Portfolio

The promised yield to maturity calculation assumes that

All coupon interest payments are reinvested at the current market interest rate for the bond.

Which of the following statements is true?

All of the above statements are true

Convexity is a desirable feature of bonds because.

As interest rates decline, the price of a high convexity bond increases at an increasing rate.

The nominal yield of a bond is the

Coupon Rate

For a given change in yield bond price volatility is inversely related to term to maturity.

False

For a two stock portfolio containing Stocks i and j, the correlation coefficient of returns (rij) is equal to the square root of the covariance (covij).

False

The expected return and standard deviation of a portfolio of risky assets is equal to the weighted average of the individual asset's expected returns and standard deviation.

False

The internal rate of return is that discount rate that sets the present value of cash flows from an investment equal to its par value.

False

There are four major factors accounting for the existence of yield differentials. Which of the following is not a factor?

Indentures

The option adjusted duration will approach the duration to maturity, when

Interest rates are significantly above the coupon rate because the option has very little chance of being called, and the call option will have very little value.

The position of a bondholder that is long a callable bond is equal to being

Long a noncallable bond + short a call option on the bond.

If the coupon payments are not reinvested during the life of the issue then the

Promised yield is greater than the realized yield.

The term structure of interest rates is a static function that relates the

Term to maturity and the yield to maturity.

Convexity is a measure of how much a bond's price-yield curve deviates from the linear approximation of that curve.

True

For a bond the present value model incorporates both the coupon receipts and the capital gain or loss.

True

Markowitz assumed that, given an expected return, investors prefer to minimize risk.

True

There is an inverse relationship between duration and coupon.

True

Yield to maturity and current yield are equal when the bond is selling for exactly par value. Correct!

True

Which of the following is not a major risk premium component for bond investors?

Yield to maturity.

The best way for an investor to "lock in" to high interest rates would be to purchase a bond that has a ____ coupon and a ____ term to maturity.

Zero, very long

According to the segmented-market hypothesis a rising yield curve indicates that

demand for long term bonds has fallen and demand for short term bonds has risen.

According to the expectations hypothesis a rising yield curve indicates that investors expect

future short term rates to rise

If you expected interest rates to fall, you would prefer to own bonds with

long durations and high convexity

If you expected interest rates to rise, you would prefer to own bonds with

short maturities and high coupons.