Fin 307-Ch 11

A perpetuity pays $100 each and every year forever. The duration of this perpetuity will be__________if its yield is 9%.

12.11

The duration of a 5-year zero-coupon bond is __________ years.

5

All other things equal, a bond's duration is __________.

Lower when the coupon rate is higher

The duration is independent of the coupon rate only for which one of the following?

The duration is independent of the coupon rate only for which one of the following?

A bond with a 9-year duration is worth $1,080, and its yield to maturity is 8%. If the yield to maturity falls to 7.84%, you would predict that the new value of the bond will be approximately __________.

$1,094

You own a bond that has a duration of 6 years. Interest rates are currently 7%, but you believe the Fed is about to increase interest rates by 25 basis points. Your predicted price change on this bond is __________.

-1.4%

A zero-coupon bond is selling at a deep discount price of $430. It matures in 13-years. If the yield to maturity of the bond is 6.7%, what is the duration of the bond?

13-years

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?

2.29 years

A bond has a current price of $1,030. The yield on the bond is 8%. If the yield changes from 8% to 8.1%, the price of the bond will go down to $1,025.88. The modified duration of this bond is __________.

4

A bond currently has a price of $1,050. The yield on the bond is 6%. If the yield increases 25 basis points, the price of thebond will go down to $1,030. The duration of this bond is __________years.

8.08

All other things equal (YTM = 10%), which of the following has the shortest duration?

A 10-year bond with a 9% coupon

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

A 20-year zero-coupon bond yielding 10%

All other things equal (YTM = 10%), which of the following has the longest duration?

A 30-year zero-coupon bond

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

A low coupon and long maturity

If you choose a zero-coupon bond with a maturity that matches your investment horizon, which of the following statements is (are) correct? I.You will have no interest rate risk on the bond II.In the absence of default, you can be sure you will earn the promised yield rate III.The duration of your bond isless than the time to your investment horizon

I and II only

The duration of a bond normally increases with an increase in__________. I.Term to maturity II.Yield to maturity III.Coupon rate

I only

All other things equal, a bond's duration is __________.

Lower when the yield to maturity is higher

Banks and other financial institutions can best manage interest rate risk by __________.

Matching the durations of their assets and liabilities

Which one of the following statements correctly describes the weights used in the Macaulay duration calculation?The weight in year tis equal to __________.

The present value of the dollar amount of the investment received in year t

Given its time to maturity, the duration of a zero-coupon bond is __________.

The same regardless of the discount rate

An investor who expects declining interest rates would maximize their capital gain by purchasing a bond that has a __________coupon and a __________ term to maturity.

Zero; Long