Chapter 13 – Bond Analysis and Portfolio Management Strategies
1. The breakeven yield is the same as the implied forward rate.
a.
True
b.
False
2. Bond price volatility varies directly with the term to maturity and directly with the coupon.
a.
True
b.
False
3. The longer the time to maturity, the greater the percentage change in a bond’s price.
a.
True
b.
False
4. There is an inverse relationship between duration and coupon.
a.
True
b.
False
Chapter 13 – Bond Analysis and Portfolio Management Strategies
5. The lower a bond’s yield to maturity, the greater its duration.
a.
True
b.
False
6. For a given change in yield bond price, volatility is inversely related to term to maturity.
a.
True
b.
False
7. For a given change in yield bond price, volatility is inversely related to coupon.
a.
True
b.
False
8. For a given change in yield bond price, volatility is directly related to duration.
a.
True
b.
False
9. Modified duration is determined by making small adjustments to the Macaulay duration.
a.
True
b.
False
10. Convexity is a measure of how much a bond’s price-yield curve deviates from the linear approximation of that curve.
a.
True
b.
False
11. The price-yield curve is a concave curve representing the relationship of bond prices and yields.
a.
True
b.
False
12. Because you expect market interest rates to decline during the next four months, if you were offered two bonds with
equal duration, you would select the one with the higher measure of convexity.
a.
True
b.
False
13. The investment style of a bond portfolio can be summarized by its two most important characteristics: credit quality
and interest rate sensitivity.
a.
True
b.
False
14. In a buy-and-hold strategy, bonds are purchased in light of the investor’s objectives and constraints and then held until
maturity.
a.
True
b.
False
15. In a ladder strategy, funds are invested equally among a wide range of maturities.
a.
True
b.
False
16. Indexing is an active portfolio management strategy that seeks to copy the composition and performance of a selected
market index.
a.
True
b.
False
17. Interest rate anticipation is the most conservative management strategy.
a.
True
b.
False
18. In valuation analysis, undervalued bonds are bonds in which the expected YTMs are lower than the prevailing YTM.
a.
True
b.
False
19. A bond swap involves liquidating a current bond position and later investing in a similar issue under more favorable
conditions.
a.
True
b.
False
20. A pure yield pickup swap involves a switch from a low-coupon bond to a higher-coupon bond of similar quality and
maturity.
a.
True
b.
False
21. A swap relies heavily on interest rate expectations.
a.
True
b.
False
22. When applying active management techniques to a global portfolio, the additional concern is an expectation regarding
exchange rates between countries.
a.
True
b.
False
23. A manager following an interest rate anticipation strategy would shorten portfolio duration if interest rates were
expected to increase.
a.
True
b.
False
24. When applying active management techniques to a global portfolio, the additional concern is an expectation regarding
exchange rates between countries.
a.
True
b.
False
25. Interest rate anticipation is one of the matched funding techniques that matches anticipated interest rates with the
required rates on a portfolio.
a.
True
b.
False
26. Altman-Nammacher (1987) created a modified Z-score model using a multiple regression analysis technique.
a.
True
b.
False
27. An investor in a pure yield pickup swap is most concerned about changes in interest rates.
a.
True
b.
False
28. Credit analysis and core-plus management are examples of active bond portfolio management.
a.
True
b.
False
29. A bond portfolio is immunized from interest rate risk if the modified duration of the portfolio is always equal to the
desired investment horizon.
a.
True
b.
False
Chapter 13 – Bond Analysis and Portfolio Management Strategies
30. The bond management strategy intended to eliminate interest rate risk is immunization.
a.
True
b.
False
31. A portfolio of bonds is immunized from interest rate risk if the duration of the portfolio is always equal to the desired
investment horizon.
a.
True
b.
False
32. 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 portfolio’s interest rate risk.
a.
True
b.
False
33. Investment horizon is the future time when an investor must begin an investment program to generate the required
funds for a future liability.
a.
True
b.
False
34. The components of interest rate risk are price risk and maturity risk.
a.
True
b.
False
35. Contingent procedures for managing bond portfolios are a form of what has come to be called structured active
management.
a.
True
b.
False
36. Contingent immunization 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.
True
b.
False
37. Estimating forward rates from the spot rate curve is based on the assumption that the ____ hypothesis accurately
describes the shape of the yield curve.
a.
b.
c.
d.
e.
38. If you expected interest rates to fall, you would prefer to own bonds with
a.
long durations and high convexity.
b.
long durations and low convexity.
Chapter 13 – Bond Analysis and Portfolio Management Strategies
c.
short durations and high convexity.
d.
short durations and high convexity.
e.
None of these are correct.
39. If you expected interest rates to fall, you would prefer to own bonds with
a.
short maturities and low coupons.
b.
long maturities and high coupons.
c.
long maturities and low coupons.
d.
short maturities and high coupons.
e.
None of these are correct.
40. If you expected interest rates to rise, you would prefer to own bonds with
a.
short maturities and low coupons.
b.
long maturities and high coupons.
c.
long maturities and low coupons.
d.
short maturities and high coupons.
e.
None of these are correct.
41. Convexity is a desirable feature of bonds because as interest rates decline, the price of a low convexity bond
a.
decreases at a decreasing rate.
b.
decreases at an increasing rate.
c.
increases at a decreasing rate.
d.
increases at an increasing rate.
e.
decreases at a decreasing rate.
42. The position of a bondholder that is long a callable bond is equal to being
a.
long a noncallable bond + long a call option on the bond.
b.
long a noncallable bond + short a call option on the bond.
c.
short a noncallable bond + long a call option on the bond.
d.
short a noncallable bond + short a call option on the bond.
e.
None of these are correct.
43. Option adjusted duration can be calculated as
a.
duration of noncallable bond − duration of call option on the bond.
b.
duration of noncallable bond + duration of call option on the bond.
c.
duration of callable bond − duration of call option on the bond.
d.
duration of callable bond + duration of call option on the bond.
e.
None of these are correct.
Chapter 13 – Bond Analysis and Portfolio Management Strategies
44. The option adjusted duration will approach the duration to maturity, when
a.
interest rates are significantly above the coupon rate because the option has very little chance of being called,
and the call option will have very little value.
b.
interest rates are significantly below the coupon rate because the option has very little chance of being called,
and the call option will have very little value.
c.
interest rates are significantly above the coupon rate because the option has a high chance of being called, and
the call option will have significant value.
d.
interest rates are significantly below the coupon rate because the option has a high chance of being called, and
the call option will have significant value.
e.
None of these are correct.
45. All of the following are one of Malkiel’s stated relationships between yield changes and bond prices EXCEPT
a.
bond prices move inversely to bond yields.
b.
longer-maturity bonds experience larger price changes than shorter-maturity bonds.
c.
bond price volatility increases at a diminishing rate as term to maturity increases.
d.
bond price movements resulting from equal absolute increases or decreases in yield are symmetrical.
e.
bond price volatility is inversely related to the coupon rate.
46. Which duration is computed by discounting flows using the yield to maturity of the bond?
a.
effective duration
b.
Macaulay duration
c.
modified duration
d.
present value duration
e.
cash flow duration
47. A graph of a bond’s Price-Yield curve reveals all of the following EXCEPT
a.
price moves inverse to yield.
b.
the bond sells at a premium when the yield is below the coupon rate.
c.
the bond sells at a discount when the yield is above the coupon rate.
d.
the Price-Yield curve is concave.
e.
All of these are correct.
48. When there are no embedded options, ____ duration can be used to provide an approximation of the interest rate
sensitivity of the bond.
a.
b.
c.
d.
e.
Chapter 13 – Bond Analysis and Portfolio Management Strategies
49. Calculate the duration of a 6 percent, $1,000 par bond maturing in three years if the yield to maturity is 10 percent and
interest is paid semiannually.
a.
1.35 years
b.
1.78 years
c.
2.50 years
d.
2.78 years
e.
2.95 years
50. Calculate the modified duration for a 10-year, 12 percent bond with a yield to maturity of 10 percent and a Macaulay
duration of 7.2 years.
a.
6.43 years
b.
6.55 years
c.
6.79 years
d.
6.86 years
e.
7.01 years
51. A 12-year, 8 percent bond with a YTM of 12 percent has a Macaulay duration of 9.5 years. If interest rates decline by
50 basis points, what will be the percent change in price for this bond?
a.
+4.48 percent
b.
+4.61 percent
c.
+8.48 percent
d.
+8.96 percent
e.
+17.92 percent
52. Consider a bond with a duration of 6 years having a yield to maturity of 8 percent, and interest rates are expected to
rise by 50 basis points. What is the percentage change in the price of the bond?
a.
2.88 percent
b.
3.45 percent
c.
−3.89 percent
d.
−3.45 percent
e.
−2.88 percent
53. Consider a bond with a duration of 7 years having a yield to maturity of 7 percent, and interest rates are expected to
rise by 50 basis points. What is the percentage change in the price of the bond?
a.
3.62 percent
b.
3.45 percent
c.
−3.38 percent
d.
3.38 percent
e.
−3.62 percent
Chapter 13 – Bond Analysis and Portfolio Management Strategies
54. Consider a bond with a duration of 8 years having a yield to maturity of 8 percent, and interest rates are expected to
rise by 50 basis points. What is the percentage change in the price of the bond?
a.
3.85 percent
b.
3.45 percent
c.
−4.02 percent
d.
−3.45 percent
e.
−3.85 percent
55. Suppose the current six-year spot rate is 8 percent and the current five-year spot rate is 7 percent. What is the one year
forward rate in five years?
a.
12.62 percent
b.
11.58 percent
c.
13.14 percent
d.
14.65 percent
e.
15.14 percent
56. Suppose the current six-year rate is 9 percent and the current five-year rate is 7 percent. What is the one year forward
rate for five years?
a.
19.57 percent
b.
18.62 percent
c.
15.80 percent
d.
14.65 percent
e.
12.67 percent
57. Suppose the current seven-year rate is 8 percent and the current six-year rate is 6 percent. What is the one year forward
rate for six years?
a.
16.33 percent
b.
18.22 percent
c.
20.82 percent
d.
14.65 percent
e.
15.14 percent
58. Calculate the Macaulay duration for a five-year, $1,000 par value bond, with a 6 percent coupon and a yield to
maturity of 8 percent. Interest is paid annually.
a.
6.44 years
b.
5.25 years
c.
4.44 years
d.
2.50 years