Chap 011

Chapter 11 - Managing Bond Portfolios
Chapter 11
Managing Bond Portfolios

Multiple Choice Questions

1. All other things equal, which of the following has the longest duration?
A. A 30 ear !ond with a 10" coupon
B. A #0 ear !ond with a $" coupon
C. A #0 ear !ond with a %" coupon
&. A 10 ear 'ero coupon !ond

#. All other things equal, which of the following has the shortest duration?

3. A pension fund (ust pa out )1 (illion ne*t ear, )# (illion the following ear and then
)3 (illion the ear after that. +f the discount rate is ," what is the duration of this set of
pa(ents?
A. #.00 ears
B. #.1- ears
C. #.#$ ears
&. #.-3 ears

.. All other things equal, which of the following has the longest duration?
A. A #0 ear !ond with a 10" coupon ielding 10"
B. A #0 ear !ond with a 10" coupon ielding 11"
C. A #0 ear 'ero coupon !ond ielding 10"
&. A #0 ear 'ero coupon !ond ielding 11"

11-1
-. /he duration of a perpetuit 0aries 1111111 with interest rates.
A. directl
B. in0ersel
C. con0e*l
&. rando(l

2. Because of con0e*it, when interest rates change the actual !ond price will 111111111111
the !ond price predicted ! duration.
A. alwas !e higher than
B. so(eti(es !e higher than
C. alwas !e lower than
&. so(eti(es !e lower than

%. 3ou find a - ear AA 4ero* !ond priced to ield 2". 3ou find a si(ilar ris5 - ear Canon
!ond priced to ield 2.-". /o ta5e ad0antage of this ou should do which of the following?
A. 6hort the Canon !ond and !u the 4ero* !ond
B. Bu the Canon !ond and short the 4ero* !ond
C. 6hort !oth the Canon !ond and the 4ero* !ond
&. Bu !oth the Canon !ond and the 4ero* !ond

,. A forecast of !ond returns !ased largel on a prediction of the ield cur0e at the end of the
in0est(ent hori'on is called a 111111111.
A. contingent i((uni'ation
B. dedication strateg
C. duration analsis
&. hori'on analsis

$. A !ond7s price 0olatilit 111111111 at a8an 111111111 rate as (aturit increases.
A. increases9 increasing
B. increases9 decreasing
C. decreases9 increasing
&. decreases9 decreasing

11-#
10. As a result of !ond con0e*it an increase in a !ond7s price when ield to (aturit falls is
11111111 the price decrease resulting fro( an increase in ield of equal (agnitude.
A. greater than
B. equi0alent to
C. s(aller than
&. /he answer is indeter(inate.

11. All else equal, !ond price 0olatilit is greater for 1111111111.
A. higher coupon rates
B. lower coupon rates
C. shorter (aturit
&. lower default ris5

1#. 11111111111111 is an i(portant characteristic of the relationship !etween !ond prices
and ields.
A. Con0e*it
B. Conca0it
C. Co(ple*it
&. :inearit

13. Bond prices are 1111111 sensiti0e to changes in ield when the !ond is selling at a
1111111 initial ield to (aturit.
A. (ore9 lower
B. (ore9 higher
C. less9 lower
&. equall9 higher or lower

1.. /he pioneer of the duration concept was 111111111.
A. ;ugene <a(a
B. =ohn >er'og
C. <rederic5 Macaula
&. >arr Mar5owit'

11-3
1-. A portfolio (anager sells treasur !onds and !us corporate !onds !ecause the spread
!etween corporate and /reasur !ond ields is higher than its historical a0erage. /his is an
e*a(ple of 1111111111 swap.
A. a pure ield pic5 up
B. a rate anticipation
C. a su!stitution
&. an inter(ar5et spread

12. /he duration of a --ear 'ero coupon !ond is 1111 ears.
A. ..-
B. -.0
C. -.-
&. 3.-

1%. A portfolio (anager !elie0es interest rates will drop and decides to sell short duration
!onds and !u long duration !onds. /his is an e*a(ple of 1111111111 swap.
C. a su!stitution
&. an inter-(ar5et spread

1,. /arget date i((uni'ation would pri(aril !e of interest to 111111111.
A. !an5s
B. (utual funds
C. pension funds
&. indi0idual in0estors

1$. &uration is a concept that is useful in assessing a !ond7s 111111111.
A. credit ris5
B. liquidit ris5
C. price 0olatilit
&. con0e*it ris5

11-.
#0. A pension fund has an a0erage duration of its lia!ilities equal to 1- ears. /he fund is
loo5ing at - ear (aturit 'ero coupon !onds and ." ield perpetuities to i((uni'e its
interest rate ris5. >ow (uch of its portfolio should it allocate to the 'ero coupon !onds to
i((uni'e if there are no other assets funding the plan?
A. -#"
B. .,"
C. 33"
&. #-"

#1. 3ou own a !ond that has a duration of 2 ears. +nterest rates are currentl %" !ut ou
!elie0e the <ed is a!out to increase interest rates ! #- !asis points. 3our predicted price
change on this !ond is 11111111.
A. ?1..0"
B. -1..0"
C. -#.-1"
&. ?#.-1"

##. @i0en its ti(e to (aturit the duration of a 'ero coupon !ond is 111111111.
A. higher when the discount rate is higher
B. higher when the discount rate is lower
C. lowest when the discount rate is equal to the ris5 free rate
&. the sa(e regardless of the discount rate

#3. An increase in a !ond7s ield to (aturit results in a price decline that is 11111111 the
price increase resulting fro( a decrease in ield of equal (agnitude.
A. greater than
B. equi0alent to
C. s(aller than
&. /he answer is indeter(inate

11--
#.. All other things equal, a !ond7s duration is 111111111.
A. higher when the ield to (aturit is higher
B. lower when the ield to (aturit is higher
C. the sa(e at all ield rates
&. indeter(ina!le when the ield to (aturit is high

#-. A !an5 has an a0erage duration of its lia!ilities equal to # ears. /he !an57s a0erage
duration of its assets is 3.- ears. /he !an57s (ar5et 0alue of equit is at ris5 if
11111111111111111111111.
A. interest rates fall
B. credit spreads fall
C. interest rates rise
&. the price of all fi*ed inco(e securities rises

#2. All other things equal, a !ond7s duration is 111111111.
A. higher when the coupon rate is higher
B. lower when the coupon rate is higher
C. the sa(e when the coupon rate is higher
&. indeter(inate when the coupon rate is high

