Investment Analysis and Portfolio Management 9th Edition TestBank Chapter 19

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CHAPTER 19—BOND PORTFOLIO MANAGEMENT STRATEGIES

TRUE/FALSE

Question: A bond portfolio is immunized from interest rate risk if the modified duration of

the portfolio is always equal to the desired investment horizon.

Answer:

Question: Interest rate anticipation is the most conservative management strategy.

Answer:

Question: In valuation analysis, undervalued bonds are bonds where the expected YTMs

are lower than the prevailing YTM.

Answer:

Question: A bond swap involves liquidating a current bond position, and later investing in

a similar issue under more favorable conditions.

Answer:

Question: A pure yield pickup swap involves a switch from a low-coupon bond to a

higher-coupon bond of similar quality and maturity.

Answer:

Question: A substitution swap relies heavily on interest rate expectations.

Answer:

Question: When applying active management techniques to a global portfolio the

additional concern is expectations regarding exchange rates between countries.

Answer:

Question: The bond management strategy intended to eliminate interest rate risk is

immunization.

Answer:

Question: A portfolio of bonds is immunized from interest rate risk if the duration of the

portfolio is always equal to the desired investment horizon.

Answer:

Question: The duration of a perpetual bond is always equal to its term to maturity.

Answer:

Question: In a buy-and-hold strategy, bonds are purchased in light of the investors

objectives and constraints and then held until maturity.

Answer:

Question: Indexing is an active portfolio management strategy that seeks to copy the

composition and performance of a selected market index.

Answer:

Question: Interest rate anticipation is one of the matched funding techniques that matches

anticipated interest rates with the required rates on a portfolio.

Answer:

Question: In a ladder strategy, funds are invested equally among a wide range of

maturities.

Answer:

Question: Credit analysis and core-plus management are examples of active bond portfolio

management.

Answer:

Question: A manager following an interest rate anticipation strategy would shorten

portfolio duration if interest rates were expected to increase.

Answer:

Question: When applying active management techniques to a global portfolio the

additional concern is expectations regarding exchange rates between countries.

Answer:

Question: With a matched funding technique portfolio managers try to match specific

liability obligations due at specific times to a portfolio of bonds that minimize the

portfolios interest rate risk.

Answer:

Question: Investment horizon is the future time when an investor must begin an investment

program to generate the required funds for a future liability.

Answer:

Question: The components of interest rate risk are: price risk and maturity risk.

Answer:

Question: Altman-Nammacher (1987) create a modified Z-score model using a multiple

regression analysis technique.

Answer:

Question: The substitution swap is generally long term and relies heavily on interest rate

expectations.

Answer:

Question: Which of the following is a passive bond portfolio strategy?

Answer:

Question: The active strategies for bond management include all of the following, except

Answer:

Question: Which of the following is a matched funding technique?

Answer:

Question: For a bond investor selecting a buy-and-hold strategy, which of the following

would be the least important consideration?

Answer:

Question: Junk bonds are high yield bond bonds rated below

Answer:

Question: Contingent immunization strategies:

Answer:

Question: Which of the following would not normally be a reason for a bond swap?

Answer:

Question: If an investor swaps identical issues to establish a loss, the loss is disallowed and

the transaction is known as a

Answer:

Question: The term dedication, used to describe portfolio management techniques, is

referring to servicing a prescribed set of

Answer:

Question: Coupon reinvestment risk arises because the yield to maturity computation

implicitly assumes that all coupon flows will be reinvested at the

Answer:

Question: Assuming no change in interest rates the duration of a coupon bond

Answer:

Question: In core-plus bond management

Answer:

Question: A tax swap involves swapping out of a

Answer:

Question: A substitution pickup swap involves swapping out of a

Answer:

Question: A pure yield pickup swap involves swapping out of a

Answer:

Question: In a barbell strategy

Answer:

Question: In a ladder strategy

Answer:

Question: An example of an active strategy for bond management would be

Answer:

Question: A portfolio manager that attempts to select bonds based on their intrinsic value

would be carrying out

Answer:

Question: Which factors indicate that in-depth credit analysis of high-yield bonds is

important.

Answer:

Question: In classical immunization the effect of a change in interest rates is effectively

neutralized because?

Answer:

Question: Horizon matching is a combination of

Answer:

Question: Interest rate risk is comprised of which of the following risks?

Answer:

Question: Which of the following statements is true?

Answer:

Question: Horizon matching is a combination of

Answer:

USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

The following information is given concerning a pure yield pick-up swap: You currently

hold a 10 year, 7 percent coupon bond priced to yield 8 percent. As a swap candidate you

are considering a 10 year, 8 percent coupon bond priced to yield 9 percent. Assume a

reinvestment at 9 percent, semiannual compounding, and a one-year workout period.

NARREND

Question: Refer to Exhibit 19-1. The interest on one coupon for the candidate bond is

Answer:

Question: Refer to Exhibit 19-1. The realized compound yield on the candidate bond is

Answer:

Question: Refer to Exhibit 19-1. The value of the swap is ____ basis points in one year.

Answer:

USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

The following information is given concerning a substitution swap: You currently hold a

15 year, 7 percent coupon bond priced to yield 8 percent. As a swap candidate you are

considering a 15 year, 7 percent coupon bond priced to yield 8.5 percent. Assume a

reinvestment rate of 8.5 percent, semiannual compounding, and a one-year workout period.

NARREND

Question: Refer to Exhibit 19-2. The dollar investment in the candidate bond is

Answer:

Question: Refer to Exhibit 19-2. The realized compound yield on the current bond is

Answer:

Question: Refer to Exhibit 19-2. The value of the swap is ____ basis points in one year.

