Chapter 16

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.

An 8%, 15-year bond has a yield to maturity of 10% and duration of 8.05 years. If the market yield changes by 25 basis points, how much change will there be in the bond's price?

1.85%

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

11 years.

The duration of a perpetuity with a yield of 8% is

13.50 years.

The duration of a perpetuity with a yield of 6% is

17.67 years.

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

20-year maturity with a 0% coupon.

Holding other factors constant, which one of the following bonds has the smallest price volatility?

20-year, 9% coupon bond

48. Consider a bond selling at par with modified duration of 10.6 years and convexity of 210. A 2 percent decrease in yield would cause the price to increase by 21.2%, according to the duration rule. What would be the percentage price change according to the duration-with- convexity rule?

25.4%

The duration of a par value bond with a coupon rate of 8% and a remaining time to maturity of 5 years is

4.31 years.

Holding other factors constant, which one of the following bonds has the smallest price volatility?

5 year, 14% coupon bond

A seven-year par value bond has a coupon rate of 9% and a modified duration of

5.03 years.

Holding other factors constant, which one of the following bonds has the smallest price volatility?

7 year, 14% coupon bond

An 8%, 30-year corporate bond was recently being priced to yield 10%. The Macaulay duration for the bond is 10.20 years. Given this information, the bond's modified duration would be ________.

9.27

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 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 one of the following par value 12% coupon bonds experiences a price change of $23 when the market yield changes by 50 basis points?

The bond with a duration of 5.15 years.

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.

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.

Immunization through duration matching of assets and liabilities may be ineffective or inappropriate because

all of these correct

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 duration of a 15-year zero-coupon bond is

equal to 15.

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 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.

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.

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.

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.

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

All of these are correct.

Which of the following offers a bond index?

All of these are correct.

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.

Cash flow matching on a multiperiod basis is referred to as

C. dedication.

A substitution swap is an exchange of bonds undertaken to

D. profit from apparent mispricing between two bonds.

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.

55. Which of the following researchers have contributed significantly to bond portfolio management theory?

I) Sidney Homer III) Burton Malkiel IV) Martin Liebowitz V) Frederick Macaulay

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.

Par value bond GE has a modified duration of 11. 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 $110.

Par value bond F has a modified duration of 9. 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 $90.

23. 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.

The duration of a coupon bond

None of these is correct.

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

The duration of 15% yield perpetuity that pays $100 annually is longer than that of a 15% yield perpetuity that pays $200 annually, and the duration of a 15% yield perpetuity that pays $100 annually is shorter than that of a 15% yield perpetuity that pays $200 annually.

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.

You have an obligation to pay $1,488 in four years and 2 months. In which bond would you invest your $1,000 to accumulate this amount, with relative certainty, even if the yield on the bond declines to 9.5% immediately after you purchase the bond?

a 5-year; 10% coupon par value bond

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

adjustable rate mortgages.

Interest-rate risk is important to

both active and passive bond portfolio managers.

47. 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.

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

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

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.

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.

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.

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