FNCE 495 - Chapter 7 (Test 2)

An analyst accurately calculates that the price of an option-free bond with a 9 percent coupon would experience a 12 percent change if market yields increase 100 basis points. If market yields decrease 100 basis points, the bond's price would most likely:

increase by more than 12%

Which of the following statements about an embedded call feature in a bond is least accurate? The call feature:

increases the bond's duration, increasing price risk.

The price value of a basis point (PVBP) for an 18 year, 8% annual pay bond with a par value of $1,000 and yield of 9% is closest to:

$0.82

A bond's duration is 4.5 and its convexity is 87.2. If interest rates rise 100 basis points, the bond's percentage price change is closest to:

-3.63%

Calculate the modified duration for a 7-year bond with the following characteristics: Current price of $660 A price of $639 when the yield curve shifts up 50 basis points A price of $684 when the yield curve shifts down by 50 basis points

6.8

An investor gathered the following information on two U.S. corporate bonds: Bond J is callable with maturity of 5 years Bond J has a par value of $10,000 Bond M is option-free with a maturity of 5 years Bond M has a par value of $1,000 For each bond, which duration calculation should be applied?

Bond J- Effective duration; Bond M- Modified duration

Which of the following statements concerning the price volatility of bonds is most accurate?

Bonds with higher coupons have lower interest rate risk.

Negative convexity is most likely to be observed in:

Callable bonds

Which of the following bonds is most likely to exhibit the greatest volatility due to interest rate changes? A bond with a:

Low coupon and a long maturity.

Which of the following is most accurate about a bond with positive convexity?

Price increases when yields drop are greater than price decreases when yields rise by the same amount.

Which of the following statements best describes the concept of negative convexity in bond prices? As interest rates:

fall, the bond's price increases at a decreasing rate

Which of the following five-year bonds has the highest interest rate sensitivity?

Zero-coupon bond

When compared to modified duration, effective duration:

factors in how embedded options will change expected cash flows

Holding other factors constant, the interest rate risk of a coupon bond is higher when the bond's:

yield to maturity is lower