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Exam 11: Managing Bond Portfolios

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Question 51

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Target date immunization would primarily be of interest to ________.

A) banks
B) mutual funds
C) pension funds
D) individual investors

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

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Question 52

Multiple Choice

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In 2012, the S&P 500 increased 16%. Given the low interest rate environment, many large companies had to pour billions of dollars into their pension funds. This example illustrates ________.

A) horizon analysis
B) convexity
C) cash flow matching and dedication
D) duration mismatch

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

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Question 53

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All other things equal (YTM = 10%) , which of the following has the shortest duration?

As compared with equivalent maturity bonds selling at par, deep discount bonds will have ________.

You have an investment horizon of 6 years. You choose to hold a bond with a duration of 4 years. Your realized rate of return will be larger than the promised yield on the bond if ________.

You have purchased a guaranteed investment contract (GIC) from an insurance firm that promises to pay you a 5% compound rate of return per year for 6 years. If you pay $10,000 for the GIC today and receive no interest along the way, you will get ________ in 6 years (to the nearest dollar) .

A 20-year maturity bond pays interest of $90 once per year and has a face value of $1,000. Its yield to maturity is 10%. You expect that interest rates will decline over the upcoming year and that the yield to maturity on this bond will be only 8% a year from now. Using horizon analysis, the return you expect to earn by holding this bond over the upcoming year is ________.

Convexity of a bond is ________.

Pension fund managers can generally best bring about an effective reduction in their interest rate risk by holding ________.

You have a 15-year maturity, 4% coupon, 6% yield bond with duration of 10.5 years and a convexity of 128.75. The bond is currently priced at $805.76. If the interest rate were to increase 200 basis points, your predicted new price for the bond (including convexity) is ________.