#%. Ban5s and other financial institutions can !est (anage interest rate ris5 !
1111111111111.
A. (a*i(i'ing the duration of assets and (ini(i'ing the duration of lia!ilities
B. (ini(i'ing the duration of assets and (a*i(i'ing the duration of lia!ilities
C. (atching the durations of their assets and lia!ilities
&. (atching the (aturities of their assets and lia!ilities

#,. +n the conte*t of a !ond portfolio, price ris5 and rein0est(ent rate ris5 e*actl cancel out
at a ti(e hori'on equal to 1111.
A. the a0erage !ond (aturit in the portfolio
B. the duration of the portfolio
C. the difference !etween the shortest duration and longest duration of the indi0idual !onds in
the portfolio
&. the a0erage of the shortest duration and longest duration of the !onds in the portfolio

11-2
#$. Bond portfolio i((uni'ation techniques !alance 11111111 and 11111111 ris5.
A. price9 rein0est(ent
B. price9 liquidit
C. credit9 rein0est(ent
&. credit9 liquidit

30. 3ou ha0e purchased a @uaranteed +n0est(ent contracts A@+CsB fro( an insurance fir(
that pro(ises to pa ou a -" co(pound rate of return per ear for 2 ears. +f ou pa
)10,000 for the @+C toda and recei0e no interest along the wa ou will get 1111111111 in 2
ears Ato the nearest dollarB.
A. )1#,-2-
B. )13,000
C. )13,.01
&. )13,2%2

31. /he duration of a portfolio of !onds can !e calculated as 111111111111111.
A. the coupon weighted a0erage of the durations of the indi0idual !onds in the portfolio
B. the ield weighted a0erage of the durations of the indi0idual !onds in the portfolio
C. the 0alue weighed a0erage of the durations of the indi0idual !onds in the portfolio
&. a0erages of the durations of the longest and shortest duration !onds in the portfolio

3#. Pension fund (anagers can generall !est !ring a!out an effecti0e reduction in their
interest rate ris5 ! holding 1111111111111111111.
A. long (aturit !onds
B. long duration !onds
C. short (aturit !onds
&. short duration !onds

33. Chich of the following is not a tpe of !ond swap used in acti0e portfolio (anage(ent?
A. +nter-(ar5et spread swap
B. 6u!stitution swap
C. Date anticipation swap
&. Asset-lia!ilit swap

11-%
3.. /he e*change of one !ond for a !ond with si(ilar attri!utes !ut (ore attracti0el priced is
called 11111111111111.
A. a su!stitution swap
B. an inter(ar5et spread swap
C. rate anticipation swap
&. pure ield pic5up swap

3-. Dan5 the interest sensiti0it of the following fro( (ost sensiti0e to an interest rate change
to the least sensiti0e.
+. ," coupon, noncalla!le #0 ear (aturit, par !ond
++. $" coupon, currentl calla!le #0 ear (aturit, pre(iu( !ond
+++. Eero coupon, 30 ear (aturit !ond
A. +, ++, +++
B. ++, +++, +
C. +++, +, ++
&. +++, ++, +

32. A !ond swap (ade in response to forecasts of interest rate changes is called 111111.

3%. Mo0ing to higher ield !onds, usuall with longer (aturities is called 11111111.

3,. +n a pure ield pic5up swap, 11111111 !onds are e*changed for 111111111 !onds.
A. longer duration9 shorter duration
B. shorter duration9 longer duration
C. high coupon9 high ield
&. low ield9 high ield

11-,
3$. /he duration rule alwas 11111111 the 0alue of a !ond following a change in its ield.
A. under-esti(ates
B. pro0ides an un!iased esti(ate of
C. o0er-esti(ates
&. /he esti(ated price (a !e !iased either upward or downward, depending on whether the
!ond is trading at a discount or a pre(iu(

.0. Chere 3 F ield to (aturit, the duration of a perpetuit would !e 111111111.
A. 3
B. 38A1 ? 3B
C. 183
&. A1 ? 3B83

.1. A !ond currentl has a price of )1,0-0. /he ield on the !ond is 2.00". +f the ield
increases #- !asis points, the price of the !ond will go down to )1,030. /he duration of this
!ond is 1111 ears.
A. %..2
B. ,.0,
C. $.0#
&. 10.11

.#. A !ond has a current price of )1,030. /he ield on the !ond is ,.00". +f the ield changes
fro( ,.00" to ,.10", the price of the !ond will go down to )1,0#-.,,. /he (odified duration
of this !ond is 111111111.
A. ..3#
B. ..00
C. 3.#-
&. 3.%-

11-$
.3. A !an5 has )-0 (illion in assets, ).% (illion in lia!ilities and )3 (illion in shareholders7
equit. +f the duration of its lia!ilities are 1.3 and the !an5 wants to i((uni'e its net worth
against interest rate ris5 and thus set the duration of equit equal to 'ero, it should select
assets with an a0erage duration of 111111111.
A. 1.##
B. 1.-0
C. 1.20
&. #.00

... A perpetuit pas )100 each and e0er ear fore0er. /he duration of this perpetuit will
!e 1111111111 if its ield is $".
A. %
B. $
C. $.3$
&. 1#.11

A !ond pas annual interest. +ts coupon rate is $". +ts 0alue at (aturit is )1,000. +t (atures
in four ears. +ts ield to (aturit is currentl 2".

.-. /he duration of this !ond is 1111111 ears.
A. #...
B. 3.#3
C. 3.-2
&. ..10

.2. /he (odified duration of this !ond is 111111 ears.
A. ..00
B. 3.-2
C. 3.32
&. 3.0-

11-10
.%. A !ond has a (aturit of 1# ears, a duration of $.- ears at a pro(ised ield rate of ,".
Chat is the !ond7s (odified duration?
A. 1# ears
B. 11.1 ears
C. $.- ears
&. ,., ears

.,. A #0-ear (aturit !ond pas interest of )$0 once per ear and has a face 0alue of )1,000.
+ts ield to (aturit is 10". G0er the upco(ing ear, ou e*pect interest rates to decline and
that the ield to (aturit on this !ond will onl !e ," a ear fro( now. Hsing hori'on
analsis, the return ou e*pect to earn ! holding this !ond o0er the upco(ing ear is
111111111.
A. 10.0"
B. 1#.0"
C. #1.2"
&. #$.2"

.$. A !ond with a $-ear duration is worth )1,0,0.00 and its ield to (aturit is ,". +f the
ield to (aturit falls to %.,.", ou would predict that the new 0alue of the !ond will !e
111111111.
A. )1,03-
B. )1,032
C. )1,0$.
&. )1,1#.

