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Exam 11: Managing Bond Portfolios

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Question 41

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Steel Pier Company has issued bonds that pay semiannually with the following characteristics: 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.

E) None of the above
F) B) and D)

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Question 42

Multiple Choice

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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

E) B) and C)
F) A) and D)

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Question 43

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The exchange of one bond for a bond that has similar attributes but is more attractively priced is called ________.

When bonds sell above par, what is the relationship of price sensitivity to rising interest rates?

Which one of the following statements correctly describes the weights used in the Macaulay duration calculation? The weight in year t is equal to ________.

Rank the interest sensitivity of the following from the most sensitive to an interest rate change to the least sensitive: I. 8% coupon, noncallable 20-year maturity par bond II. 9% coupon, currently callable 20-year maturity premium bond III. Zero-coupon 30-year maturity bond

The duration of a 5-year zero-coupon bond is ________ years.

A bond pays annual interest. Its coupon rate is 9%. Its value at maturity is $1,000. It matures in 4 years. Its yield to maturity is currently 6%. The duration of this bond is ________ years.

Steel Pier Company has issued bonds that pay semiannually with the following characteristics: If the yield to maturity decreases to 8.045%, the expected percentage change in the price of the bond using modified duration would be ________.

Duration facilitates the comparison of bonds with differing ________.

Which of the following is not a type of bond swap used in active portfolio management?

The duration of a perpetuity varies ________ with interest rates.

Duration measures

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 bond currently has a price of $1,050. The yield on the bond is 6%. If the yield increases 25 basis points, the price of the bond will go down to $1,030. The duration of this bond is ________ years.

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 ________.

The duration rule always ________ the value of a bond following a change in its yield.

A perpetuity pays $100 each and every year forever. The duration of this perpetuity will be ________ if its yield is 9%.

Which of the following statements is false?

If an investment returns a higher percentage of your money back sooner, it will ________.