Chapter 16

Which of the following bonds has the longest duration?

. A 12-year maturity, 0% coupon bond.

Identify the bond that has the longest duration (no calculations necessary).

20-year maturity with a 0% coupon.

Given the time to maturity, the duration of a zero-coupon bond is higher when the discount rate is

The bond's duration is independent of the discount rate.

Interest-rate risk is important to

both active and passive bond portfolio managers.

Some of the problems with immunization are

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.

If a bond portfolio manager believes

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.

When interest rates decline, the duration of a 10-year bond selling at a premium

increases.

An analyst who selects a particular holding period and predicts the yield curve at the end of that holding period is engaging in

horizon analysis

The duration of a perpetuity with a yield of 10% is

11 years.

Which of the following bonds has the longest duration?

A 10-year maturity, 0% coupon bond.

Which of the following bonds has the longest duration?

A 20-year maturity, 0% coupon bond.

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

A. term-to-maturity is lower. B. coupon rate is higher. C. yield to maturity is higher. D. term-to-maturity is lower and coupon rate is higher.

Indexing of bond portfolios is difficult because

A. the number of bonds included in the major indexes is so large that it would be difficult to purchase them in the proper proportions. B. many bonds are thinly traded so it is difficult to purchase them at a fair market price. C. the composition of bond indexes is constantly changing.

Which of the following offers a bond index?

A. Merrill Lynch B. Salomon C. Barclays Capital

. 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.

The duration of a bond is a function of the bond's

A. coupon rate. B. yield to maturity. C. time to maturity.

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.

Bond B because of the longer duration.

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.

Bond E because of the longer duration.

Which of the following two bonds is more price sensitive to changes in interest rates? 1) A par value bond, X, with a 5-year-to-maturity and a 10% coupon rate. 2) A zero-coupon bond, Y, with a 5-year-to-maturity and a 10% yield-to-maturity.

Bond Y because of the longer duration.

Par value bond XYZ has a modified duration of 6. Which one of the following statements regarding the bond is true?

If the market yield increases by 1% the bond's price will decrease by $60.

Which of the following is true?

Given time to maturity and yield to maturity, the duration of a bond is higher when the coupon rate is lower, and duration is a better measure of price sensitivity to interest rate changes than is time to maturity.

Which of the following is not true?

Given time to maturity, the duration of a zero-coupon decreases with yield to maturity.

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. 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.

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.

Which of the following are false about the interest-rate sensitivity of bonds?

III) Interest-rate risk is directly related to the bond's coupon rate.

The duration of a coupon bond

None of these is correct.

Which one of the following statements is true concerning the duration of a perpetuity?

The duration of a 15% yield perpetuity that pays $100 annually is equal to that of 15% yield perpetuity that pays $200 annually.

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?

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

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?

The duration of the lower-coupon bond will be higher.

Which one of the following is a correct statement concerning duration?

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

Which one of the following is an incorrect statement concerning duration?

The higher the yield to maturity, the greater the duration.

One way that banks can reduce the duration of their asset portfolios is through the use of

adjustable rate mortgages

Duration

assesses the time element of bonds in terms of both coupon and term to maturity and allows structuring a portfolio to avoid interest-rate risk.

The curvature of the price-yield curve for a given bond is referred to as the bond's

convexity

Ceteris paribus, the duration of a bond is negatively correlated with the bond's

coupon rate and yield to maturity.

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

coupon rate is lower.

Cash flow matching on a multiperiod basis is referred to as

dedication.

The "modified duration" used by practitioners is equal to the Macaulay duration

divided by (one plus the bond's yield to maturity).

The duration of a 15-year zero-coupon bond is

equal to 15.

The duration of a 20-year zero-coupon bond is

equal to 20

The duration of a 5-year zero-coupon bond is

equal to 5

Immunization is not a strictly passive strategy because

it requires frequent rebalancing as maturities and interest rates change.

The two components of interest-rate risk are

price risk and reinvestment risk

The basic purpose of immunization is to

produce a zero net interest-rate risk and offset price and reinvestment risk.

A substitution swap is an exchange of bonds undertaken to

profit from apparent mispricing between two bonds.

A rate anticipation swap is an exchange of bonds undertaken to

shift portfolio duration in response to an anticipated change in interest rates.

The duration of a bond normally increases with an increase in

term to maturity.

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

term-to-maturity is higher.

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

term-to-maturity is lower and coupon rate is higher.

The "modified duration" used by practitioners is equal to ______ divided by (one plus the bond's yield to maturity).

the Macaulay duration

According to the duration concept

the coupon payments made prior to maturity make the effective maturity of the bond less than its actual time to maturity.

The interest-rate risk of a bond is

the risk that arises from the uncertainty of the bond's return caused by changes in interest rates.

Ceteris paribus, the duration of a bond is positively correlated with the bond's

time to maturity.

Duration measures

weighted average time until cash flow payment.

9. Holding other factors constant, the interest-rate risk of a coupon bond is lower when the bond's:

yield to maturity is higher.

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

yield to maturity is lower