-0. Chen interest rates increase, the duration of a #0-ear !ond selling at a pre(iu(
111111111.
A. increases
B. decreases
C. re(ains the sa(e
&. increases at first, then declines

11-11
-1. &uration facilitates the co(parison of !onds with differing 11111111111.
A. default ris5
B. con0ersion ratios
C. (aturities
&. ields to (aturit

-#. /he historical ield spread !etween the AA !ond and the AAA !ond has !een #- !asis
points. Currentl the spread is onl $ !asis points. +f ou !elie0e the spread will soon return to
its historical le0els ou should 111111111111111111111111.
A. !u the AA and short the AAA
B. !u !oth the AA and the AAA
C. !u the AAA and short the AA
&. short !oth the AA and the AAA

-3. /he duration of a !ond nor(all increases with an increase in 111111111.
+. ter(-to-(aturit
++. ield-to-(aturit.
+++. coupon rate
A. + onl
B. + and ++ onl
C. ++ and +++ onl
&. +, ++ and +++

-.. A fi*ed inco(e portfolio (anager sets a (ini(u( accepta!le rate of return on the !ond
portfolio at -" per ear o0er the ne*t . ears. /he portfolio is currentl worth )10 (illion.
Gne ear later interest rates are at 2". Chat is the portfolio 0alue trigger point at this ti(e
that would require hi( to i((uni'e the portfolio?
A. )1#,1--,023
B. )10,#0-,2#-
C. )$,2#%,$.,
&. )10,-00,000

11-1#
--. Co(pute the duration of an ,", --ear corporate !ond with a par 0alue of )1000 if ield
to (aturit of 10".
A. 3.$#
B. ..#,
C. ..--
&. -.00

-2. Co(pute the (odified duration of a $" coupon, 3-ear corporate !ond with a ield to
(aturit of 1#".
A. #..-
B. #.%-
C. #.,,
&. 3.00

-%. An ,", 30-ear !ond has a ield-to-(aturit of 10" and a (odified duration of ,.0 ears.
+f the (ar5et ield drops ! 1- !asis points, there will !e a 1111111111 in the !ond7s price.
A. 1.1-" decrease
B. 1.#0" increase
C. 1.-3" increase
&. #..3" decrease

-,. /o create a portfolio with a duration of . ears using a - ear 'ero-coupon !ond and a 3
ear ," annual coupon !ond with a ield to (aturit of 10", one would ha0e to in0est
11111111 of the portfolio 0alue in the 'ero-coupon !ond.
A. -0"
B. --"
C. 20"
&. %-"

11-13
-$. Chich of the following set of conditions will result in a !ond with the greatest price
0olatilit?
A. A high coupon and a short (aturit.
B. A high coupon and a long (aturit.
C. A low coupon and a short (aturit.
&. A low coupon and a long (aturit.

20. An in0estor who e*pects declining interest rates would (a*i(i'e their capital gain !
purchasing a !ond that has a 111 coupon and a 111 ter( to (aturit.
A. low9 long
B. high9 short
C. high9 long
&. 'ero9 long

21. +f ou choose a 'ero coupon !ond with a (aturit that (atches our in0est(ent hori'on
which of the following state(ents is8are correct?
+. 3ou will ha0e no interest rate ris5 on this !ond.
++. A!sent default, ou can !e sure ou will earn the pro(ised ield rate.
+++. /he duration of our !ond is less than the ti(e to our in0est(ent hori'on.
A. + onl
B. + and ++ onl
C. ++ and +++ onl
&. +, ++ and +++

2#. As co(pared with equi0alent (aturit !onds selling at par, deep discount !onds will ha0e
11111111.
A. greater rein0est(ent ris5
B. greater price 0olatilit
C. less call protection
&. shorter a0erage (aturit

11-1.
6teel Pier Co(pan has issued !onds that pa se(iannuall with the following
characteristicsI

23. /he (odified duration for the 6teel Pier !ond is 111111.
A. 2.1- ears
B. -.$- ears
C. 2..$ ears
&. $.0$ ears

2.. +f the !ond7s coupon was s(aller than 10", the (odified duration would !e 11111
co(pared to the original (odified duration.
A. larger
B. unchanged
C. s(aller
&. /here is not enough infor(ation to deter(ine the direction of change

2-. +f the (aturit of the !ond was less than 10 ears, the (odified duration would !e 11111
A. larger
B. unchanged
C. s(aller

22. +f the ield to (aturit decreases to ,.0.-" the e*pected percentage change in the price of
the !ond using Macaule7s duration would !e 1111, while the e*pected percentage change in
the price of the !ond using (odified duration would !e 1111.
A. 11", 1#"
B. 1#", 11"
C. 1#", 1#"
&. 11", 11"

11-1-
2%. A #0 ear (aturit corporate !ond has a 2.-" coupon rate Athe coupons are paid
annuallB. /he !ond currentl sells for )$#-.-0. A !ond (ar5et analst forecasts that in fi0e
ears ield rates on these !onds will !e at %.0". 3ou !elie0e that ou will !e a!le to rein0est
the coupons earned o0er the ne*t fi0e ears at a 2" rate of return. Chat is our e*pected
annual co(pound rate of return if ou plan on selling the !ond in fi0e ears?
A. %.3%"
B. %.-2"
C. ,.1#"
&. ,.-."

2,. Chen !onds sell a!o0e par, what is the relationship of price sensiti0it to rising interest
rates?
A. Price 0olatilit increases at an increasing rate
B. Price 0olatilit increases at a decreasing rate
C. Price 0olatilit decreases at a decreasing rate
&. Price 0olatilit decreases at an increasing rate

2$. A 'ero coupon !ond is selling at a deep discount price of ).30.00. +t (atures in 13 ears.
+f the ield to (aturit of the !ond is 2.%", what is the duration of the !ond?
A. 2.% ears
B. ,.0 ears
C. 10 ears
&. 13 ears

%0. 3ou ha0e an in0est(ent that in toda7s dollars returns 1-" of our in0est(ent in ear 1,
1#" in ear two, $" in ear 3 and the re(ainder in ear .. Chat is the duration of this
in0est(ent?
A. . ears
B. 3.-0 ears
C. 3.## ears
&. #.$- ears

11-12
%1. +f an in0est(ent returns a higher percentage of our (one !ac5 sooner it will 111111.
A. !e less price 0olatile
B. ha0e a higher credit rating
C. !e less liquid
&. ha0e a higher (odified duration

%#. Chich one of the following state(ents correctl descri!es the weights used in the
Macaula duration calculation? /he weight in ear t is equal to 111111111111.
A. the dollar a(ount of the in0est(ent recei0ed in ear t
B. the percentage of the future 0alue of the in0est(ent recei0ed in ear t
C. the present 0alue of the dollar a(ount of the in0est(ent recei0ed in ear t
&. the percentage of the total present 0alue of the in0est(ent recei0ed in ear t

