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Chap 011
Chap 011
1. All other things equal (YTM = 10%), which of the following has the longest duration?
2. All other things equal(YTM = 10%), which of the following has the shortest duration?
3. A pension fund must pay out $1 million next year, $2 million the following year, and then $3 million the
year after that. If the discount rate is 8%, what is the duration of this set of payments?
A. 2 years
B. 2.15 years
C. 2.29 years
D. 2.53 years
4. All other things equal, which of the following has the longest duration?
A. directly
B. inversely
C. convexly
D. randomly
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
6. Because of convexity, when interest rates change, the actual bond price will ____________ the bond price
predicted by duration.
7. You find a 5-year AA Xerox bond priced to yield 6%. You find a similar-risk 5-year Canon bond priced to
yield 6.5%. If you expect interest rates to rise, which of the following should you do?
8. A forecast of bond returns based largely on a prediction of the yield curve at the end of the investment
horizon is called a _________.
A. contingent immunization
B. dedication strategy
C. duration analysis
D. horizon analysis
A. increases; an increasing
B. increases; a decreasing
C. decreases; an increasing
D. decreases; a decreasing
10. As a result of bond convexity, an increase in a bond's price when yield to maturity falls is ________ the
price decrease resulting from an increase in yield of equal magnitude.
A. greater than
B. equivalent to
C. smaller than
D. The answer cannot be determined from the information given.
11. All else equal, bond price volatility is greater for __________.
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
12. ______________ is an important characteristic of the relationship between bond prices and yields.
A. Convexity
B. Concavity
C. Complexity
D. Linearity
13. Bond prices are _______ sensitive to changes in yield when the bond is selling at a _______ initial yield to
maturity.
A. more; lower
B. more; higher
C. less; lower
D. equally; higher or lower
A. Eugene Fama
B. John Herzog
C. Frederick Macaulay
D. Harry Markowitz
15. A portfolio manager sells Treasury bonds and buys corporate bonds because the spread between corporate-
and Treasury-bond yields is higher than its historical average. This is an example of __________ swap.
A. 4.5
B. 5
C. 5.5
D. 3.5
17. A portfolio manager believes interest rates will drop and decides to sell short-duration bonds and buy long-
duration bonds. This is an example of __________ swap.
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
18. Target date immunization would primarily be of interest to _________.
A. banks
B. mutual funds
C. pension funds
D. individual investors
A. credit risk
B. liquidity risk
C. price volatility
D. convexity risk
20. A pension fund has an average duration of its liabilities equal to 15 years. The fund is looking at 5-year
maturity zero-coupon bonds and 4% yield perpetuities to immunize its interest rate risk. How much of its
portfolio should it allocate to the zero-coupon bonds to immunize if there are no other assets funding the
plan?
A. 52%
B. 48%
C. 33%
D. 25%
21. You own a bond that has a duration of 6 years. Interest rates are currently 7%, but you believe the Fed is
about to increase interest rates by 25 basis points. Your predicted price change on this bond is ________.
A. +1.4%
B. -1.4%
C. -2.51%
D. +2.51%
22. Given its time to maturity, the duration of a zero-coupon bond is _________.
23. An increase in a bond's yield to maturity results in a price decline that is ________ the price increase
resulting from a decrease in yield of equal magnitude.
A. greater than
B. equivalent to
C. smaller than
D. The answer cannot be determined.
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
24. All other things equal, a bond's duration is _________.
25. A bank has an average duration of its liabilities equal to 2 years. The bank's average duration of its assets is
3.5 years. The bank's market value of equity is at risk if _______________________.
27. Banks and other financial institutions can best manage interest rate risk by _____________.
28. In the context of a bond portfolio, price risk and reinvestment rate risk exactly cancel out at a time horizon
equal to the ____.
29. Bond portfolio immunization techniques balance ________ and ________ risk.
A. price; reinvestment
B. price; liquidity
C. credit; reinvestment
D. credit; liquidity
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
30. 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. $12,565
B. $13,000
C. $13,401
D. $13,676
A. the coupon weighted average of the durations of the individual bonds in the portfolio
B. the yield weighted average of the durations of the individual bonds in the portfolio
C. the value weighted average of the durations of the individual bonds in the portfolio
D. averages of the durations of the longest- and shortest-duration bonds in the portfolio
32. Pension fund managers can generally best bring about an effective reduction in their interest rate risk by
holding ___________________.
