Chapter 13 – Bond Analysis and Portfolio Management Strategies
e.
1.25 years
59. Refer to Exhibit 13.1. Calculate the current price of the bond.
a.
$1579.46
b.
$918.89
c.
$789.29
d.
$1000
e.
$743.29
60. Refer to Exhibit 13.1. Calculate the Macaulay duration for the bond.
a.
4.19 years
b.
4.36 years
c.
8.72 years
d.
8.38 years
e.
9.52 years
61. Refer to Exhibit 13.1. Calculate the modified duration for the bond.
a.
4.19 years
b.
4.36 years
c.
8.72 years
d.
8.38 years
e.
9.52 years
62. Refer to Exhibit 13.1. Estimate the percentage price change for this five-year, $1,000 par value bond, with a 6 percent
coupon, if the yield rises from 8 percent to 8.5 percent. Interest is paid semiannually.
a.
b.
c.
d.
e.
Exhibit 13.2
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Chapter 13 – Bond Analysis and Portfolio Management Strategies
Talmart Corporation bonds have a $1,000 face value and will mature in four years. The bonds have a 7 percent coupon
rate. Interest is paid annually, and the required rate of return is 6 percent for these bonds.
63. Refer to Exhibit 13.2. What is the price of the Talmart corporate bonds?
a.
$965.63
b.
$966.13
c.
$1,034.65
d.
$1,135.10
e.
$1,051.97
64. Refer to Exhibit 13.2. What is the Macaulay duration of the Talmart corporate bonds?
a.
3.43
b.
3.64
c.
3.76
d.
3.85
e.
4.11
65. Refer to Exhibit 13.2. What is the Modified duration of the Talmart corporate bonds?
a.
3.43
b.
3.64
c.
3.76
d.
3.85
Chapter 13 – Bond Analysis and Portfolio Management Strategies
e.
4.11
66. Refer to Exhibit 13.2. If interest rates increase 50 basis points, what will be the approximate price change for the
Talmart bond?
a.
−17.0 percent
b.
−1.7 percent
c.
1.7 percent
d.
1.8 percent
e.
17.0 percent
67. Calculate the modified duration of a bond that has a Macaulay duration of 7.6 and the bond pays interest semi-
annually with a coupon rate of 6 percent and a required rate of return of 8 percent.
a.
7.04
b.
7.17
c.
7.31
d.
7.38
e.
8.12
68. Zappo Corporation just issued $1,000 face value bonds that will mature in 20 years and have a 7 percent coupon rate.
Interest is paid semi-annually, and the required rate of return is 9 percent for these bonds. The bonds have a five-year call
provision that will pay a call premium of $1,050 if they are called in. What is the price of the Zappo Corporation bond?
a.
$815.98
b.
$817.43
c.
$826.35
d.
$920.87
e.
$953.07
Exhibit 13.3
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
A $1000 par value bond with four years to maturity and a 5 percent coupon has a yield to maturity of 6 percent. Interest is
paid annually.
69. Refer to Exhibit 13.3. Calculate the current price of the bond.
a.
$964.90
b.
$965.35
c.
$981.41
d.
$1035.45
e.
$1035.85
70. Refer to Exhibit 13.3. Calculate the Macaulay duration for the bond.
a.
3.19 years
b.
3.36 years
c.
3.57 years
d.
3.72 years
e.
3.84 years
71. Refer to Exhibit 13.3. Calculate the modified duration for the bond.
a.
3.51 years
b.
3.61 years
c.
3.72 years
d.
4.38 years
e.
7.44 years
72. Refer to Exhibit 13.3. Estimate the percentage price change for this four-year, $1,000 par value bond, with an annual 5
percent coupon, if the yield falls from 6 percent to 5.5 percent.
a.
−3.50 percent
b.
−1.75 percent
c.
1.75 percent
d.
3.50 percent
e.
0 percent
73. Assuming no change in interest rates, the duration of a coupon bond
a.
stays constant.
b.
declines more slowly than the term to maturity.
c.
declines more quickly than the term to maturity
d.
increases at a slower rate than the term to maturity.
e.
changes in line with the term to maturity.
74. Investment style for a bond portfolio is best characterized by
a.
beta and credit quality.
b.
credit quality and duration.
c.
interest rate risk and yield to maturity.
d.
yield to maturity and beta.
e.
beta and duration.
75. Two common methods for constructing a bond index are
Chapter 13 – Bond Analysis and Portfolio Management Strategies
a.
full replication and stratified sampling.
b.
partial replication and overall market approach.
c.
ETFs and High Yield sampling.
d.
multiple discriminant analysis and bond swaps.
e.
High Yield sampling and partial replication.
76. For a bond investor selecting a buy-and-hold strategy, which of the following would be the least important
consideration?
a.
term to maturity
b.
indenture provisions
c.
coupon levels
d.
liquidity
e.
quality
77. Reinvestment risk is greatest for bonds that have
a.
short maturities and low coupon rates.
b.
long maturities and high coupon rates.
c.
short maturities and high coupon rates.
d.
long maturities and low coupon rates.
e.
