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Exam 10: Managing Bond Portfolios

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Question 21

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An 8%, 30-year bond has a yield-to-maturity of 10% and a modified duration of 8.0 years. If the market yield drops by 15 basis points, there will be a ________ in the bond's price.

A) 1.15% decrease
B) 1.20% increase
C) 1.53% increase
D) 2.43% decrease

E) None of the above
F) A) and D)

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Question 22

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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) 4 years
B) 3.50 years
C) 3.22 years
D) 2.95 years

E) All of the above
F) None of the above

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Question 23

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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 five years, yield rates on these bonds will be at 7.0%. You believe that you will be able to reinvest the coupons earned over the next five years at a 6% rate of return. What is your expected annual compound rate of return if you plan on selling the bond in five years?

All else equal, bond price volatility is greater for ________.

Because of convexity, when interest rates change the actual bond price will ________ the bond price predicted by duration.

If an investment returns a higher percentage of your money back sooner it will ________.

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

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 6 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 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%. Over the upcoming year, you expect interest rates to decline and that the yield to maturity on this bond will only be 8% a year from now. Using horizon analysis, the return you expect to earn by holding this bond over the upcoming year is ________.

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

Duration is a concept that is useful in assessing a bond's ________.

The duration of a perpetuity varies ________ with interest rates.

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?

A bank's liabilities have an average duration of 2 years. Its assets have an average duration of 3.5 years. The bank's market value of equity is at risk if ________.

Market economists all predict a rise in interest rates. An astute bond manager wishing to maximise her capital gain might employ which strategy?

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

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?

________ is an important characteristic of the relationship between bond prices and yields.

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 immunise its interest rate risk. How much of its portfolio should it allocate to the zero coupon bonds to immunise if there are no other assets funding the plan?

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.