%3. /he duration is independent of the coupon rate onl for which one of the following?
A. &iscount !onds
B. Pre(iu( !onds
C. Perpetuities
&. 6hort ter( !onds

%.. 3ou ha0e an in0est(ent hori'on of 2 ears. 3ou choose to hold a !ond with a duration of
10 ears. 3our reali'ed rate of return will !e larger than the pro(ised ield on the !ond if
1111111111111111111.
A. interest rates increase
B. interest rates sta the sa(e
C. interest rates fall
&. one can7t tell with the infor(ation gi0en

%-. A !ond portfolio (anager notices a hu(p in the ield cur0e at the fi0e ear point. >ow
(ight a !ond (anager ta5e ad0antage of this e0ent?
A. Bu the - ear !onds and short the surrounding (aturit !onds
B. Bu the - ear !onds and !u the surrounding (aturit !onds
C. 6hort the - ear !onds and short the surrounding (aturit !onds
&. 6hort the - ear !onds and !u the surrounding (aturit !onds

11-1%
%2. Mar5et econo(ists all predict a rise in interest rates. An astute !ond (anager wishing to
(a*i(i'e her capital gain (ight e(plo which strateg?
A. 6witch fro( low duration to high duration !onds.
B. 6witch fro( high duration to low duration !onds.
C. 6witch fro( high grade to low grade !onds.
&. 6witch fro( low coupon to high coupon !onds.

%%. 3ou ha0e an in0est(ent hori'on of 2 ears. 3ou choose to hold a !ond with a duration of
. ears. 3our reali'ed rate of return will !e larger than the pro(ised ield on the !ond if
1111111111111111111.

%,. Chat strateg (ight an insurance co(pan e(plo to ensure that it will !e a!le to (eet
the o!ligations of annuit holders?
A. Cash flow (atching
B. +nde* trac5ing
C. 3ield pic5up swaps
&. 6u!stitution swap

%$. 3ou ha0e an in0est(ent hori'on of 2 ears. 3ou choose to hold a !ond with a duration of
2 ears and continue to (atch our in0est(ent hori'on and duration throughout our holding
period. 3our reali'ed rate of return will !e the sa(e as the pro(ised ield on the !ond if
+. interest rates increase
++. interest rates sta the sa(e
+++. interest rates fall
A. + onl
B. ++ onl
C. + and ++ onl
&. +, ++ and +++

11-1,
,0. +((uni'ation of coupon paing !onds is not a passi0e strateg !ecause
+. the portfolio (ust !e re!alanced e0er ti(e interest rates change
++. the portfolio (ust !e re!alanced o0er ti(e e0en if interest rates don7t change
+++. con0e*it i(plies duration !ased i((uni'ation strategies don7t wor5
A. + onl
B. + and ++ onl
C. ++ onl
&. +, ++ and +++

,1. Ad0antages of cash flow (atching and dedicated strategies include 111111.
+. once the cash flows are (atched there is no need for re!alancing
++. cash flow (atching tpicall earns a higher rate of return than acti0e !ond portfolio
(anage(ent
+++. financial institution7s lia!ilities often e*ceed the (aturit of a0aila!le !onds, (a5ing cash
(atching e0en (ore desira!le
A. + onl
B. ++ onl
C. + and +++ onl
&. +, ++ and +++

,#. Con0e*it i(plies that duration predictions 1111111.
+. underesti(ate the " increase in !ond price when the ield falls
++. underesti(ate the " decrease in !ond price when the ield rises
+++. o0eresti(ates the " increase in !ond price when the ield falls
+J. o0eresti(ates the " decrease in !ond price when the ield rises
A. + and +++ onl
B. ++ and +J onl
C. + and +J onl
&. ++ and +++ onl

11-1$
,3. 3ou ha0e a #- ear (aturit 10" coupon, 10" ield !ond with duration of 10 ears and a
con0e*it of 13-.-0. +f interest rate were to fall 1#- !asis points our predicted new price for
the !ond Aincluding con0e*itB is 111111111.
A. )10$,..-
B. )110..-2
C. )1113..1
&. )11#..#0

,.. 3ou ha0e a 1- ear (aturit ." coupon, 2" ield !ond with duration of 10.- ears and a
con0e*it of 1#,.%-. /he !ond is currentl priced at ),0-.%2. +f interest rate were to increase
#00 !asis points our predicted new price for the !ond Aincluding con0e*itB is 111111111.
A. )23,.,-
B. )2.#.-.
C. )222.,,
&. )%0-.03

,-. Con0e*it of a !ond is 11111111111.
A. the sa(e as hori'on analsis
B. the rate of change of the price-ield cur0e di0ided ! !ond price
C. a (easure of !ond duration
&. none of the a!o0e

Chapter 11 Managing Bond Portfolios Answer Ke

Multiple Choice Questions

11-#0
1. All other things equal, which of the following has the longest duration?

Difficulty: Medium

#. All other things equal, which of the following has the shortest duration?
D. A 10 ear 'ero coupon !ond

Difficulty: Medium

3. A pension fund (ust pa out )1 (illion ne*t ear, )# (illion the following ear and then
)3 (illion the ear after that. +f the discount rate is ," what is the duration of this set of
pa(ents?
A. #.00 ears
B. #.1- ears
C. #.#$ ears
&. #.-3 ears

Difficulty: Hard

11-#1
.. All other things equal, which of the following has the longest duration?
A. A #0 ear !ond with a 10" coupon ielding 10"
B. A #0 ear !ond with a 10" coupon ielding 11"
C. A #0 ear 'ero coupon !ond ielding 10"
&. A #0 ear 'ero coupon !ond ielding 11"

Difficulty: Medium

-. /he duration of a perpetuit 0aries 1111111 with interest rates.
A. directl
B. in0ersel
C. con0e*l
&. rando(l

Difficulty: Medium

2. Because of con0e*it, when interest rates change the actual !ond price will 111111111111
the !ond price predicted ! duration.
A. alwas !e higher than
B. so(eti(es !e higher than
C. alwas !e lower than
&. so(eti(es !e lower than

Difficulty: Easy

%. 3ou find a - ear AA 4ero* !ond priced to ield 2". 3ou find a si(ilar ris5 - ear Canon
!ond priced to ield 2.-". /o ta5e ad0antage of this ou should do which of the following?
A. 6hort the Canon !ond and !u the 4ero* !ond
B. Bu the Canon !ond and short the 4ero* !ond
C. 6hort !oth the Canon !ond and the 4ero* !ond
&. Bu !oth the Canon !ond and the 4ero* !ond

Difficulty: Medium

11-##
,. A forecast of !ond returns !ased largel on a prediction of the ield cur0e at the end of the
in0est(ent hori'on is called a 111111111.
A. contingent i((uni'ation
B. dedication strateg
C. duration analsis
D. hori'on analsis

Difficulty: Easy

$. A !ond7s price 0olatilit 111111111 at a8an 111111111 rate as (aturit increases.
A. increases9 increasing
B. increases9 decreasing
C. decreases9 increasing
&. decreases9 decreasing

Difficulty: Easy

10. As a result of !ond con0e*it an increase in a !ond7s price when ield to (aturit falls is
11111111 the price decrease resulting fro( an increase in ield of equal (agnitude.
A. greater than
B. equi0alent to
C. s(aller than
&. /he answer is indeter(inate.

