ________ compared
to the original modified duration.
A) larger
B) unchanged
C) smaller
D) The answer cannot be determined from the information given.
64) Steel Pier Company has issued bonds that pay semiannually with the following
characteristics:
Coupon
Yield to Maturity
Maturity
Macaulay Duration
10%
10%
10 years
6.76 years
If the maturity of the bond was less than 10 years, the modified duration would be ________
compared to the original modified duration.
A) larger
B) unchanged
C) smaller
D) The answer cannot be determined from the information given.
65) Steel Pier Company has issued bonds that pay semiannually with the following
characteristics:
Coupon
Yield to Maturity
Maturity
Macaulay Duration
10%
10%
10 years
6.76 years
If the yield to maturity decreases to 8.045%, the expected percentage change in the price of the
bond using modified duration would be ________.
A) 11%
B) 13%
C) 12%
D) 10%
66) A 20-year maturity corporate bond has a 6.5% coupon rate (the coupons are paid annually).
The bond currently sells for $925.50. A bond market analyst forecasts that in 5 years yields on
such bonds will be at 7%. You believe that you will be able to reinvest the coupons earned over
the next 5 years at a 6% rate of return. What is your expected annual compound rate of return if
you plan on selling the bond in 5 years?
A) 7.37%
B) 7.56%
C) 8.12%
D) 8.54%
67) When bonds sell above par, what is the relationship of price sensitivity to rising interest
rates?
A) Price volatility increases at an increasing rate.
B) Price volatility increases at a decreasing rate.
C) Price volatility decreases at a decreasing rate.
D) Price volatility decreases at an increasing rate.
68) A zero-coupon bond is selling at a deep discount price of $430. It matures in 13 years. If the
yield to maturity of the bond is 6.7%, what is the duration of the bond?
A) 6.7 years
B) 8 years
C) 10 years
D) 13 years
69) You have an investment that in today’s dollars returns 15% of your investment in year 1,
12% in year 2, 9% in year 3, and the remainder in year 4. What is the duration of this
investment?
A) 4 years
B) 3.5 years
C) 3.22 years
D) 2.95 years
70) If an investment returns a higher percentage of your money back sooner, it will ________.
A) be less price-volatile
B) have a higher credit rating
C) be less liquid
D) have a higher modified duration
71) Which one of the following statements correctly describes the weights used in the Macaulay
duration calculation? The weight in year t is equal to ________.
A) the dollar amount of the investment received in year t
B) the percentage of the future value of the investment received in year t
C) the present value of the dollar amount of the investment received in year t
D) the percentage of the total present value of the investment received in year t
72) The duration is independent of the coupon rate only for which one of the following?
A) discount bonds
B) premium bonds
C) perpetuities
D) short-term bonds
73) You have an investment horizon of 6 years. You choose to hold a bond with a duration of 10
years. Your realized rate of return will be larger than the promised yield on the bond if
________.
A) interest rates increase
B) interest rates stay the same
C) interest rates fall
D) The answer cannot be determined from the information given.
74) A bond portfolio manager notices a hump in the yield curve at the 5-year point. How might a
bond manager take advantage of this event?
A) Buy the 5-year bonds, and short the surrounding maturity bonds.
B) Buy the 5-year bonds, and buy the surrounding maturity bonds.
C) Short the 5-year bonds, and short the surrounding maturity bonds.
D) Short the 5-year bonds, and buy the surrounding maturity bonds.
75) Market economists all predict a rise in interest rates. An astute bond manager wishing to
maximize her capital gain might employ which strategy?
A) Switch from low-duration to high-duration bonds.
B) Switch from high-duration to low-duration bonds.
C) Switch from high-grade to low-grade bonds.
D) Switch from low-coupon to high-coupon bonds.
76) You have an investment horizon of 6 years. You choose to hold a bond with a duration of 4
years. Your realized rate of return will be larger than the promised yield on the bond if
________.
A) interest rates increase
B) interest rates stay the same
C) interest rates fall
D) The answer cannot be determined from the information given.
77) What strategy might an insurance company employ to ensure that it will be able to meet the
obligations of annuity holders?
A) cash flow matching
B) index tracking
C) yield pickup swaps
D) substitution swap
78) You have an investment horizon of 6 years. You choose to hold a bond with a duration of 6
years and continue to match your investment horizon and duration throughout your holding
period. Your realized rate of return will be the same as the promised yield on the bond if:
I. Interest rates increase.
II. Interest rates stay the same.
III. Interest rates fall.
A) I only
B) II only
C) I and II only
D) I, II, and III
79) Immunization of coupon-paying bonds does not imply that the portfolio manager is inactive
because:
I. The portfolio must be rebalanced every time interest rates change.
II. The portfolio must be rebalanced over time even if interest rates don’t change.
III. Convexity implies duration-based immunization strategies don’t work.
A) I only
B) I and II only
C) II only
D) I, II, and III
80) Advantages of cash flow matching and dedicated strategies include:
I. Once the cash flows are matched, there is no need for rebalancing.
II. Cash flow matching typically earns a higher rate of return than active bond portfolio
management.
III. Financial institutions’ liabilities often exceed the maturity of available bonds, making cash
matching even more desirable.
A) I only
B) II only
C) I and III only
D) I, II, and III
81) Convexity implies that duration predictions:
I. Underestimate the percentage increase in bond price when the yield falls.
II. Underestimate the percentage decrease in bond price when the yield rises.
III. Overestimate the percentage increase in bond price when the yield falls.
IV. Overestimate the percentage decrease in bond price when the yield rises.
A) I and III only
B) II and IV only
C) I and IV only
D) II and III only
82) You have a 25-year maturity, 10% coupon, 10% yield bond with a duration of 10 years and a
convexity of 135.5. If the interest rate were to fall 125 basis points, your predicted new price for
the bond (including convexity) is ________.
A) $1,098.45
B) $1,104.56
C) $1,113.41
D) $1,124.22
83) You have a 15-year maturity, 4% coupon, 6% yield bond with duration of 10.5 years and a
convexity of 128.75. The bond is currently priced at $805.76. If the interest rate were to increase
200 basis points, your predicted new price for the bond (including convexity) is ________.
A) $638.85
B) $642.54
C) $666.88
D) $705.03
84) Convexity of a bond is ________.
A) the same as horizon analysis
B) the rate of change of the slope of the price-yield curve divided by the bond price
C) a measure of bond duration
D) none of these options
85) In 2012, the S&P 500 increased 16%. Given the low interest rate environment, many large
companies had to pour billions of dollars into their pension funds. This example illustrates
________.
A) horizon analysis
B) convexity
C) cash flow matching and dedication
D) duration mismatch
86) A ________ investment strategy takes market prices of securities as set fairly.
A) passive
B) active
C) interest rate focused
D) convex
87) Which of the following statements is false?
A) Bond prices and yields are inversely related.
B) An increase in a bond’s YTM results in a smaller price change than a decrease in yield of
equal magnitude.
C) Prices of short-term bonds tend to be more sensitive to interest rate changes than prices of
long-term bonds.
D) Interest rate risk is inversely related to the bond’s coupon rate.
88) Duration measures
A) the effective maturity of a bond.
B) the weighted average of the time until each payment is received, with weights proportional to
the present value of the payment.
C) the average maturity of the bond’s promised cash flows.
D) all of the options.
89) At a 4% yield, the duration of a perpetuity that pays $100 once a year forever is ________.
A) 3.85 years
B) 4 years
C) 26 years
D) 100 years
90) Which of the following is a strategy to shield net worth from interest rate movements?
A) interest rate management
B) immunization
C) convexity management
D) intermarket spread swap