A. long-maturity bonds
B. long-duration bonds
C. short-maturity bonds
D. short-duration bonds
33. Which of the following is not a type of bond swap used in active portfolio management?
34. The exchange of one bond for a bond that has similar attributes but is more attractively priced is called
______________.
A. a substitution swap
B. an intermarket spread swap
C. a rate anticipation swap
D. a pure yield pickup swap
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
35. Rank the interest sensitivity of the following from the most sensitive to an interest rate change to the least
sensitive:
A. I, II,
III
B. II, III,
I
C. III, I,
II
D. III, II,
I
36. A bond swap made in response to forecasts of interest rate changes is called ______.
A. a substitution swap
B. an intermarket spread swap
C. a rate anticipation swap
D. a pure yield pickup swap
37. Moving to higher-yield bonds, usually with longer maturities, is called ________.
A. a substitution swap
B. an intermarket spread swap
C. a rate anticipation swap
D. a pure yield pickup swap
38. In a pure yield pickup swap, ________ bonds are exchanged for _________ bonds.
A. longer-duration; shorter-duration
B. shorter-duration; longer-duration
C. high-coupon; high-yield
D. low-yield; high-yield
39. The duration rule always ________ the value of a bond following a change in its yield.
A. underestimates
B. provides an unbiased estimate of
C. overestimates
D. The estimated price may be biased either upward or downward, depending on whether the bond is
trading at a discount or a premium.
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
40. Where y = yield to maturity, the duration of a perpetuity would be _________.
A. y
B. y/(1 + y)
C. 1/y
D. (1 + y)/y
41. 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.
A. 7.46
B. 8.08
C. 9.02
D. 10.11
42. A bond has a current price of $1,030. The yield on the bond is 8%. If the yield changes from 8% to 8.1%,
the price of the bond will go down to $1,025.88. The modified duration of this bond is _________.
A. 4.32
B. 4
C. 3.25
D. 3.75
43. A bank has $50 million in assets, $47 million in liabilities, and $3 million in shareholders' equity. If the
duration of its liabilities is 1.3 and the bank wants to immunize its net worth against interest rate risk and
thus set the duration of equity equal to zero, it should select assets with an average duration of _________.
A. 1.22
B. 1.5
C. 1.6
D. 2
44. A perpetuity pays $100 each and every year forever. The duration of this perpetuity will be __________ if
its yield is 9%.
A. 7
B. 9
C. 9.39
D. 12.11
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
45. 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%.
A. 2.44
B. 3.23
C. 3.56
D. 4.1
46. 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%.
A. 4
B. 3.56
C. 3.36
D. 3.05
47. A bond has a maturity of 12 years and a duration of 9.5 years at a promised yield rate of 8%. What is the
bond's modified duration?
A. 12 years
B. 11.1 years
C. 9.5 years
D. 8.8 years
48. 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 _________.
A. 10%
B. 12%
C. 21.6%
D. 29.6%
49. A bond with a 9-year duration is worth $1,080, and its yield to maturity is 8%. If the yield to maturity falls
to 7.84%, you would predict that the new value of the bond will be approximately _________.
A. $1,035
B. $1,036
C. $1,094
D. $1,124
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
50. When interest rates increase, the duration of a 20-year bond selling at a premium _________.
A. increases
B. decreases
C. remains the same
D. increases at first and then declines
A. default risks
B. conversion ratios
C. maturities
D. yields to maturity
52. 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
________________________.
I. Term to maturity
II. Yield to maturity
III. Coupon rate
A. I only
B. I and II only
C. II and III only
D. I, II, and III
54. A fixed-income portfolio manager sets a minimum acceptable rate of return on the bond portfolio at 5% per
year over the next 4 years. The portfolio is currently worth $10 million. One year later interest rates are at
6%. What is the portfolio value trigger point at this time that would require the manager to immunize the
portfolio?
A. $12,155,063
B. $10,205,625
C. $9,627,948
D. $10,500,000
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
55. Compute the duration of an 8%, 5-year corporate bond with a par value of $1,000 and yield to maturity of
10%.
A. 3.92
B. 4.28
C. 4.55
D. 5
56. Compute the modified duration of a 9% coupon, 3-year corporate bond with a yield to maturity of 12%.
A. 2.45
B. 2.75
C. 2.88
D. 3
57. 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. 1.15% decrease
B. 1.2% increase
C. 1.53% increase
D. 2.43% decrease
58. To create a portfolio with a duration of 4 years using a 5-year zero-coupon bond and a 3-year 8% annual
coupon bond with a yield to maturity of 10%, one would have to invest ________ of the portfolio value in
the zero-coupon bond.
A. 50%
B. 55%
C. 60%
D. 75%
59. Which of the following set of conditions will result in a bond with the greatest price volatility?
60. An investor who expects declining interest rates would maximize her capital gain by purchasing a bond that
has a _________ coupon and a _________ term to maturity.
A. low; long
B. high; short
C. high; long
D. zero; long
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
61. If you choose a zero-coupon bond with a maturity that matches your investment horizon, which of the
following statements is (are) correct?
A. I only
B. I and II only
C. II and III only
D. I, II, and III
62. As compared with equivalent maturity bonds selling at par, deep discount bonds will have ________.
63. Steel Pier Company has issued bonds that pay semiannually with the following characteristics:
A. 6.15 years
B. 5.95 years
C. 6.49 years
D. 9.09 years
64. 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.
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
65. Steel Pier Company has issued bonds that pay semiannually with the following characteristics:
If the maturity of the bond was less than 10 years, 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.
66. 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 ____.
A. 11%
B. 13%
C. 12%
D. 10%
67. A 20-year maturity corporate bond has a 6.5% coupon rate (the coupons are paid annually). The bond
currently sells for $925.50. A bond market analyst forecasts that in 5 years yields on such bonds will be at
7%. You believe that you will be able to reinvest the coupons earned over the next 5 years at a 6% rate of
return. What is your expected annual compound rate of return if you plan on selling the bond in 5 years?
A. 7.37%
B. 7.56%
C. 8.12%
D. 8.54%
68. When bonds sell above par, what is the relationship of price sensitivity to rising interest rates?
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
69. A zero-coupon bond is selling at a deep discount price of $430. It matures in 13 years. If the yield to
maturity of the bond is 6.7%, what is the duration of the bond?
A. 6.7 years
B. 8 years
C. 10 years
D. 13 years
70. You have an investment that in today's dollars returns 15% of your investment in year 1, 12% in year 2, 9%
in year 3, and the remainder in year 4. What is the duration of this investment?
A. 4 years
B. 3.5 years
C. 3.22 years
D. 2.95 years
71. If an investment returns a higher percentage of your money back sooner, it will ______.
A. be less price-volatile
B. have a higher credit rating
C. be less liquid
D. have a higher modified duration
72. Which one of the following statements correctly describes the weights used in the Macaulay duration
calculation? The weight in year t is equal to ____________.
73. The duration is independent of the coupon rate only for which one of the following?
A. Discount bonds
B. Premium bonds
C. Perpetuities
D. Short-term bonds
74. You have an investment horizon of 6 years. You choose to hold a bond with a duration of 10 years. Your
realized rate of return will be larger than the promised yield on the bond if ___________________.
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authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
75. A bond portfolio manager notices a hump in the yield curve at the 5-year point. How might a bond manager
take advantage of this event?
A. Buy the 5-year bonds, and short the surrounding maturity bonds.
B. Buy the 5-year bonds, and buy the surrounding maturity bonds.
C. Short the 5-year bonds, and short the surrounding maturity bonds.
D. Short the 5-year bonds, and buy the surrounding maturity bonds.
76. Market economists all predict a rise in interest rates. An astute bond manager wishing to maximize her
capital gain might employ which strategy?
77. 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 ___________________.
78. What strategy might an insurance company employ to ensure that it will be able to meet the obligations of
annuity holders?
79. You have an investment horizon of 6 years. You choose to hold a bond with a duration of 6 years and
continue to match your investment horizon and duration throughout your holding period. Your realized rate
of return will be the same as the promised yield on the bond if:
A. I only
B. II
only
C. I and II only
D. I, II, and III
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
80. Immunization of coupon-paying bonds does not imply that the portfolio manager is inactive because:
A. I only
B. I and II only
C. II
only
D. I, II, and III
I. Once the cash flows are matched, there is no need for rebalancing.
II. Cash flow matching typically earns a higher rate of return than active bond portfolio management.
III. Financial institutions' liabilities often exceed the maturity of available bonds, making cash matching
even more desirable.
A. I only
B. II
only
C. I and III only
D. I, II, and III
I. Underestimate the percentage increase in bond price when the yield falls.
II. Underestimate the percentage decrease in bond price when the yield rises.
III. Overestimate the percentage increase in bond price when the yield falls.
IV. Overestimate the percentage decrease in bond price when the yield rises.
83. You have a 25-year maturity, 10% coupon, 10% yield bond with a duration of 10 years and a convexity of
135.5. If the interest rate were to fall 125 basis points, your predicted new price for the bond (including
convexity) is _________.
A. $1,098.45
B. $1,104.56
C. $1,113.41
D. $1,124.22
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
84. 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 _________.
A. $638.85
B. $642.54
C. $666.88
D. $705.03
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 Managing Bond Portfolios Answer Key
1. All other things equal (YTM = 10%), which of the following has the longest duration?
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
2. All other things equal(YTM = 10%), which of the following has the shortest duration?
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
3. A pension fund must pay out $1 million next year, $2 million the following year, and then $3 million the
year after that. If the discount rate is 8%, what is the duration of this set of payments?
A. 2 years
B. 2.15 years
C. 2.29 years
D. 2.53 years
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
4. All other things equal, which of the following has the longest duration?
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
A. directly
B. inversely
C. convexly
D. randomly
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
6. Because of convexity, when interest rates change, the actual bond price will ____________ the bond
price predicted by duration.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-03 Show how convexity affects the response of bond prices to changes in interest rates.
Topic: Convexity
7. You find a 5-year AA Xerox bond priced to yield 6%. You find a similar-risk 5-year Canon bond priced
to yield 6.5%. If you expect interest rates to rise, which of the following should you do?
8. A forecast of bond returns based largely on a prediction of the yield curve at the end of the investment
horizon is called a _________.
A. contingent immunization
B. dedication strategy
C. duration analysis
D. horizon analysis
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-05 Analyze the choices to be made in an actively managed bond portfolio.
Topic: Active Bond Management
A. increases; an increasing
B. increases; a decreasing
C. decreases; an increasing
D. decreases; a decreasing
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-01 Analyze the features of a bond that affect the sensitivity of its price to interest rates.
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
Topic: Interest Rate Risk
10. As a result of bond convexity, an increase in a bond's price when yield to maturity falls is ________ the
price decrease resulting from an increase in yield of equal magnitude.
A. greater than
B. equivalent to
C. smaller than
D. The answer cannot be determined from the information given.
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 11-01 Analyze the features of a bond that affect the sensitivity of its price to interest rates.
Topic: Interest Rate Risk
11. All else equal, bond price volatility is greater for __________.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-01 Analyze the features of a bond that affect the sensitivity of its price to interest rates.
Topic: Interest Rate Risk
12. ______________ is an important characteristic of the relationship between bond prices and yields.
A. Convexity
B. Concavity
C. Complexity
D. Linearity
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 11-03 Show how convexity affects the response of bond prices to changes in interest rates.
Topic: Convexity
13. Bond prices are _______ sensitive to changes in yield when the bond is selling at a _______ initial yield
to maturity.
A. more; lower
B. more; higher
C. less; lower
D. equally; higher or lower
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
Learning Objective: 11-01 Analyze the features of a bond that affect the sensitivity of its price to interest rates.
Topic: Interest Rate Risk
A. Eugene Fama
B. John Herzog
C. Frederick Macaulay
D. Harry Markowitz
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
15. A portfolio manager sells Treasury bonds and buys corporate bonds because the spread between
corporate- and Treasury-bond yields is higher than its historical average. This is an example of
__________ swap.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-05 Analyze the choices to be made in an actively managed bond portfolio.
Topic: Active Bond Management
A. 4.5
B. 5
C. 5.5
D. 3.5
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
17. A portfolio manager believes interest rates will drop and decides to sell short-duration bonds and buy
long-duration bonds. This is an example of __________ swap.
AACSB: Analytic
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-05 Analyze the choices to be made in an actively managed bond portfolio.
