Chapter 11 Test Bank - Static PDF

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Student: _______________________________________________________________________________________

1.

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

A. a 30-year bond with a 10% coupon B. a 20-year bond with a 9% coupon C. a 20-year bond with a 7% coupon D. a 10-year zero-coupon bond 2. All other things equal (YTM = 10%), which of the following has the shortest duration? A. a 30-year bond with a 10% coupon B. a 20-year bond with a 9% coupon C. a 20-year bond with a 7% coupon D. a 10-year zero-coupon bond

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 duratio of this set of payments?

A. B. C. D. 4.

2 years 2.15 years 2.29 years 2.53 years All other things equal, which of the following has the longest duration?

A. a 20-year bond with a 10% coupon yielding 10% B. a 20-year bond with a 10% coupon yielding 11% C. a 20-year zero-coupon bond yielding 10% D. a 20-year zero-coupon bond yielding 11%

5. A. B. C. D.

The duration of a perpetuity varies _______ with interest rates. directly inversely convexly randomly

6. A. B. C. D.

Because of convexity, when interest rates change, the actual bond price will ____________ the bond price predicted by duration. always be higher than sometimes be higher than always be lower than sometimes be lower than

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?

A. B. C. D. 8. A. B. C. D. 9. A. B. C. D.

Short the Canon bond, and buy the Xerox bond. Buy the Canon bond, and short the Xerox bond. Short both the Canon bond and the Xerox bond. Buy both the Canon bond and the Xerox bond. A forecast of bond returns based largely on a prediction of the yield curve at the end of the investment horizon is called a _________. contingent immunization dedication strategy duration analysis horizon analysis A bond's price volatility _________ at _________ rate as maturity increases. increases; an increasing increases; a decreasing decreases; an increasing 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. B. C. D.

greater than equivalent to smaller than The answer cannot be determined from the information given.

11. All else equal, bond price volatility is greater for __________. A. B. C. D.

higher coupon rates lower coupon rates shorter maturity lower default risk

12. ______________ is an important characteristic of the relationship between bond prices and yields. A. B. C. D.

Convexity Concavity Complexity Linearity

13. Bond prices are _______ sensitive to changes in yield when the bond is selling at a _______ initial yield to maturity. A. B. C. D.

more; lower more; higher less; lower equally; higher or lower

14. The pioneer of the duration concept was _________. A. B. C. D.

Eugene Fama John Herzog Frederick Macaulay 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. B. C. D.

a pure yield pickup a rate anticipation a substitution an intermarket spread

16. The duration of a 5-year zero-coupon bond is ____ years. A. B. C. D.

4.5 5 5.5 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. A. B. C. D.

a pure yield pickup a rate anticipation a substitution an intermarket spread

18. Target date immunization would primarily be of interest to _________. A. B. C. D.

banks mutual funds pension funds individual investors

19. Duration is a concept that is useful in assessing a bond's _________. A. B. C. D.

credit risk liquidity risk price volatility 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. B. C. D.

52% 48% 33% 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. B. C. D.

+1.4% -1.4% -2.51% +2.51%

22. Given its time to maturity, the duration of a zero-coupon bond is _________. A. B. C. D.

higher when the discount rate is higher higher when the discount rate is lower lowest when the discount rate is equal to the risk-free rate the same regardless of the discount rate

23. A. B. C. D.

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.

greater than equivalent to smaller than The answer cannot be determined.

24. All other things equal, a bond's duration is _________. A. B. C. D.

higher when the yield to maturity is higher lower when the yield to maturity is higher the same at all yield rates indeterminable when the yield to maturity is high

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 a risk if _______________________.

A. B. C. D.

interest rates fall credit spreads fall interest rates rise the price of all fixed-income securities rises

26. All other things equal, a bond's duration is _________. A. B. C. D.

higher when the coupon rate is higher lower when the coupon rate is higher the same when the coupon rate is higher indeterminable when the coupon rate is high

27. Banks and other financial institutions can best manage interest rate risk by _____________. A. B. C. D.

maximizing the duration of assets and minimizing the duration of liabilities minimizing the duration of assets and maximizing the duration of liabilities matching the durations of their assets and liabilities matching the maturities of their assets and liabilities

28. In the context of a bond portfolio, price risk and reinvestment rate risk exactly cancel out at a time horizon equal to the ____. A. B. C. D.

average bond maturity in the portfolio duration of the portfolio difference between the shortest duration and longest duration of the individual bonds in the portfolio average of the shortest duration and longest duration of the bonds in the portfolio

29. Bond portfolio immunization techniques balance ________ and ________ risk. A. B. C. D.

price; reinvestment price; liquidity credit; reinvestment credit; liquidity

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 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. B. C. D.

$12,565 $13,000 $13,401 $13,676

31. The duration of a portfolio of bonds can be calculated as _______________. A. B. C. D.

the coupon weighted average of the durations of the individual bonds in the portfolio the yield weighted average of the durations of the individual bonds in the portfolio the value weighted average of the durations of the individual bonds in the portfolio 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. B. C. D.

long-maturity bonds long-duration bonds short-maturity bonds short-duration bonds

33. Which of the following is not a type of bond swap used in active portfolio management? A. intermarket spread swap B. substitution swap C. rate anticipation swap D. asset-liability swap

34. The exchange of one bond for a bond that has similar attributes but is more attractively priced is called ______________. A. B. C. D.

a substitution swap an intermarket spread swap a rate anticipation swap a pure yield pickup swap

35. Rank the interest sensitivity of the following from the most sensitive to an interest rate change to the least sensitive: I. 8% coupon, noncallable 20-year maturity par bond II. 9% coupon, currently callable 20-year maturity premium bond III. Zero-coupon 30-year maturity bond 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. 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. B. C. D.

7.46 8.08 9.02 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. B. C. D.

4.32 4 3.25 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. B. C. D.

1.22 1.5 1.6 2

44. A perpetuity pays $100 each and every year forever. The duration of this perpetuity will be __________ if its yield is 9%. A. B. C. D.

7 9 9.39 12.11

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%. The duration of this bond is _______ years. 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%. The modified duration of this bond is ______ years. A. B. C. D.

4 3.56 3.36 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. B. C. D.

12 years 11.1 years 9.5 years 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 wi 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. B. C. D.

10% 12% 21.6% 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. B. C. D.

$1,035 $1,036 $1,094 $1,124

50. When interest rates increase, the duration of a 20-year bond selling at a premium _________. A. B. C. D.

increases decreases remains the same increases at first and then declines

51. Duration facilitates the comparison of bonds with differing ___________. A. B. C. D.

default risks conversion ratios maturities 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 ________________________.

A. B. C. D.

buy the AA and short the AAA buy both the AA and the AAA buy the AAA and short the AA short both the AA and the AAA

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

I only I and II only II and III only 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. B. C. D.

$12,155,063 $10,205,625 $9,627,948 $10,500,000

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. B. C. D.

3.92 4.28 4.55 5

56. Compute the modified duration of a 9% coupon, 3-year corporate bond with a yield to maturity of 12%. A. B. C. D.

2.45 2.75 2.88 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. B. C. D.

1.15% decrease 1.2% increase 1.53% increase 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. B. C. D.

50% 55% 60% 75%

59. Which of the following set of conditions will result in a bond with the greatest price volatility? A. a high coupon and a short maturity B. a high coupon and a long maturity C. a low coupon and a short maturity D. a low coupon and a long maturity

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. B. C. D.

low; long high; short high; long zero; long

61. If you choose a zero-coupon bond with a maturity that matches your investment horizon, which of the following statements is (are) correct? I. You will have no interest rate risk on this bond. II. In the absence of default, you can be sure you will earn the promised yield rate. III. The duration of your bond is less than the time to your investment horizon. A. B. C. D.

I only I and II only II and III only I, II, and III

62. As compared with equivalent maturity bonds selling at par, deep discount bonds will have ________. A. B. C. D.

greater reinvestment risk greater price volatility less call protection shorter average maturity

63. Steel Pier Company has issued bonds that pay semiannually with the following characteristics:

The modified duration for the Steel Pier bond is ______.

A. B. C. D.

6.15 years 5.95 years 6.49 years 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. B. C. D.

larger unchanged smaller The answer cannot be determined from the information given.

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. B. C. D.

larger unchanged smaller 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. B. C. D.

11% 13% 12% 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. B. C. D.

7.37% 7.56% 8.12% 8.54%

68. When bonds sell above par, what is the relationship of price sensitivity to rising interest rates? A. B. C. D.

Price volatility increases at an increasing rate. Price volatility increases at a decreasing rate. Price volatility decreases at a decreasing rate. Price volatility decreases at an increasing rate.

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. B. C. D.

6.7 years 8 years 10 years 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. B. C. D.

4 years 3.5 years 3.22 years 2.95 years

71. If an investment returns a higher percentage of your money back sooner, it will ______. A. B. C. D.

be less price-volatile have a higher credit rating be less liquid 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

____________. A. B. C. D.

the dollar amount of the investment received in year t the percentage of the future value of the investment received in year t the present value of the dollar amount of the investment received in year t the percentage of the total present v...