Answer:

USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

The following information is given concerning a pure yield pick-up swap: You currently

hold a 20 year, Aa 8 percent coupon bond priced to yield 10 percent. As a swap candidate

you are considering a 20 year, Aa 10 percent coupon bond priced to yield 10.75 percent.

Assume a reinvestment rate of 12.00 percent, semiannual compounding, and a one-year

workout period.

NARREND

Question: Refer to Exhibit 19-3. The interest on one coupon for the candidate bond is

Answer:

Question: Refer to Exhibit 19-3. The value of the swap is ____ basis points in one year

Answer:

USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

The following information is given concerning a substitution swap: You currently hold a

25 year, Aa 8 percent coupon bond priced to yield 10 percent. As a swap candidate you are

considering a 25 year, Aa 8 percent coupon bond priced to yield 10.50 percent. Assume a

reinvestment rate of 10 percent, semiannual compounding, and a one-year workout period.

NARREND

Question: Refer to Exhibit 19-4. The dollar investment in the candidate bond is

Answer:

Question: Refer to Exhibit 19-4. The realized compound yield on the current bond is

Answer:

Question: Refer to Exhibit 19-4. The value of the swap is ____ basis points in one year.

Answer:

USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

The following information is given concerning a pure yield pick-up swap: You currently

hold a 20 year, Aa 2 percent coupon bond priced to yield 9.5 percent. As a swap candidate

you are considering a 20 year, Aa 14 percent coupon bond priced to yield 10.00. Assume a

reinvestment rate of 11 percent, semiannual compounding, and a one-year workout period.

NARREND

Question: Refer to Exhibit 19-5. The interest on one coupon for the candidate bond is

Answer:

Question: Refer to Exhibit 19-5. The value of the swap is ____ basis points in one year

Answer:

USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

The following information is given concerning a substitution swap: You currently hold a

25 year, Aa 10 percent coupon bond priced to yield 12 percent. As a swap candidate you

are considering a 25 year, Aa 10 percent coupon bond priced to yield 13 percent. Assume a

reinvestment rate of 12 percent, semiannual compounding, and a one-year workout period.

NARREND

Question: Refer to Exhibit 19-6. The dollar investment in the candidate bond is

Answer:

Question: Refer to Exhibit 19-6. The realized compound yield on the current bond is

Answer:

Question: Refer to Exhibit 19-6. The value of the swap is ____ basis points in one year.

Answer:

USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

Consider two bonds, both pay semiannual interest. Bond A has a coupon of 8% per year,

maturity of 30 years, yield to maturity of 9% per year, and a face value of $1000. Bond B

has a coupon of 8% per year, maturity of 30 years, yield to maturity of 9.5% per year, and

a face value of $1000.

NARREND

Question: Refer to Exhibit 19-7. Calculate the percentage gain per invested dollar for Bond

A assuming a one year horizon, and a reinvestment rate of 9% per year.

Answer:

Question: Refer to Exhibit 19-7. Calculate the percentage gain per invested dollar for Bond

B assuming a one year horizon, and a reinvestment rate of 9.5% per year.

Answer:

Question: Refer to Exhibit 19-7. Calculate the value of swap out of Bond A into Bond B.

Answer:

USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

Consider two bonds, both pay annual interest. Bond C has a coupon of 6% per year,

maturity of 5 years, yield to maturity of 6% per year, and a face value of $1000. Bond D

has a coupon of 8% per year, maturity of 15 years, yield to maturity of 6% per year, and a

face value of $1000.

NARREND

Question: Refer to Exhibit 19-8. Calculate the modified duration for Bond C.

Answer:

Question: Refer to Exhibit 19-8. Calculate the modified duration for Bond D.

Answer:

Question: Refer to Exhibit 19-8. Assume that your investment horizon is 6 years and your

portfolio consists only of Bond C and Bond D. Indicate the proportions invested in each

bond, so that the portfolio is immunized.

Answer:

USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

Consider two bonds, both pay annual interest. Bond Y has a coupon of 6% per year,

maturity of 5 years, yield to maturity of 6% per year, and a face value of $1000. Bond X

has a coupon of 7% per year, maturity of 10 years, yield to maturity of 4% per year, and a

face value of $1000.

NARREND

Question: Refer to Exhibit 19-9. Calculate the modified duration for Bond Y.

Answer:

Question: Refer to Exhibit 19-9. Calculate the modified duration for Bond X.

Answer:

Question: Refer to Exhibit 19-9. Assume that your investment horizon is 5 years and your

portfolio consists only of Bond Y and Bond X. Indicate the proportions invested in each

bond, so that the portfolio is immunized.

Answer:

USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

You are creating a portfolio that consists of the following two bonds. Bond A pays an

annual 7% coupon, matures in two years, has a yield to maturity of 8%, and a face value of

$1,000. Bond B pays an annual 8% coupon, matures in three years, has a yield to maturity

of 9%, and a face value of $1,000.

NARREND

Question: Refer to Exhibit 19-10. Calculate the price of Bond A.

Answer:

Question: Refer to Exhibit 19-10. Calculate the price of Bond B.

Answer:

Question: Refer to Exhibit 19-10. Calculate the Macaulay Duration for Bond A.

Answer:

Question: Refer to Exhibit 19-10. Calculate the Macaulay Duration for Bond B.

Answer:

Question: Refer to Exhibit 19-10. Calculate the Modified Duration for Bond A.

Answer:

Question: Refer to Exhibit 19-10. Calculate the Modified Duration for Bond B.

Answer:

Question: Refer to Exhibit 19-10. Assume that your investment horizon is 2 years and your

portfolio consists only of bonds A and B. What proportion should be invested in each bond

to immunize the portfolio?

Answer: