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1 | | The duration of a bond is a function of the bond's |
| | A) | coupon rate. |
| | B) | time to maturity. |
| | C) | yield to maturity. |
| | D) | all of the above |
| | E) | none of the above |
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2 | | The "modified duration" used by practitioners is equal to the Macaulay duration |
| | A) | times the change in interest rate. |
| | B) | times (one plus the bond's yield to maturity). |
| | C) | divided by (one plus the bond's yield to maturity). |
| | D) | divided by (one minus the bond's yield to maturity). |
| | E) | none of the above |
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3 | | The interest-rate risk of a bond is |
| | A) | the risk related to the possibility of bankruptcy of the bond's issuer. |
| | B) | the risk that arises from the uncertainty of the bond's return caused by changes in interest rates. |
| | C) | the unsystematic risk caused by factors unique in the bond. |
| | D) | A and B above. |
| | E) | A, B, and C above. |
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4 | | Which of the following two bonds is more price sensitive to changes in interest rates? A par value bond, X, with 10 years-to-maturity and a 10% coupon rate or a zero-coupon bond, Y, with 10 years-to-maturity and a 10% yield-to-maturity. |
| | A) | Bond Y because of the longer duration. |
| | B) | Bond X because of the longer time to maturity. |
| | C) | Bond X because of the higher coupon rate. |
| | D) | Both have the same sensitivity because both have the same yield to maturity. |
| | E) | None of the above |
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5 | | Holding other factors constant, which one of the following bonds has the smallest price volatility? |
| | A) | 6-year, 0% coupon bond |
| | B) | 6-year, 9% coupon bond |
| | C) | 6 year, 15% coupon bond |
| | D) | 6-year, 10% coupon bond |
| | E) | Cannot tell from the information given |
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6 | | Which of the following is not true? |
| | A) | Holding other things constant, the duration of a bond increases with time to maturity. |
| | B) | Given time to maturity and yield to maturity, the duration of a bond is higher when the coupon rate is lower. |
| | C) | Given time to maturity, the duration of a zero-coupon decreases with yield to maturity. |
| | D) | Duration is a better measure of price sensitivity to interest rate changes than is time to maturity. |
| | E) | None of the above |
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7 | | Par value bond GE has a modified duration of 11. Which one of the following statements regarding the bond is true? |
| | A) | If the market yield increases by 1%, the bond's price will decrease by $55. |
| | B) | If the market yield increases by 1%, the bond's price will increase by $55. |
| | C) | If the market yield increases by 1%, the bond's price will decrease by $110. |
| | D) | If the market yield increases by 1%, the bond's price will increase by $110. |
| | E) | None of the above |
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8 | | Indexing of bond portfolios is difficult because |
| | A) | the number of bonds included in the major indexes is so large that it would be difficult to purchase them in the proper proportions. |
| | B) | many bonds are thinly traded so it is difficult to purchase them at a fair market price. |
| | C) | the composition of bond indexes is constantly changing. |
| | D) | all of the above |
| | E) | both B and C are true |
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9 | | A substitution swap is an exchange of bonds undertaken to |
| | A) | change the credit risk of a portfolio. |
| | B) | extend the duration of a portfolio. |
| | C) | reduce the duration of a portfolio. |
| | D) | profit from apparent mispricing between two bonds. |
| | E) | adjust for differences in the yield spread. |
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10 | | An analyst who selects a particular holding period and predicts the yield curve at the end of that holding period is engaging in |
| | A) | a rate anticipation swap. |
| | B) | immunization. |
| | C) | horizon analysis. |
| | D) | an intermarket spread swap. |
| | E) | none of the above |
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