Interest Rate Risk Practice Q's

Which of the following bonds would you expect to have the highest interest rate risk? Assume that the maturities are the same. A. A coupon-paying bond with a 5% coupon rate and a 6% yield to maturity B. A coupon-paying bond with a 5% coupon rate and an 8% yield to maturity C. A zero coupon bond with a 6% yield to maturity D. A zero coupon bond with an 8% yield to maturity E. They all have equivalent interest rate risk

C

Which of the following choices is NOT a direct factor in calculating a bond's interest rate risk? A. Coupon rate B. Maturity C. Number of bonds issued D. Yield to maturity E. All of these affect interest rate risk

C

What is a problem with using duration?

Changes with interest rates

When implementing a target date immunization strategy, we attempt to offset the ________ risk of our portfolio with its __________risk.

interest rate, reinvestment

All else equal, bonds with _______ are MORE sensitive to interest rate movements.

longer maturities

Duration is increased by a _______ maturity, a _______ coupon rate, and a ______yield to maturity

longer, lower, lower

According to our class discussion, a bank would most likely use ________to manage its interest rate risk

net-worth immunization

You are managing an investment company that focuses on investing in bonds, annuities, and other interest rate securities. In addition, your firm needs to issue substantial amounts of debt to get off the ground. What strategy might you employ in order to protect the value of the firm against interest rate risk?

net-worth immunization

Key rates can be used to resolve which problem with our typical duration calculation? A. Cash flows change with interest rates B. Duration changes with interest rates C. Forced conversion D. Instantaneous method E. Interest rates don't move in parallel

E

Which of the following INCREASES interest rate risk? A. Higher coupon rate B. Higher yield to maturity C. Shorter maturity D. All of these increase interest rate risk E. None of these increase interest rate risk

E

Which of the following implies a higher duration? A. A higher coupon rate B. A higher yield to maturity C. A shorter maturity D. All of these E. None of these

E

Which of the following is NOT a problem with approximating the price change of a bond when interest rates move using duration? A. Bad at modeling larger rate movements B. Only an approximation C. Takes as much time as exact answers D. Using a straight line to model a curved relationship E. All of these are problems

E

Which of the following is NOT true of the duration of a perpetual bond? A higher duration implies higher price sensitivity to interest rate changes B.It has equivalent interest rate risk to a zero coupon bond that matures at its duration C. It only depends on the yield of the bond D. The bond continues after the duration E. All of these are true

E

______are a way to isolate the particular rate(s) that are important to a bond's interest rate risk and calculate essentially a partial duration.

Key rates

the estimated relationship between the two is _______

straight

Your retirement fund consists of a large amount of bonds. You have 40 years until retirement. Given today's low interest rates, you fear rates rising in the future, so you want to protect your portfolio from interest rate risk until you enter retirement. What strategy might you employ?

target date immunization

_________ is a bond strategy that relies on perfectly offsetting the interest rate risk of the portfolio with its reinvestment risk

target date immunization

you have a specific investment horizon, _________ would make the most sense.

target date immunization

You are considering an investment in a perpetual bond. The bond pays out $100 each year. You figure that the relevant yield on the bond is 10%. What is the effective maturity of this bond?

11 years

Which of the following does NOT imply a longer duration? A. Higher coupon rate B. Higher maturity C. Lower coupon rate D. Lower yield to maturity

A

Which of the following is NOT an issue with using duration to predict price changes as a result of interest rate changes? A. Approximation formula is too complicated B. Duration changes when interest rates change C. Duration projects a straight line, while the actual price-yield relationship is curved D. Excel can calculate exact price changes much faster

A

___________bonds can exhibit negative effective convexity, which means that their _______can decrease when interest rates decrease

callable, duration

According to our class discussion, we are unable to precisely immunize our portfolio because duration .________

changes with interest rates

The actual relationship between the bond price and its yield is _______

curved

A major problem with using duration to approximate bond price changes is that we are trying to match the actual ______ relationship with a ________ estimate.

curved, straight