Chapter 16 PM

36. One way that banks can reduce the duration of their asset portfolios is through the use of A. fixed-rate mortgages. B. adjustable-rate mortgages. C. certificates of deposit. D. short-term borrowing.

B. adjustable-rate mortgages.

18. The duration of a 5-year zero-coupon bond is A. smaller than 5. B. larger than 5. C. equal to 5. D. equal to that of a 5-year 10% coupon bond. E. None of the options are correct.

C. equal to 5.

33. When interest rates decline, the duration of a 10-year bond selling at a premium A. increases. B. decreases. C. remains the same. D. increases at first, then declines. E. decreases at first, then increases.

A. increases.

1. The duration of a bond is a function of the bond's A. coupon rate. B. yield to maturity. C. time to maturity. D. All of the options are correct. E. None of the options are correct.

D. All of the options are correct.

5. Holding other factors constant, the interest-rate risk of a coupon bond is higher when the bond's A. term to maturity is higher. B. coupon rate is higher. C. yield to maturity is higher. D. All of the options are correct. E. None of the options are correct.

A. term to maturity is higher.

37. The duration of a bond normally increases with an increase in A. term to maturity. B. yield to maturity. C. coupon rate. D. All of the options are correct. E. None of the options are correct.

A. term to maturity.

2. Ceteris paribus, the duration of a bond is positively correlated with the bond's A. time to maturity. B. coupon rate. C. yield to maturity. D. All of the options are correct. E. None of the options are correct.

A. time to maturity.

16. Which of the following is not true? A. Holding other things constant, the duration of a bond increases with time to maturity. B. Given time to maturity, the duration of a zero-coupon decreases with yield to maturity. C. Given time to maturity and yield to maturity, the duration of a bond is higher when the coupon rate is lower. D. Duration is a better measure of price sensitivity to interest-rate changes than is time to maturity. E. All of the options are correct.

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

6. Holding other factors constant, the interest-rate risk of a coupon bond is higher when the bond's A. term to maturity is lower. B. coupon rate is lower. C. yield to maturity is higher. D. term to maturity is lower and yield to maturity is higher. E. None of the options are correct.

B. coupon rate is lower.

11. The "modified duration" used by practitioners is equal to ______ divided by (one plus the bond's yield to maturity). A. current yield B. the Macaulay duration C. yield to call D. yield to maturity E. None of the options are correct.

B. the Macaulay duration

13. The interest-rate risk of a bond is A. the risk related to the possibility of bankruptcy of the bond's issuer. B. the risk that arises from the uncertainty of the bond's return caused by changes in interest rates. C. the unsystematic risk caused by factors unique in the bond. D.the risk related to the possibility of bankruptcy of the bond's issuer, and the risk that arises from the uncertainty of the bond's return caused by changes in interest rates. E. All of the options are correct.

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

30. Duration measures A. weighted-average time until a bond's half-life. B. weighted-average time until cash flow payment. C. the time required to make excessive profit from the investment. D. weighted-average time until a bond's half-life and the time required to make excessive profit from the investment. E. weighted-average time until cash flow payment and the time required to make excessive profit from the investment.

B. weighted-average time until cash flow payment.

32. Identify the bond that has the longest duration (no calculations necessary). A. 20-year maturity with an 8% coupon B. 20-year maturity with a 12% coupon C. 20-year maturity with a 0% coupon D. 10-year maturity with a 15% coupon E. 12-year maturity with a 12% coupon

C. 20-year maturity with a 0% coupon

15. Holding other factors constant, which one of the following bonds has the smallest price volatility? A. 5-year, 0% coupon bond B. 5-year, 12% coupon bond C. 5 year, 14% coupon bond D. 5-year, 10% coupon bond E. Cannot tell from the information given

C. 5 year, 14% coupon bond

14. 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 year to maturity and a 10% coupon rate. 2) A zero-coupon bond, Y, with a 5-year year to maturity and a 10% yield to maturity. A. Bond X because of the higher yield to maturity B. Bond X because of the longer time to maturity C. Bond Y because of the longer duration D. Both have the same sensitivity because both have the same yield to maturity. E. None of the options are correct.

C. Bond Y because of the longer duration

38. 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 the options are correct.

C. it requires frequent rebalancing as maturities and interest rates change.

9. Holding other factors constant, the interest-rate risk of a coupon bond is lower when the bond's A. term to maturity is higher. B. coupon rate is lower. C. yield to maturity is higher. D. term to maturity is higher and coupon rate is lower. E. All of the options are correct.

C. yield to maturity is higher.

4. Holding other factors constant, the interest-rate risk of a coupon bond is higher when the bond's A. term to maturity is lower. B. coupon rate is higher. C. yield to maturity is lower. D. current yield is higher. E. None of the options are correct.

C. yield to maturity is lower.

24. Which of the following bonds has the longest duration? A. An 8-year maturity, 0% coupon bond B. An 8-year maturity, 5% coupon bond C. A 10-year maturity, 5% coupon bond D. A 10-year maturity, 0% coupon bond E. Cannot tell from the information given

D. A 10-year maturity, 0% coupon bond The longer the maturity and the lower the coupon, the greater the duration.

29. 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. D. All of the options are true.

D. All of the options are true.

17. Which of the following statements are true? I) Holding other things constant, the duration of a bond decreases with time to maturity. II) Given time to maturity, the duration of a zero-coupon increases with yield to maturity. III) Given time to maturity and yield to maturity, the duration of a bond is higher when the coupon rate is lower. IV) Duration is a better measure of price sensitivity to interest-rate changes than is time to maturity. A. I only B. I and II C. III only D. III and IV E. I, II, and IV

D. III and IV

12. Given the time to maturity, the duration of a zero-coupon bond is higher when the discount rate is A. higher. B. lower. C. equal to the risk-free rate. D. The bond's duration is independent of the discount rate. E. None of the options are correct.

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

31. Duration A. assesses the time element of bonds in terms of both coupon and term to maturity. B. allows structuring a portfolio to avoid interest-rate risk. C. is a direct comparison between bond issues with different levels of risk. D. 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. E. assesses the time element of bonds in terms of both coupon and term to maturity and is a direct comparison between bond issues with different levels of risk.

D. 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.

3. Ceteris paribus, the duration of a bond is negatively correlated with the bond's A. time to maturity. B. coupon rate. C. yield to maturity. D. coupon rate and yield to maturity. E. None of the options are correct.

D. coupon rate and yield to maturity.

10. The "modified duration" used by practitioners is equal to the Macaulay duration A. times the change in interest rate. B. times (one plus the bond's yield to maturity). C. divided by (one minus the bond's yield to maturity). D. divided by (one plus the bond's yield to maturity). E. None of the options are correct.

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

27. The two components of interest-rate risk are A. price risk and default risk. B. reinvestment risk and systematic risk. C. call risk and price risk. D. price risk and reinvestment risk. E. None of the options are correct.

D. price risk and reinvestment risk.

7. 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 lower. D. term to maturity is lower and coupon rate is higher. E. All of the options are correct.

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

8. 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. E. All of the options are correct.

E. All of the options are correct.

28. The duration of a coupon bond A. does not change after the bond is issued. B. can accurately predict the price change of the bond for any interest-rate change. C. will decrease as the yield to maturity decreases. D. All of the options are true. E. None of the options are true.

E. None of the options are true.

19. The basic purpose of immunization is to A. eliminate default risk. B. produce a zero net-interest-rate risk. C. offset price and reinvestment risk. D. eliminate default risk and produce a zero net-interest-rate risk. E. produce a zero net-interest-rate risk and offset price and reinvestment risk.

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