Difficulty: Medium

11. All else equal, !ond price 0olatilit is greater for 1111111111.
A. higher coupon rates
B. lower coupon rates
C. shorter (aturit
&. lower default ris5

Difficulty: Easy

11-#3
1#. 11111111111111 is an i(portant characteristic of the relationship !etween !ond prices
and ields.
A. Con0e*it
B. Conca0it
C. Co(ple*it
&. :inearit

Difficulty: Medium

13. Bond prices are 1111111 sensiti0e to changes in ield when the !ond is selling at a
1111111 initial ield to (aturit.
A. (ore9 lower
B. (ore9 higher
C. less9 lower
&. equall9 higher or lower

Difficulty: Easy

1.. /he pioneer of the duration concept was 111111111.
A. ;ugene <a(a
B. =ohn >er'og
C. <rederic5 Macaula
&. >arr Mar5owit'

Difficulty: Easy

1-. A portfolio (anager sells treasur !onds and !us corporate !onds !ecause the spread
!etween corporate and /reasur !ond ields is higher than its historical a0erage. /his is an
e*a(ple of 1111111111 swap.
C. a su!stitution
D. an inter(ar5et spread

Difficulty: Easy

11-#.
12. /he duration of a --ear 'ero coupon !ond is 1111 ears.
A. ..-
B. -.0
C. -.-
&. 3.-

Difficulty: Easy

1%. A portfolio (anager !elie0es interest rates will drop and decides to sell short duration
!onds and !u long duration !onds. /his is an e*a(ple of 1111111111 swap.
C. a su!stitution
&. an inter-(ar5et spread

Difficulty: Easy

1,. /arget date i((uni'ation would pri(aril !e of interest to 111111111.
A. !an5s
B. (utual funds
C. pension funds
&. indi0idual in0estors

Difficulty: Easy

1$. &uration is a concept that is useful in assessing a !ond7s 111111111.
A. credit ris5
B. liquidit ris5
C. price 0olatilit
&. con0e*it ris5

Difficulty: Easy

11-#-
#0. A pension fund has an a0erage duration of its lia!ilities equal to 1- ears. /he fund is
loo5ing at - ear (aturit 'ero coupon !onds and ." ield perpetuities to i((uni'e its
interest rate ris5. >ow (uch of its portfolio should it allocate to the 'ero coupon !onds to
i((uni'e if there are no other assets funding the plan?
A. -#"
B. .,"
C. 33"
&. #-"
&ur
perpetuit
F F #2 ears
1- F Aw
'
BA-B ? A1 - w
'
B #29 w
'
F -#.3,"

Difficulty: Hard

#1. 3ou own a !ond that has a duration of 2 ears. +nterest rates are currentl %" !ut ou
!elie0e the <ed is a!out to increase interest rates ! #- !asis points. 3our predicted price
change on this !ond is 11111111.
A. ?1..0"
B. -1..0"
C. -#.-1"
&. ?#.-1"
"P F A-2B F -1..0"

Difficulty: Medium

##. @i0en its ti(e to (aturit the duration of a 'ero coupon !ond is 111111111.
A. higher when the discount rate is higher
B. higher when the discount rate is lower
C. lowest when the discount rate is equal to the ris5 free rate
D. the sa(e regardless of the discount rate

Difficulty: Easy

11-#2
#3. An increase in a !ond7s ield to (aturit results in a price decline that is 11111111 the
price increase resulting fro( a decrease in ield of equal (agnitude.
A. greater than
B. equi0alent to
C. s(aller than
&. /he answer is indeter(inate

Difficulty: Medium

#.. All other things equal, a !ond7s duration is 111111111.
A. higher when the ield to (aturit is higher
B. lower when the ield to (aturit is higher
C. the sa(e at all ield rates
&. indeter(ina!le when the ield to (aturit is high

Difficulty: Medium

#-. A !an5 has an a0erage duration of its lia!ilities equal to # ears. /he !an57s a0erage
duration of its assets is 3.- ears. /he !an57s (ar5et 0alue of equit is at ris5 if
11111111111111111111111.
A. interest rates fall
B. credit spreads fall
C. interest rates rise
&. the price of all fi*ed inco(e securities rises

Difficulty: Medium

#2. All other things equal, a !ond7s duration is 111111111.
A. higher when the coupon rate is higher
B. lower when the coupon rate is higher
C. the sa(e when the coupon rate is higher
&. indeter(inate when the coupon rate is high

Difficulty: Easy

11-#%
#%. Ban5s and other financial institutions can !est (anage interest rate ris5 !
1111111111111.
A. (a*i(i'ing the duration of assets and (ini(i'ing the duration of lia!ilities
B. (ini(i'ing the duration of assets and (a*i(i'ing the duration of lia!ilities
C. (atching the durations of their assets and lia!ilities
&. (atching the (aturities of their assets and lia!ilities

Difficulty: Medium

#,. +n the conte*t of a !ond portfolio, price ris5 and rein0est(ent rate ris5 e*actl cancel out
at a ti(e hori'on equal to 1111.
A. the a0erage !ond (aturit in the portfolio
B. the duration of the portfolio
C. the difference !etween the shortest duration and longest duration of the indi0idual !onds in
the portfolio
&. the a0erage of the shortest duration and longest duration of the !onds in the portfolio

Difficulty: Easy

#$. Bond portfolio i((uni'ation techniques !alance 11111111 and 11111111 ris5.
A. price9 rein0est(ent
B. price9 liquidit
C. credit9 rein0est(ent
&. credit9 liquidit

Difficulty: Easy

11-#,
30. 3ou ha0e purchased a @uaranteed +n0est(ent contracts A@+CsB fro( an insurance fir(
that pro(ises to pa ou a -" co(pound rate of return per ear for 2 ears. +f ou pa
)10,000 for the @+C toda and recei0e no interest along the wa ou will get 1111111111 in 2
ears Ato the nearest dollarB.
A. )1#,-2-
B. )13,000
C. )13,.01
&. )13,2%2
A10,000BA1.0-B
2
F )13,.01

