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Exam 11: Managing Bond Portfolios

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Question 1

Multiple Choice

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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 ________.

A) interest rates fall
B) credit spreads fall
C) interest rates rise
D) the price of all fixed-income securities rises

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

Correct Answer

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C

Question 2

Multiple Choice

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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

E) A) and C)
F) All of the above

Correct Answer

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B

Question 3

Multiple Choice

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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 ________.

Given its time to maturity, the duration of a zero-coupon bond is ________.

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.

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.

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 ________.

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?

All other things equal, a bond's duration is ________.

A bond's price volatility ________ at ________ rate as maturity increases.

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?

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 ________.

The pioneer of the duration concept was ________.

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.

The duration of a bond normally increases with an increase in: I. Term to maturity II. Yield to maturity III. Coupon rate

In the context of a bond portfolio, price risk and reinvestment rate risk exactly cancel out at a time horizon equal to the ________.

All other things equal, which of the following has the longest duration?

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: I. Interest rates increase. II. Interest rates stay the same. III. Interest rates fall.

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?

Which of the following set of conditions will result in a bond with the greatest price volatility?