Topic: Active Bond Management
A. banks
B. mutual funds
C. pension funds
D. individual investors
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-04 Formulate fixed-income immunization strategies for various investment horizons.
Topic: Passive Bond Management
A. credit risk
B. liquidity risk
C. price volatility
D. convexity risk
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
20. A pension fund has an average duration of its liabilities equal to 15 years. The fund is looking at 5-year
maturity zero-coupon bonds and 4% yield perpetuities to immunize its interest rate risk. How much of its
portfolio should it allocate to the zero-coupon bonds to immunize if there are no other assets funding the
plan?
A. 52%
B. 48%
C. 33%
D. 25%
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 11-04 Formulate fixed-income immunization strategies for various investment horizons.
Topic: Passive Bond Management
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
21. You own a bond that has a duration of 6 years. Interest rates are currently 7%, but you believe the Fed is
about to increase interest rates by 25 basis points. Your predicted price change on this bond is
________.
A. +1.4%
B. -1.4%
C. -2.51%
D. +2.51%
D* = 6/1.07 = 5.61
ΔP/P = -D*(Δy) = -5.61(.25%) = -1.4%
AACSB: Analytic
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
22. Given its time to maturity, the duration of a zero-coupon bond is _________.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
23. An increase in a bond's yield to maturity results in a price decline that is ________ the price increase
resulting from a decrease in yield of equal magnitude.
A. greater than
B. equivalent to
C. smaller than
D. The answer cannot be determined.
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 11-01 Analyze the features of a bond that affect the sensitivity of its price to interest rates.
Topic: Interest Rate Risk
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
24. All other things equal, a bond's duration is _________.
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
25. A bank has an average duration of its liabilities equal to 2 years. The bank's average duration of its assets
is 3.5 years. The bank's market value of equity is at risk if _______________________.
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 11-04 Formulate fixed-income immunization strategies for various investment horizons.
Topic: Passive Bond Management
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
27. Banks and other financial institutions can best manage interest rate risk by _____________.
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 11-04 Formulate fixed-income immunization strategies for various investment horizons.
Topic: Passive Bond Management
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
28. In the context of a bond portfolio, price risk and reinvestment rate risk exactly cancel out at a time
horizon equal to the ____.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-04 Formulate fixed-income immunization strategies for various investment horizons.
Topic: Passive Bond Management
29. Bond portfolio immunization techniques balance ________ and ________ risk.
A. price; reinvestment
B. price; liquidity
C. credit; reinvestment
D. credit; liquidity
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-04 Formulate fixed-income immunization strategies for various investment horizons.
Topic: Passive Bond Management
30. 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. $12,565
B. $13,000
C. $13,401
D. $13,676
(10,000)(1.05)6 = $13,401
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 11-04 Formulate fixed-income immunization strategies for various investment horizons.
Topic: Passive Bond Management
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
31. The duration of a portfolio of bonds can be calculated as _______________.
A. the coupon weighted average of the durations of the individual bonds in the portfolio
B. the yield weighted average of the durations of the individual bonds in the portfolio
C. the value weighted average of the durations of the individual bonds in the portfolio
D. averages of the durations of the longest- and shortest-duration bonds in the portfolio
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
32. Pension fund managers can generally best bring about an effective reduction in their interest rate risk by
holding ___________________.
A. long-maturity bonds
B. long-duration bonds
C. short-maturity bonds
D. short-duration bonds
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 11-04 Formulate fixed-income immunization strategies for various investment horizons.
Topic: Passive Bond Management
33. Which of the following is not a type of bond swap used in active portfolio management?
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-05 Analyze the choices to be made in an actively managed bond portfolio.
Topic: Active Bond Management
34. The exchange of one bond for a bond that has similar attributes but is more attractively priced is called
______________.
A. a substitution swap
B. an intermarket spread swap
C. a rate anticipation swap
D. a pure yield pickup swap
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-05 Analyze the choices to be made in an actively managed bond portfolio.
Topic: Active Bond Management
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
35. Rank the interest sensitivity of the following from the most sensitive to an interest rate change to the
least sensitive:
A. I, II,
III
B. II, III,
I
C. III, I,
II
D. III, II,
I
AACSB: Analytic
Blooms: Remember
Difficulty: 3 Hard
Learning Objective: 11-01 Analyze the features of a bond that affect the sensitivity of its price to interest rates.
Topic: Interest Rate Risk
36. A bond swap made in response to forecasts of interest rate changes is called ______.
A. a substitution swap
B. an intermarket spread swap
C. a rate anticipation swap
D. a pure yield pickup swap
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-05 Analyze the choices to be made in an actively managed bond portfolio.
Topic: Active Bond Management
37. Moving to higher-yield bonds, usually with longer maturities, is called ________.
A. a substitution swap
B. an intermarket spread swap
C. a rate anticipation swap
D. a pure yield pickup swap
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-05 Analyze the choices to be made in an actively managed bond portfolio.
Topic: Active Bond Management
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
38. In a pure yield pickup swap, ________ bonds are exchanged for _________ bonds.
A. longer-duration; shorter-duration
B. shorter-duration; longer-duration
C. high-coupon; high-yield
D. low-yield; high-yield
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-05 Analyze the choices to be made in an actively managed bond portfolio.
Topic: Active Bond Management
39. The duration rule always ________ the value of a bond following a change in its yield.
A. underestimates
B. provides an unbiased estimate of
C. overestimates
D. The estimated price may be biased either upward or downward, depending on whether the bond is
trading at a discount or a premium.
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
A. y
B. y/(1 + y)
C. 1/y
D. (1 + y)/y
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
41. 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.
A. 7.46
B. 8.08
C. 9.02
D. 10.11
ΔP/P = -D*(Δy)
-20/1,050 = -D*(.25%)
-1.9% = -D*(.25%)
D* = 7.6
D = D*(1 + y)
D = 7.6(1.0625) = 8.075
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
42. A bond has a current price of $1,030. The yield on the bond is 8%. If the yield changes from 8% to 8.1%,
the price of the bond will go down to $1,025.88. The modified duration of this bond is _________.
A. 4.32
B. 4
C. 3.25
D. 3.75
ΔP/P = -D*(Δy)
-.40% = -D*(.10%)
D* = .40%/.10% = 4
AACSB: Analytic
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
43. A bank has $50 million in assets, $47 million in liabilities, and $3 million in shareholders' equity. If the
duration of its liabilities is 1.3 and the bank wants to immunize its net worth against interest rate risk and
thus set the duration of equity equal to zero, it should select assets with an average duration of
_________.
A. 1.22
B. 1.5
C. 1.6
D. 2
AACSB: Analytic
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 11-04 Formulate fixed-income immunization strategies for various investment horizons.
Topic: Passive Bond Management
44. A perpetuity pays $100 each and every year forever. The duration of this perpetuity will be __________
if its yield is 9%.
A. 7
B. 9
C. 9.39
D. 12.11
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
45. 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%.
A. 2.44
B. 3.23
C. 3.56
D. 4.1
Duration = 3.56
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
46. 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%.
A. 4
B. 3.56
C. 3.36
D. 3.05
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
47. A bond has a maturity of 12 years and a duration of 9.5 years at a promised yield rate of 8%. What is the
bond's modified duration?
A. 12 years
B. 11.1 years
C. 9.5 years
D. 8.8 years
AACSB: Analytic
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
48. 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 _________.
A. 10%
B. 12%
C. 21.6%
D. 29.6%
Calculator entries for the price today are N = 20, I/Y = 10, PMT = 90, FV = 1,000, CPT PV -914.86
calculator entries for the price in 1 year are N = 19, I/Y = 8, PMT = 90, FV = 1,000, CPT PV -
1,096.04
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 11-01 Analyze the features of a bond that affect the sensitivity of its price to interest rates.
Topic: Interest Rate Risk
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
49. A bond with a 9-year duration is worth $1,080, and its yield to maturity is 8%. If the yield to maturity
falls to 7.84%, you would predict that the new value of the bond will be approximately _________.
A. $1,035
B. $1,036
C. $1,094
D. $1,124
ΔP/P = -D*(Δy)
D* = D/(1 + y) = 9/1.08 = 8.33
ΔP/P = -D*(Δy) = -8.33(-.16%) = 1.33%
New price = $1,080(1.01333) = $1,094.40
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
50. When interest rates increase, the duration of a 20-year bond selling at a premium _________.
A. increases
B. decreases
C. remains the same
D. increases at first and then declines
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
A. default risks
B. conversion ratios
C. maturities
D. yields to maturity
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
52. 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 ________________________.
I. Term to maturity
II. Yield to maturity
III. Coupon rate
A. I only
B. I and II only
C. II and III only
D. I, II, and III
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
54. A fixed-income portfolio manager sets a minimum acceptable rate of return on the bond portfolio at 5%
per year over the next 4 years. The portfolio is currently worth $10 million. One year later interest rates
are at 6%. What is the portfolio value trigger point at this time that would require the manager to
immunize the portfolio?
A. $12,155,063
B. $10,205,625
C. $9,627,948
D. $10,500,000
AACSB: Analytic
Blooms: Remember
Difficulty: 3 Hard
Learning Objective: 11-04 Formulate fixed-income immunization strategies for various investment horizons.
Topic: Passive Bond Management
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
55. Compute the duration of an 8%, 5-year corporate bond with a par value of $1,000 and yield to maturity
of 10%.
A. 3.92
B. 4.28
C. 4.55
D. 5
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
56. Compute the modified duration of a 9% coupon, 3-year corporate bond with a yield to maturity of 12%.
A. 2.45
B. 2.75
C. 2.88
D. 3
AACSB: Analytic
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
57. 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. 1.15% decrease
B. 1.2% increase
C. 1.53% increase
D. 2.43% decrease
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
58. To create a portfolio with a duration of 4 years using a 5-year zero-coupon bond and a 3-year 8% annual
coupon bond with a yield to maturity of 10%, one would have to invest ________ of the portfolio value
in the zero-coupon bond.
A. 50%
B. 55%
C. 60%
D. 75%
The duration of the 3-year bond is 2.78, as shown in the table below.
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 11-04 Formulate fixed-income immunization strategies for various investment horizons.
Topic: Passive Bond Management
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
59. Which of the following set of conditions will result in a bond with the greatest price volatility?
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-01 Analyze the features of a bond that affect the sensitivity of its price to interest rates.
Topic: Interest Rate Risk
60. An investor who expects declining interest rates would maximize her capital gain by purchasing a bond
that has a _________ coupon and a _________ term to maturity.
A. low; long
B. high; short
C. high; long
D. zero; long
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-01 Analyze the features of a bond that affect the sensitivity of its price to interest rates.
Topic: Interest Rate Risk
61. If you choose a zero-coupon bond with a maturity that matches your investment horizon, which of the
following statements is (are) correct?
A. I only
B. I and II only
C. II and III only
D. I, II, and III
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-04 Formulate fixed-income immunization strategies for various investment horizons.
Topic: Passive Bond Management
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
62. As compared with equivalent maturity bonds selling at par, deep discount bonds will have ________.
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-01 Analyze the features of a bond that affect the sensitivity of its price to interest rates.
Topic: Interest Rate Risk
63. Steel Pier Company has issued bonds that pay semiannually with the following characteristics:
A. 6.15 years
B. 5.95 years
C. 6.49 years
D. 9.09 years
AACSB: Analytic
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
64. 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.
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
65. Steel Pier Company has issued bonds that pay semiannually with the following characteristics:
If the maturity of the bond was less than 10 years, 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.
66. 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 ____.
A. 11%
B. 13%
C. 12%
D. 10%
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
67. A 20-year maturity corporate bond has a 6.5% coupon rate (the coupons are paid annually). The bond
currently sells for $925.50. A bond market analyst forecasts that in 5 years yields on such bonds will be
at 7%. You believe that you will be able to reinvest the coupons earned over the next 5 years at a 6% rate
of return. What is your expected annual compound rate of return if you plan on selling the bond in 5
years?
A. 7.37%
B. 7.56%
C. 8.12%
D. 8.54%
Calculator entries are N = 15, I/Y = 7, PMT = -65, FV = -1,000, CPT PV 954.46
Total future value at time 5 = $366.41 + $954.46 = $1,320.87
PV0 = $925.50
($925.50)(1 + r)5 = $1,320.87; r = 7.37%
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 11-05 Analyze the choices to be made in an actively managed bond portfolio.