Difficulty: Easy

31. /he duration of a portfolio of !onds can !e calculated as 111111111111111.
A. the coupon weighted a0erage of the durations of the indi0idual !onds in the portfolio
B. the ield weighted a0erage of the durations of the indi0idual !onds in the portfolio
C. the 0alue weighed a0erage of the durations of the indi0idual !onds in the portfolio
&. a0erages of the durations of the longest and shortest duration !onds in the portfolio

Difficulty: Medium

3#. Pension fund (anagers can generall !est !ring a!out an effecti0e reduction in their
interest rate ris5 ! holding 1111111111111111111.
A. long (aturit !onds
B. long duration !onds
C. short (aturit !onds
&. short duration !onds

Difficulty: Medium

11-#$
33. Chich of the following is not a tpe of !ond swap used in acti0e portfolio (anage(ent?
A. +nter-(ar5et spread swap
B. 6u!stitution swap
C. Date anticipation swap
D. Asset-lia!ilit swap

Difficulty: Easy

3.. /he e*change of one !ond for a !ond with si(ilar attri!utes !ut (ore attracti0el priced is
called 11111111111111.

Difficulty: Easy

3-. Dan5 the interest sensiti0it of the following fro( (ost sensiti0e to an interest rate change
to the least sensiti0e.
+. ," coupon, noncalla!le #0 ear (aturit, par !ond
++. $" coupon, currentl calla!le #0 ear (aturit, pre(iu( !ond
+++. Eero coupon, 30 ear (aturit !ond
A. +, ++, +++
B. ++, +++, +
C. +++, +, ++
&. +++, ++, +

Difficulty: Hard

32. A !ond swap (ade in response to forecasts of interest rate changes is called 111111.

Difficulty: Easy

11-30
3%. Mo0ing to higher ield !onds, usuall with longer (aturities is called 11111111.
D. pure ield pic5up swap

Difficulty: Easy

3,. +n a pure ield pic5up swap, 11111111 !onds are e*changed for 111111111 !onds.
A. longer duration9 shorter duration
B. shorter duration9 longer duration
C. high coupon9 high ield
&. low ield9 high ield

Difficulty: Easy

3$. /he duration rule alwas 11111111 the 0alue of a !ond following a change in its ield.
A. under-esti(ates
B. pro0ides an un!iased esti(ate of
C. o0er-esti(ates
&. /he esti(ated price (a !e !iased either upward or downward, depending on whether the
!ond is trading at a discount or a pre(iu(

Difficulty: Medium

.0. Chere 3 F ield to (aturit, the duration of a perpetuit would !e 111111111.
A. 3
B. 38A1 ? 3B
C. 183
D. A1 ? 3B83

Difficulty: Medium

11-31
.1. A !ond currentl has a price of )1,0-0. /he ield on the !ond is 2.00". +f the ield
increases #- !asis points, the price of the !ond will go down to )1,030. /he duration of this
!ond is 1111 ears.
A. %..2
B. ,.0,
C. $.0#
&. 10.11
P F F -0.01$
P F -0.01$ F -&ur 9 &ur F ,.0,

Difficulty: Medium

.#. A !ond has a current price of )1,030. /he ield on the !ond is ,.00". +f the ield changes
fro( ,.00" to ,.10", the price of the !ond will go down to )1,0#-.,,. /he (odified duration
of this !ond is 111111111.
A. ..3#
B. ..00
C. 3.#-
&. 3.%-
P F F -0.00.
P F -0.00. F -&ur 9 &ur F ..3#
&ur
MG&
F F .

Difficulty: Hard

11-3#
.3. A !an5 has )-0 (illion in assets, ).% (illion in lia!ilities and )3 (illion in shareholders7
equit. +f the duration of its lia!ilities are 1.3 and the !an5 wants to i((uni'e its net worth
against interest rate ris5 and thus set the duration of equit equal to 'ero, it should select
assets with an a0erage duration of 111111111.
A. 1.##
B. 1.-0
C. 1.20
&. #.00
A-0,000,000BA&
A
B F A.%,000,000B A1.3B9 &
A
F 1.##

Difficulty: Medium

... A perpetuit pas )100 each and e0er ear fore0er. /he duration of this perpetuit will
!e 1111111111 if its ield is $".
A. %
B. $
C. $.3$
D. 1#.11

Difficulty: Medium

A !ond pas annual interest. +ts coupon rate is $". +ts 0alue at (aturit is )1,000. +t (atures
in four ears. +ts ield to (aturit is currentl 2".

11-33
.-. /he duration of this !ond is 1111111 ears.
A. #...
B. 3.#3
C. 3.-2
&. ..10
&uration F 3.-2

Difficulty: Hard

.2. /he (odified duration of this !ond is 111111 ears.
A. ..00
B. 3.-2
C. 3.32
&. 3.0-
&ur
MG&
F 3.-281.02 F 3.32 ears

Difficulty: Hard

.%. A !ond has a (aturit of 1# ears, a duration of $.- ears at a pro(ised ield rate of ,".
Chat is the !ond7s (odified duration?
A. 1# ears
B. 11.1 ears
C. $.- ears
D. ,., ears
&ur
MG&
F $.-81.0, F ,., ears

Difficulty: Easy

11-3.
.,. A #0-ear (aturit !ond pas interest of )$0 once per ear and has a face 0alue of )1,000.
+ts ield to (aturit is 10". G0er the upco(ing ear, ou e*pect interest rates to decline and
that the ield to (aturit on this !ond will onl !e ," a ear fro( now. Hsing hori'on
analsis, the return ou e*pect to earn ! holding this !ond o0er the upco(ing ear is
111111111.
A. 10.0"
B. 1#.0"
C. #1.2"
D. #$.2"
Ause financial calculator to calculate PJ
10", #0
and
PJ
,", 1$
B

Difficulty: Hard

.$. A !ond with a $-ear duration is worth )1,0,0.00 and its ield to (aturit is ,". +f the
ield to (aturit falls to %.,.", ou would predict that the new 0alue of the !ond will !e
111111111.
A. )1,03-
B. )1,032
C. )1,0$.
&. )1,1#.

