Managing Bond Portfolios Assignment 2

Chapter 16 - Managing Bond Portfolios 41. Which one of the following is a correct statement concerning duration? A. The higher the yield to maturity, the greater the duration. B. The higher the coupon, the shorter the duration. C. The difference in duration can be large between two bonds with different coupons each maturing in more than 15 years. D. The duration is the same as term to maturity only in the case of zero-coupon bonds. E. The higher the coupon, the shorter the duration; the difference in duration can be large between two bonds with different coupons each maturing in more than 15 years; and the duration is the same as term to maturity only in the case of zero-coupon bonds. 42. Immunization is not a strictly passive strategy because A. it requires choosing an asset portfolio that matches an index. B. there is likely to be a gap between the values of assets and liabilities in most portfolios. C. it requires frequent rebalancing as maturities and interest rates change. D. durations of assets and liabilities fall at the same rate. E. None of these is correct. 43. Some of the problems with immunization are A. duration assumes that the yield curve is flat. B. duration assumes that if shifts in the yield curve occur, these shifts are parallel. C. immunization is valid for one interest rate change only. D. durations and horizon dates change by the same amounts with the passage of time. E. duration assumes that the yield curve is flat, duration assumes that if shifts in the yield curve occur, these shifts are parallel, and immunization is valid for one interest rate change only. Chapter 16 - Managing Bond Portfolios 44. If a bond portfolio manager believes A. in market efficiency, he or she is likely to be a passive portfolio manager. B. that he or she can accurately predict interest rate changes, he or she is likely to be an active portfolio manager. C. that he or she can identify bond market anomalies, he or she is likely to be a passive portfolio manager. D. in market efficiency, he or she is likely to be a passive portfolio manager; and that he or she can accurately predict interest rate changes, he or she is likely to be an active portfolio manager. E. in market efficiency, he or she is likely to be a passive portfolio manager; that he or she can accurately predict interest rate changes, he or she is likely to be an active portfolio manager; and that he or she can identify bond market anomalies, he or she is likely to be a passive portfolio manager. 45. Cash flow matching on a multiperiod basis is referred to as A. immunization. B. contingent immunization. C. dedication. D. duration matching. E. rebalancing. 46. Immunization through duration matching of assets and liabilities may be ineffective or inappropriate because A. conventional duration strategies assume a flat yield curve. B. duration matching can only immunize portfolios from parallel shifts in the yield curve. C. immunization only protects the nominal value of terminal liabilities and does not allow for inflation adjustment. D. conventional duration strategies assume a flat yield curve; and immunization only protects the nominal value of terminal liabilities and does not allow for inflation adjustment. E. All of these are correct. Chapter 16 - Managing Bond Portfolios 47. The curvature of the price-yield curve for a given bond is referred to as the bond's A. modified duration. B. immunization. C. sensitivity. D. convexity. E. tangency. 48. Consider a bond selling at par with modified duration of 10.6 years and convexity of 210. A 2 percent decrease in yield would cause the price to increase by 21.2%, according to the duration rule. What would be the percentage price change according to the duration-withconvexity rule? A. 21.2% B. 25.4% C. 17.0% D. 10.6% E. None of these is correct. 49. 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. 50. A rate anticipation swap is an exchange of bonds undertaken to A. shift portfolio duration in response to an anticipated change in interest rates. B. shift between corporate and government bonds when the yield spread is out of line with historical values. C. profit from apparent mispricing between two bonds. D. change the credit risk of the portfolio. E. increase return by shifting into higher yield bonds. Chapter 16 - Managing Bond Portfolios 51. 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 these is correct. 52. Interest-rate risk is important to A. active bond portfolio managers. B. passive bond portfolio managers. C. both active and passive bond portfolio managers. D. neither active nor passive bond portfolio managers. E. obsessive bond portfolio managers. 