Chapter 13 – Bond Analysis and Portfolio Management Strategies
c.
$1361.54.
d.
$1413.95.
e.
$1000.00.
93. Refer to Exhibit 13.7. The realized compound yield on the current bond is
a.
6.00%.
b.
7.00%.
c.
8.00%.
d.
10.00%.
e.
12.00%.
94. Refer to Exhibit 13.7. The value of the swap is ____ basis points in one year.
a.
b.
c.
d.
e.
Chapter 13 – Bond Analysis and Portfolio Management Strategies
Exhibit 13.8
USE THE INFORMATION BELOW FOR THE FOLLOWING 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.
Current Bond
Candidate Bond
Dollar Investment
$1222.04
$1343.18
Coupon
110.00
140.00
i on One Coupon
3.3
?
Principal Value at Year End
1218.04
?
Total Accrued
1341.34
?
Realized Compound Yield 9.5351%
?
95. Refer to Exhibit 13.8. The interest on one coupon for the candidate bond is
a.
$70.00.
b.
$3.58.
c.
$3.85.
d.
$8.35.
e.
$5.38.
96. Refer to Exhibit 13.8. The value of the swap is ____ basis points in one year.
a.
0.004921
b.
0.4921
c.
4.921
d.
49.21
e.
492.1
Chapter 13 – Bond Analysis and Portfolio Management Strategies
Exhibit 13.9
USE THE INFORMATION BELOW FOR THE FOLLOWING 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.
Current Bond
Candidate Bond
Dollar Investment
$842.38
?
Coupon
100.00
100.00
i on One Coupon
3.0
2.75
Principal Value at Year End
843.50
780.46
Total Accrued
946.50
883.21
Total Gain
104.12
?
Gain per Invested Dollar
?
?
Realized Compound Yield
?
?
97. Refer to Exhibit 13.9. The dollar investment in the candidate bond is
a.
$1515.36.
b.
$853.50.
c.
$780.46.
d.
$779.13.
e.
$877.53.
98. Refer to Exhibit 13.9. The realized compound yield on the current bond is
Chapter 13 – Bond Analysis and Portfolio Management Strategies
a.
10.00%.
b.
11.9985%.
c.
12.9397%.
d.
13.9399%.
e.
12.3585%.
99. Refer to Exhibit 13.9. The value of the swap is ____ basis points in one year.
a.
94.14
b.
0.9414
c.
9.414
d.
941.4
e.
0.09414
Exhibit 13.10
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider two bonds, both pay semiannual interest. Bond A has a coupon of 8 percent per year, maturity of 30 years, yield
to maturity of 9 percent per year, and a face value of $1000. Bond B has a coupon of 8 percent per year, maturity of 30
years, yield to maturity of 9.5 percent per year, and a face value of $1000.
100. Refer to Exhibit 13.10. Calculate the percentage gain per invested dollar for Bond A assuming a one-year horizon,
and a reinvestment rate of 9 percent per year.
a.
9.73%
b.
9.93 percent
c.
9.20 percent
Chapter 13 – Bond Analysis and Portfolio Management Strategies
d.
8.20 percent
e.
9.50 percent
101. Refer to Exhibit 13.10. Calculate the percentage gain per invested dollar for Bond B assuming a one-year horizon
and a reinvestment rate of 9.5 percent per year.
a.
9.73 percent
b.
9.93 percent
c.
9.20 percent
d.
8.20 percent
e.
9.50 percent
102. Refer to Exhibit 13.10. Calculate the value of swap out of Bond A into Bond B.
a.
0.41 percent
b.
1.73 percent
c.
0.23 percent
d.
0.00 percent
e.
0.51 percent
Chapter 13 – Bond Analysis and Portfolio Management Strategies
Exhibit 13.11
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider two bonds: both pay semiannual interest. Bond X has a coupon of 7 percent per year, maturity of 20 years, yield
to maturity of 8 percent per year, and a face value of $1000. Bond Y has a coupon of 7 percent per year, maturity of 20
years, yield to maturity of 8.5 percent per year, and a face value of $1000.
103. Refer to Exhibit 13.11. Calculate the percentage gain per invested dollar for Bond X assuming a one-year horizon
and a reinvestment rate of 8 percent per year.
a.
2.35 percent
b.
4.08 percent
c.
7.92 percent
d.
8.16 percent
e.
8.32 percent
104. Refer to Exhibit 13.11. Calculate the percentage gain per invested dollar for Bond Y assuming a one-year horizon
and a reinvestment rate of 8.5 percent per year.
a.
7.84 percent
b.
7.97 percent
c.
8.18 percent
d.
8.34 percent
e.
8.56 percent
105. Refer to Exhibit 13.11. Calculate the value of swap out of Bond X into Bond Y.
a.
0.38 percent
b.
0.81 percent
c.
1.94 percent
d.
3.76 percent
e.
4.12 percent
106. In core-plus bond management,
a.
75 percent of the portfolio is allocated to an equity index and the balance is allocated to a bond index.
b.
75 percent of the portfolio is allocated to a bond index, and the balance is allocated to an equity index.
c.
75 percent of the portfolio is allocated to a bond index, and the balance is allocated to actively managed bond
sectors.
d.
75 percent of the portfolio is allocated to actively managed bond sectors, and the balance is allocated to a bond
index.
e.
75 percent of the portfolio is allocated to actively managed bond sectors, and the balance is allocated to a
foreign bond index.
107. The term dedication, used to describe portfolio management techniques, is referring to servicing a prescribed set of
a.
interest payments.
b.
assets.
c.
liabilities.
d.
pensioners.
Chapter 13 – Bond Analysis and Portfolio Management Strategies
e.
sinking fund payments.