Difficulty: Hard

-0. Chen interest rates increase, the duration of a #0-ear !ond selling at a pre(iu(
111111111.
A. increases
B. decreases
C. re(ains the sa(e
&. increases at first, then declines

Difficulty: Easy

11-3-
-1. &uration facilitates the co(parison of !onds with differing 11111111111.
A. default ris5
B. con0ersion ratios
C. (aturities
&. ields to (aturit

Difficulty: Easy

-#. /he historical ield spread !etween the AA !ond and the AAA !ond has !een #- !asis
points. Currentl the spread is onl $ !asis points. +f ou !elie0e the spread will soon return to
its historical le0els ou should 111111111111111111111111.
A. !u the AA and short the AAA
B. !u !oth the AA and the AAA
C. !u the AAA and short the AA
&. short !oth the AA and the AAA

Difficulty: Medium

-3. /he duration of a !ond nor(all increases with an increase in 111111111.
+. ter(-to-(aturit
++. ield-to-(aturit.
+++. coupon rate
A. + onl
B. + and ++ onl
C. ++ and +++ onl
&. +, ++ and +++

Difficulty: Medium

11-32
-.. A fi*ed inco(e portfolio (anager sets a (ini(u( accepta!le rate of return on the !ond
portfolio at -" per ear o0er the ne*t . ears. /he portfolio is currentl worth )10 (illion.
Gne ear later interest rates are at 2". Chat is the portfolio 0alue trigger point at this ti(e
that would require hi( to i((uni'e the portfolio?
A. )1#,1--,023
B. )10,#0-,2#-
C. )$,2#%,$.,
&. )10,-00,000
Mini(u( ter(inal 0alue F A)10 (ill.BA1.0-B
.
F )1#,1--,02#.-0
/rigger point 0alue F )1#,1--,02#.-081.02
3
F )10,#0-,2#-

Difficulty: Hard

--. Co(pute the duration of an ,", --ear corporate !ond with a par 0alue of )1000 if ield
to (aturit of 10".
A. 3.$#
B. ..#,
C. ..--
&. -.00

Difficulty: Medium

11-3%
-2. Co(pute the (odified duration of a $" coupon, 3-ear corporate !ond with a ield to
(aturit of 1#".
A. #..-
B. #.%-
C. #.,,
&. 3.00

Difficulty: Medium

-%. An ,", 30-ear !ond has a ield-to-(aturit of 10" and a (odified duration of ,.0 ears.
+f the (ar5et ield drops ! 1- !asis points, there will !e a 1111111111 in the !ond7s price.
A. 1.1-" decrease
B. 1.#0" increase
C. 1.-3" increase
&. #..3" decrease
AP8PB F - ,.0 A0.001-B F - 0.01#

Difficulty: Medium

11-3,
-,. /o create a portfolio with a duration of . ears using a - ear 'ero-coupon !ond and a 3
ear ," annual coupon !ond with a ield to (aturit of 10", one would ha0e to in0est
11111111 of the portfolio 0alue in the 'ero-coupon !ond.
A. -0"
B. --"
C. 20"
&. %-"

Difficulty: Hard

-$. Chich of the following set of conditions will result in a !ond with the greatest price
0olatilit?
A. A high coupon and a short (aturit.
B. A high coupon and a long (aturit.
C. A low coupon and a short (aturit.
D. A low coupon and a long (aturit.

Difficulty: Easy

20. An in0estor who e*pects declining interest rates would (a*i(i'e their capital gain !
purchasing a !ond that has a 111 coupon and a 111 ter( to (aturit.
A. low9 long
B. high9 short
C. high9 long
D. 'ero9 long

Difficulty: Easy

11-3$
21. +f ou choose a 'ero coupon !ond with a (aturit that (atches our in0est(ent hori'on
which of the following state(ents is8are correct?
+. 3ou will ha0e no interest rate ris5 on this !ond.
++. A!sent default, ou can !e sure ou will earn the pro(ised ield rate.
+++. /he duration of our !ond is less than the ti(e to our in0est(ent hori'on.
A. + onl
B. + and ++ onl
C. ++ and +++ onl
&. +, ++ and +++

Difficulty: Easy

2#. As co(pared with equi0alent (aturit !onds selling at par, deep discount !onds will ha0e
11111111.
A. greater rein0est(ent ris5
B. greater price 0olatilit
C. less call protection
&. shorter a0erage (aturit

Difficulty: Easy

6teel Pier Co(pan has issued !onds that pa se(iannuall with the following
characteristicsI

11-.0
23. /he (odified duration for the 6teel Pier !ond is 111111.
A. 2.1- ears
B. -.$- ears
C. 2..$ ears
&. $.0$ ears
&ur
MG&
F 2.%281.10 F 2.1- ears

Difficulty: Medium

2.. +f the !ond7s coupon was s(aller than 10", the (odified duration would !e 11111
A. larger
B. unchanged
C. s(aller

Difficulty: Easy

2-. +f the (aturit of the !ond was less than 10 ears, the (odified duration would !e 11111
A. larger
B. unchanged
C. s(aller

Difficulty: Easy

11-.1
22. +f the ield to (aturit decreases to ,.0.-" the e*pected percentage change in the price of
the !ond using Macaule7s duration would !e 1111, while the e*pected percentage change in
the price of the !ond using (odified duration would !e 1111.
A. 11", 1#"
B. 1#", 11"
C. 1#", 1#"
&. 11", 11"
"P F 9 "P is the sa(e using &ur
MG&

Difficulty: Hard

2%. A #0 ear (aturit corporate !ond has a 2.-" coupon rate Athe coupons are paid
annuallB. /he !ond currentl sells for )$#-.-0. A !ond (ar5et analst forecasts that in fi0e
ears ield rates on these !onds will !e at %.0". 3ou !elie0e that ou will !e a!le to rein0est
the coupons earned o0er the ne*t fi0e ears at a 2" rate of return. Chat is our e*pected
annual co(pound rate of return if ou plan on selling the !ond in fi0e ears?
A. %.3%"
B. %.-2"
C. ,.1#"
&. ,.-."
<J-
coupons
F
P-
Bond
F
/otal <uture Jalue- F )322..1 ? )$-...2 F )1,3#0.,%
PJ0 F )$#-.-0
A)$#-.-0BA1 ? rB
-
F )1,3#0.,%9 r F %.3%"

Difficulty: Hard

11-.#
2,. Chen !onds sell a!o0e par, what is the relationship of price sensiti0it to rising interest
rates?
A. Price 0olatilit increases at an increasing rate
B. Price 0olatilit increases at a decreasing rate
C. Price 0olatilit decreases at a decreasing rate
&. Price 0olatilit decreases at an increasing rate

Difficulty: Medium

2$. A 'ero coupon !ond is selling at a deep discount price of ).30.00. +t (atures in 13 ears.
+f the ield to (aturit of the !ond is 2.%", what is the duration of the !ond?
A. 2.% ears
B. ,.0 ears
C. 10 ears
D. 13 ears
&uration of a 'ero-coupon !ond is equal to its (aturit.