Topic: Active Bond Management
68. When bonds sell above par, what is the relationship of price sensitivity to rising interest rates?
AACSB: Analytic
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 11-01 Analyze the features of a bond that affect the sensitivity of its price to interest rates.
Topic: Interest Rate Risk
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
69. A zero-coupon bond is selling at a deep discount price of $430. It matures in 13 years. If the yield to
maturity of the bond is 6.7%, what is the duration of the bond?
A. 6.7 years
B. 8 years
C. 10 years
D. 13 years
AACSB: Analytic
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
70. You have an investment that in today's dollars returns 15% of your investment in year 1, 12% in year 2,
9% in year 3, and the remainder in year 4. What is the duration of this investment?
A. 4 years
B. 3.5 years
C. 3.22 years
D. 2.95 years
AACSB: Analytic
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
71. If an investment returns a higher percentage of your money back sooner, it will ______.
A. be less price-volatile
B. have a higher credit rating
C. be less liquid
D. have a higher modified duration
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
72. Which one of the following statements correctly describes the weights used in the Macaulay duration
calculation? The weight in year t is equal to ____________.
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
73. The duration is independent of the coupon rate only for which one of the following?
A. Discount bonds
B. Premium bonds
C. Perpetuities
D. Short-term bonds
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.
Topic: Duration
74. You have an investment horizon of 6 years. You choose to hold a bond with a duration of 10 years. Your
realized rate of return will be larger than the promised yield on the bond if ___________________.
75. A bond portfolio manager notices a hump in the yield curve at the 5-year point. How might a bond
manager take advantage of this event?
A. Buy the 5-year bonds, and short the surrounding maturity bonds.
B. Buy the 5-year bonds, and buy the surrounding maturity bonds.
C. Short the 5-year bonds, and short the surrounding maturity bonds.
D. Short the 5-year bonds, and buy the surrounding maturity bonds.
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
Topic: Active Bond Management
76. Market economists all predict a rise in interest rates. An astute bond manager wishing to maximize her
capital gain might employ which strategy?
77. 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 ___________________.
78. What strategy might an insurance company employ to ensure that it will be able to meet the obligations
of annuity holders?
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 11-04 Formulate fixed-income immunization strategies for various investment horizons.
Topic: Passive Bond Management
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
79. You have an investment horizon of 6 years. You choose to hold a bond with a duration of 6 years and
continue to match your investment horizon and duration throughout your holding period. Your realized
rate of return will be the same as the promised yield on the bond if:
A. I only
B. II
only
C. I and II only
D. I, II, and III
80. Immunization of coupon-paying bonds does not imply that the portfolio manager is inactive because:
A. I only
B. I and II only
C. II
only
D. I, II, and III
I. Once the cash flows are matched, there is no need for rebalancing.
II. Cash flow matching typically earns a higher rate of return than active bond portfolio management.
III. Financial institutions' liabilities often exceed the maturity of available bonds, making cash matching
even more desirable.
A. I only
B. II
only
C. I and III only
D. I, II, and III
AACSB: Analytic
Blooms: Remember
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
Difficulty: 2 Medium
Learning Objective: 11-04 Formulate fixed-income immunization strategies for various investment horizons.
Topic: Passive Bond Management
I. Underestimate the percentage increase in bond price when the yield falls.
II. Underestimate the percentage decrease in bond price when the yield rises.
III. Overestimate the percentage increase in bond price when the yield falls.
IV. Overestimate the percentage decrease in bond price when the yield rises.
83. You have a 25-year maturity, 10% coupon, 10% yield bond with a duration of 10 years and a convexity
of 135.5. If the interest rate were to fall 125 basis points, your predicted new price for the bond
(including convexity) is _________.
A. $1,098.45
B. $1,104.56
C. $1,113.41
D. $1,124.22
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 11-03 Show how convexity affects the response of bond prices to changes in interest rates.
Topic: Convexity
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.
84. 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 _________.
A. $638.85
B. $642.54
C. $666.88
D. $705.03
AACSB: Analytic
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 11-03 Show how convexity affects the response of bond prices to changes in interest rates.
Topic: Convexity
AACSB: Analytic
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 11-03 Show how convexity affects the response of bond prices to changes in interest rates.
Topic: Convexity
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not
authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated,
forwarded, distributed, or posted on a website, in whole or part.