108. Coupon reinvestment risk arises because the yield to maturity computation implicitly assumes that all coupon flows
will be reinvested at the
a.
coupon rate.
b.
effective rate of interest.
c.
realized yield to maturity.
d.
promised yield to maturity.
e.
existing yield as the coupons are paid.
109. In a ladder strategy,
a.
one-half of funds are invested in short duration bonds, and the rest are invested in long duration bonds.
b.
75 percent of funds are invested in short duration bonds, and the rest are invested in long duration bonds.
c.
25 percent of funds are invested in short duration bonds, and the rest are invested in long duration bonds.
d.
an equal amount of funds is invested in a wide range of maturities.
e.
all the funds are invested in long duration bonds.
110. Horizon matching is a combination of
a.
cash-matching dedication and interest rates swaps.
b.
cash-matching dedication and immunization.
c.
interest rate swaps and immunization.
d.
enhanced indexing and immunization.
e.
enhanced indexing and interest rate swaps.
Exhibit 13.12
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider two bonds: both pay annual interest. Bond C has a coupon of 6 percent per year, maturity of five years, yield to
maturity of 6 percent per year, and a face value of $1000. Bond D has a coupon of 8 percent per year, maturity of 15
years, yield to maturity of 6 percent per year, and a face value of $1000.
111. Refer to Exhibit 13.12. Calculate the modified duration for Bond C.
a.
4.47
b.
4.22
c.
4.34
d.
5
e.
5.34
112. Refer to Exhibit 13.12. Calculate the modified duration for Bond D.
a.
9.5
b.
9.8
c.
9.2
d.
15
e.
17
113. Refer to Exhibit 13.12. 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.
a.
50 percent in Bond C and 50 percent in Bond D
b.
64 percent in Bond C and 36 percent in Bond D
c.
36 percent in Bond C and 64 percent in Bond D
d.
100 percent in Bond D
e.
100 percent in Bond C
Exhibit 13.13
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider two bonds: both pay annual interest. Bond Y has a coupon of 6 percent per year, maturity of five years, yield to
maturity of 6 percent per year, and a face value of $1000. Bond X has a coupon of 7 percent per year, maturity of 10
years, yield to maturity of 4 percent per year, and a face value of $1000.
114. Refer to Exhibit 13.13. Calculate the modified duration for Bond Y.
a.
7.8
b.
4.22
Chapter 13 – Bond Analysis and Portfolio Management Strategies
c.
4.34
d.
7.5
e.
9.8
115. Refer to Exhibit 13.13. Calculate the modified duration for Bond X.
a.
4.22
b.
7.8
c.
7.5
d.
9.2
e.
4.34
116. Refer to Exhibit 13.13. Assume that your investment horizon is five 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.
a.
50 percent in Bond Y and 50 percent in Bond X
b.
76 percent in Bond Y and 24 percent in Bond X
c.
36 percent in Bond Y and 64 percent in Bond X
d.
100 percent in Bond X
e.
100 percent in Bond Y
Chapter 13 – Bond Analysis and Portfolio Management Strategies
Exhibit 13.14
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
You are creating a portfolio that consists of the following two bonds. Bond A pays an annual 7 percent coupon, matures in
two years, has a yield to maturity of 8 percent, and a face value of $1,000. Bond B pays an annual 8 percent coupon,
matures in three years, has a yield to maturity of 9 percent, and a face value of $1,000.
117. Refer to Exhibit 13.14. Calculate the price of Bond A.
a.
$975.62
b.
$982.17
c.
$990.57
d.
$1,009.50
e.
$1,018.08
118. Refer to Exhibit 13.14. Calculate the price of Bond B.
a.
$974.69
b.
$990.64
c.
$995.22
d.
$1,013.88
e.
$1,025.77
119. Refer to Exhibit 13.14. Calculate the Macaulay Duration for Bond A.
a.
0.98
b.
1.79
c.
1.90
d.
1.93
e.
2.31
120. Refer to Exhibit 13.14. Calculate the Macaulay Duration for Bond B.
a.
1.44
b.
2.47
c.
2.55
d.
2.70
e.
2.78
121. Refer to Exhibit 13.14. Calculate the Modified Duration for Bond A.
a.
0.98
b.
1.79
c.
1.90
d.
1.93
e.
2.31
122. Refer to Exhibit 13.14. Calculate the Modified Duration for Bond B.
a.
1.44
b.
2.47
c.
2.55
d.
2.70
e.
2.78
123. Refer to Exhibit 13.14. Assume that your investment horizon is two years and your portfolio consists only of bonds
A and B. What proportion should be invested in each bond to immunize the portfolio?
a.
Invest 72.4 percent in bond A and 27.6 percent in bond B.
b.
Invest 68.3 percent in bond A and 31.7 percent in bond B.
c.
Invest 58.5 percent in bond A and 41.5 percent in bond B.
d.
Invest 31.7 percent in bond A and 68.3 percent in bond B.
e.
Invest 27.6 percent in bond A and 72.4 percent in bond B.
124. Which of the following is a strategy that allows the bond manager flexibility to actively manage the portfolio subject
to an overriding constraint that the portfolio remains immunized at some predetermined yield level?
a.
classical immunization
b.
contingent immunization
c.
bond swaps
d.
valuation analysis
e.
interest rate anticipation
125. Assume that you purchase a five-year, $1,000 par value bond, with a 6 percent coupon and a yield of 7 percent.
Immediately after you purchase the bond, yields rise to 8 percent and remain at that level to maturity. Calculate the
realized horizon yield if you hold the bond to maturity. Interest is paid annually.
a.
6.0 percent
b.
7.11 percent
c.
8.0 percent
d.
15.25 percent
e.
8.18 percent