53. Which of the following are true about the interest-rate sensitivity of bonds? I) Bond prices and yields are inversely related. II) Prices of long-term bonds tend to be more sensitive to interest rate changes than prices of short-term bonds. III) Interest-rate risk is directly related to the bond's coupon rate. IV) The sensitivity of a bond's price to a change in its yield to maturity is inversely related to the yield to maturity at which the bond is currently selling. A. I and II B. I and III C. I, II, and IV D. II, III, and IV E. I, II, III, and IV Chapter 16 - Managing Bond Portfolios 54. Which of the following are false about the interest-rate sensitivity of bonds? I) Bond prices and yields are inversely related. II) Prices of long-term bonds tend to be more sensitive to interest rate changes than prices of short-term bonds. III) Interest-rate risk is directly related to the bond's coupon rate. IV) The sensitivity of a bond's price to a change in its yield to maturity is inversely related to the yield to maturity at which the bond is currently selling. A. I B. III C. I, II, and IV D. II, III, and IV E. I, II, III, and IV 55. Which of the following researchers have contributed significantly to bond portfolio management theory? I) Sidney Homer II) Harry Markowitz III) Burton Malkiel IV) Martin Liebowitz V) Frederick Macaulay A. I and II B. III and V C. III, IV, and V D. I, III, IV, and V E. I, II, III, IV, and V 56. According to the duration concept A. only coupon payments matter. B. only maturity value matters. C. the coupon payments made prior to maturity make the effective maturity of the bond greater than its actual time to maturity. D. the coupon payments made prior to maturity make the effective maturity of the bond less than its actual time to maturity. E. coupon rates don't matter. Chapter 16 - Managing Bond Portfolios 57. Duration is important in bond portfolio management because I) it can be used in immunization strategies. II) it provides a gauge of the effective average maturity of the portfolio. III) it is related to the interest rate sensitivity of the portfolio. IV) it is a good predictor of interest rate changes. A. I and II B. I and III C. III and IV D. I, II, and III E. I, II, III, and IV 58. Two bonds are selling at par value and each has 17 years to maturity. The first bond has a coupon rate of 6% and the second bond has a coupon rate of 13%. Which of the following is true about the durations of these bonds? A. The duration of the higher-coupon bond will be higher. B. The duration of the lower-coupon bond will be higher. C. The duration of the higher-coupon bond will equal the duration of the lower-coupon bond. D. There is no consistent statement that can be made about the durations of the bonds. E. The bond's durations cannot be determined without knowing the prices of the bonds. 59. Two bonds are selling at par value and each has 17 years to maturity. The first bond has a coupon rate of 6% and the second bond has a coupon rate of 13%. Which of the following is most false about the durations of these bonds? A. The duration of the higher-coupon bond will be higher. B. The duration of the lower-coupon bond will be higher. C. The duration of the higher-coupon bond will equal the duration of the lower-coupon bond. D. There is no consistent statement that can be made about the durations of the bonds. E. The duration of the higher-coupon bond will be higher and will equal the duration of the lower-coupon bond; and there is no consistent statement that can be made about the durations of the bonds Chapter 16 - Managing Bond Portfolios 60. Which of the following offers a bond index? A. Merrill Lynch B. Salomon C. Barclays Capital D. All of these are correct. E. All but Merrill Lynch. 61. Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par value bond, A, with a 12-year-to-maturity and a 12% coupon rate. 2) A zero-coupon bond, B, with a 12-year-to-maturity and a 12% yield-to-maturity. A. Bond A because of the higher yield to maturity. B. Bond A because of the longer time to maturity. C. Bond B because of the longer duration. D. Both have the same sensitivity because both have the same yield to maturity. E. None of these is correct. 62. Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par value bond, D, with a 2-year-to-maturity and a 8% coupon rate. 2) A zero-coupon bond, E, with a 2-year-to-maturity and a 8% yield-to-maturity. A. Bond D because of the higher yield to maturity. B. Bond E because of the longer duration. C. Bond D because of the longer time to maturity. D. Both have the same sensitivity because both have the same yield to maturity. E. None of these is correct. 63. Holding other factors constant, which one of the following bonds has the smallest price volatility? A. 7-year, 0% coupon bond B. 7-year, 12% coupon bond C. 7 year, 14% coupon bond D. 7-year, 10% coupon bond E. Cannot tell from the information given. Chapter 16 - Managing Bond Portfolios 64. Holding other factors constant, which one of the following bonds has the smallest price volatility? A. 20-year, 0% coupon bond B. 20-year, 6% coupon bond C. 20 year, 7% coupon bond D. 20-year, 9% coupon bond E. Cannot tell from the information given. 65. The duration of a 15-year zero-coupon bond is A. smaller than 15. B. larger than 15. C. equal to 15. D. equal to that of a 15-year 10% coupon bond. E. None of these is correct. 