Difficulty: Easy

%0. 3ou ha0e an in0est(ent that in toda7s dollars returns 1-" of our in0est(ent in ear 1,
1#" in ear two, $" in ear 3 and the re(ainder in ear .. Chat is the duration of this
in0est(ent?
A. . ears
B. 3.-0 ears
C. 3.## ears
&. #.$- ears
&ur F A1-"BA1B ? A1#"BA#B ? A$"BA3B ? A2."BA.B F 3.## ears

Difficulty: Medium

11-.3
%1. +f an in0est(ent returns a higher percentage of our (one !ac5 sooner it will 111111.
A. !e less price 0olatile
B. ha0e a higher credit rating
C. !e less liquid
&. ha0e a higher (odified duration

Difficulty: Easy

%#. Chich one of the following state(ents correctl descri!es the weights used in the
Macaula duration calculation? /he weight in ear t is equal to 111111111111.
A. the dollar a(ount of the in0est(ent recei0ed in ear t
B. the percentage of the future 0alue of the in0est(ent recei0ed in ear t
C. the present 0alue of the dollar a(ount of the in0est(ent recei0ed in ear t
D. the percentage of the total present 0alue of the in0est(ent recei0ed in ear t

Difficulty: Hard

%3. /he duration is independent of the coupon rate onl for which one of the following?
A. &iscount !onds
B. Pre(iu( !onds
C. Perpetuities
&. 6hort ter( !onds

Difficulty: Medium

%.. 3ou ha0e an in0est(ent hori'on of 2 ears. 3ou choose to hold a !ond with a duration of
10 ears. 3our reali'ed rate of return will !e larger than the pro(ised ield on the !ond if
1111111111111111111.

Difficulty: Medium

11-..
%-. A !ond portfolio (anager notices a hu(p in the ield cur0e at the fi0e ear point. >ow
(ight a !ond (anager ta5e ad0antage of this e0ent?
A. Bu the - ear !onds and short the surrounding (aturit !onds
B. Bu the - ear !onds and !u the surrounding (aturit !onds
C. 6hort the - ear !onds and short the surrounding (aturit !onds
&. 6hort the - ear !onds and !u the surrounding (aturit !onds

Difficulty: Medium

%2. Mar5et econo(ists all predict a rise in interest rates. An astute !ond (anager wishing to
(a*i(i'e her capital gain (ight e(plo which strateg?
A. 6witch fro( low duration to high duration !onds.
B. 6witch fro( high duration to low duration !onds.
C. 6witch fro( high grade to low grade !onds.
&. 6witch fro( low coupon to high coupon !onds.

Difficulty: Medium

%%. 3ou ha0e an in0est(ent hori'on of 2 ears. 3ou choose to hold a !ond with a duration of
. ears. 3our reali'ed rate of return will !e larger than the pro(ised ield on the !ond if
1111111111111111111.

Difficulty: Medium

%,. Chat strateg (ight an insurance co(pan e(plo to ensure that it will !e a!le to (eet
the o!ligations of annuit holders?
A. Cash flow (atching
B. +nde* trac5ing
C. 3ield pic5up swaps
&. 6u!stitution swap

Difficulty: Medium

11-.-
%$. 3ou ha0e an in0est(ent hori'on of 2 ears. 3ou choose to hold a !ond with a duration of
2 ears and continue to (atch our in0est(ent hori'on and duration throughout our holding
period. 3our reali'ed rate of return will !e the sa(e as the pro(ised ield on the !ond if
+. interest rates increase
++. interest rates sta the sa(e
+++. interest rates fall
A. + onl
B. ++ onl
C. + and ++ onl
D. +, ++ and +++

Difficulty: Medium

,0. +((uni'ation of coupon paing !onds is not a passi0e strateg !ecause
+. the portfolio (ust !e re!alanced e0er ti(e interest rates change
++. the portfolio (ust !e re!alanced o0er ti(e e0en if interest rates don7t change
+++. con0e*it i(plies duration !ased i((uni'ation strategies don7t wor5
A. + onl
B. + and ++ onl
C. ++ onl
&. +, ++ and +++

Difficulty: Medium

,1. Ad0antages of cash flow (atching and dedicated strategies include 111111.
+. once the cash flows are (atched there is no need for re!alancing
++. cash flow (atching tpicall earns a higher rate of return than acti0e !ond portfolio
(anage(ent
+++. financial institution7s lia!ilities often e*ceed the (aturit of a0aila!le !onds, (a5ing cash
(atching e0en (ore desira!le
A. + onl
B. ++ onl
C. + and +++ onl
&. +, ++ and +++

Difficulty: Medium

11-.2
,#. Con0e*it i(plies that duration predictions 1111111.
+. underesti(ate the " increase in !ond price when the ield falls
++. underesti(ate the " decrease in !ond price when the ield rises
+++. o0eresti(ates the " increase in !ond price when the ield falls
+J. o0eresti(ates the " decrease in !ond price when the ield rises
A. + and +++ onl
B. ++ and +J onl
C. + and +J onl
&. ++ and +++ onl

Difficulty: Hard

,3. 3ou ha0e a #- ear (aturit 10" coupon, 10" ield !ond with duration of 10 ears and a
con0e*it of 13-.-0. +f interest rate were to fall 1#- !asis points our predicted new price for
the !ond Aincluding con0e*itB is 111111111.
A. )10$,..-
B. )110..-2
C. )1113..1
D. )11#..#0
PJ0 F )1,000
"P F
P
Lew
F A)1,000BA1 ? 0.1#.#B F )1,1#..#0

Difficulty: Hard

11-.%
,.. 3ou ha0e a 1- ear (aturit ." coupon, 2" ield !ond with duration of 10.- ears and a
con0e*it of 1#,.%-. /he !ond is currentl priced at ),0-.%2. +f interest rate were to increase
#00 !asis points our predicted new price for the !ond Aincluding con0e*itB is 111111111.
A. )23,.,-
B. )2.#.-.
C. )222.,,
&. )%0-.03
PJ0 F ),0-.%2
"P F
P
Lew
F A),0-.%2BA1 ? -0.1%#.B F )222.,,

Difficulty: Hard

,-. Con0e*it of a !ond is 11111111111.
A. the sa(e as hori'on analsis
B. the rate of change of the price-ield cur0e di0ided ! !ond price
C. a (easure of !ond duration
&. none of the a!o0e

Difficulty: Medium

11-.,

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Chapter 11 - Managing Bond Portfolios

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