None of these are correct.
78. Which of the following would NOT normally be a reason for a bond swap?
a.
increasing current yield
b.
improving the quality of the portfolio
c.
taking advantage of interest rate shifts
d.
tax savings
e.
realigning the portfolio’s duration
79. A pure yield pickup swap involves swapping out of a
a.
bond to realize capital losses into a comparable bond.
b.
low coupon bond into a comparable high coupon bond.
c.
high coupon bond into a comparable low coupon bond.
d.
bond that is underpriced into a comparable bond that is overpriced.
e.
bond that is overpriced into a comparable bond that is underpriced.
80. An example of an active strategy for bond management would be
a.
buy and hold.
b.
credit analysis.
Chapter 13 – Bond Analysis and Portfolio Management Strategies
c.
indexing.
d.
classical immunization.
e.
horizon matching.
81. A portfolio manager that attempts to select bonds based on their intrinsic value would be carrying out
a.
credit analysis.
b.
valuation analysis.
c.
yield-spread analysis.
d.
horizon-matching analysis.
e.
interest-rate analysis.
82. The active strategies for bond management include all of the following EXCEPT
a.
interest rate anticipation.
b.
credit analysis.
c.
spread analysis.
d.
classical immunization.
e.
bond swaps.
83. Studies by Reilly and Wright (1994, 2001) and Fabozzi (2005) suggest analysis of high-yield bonds should be
expanded to include all of the following EXCEPT
a.
the firm’s competitive position with respect to cost and pricing.
b.
the firm’s cash flow relative to interest expense, research expenses, and growth needs.
c.
the firm’s market share and growth in sales.
d.
the quality of the total management team.
e.
the firm’s size.
Exhibit 13.4
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 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.
Current Bond
Candidate Bond
Dollar Investment
$932.05
$934.96
Coupon
$70.00
$80.00
i on One Coupon
$1.575
?
Principal Value at Year End
$936.70
?
Total Accrued
$1008.28
?
Realized Compound Yield
8.018%
?
84. Refer to Exhibit 13.4. The interest on one coupon for the candidate bond is
a.
$2.97.
b.
$2.03.
c.
$1.80.
d.
$1.37.
e.
$3.49.
85. Refer to Exhibit 13.4. The realized compound yield on the candidate bond is
a.
7.0%.
b.
11.0%.
c.
10.0%.
d.
9.0%.
e.
12.0%.
86. Refer to Exhibit 13.4. The value of the swap is ____ basis points in one year.
a.
32.3
b.
48.7
c.
75.8
d.
98.2
e.
104.3
Exhibit 13.5
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Chapter 13 – Bond Analysis and Portfolio Management Strategies
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.
Current Bond
Candidate Bond
Dollar Investment
$913.54
?
Coupon
70.00
70.00
i on One Coupon
1.487
1.487
Principal Value at Year End
916.68
878.55
Total Accrued
988.17
950.04
Total Gain
74.63
?
Gain per Invested Dollar
?
?
Realized Compound Yield
?
?
87. Refer to Exhibit 13.5. The dollar investment in the candidate bond is
a.
$812.57.
b.
$803.22.
c.
$874.16.
d.
$746.83.
e.
$700.01.
88. Refer to Exhibit 13.5. The realized compound yield on the current bond is
a.
15.50%.
b.
11.03%.
c.
10.30%.
d.
8.01%.
e.
9.00%.
89. Refer to Exhibit 13.5. The value of the swap is ____ basis points in one year.
a.
18.4
b.
23.3
c.
49.1
d.
46.5
e.
46.8
Exhibit 13.6
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 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.
Current Bond
Candidate Bond
Dollar Investment
$828.41
$938.83
Coupon
80.00
100.00
i on One Coupon
2.4
?
Principal Value at Year End
831.32
?
Total Accrued
913.72
?
Realized Compound Yield
10.5547
?
90. Refer to Exhibit 13.6. The interest on one coupon for the candidate bond is
a.
$2.40.
b.
$2.75.
c.
$9.60.
d.
$11.00.
e.
$50.00.
91. Refer to Exhibit 13.6. The value of the swap is ____ basis points in one year.
a.
40.4
b.
60.6
c.
80.8
d.
20.5
e.
100.1
Exhibit 13.7
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 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.
Current Bond
Candidate Bond
Dollar Investment
$817.44
?
Coupon
80.00
80.00
i on One Coupon
2.00
2.20
Principal Value at Year End
819.23
782.33
Total Accrued
901.23
864.53
Total Gain
83.79
?
Gain per Invested Dollar
?
?
Realized Compound Yield
?
?
92. Refer to Exhibit 13.7. The dollar investment in the candidate bond is
a.
$780.34.
b.
$1483.25.