66. The duration of a 20-year zero-coupon bond is A. equal to 20. B. larger than 20. C. smaller than 20. D. equal to that of a 20-year 10% coupon bond. E. None of these is correct. 67. The duration of a perpetuity with a yield of 10% is A. 13.50 years. B. 11 years. C. 6.66 years. D. cannot be determined. E. None of these is correct. Chapter 16 - Managing Bond Portfolios 68. The duration of a perpetuity with a yield of 6% is A. 13.50 years. B. 12.11 years. C. 17.67 years. D. cannot be determined. E. None of these is correct. 69. Par value bond F has a modified duration of 9. 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 $90. B. If the market yield increases by 1% the bond's price will increase by $90. C. If the market yield increases by 1% the bond's price will decrease by $60. D. If the market yield decreases by 1% the bond's price will increase by $60. E. None of these is true. 70. 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 these is true. 71. Which of the following bonds has the longest duration? A. A 15-year maturity, 0% coupon bond. B. A 15-year maturity, 9% coupon bond. C. A 20-year maturity, 9% coupon bond. D. A 20-year maturity, 0% coupon bond. E. Cannot tell from the information given. Chapter 16 - Managing Bond Portfolios 72. Which of the following bonds has the longest duration? A. A 12-year maturity, 0% coupon bond. B. A 12-year maturity, 8% coupon bond. C. A 4-year maturity, 8% coupon bond. D. A 4-year maturity, 0% coupon bond. E. Cannot tell from the information given. 73. A 10%, 30-year corporate bond was recently being priced to yield 12%. The Macaulay duration for the bond is 11.3 years. Given this information, the bond's modified duration would be A. 8.05. B. 10.09. C. 9.27. D. 11.22. E. None of these is correct. 74. A 6%, 30-year corporate bond was recently being priced to yield 8%. The Macaulay duration for the bond is 8.4 years. Given this information, the bond's modified duration would be A. 8.05. B. 9.44. C. 9.27. D. 7.78. E. None of these is correct. 75. A 9%, 16-year bond has a yield to maturity of 11% and duration of 9.25 years. If the market yield changes by 32 basis points, how much change will there be in the bond's price? A. 1.85% B. 2.01% C. 2.67% D. 6.44% E. None of these is correct. Chapter 16 - Managing Bond Portfolios 76. A 7%, 14-year bond has a yield to maturity of 6% and duration of 7 years. If the market yield changes by 44 basis points, how much change will there be in the bond's price? A. 1.85% B. 2.91% C. 3.27% D. 6.44% E. None of these is correct. 77. Consider a bond selling at par with modified duration of 12 years and convexity of 265. A 1 percent decrease in yield would cause the price to increase by 12%, according to the duration rule. What would be the percentage price change according to the duration-withconvexity rule? A. 21.2% B. 25.4% C. 17.0% D. 13.3% E. None of these is correct. 78. Consider a bond selling at par with modified duration of 22-years and convexity of 415. A 2 percent decrease in yield would cause the price to increase by 44%, according to the duration rule. What would be the percentage price change according to the duration-withconvexity rule? A. 21.2% B. 25.4% C. 17.0% D. 52.3% E. None of these is correct. 79. The duration of a par value bond with a coupon rate of 6.5% and a remaining time to maturity of 4 years is A. 3.65 years. B. 3.45 years. C. 3.85 years. D. 4.00 years. E. None of these is correct. Chapter 16 - Managing Bond Portfolios 80. The duration of a par value bond with a coupon rate of 7% and a remaining time to maturity of 3 years is A. 3 years. B. 2.71years. C. 2.81 years. D. 2.91 years. E. None of these is correct. 81. The duration of a par value bond with a coupon rate of 8.7% and a remaining time to maturity of 6 years is A. 6.0 years. B. 5.1 years. C. 4.27 years. D. 3.95 years. E. None of these is correct. Short Answer Questions 82. Discuss duration. Include in your discussion what duration measures, how duration relates to maturity, what variables affect duration, and how duration is used as a portfolio management tool (include some of the problems associated with the use of duration as a portfolio management tool). 83. Discuss rate anticipation swaps as a bond portfolio management strategy. Chapter 16 - Managing Bond Portfolios 84. You have purchased a bond for $973.02. The bond has a coupon rate of 6.4%, pays interest annually, has a face value of $1,000, 4 years to maturity, and a yield to maturity of 7.2%. The bond's duration is 3.6481 years. You expect that interest rates will fall by .3% later today. Use the modified duration to find the approximate percentage change in the bond's price. Find the new price of the bond from this calculation. Use your calculator to do the regular present value calculations to find the bond's new price at its new yield to maturity. What is the amount of the difference between the two answers? Why are your answers different? Explain the reason in words and illustrate it graphically.