Q&A Hero

Q: If you believe the economy is about to go into a recession, you might change your asset allocation by selling _______ and buying ______. A. growth stocks; long-term bonds B. long-term bonds; growth stocks C. defensive stocks; growth stocks D. defensive stocks; long-term bonds

Q: Between 1999 and 2010, the purchasing power of the U.S. dollar increased relative to the purchasing power of _______. A. the United Kingdom B. the Euro C. Switzerland D. Canada

Q: You estimate that the present value of a firm's cash flow is valued at $15 million. The break up value of the firm if you were to sell the major assets and divisions separately would be $20 million. This is an example of what Peter Lynch would call ___________. A. a stalwart B. slow growth C. a star D. an asset play

Q: An increase in the value of the yen against the U.S. dollar can cause the Japanese automaker Toyota to either _____________ on its U.S. sales. A. lose market share or reduce its profit margin B. gain market share or reduce its profit margin C. lose market share or increase its profit margin D. gain market share or increase its profit margin

Q: In 1980 the dollar-yen exchange rate was about $.0045. In 2012 the yen-dollar exchange rate was about 80 yen per dollar. A Japanese producer would have had to increase the dollar price of a good sold in the United States by approximately _____ to maintain the same yen price in 2012. A. 178% B. 79.5% C. 265.4% D. 36%

Q: A top-down analysis of a firm's prospects starts with an analysis of the ____. A. firm's position in its industry B. U.S. economy or even the global economy C. industry D. specific firm under consideration

Q: Which of the following are barriers to entry? I. Large economies of scale required to be profitable II. Established brand loyalty III. Patent protection for the firm's product IV. Rapid industry growth A. I and II only B. I, II, and III only C. II, III, and IV only D. III and IV only

Q: Large-growth companies generally emerge in the __________ stage. A. start-up B. consolidation C. maturity D. relative decline

Q: Convexity of a bond is ___________. A. the same as horizon analysis B. the rate of change of the slope of the price-yield curve divided by the bond price C. a measure of bond duration D. none of these options

Q: You have a 15-year maturity, 4% coupon, 6% yield bond with duration of 10.5 years and a convexity of 128.75. The bond is currently priced at $805.76. If the interest rate were to increase 200 basis points, your predicted new price for the bond (including convexity) is _________. A. $638.85 B. $642.54 C. $666.88 D. $705.03

Q: You have a 25-year maturity, 10% coupon, 10% yield bond with a duration of 10 years and a convexity of 135.5. If the interest rate were to fall 125 basis points, your predicted new price for the bond (including convexity) is _________. A. $1,098.45 B. $1,104.56 C. $1,113.41 D. $1,124.22

Q: Convexity implies that duration predictions: I. Underestimate the percentage increase in bond price when the yield falls. II. Underestimate the percentage decrease in bond price when the yield rises. III. Overestimate the percentage increase in bond price when the yield falls. IV. Overestimate the percentage decrease in bond price when the yield rises. A. I and III only B. II and IV only C. I and IV only D. II and III only

Q: Advantages of cash flow matching and dedicated strategies include: I. Once the cash flows are matched, there is no need for rebalancing. II. Cash flow matching typically earns a higher rate of return than active bond portfolio management. III. Financial institutions' liabilities often exceed the maturity of available bonds, making cash matching even more desirable. A. I only B. II only C. I and III only D. I, II, and III

Q: Immunization of coupon-paying bonds does not imply that the portfolio manager is inactive because: I. The portfolio must be rebalanced every time interest rates change. II. The portfolio must be rebalanced over time even if interest rates don't change. III. Convexity implies duration-based immunization strategies don't work. A. I only B. I and II only C. II only D. I, II, and III

Q: You have an investment horizon of 6 years. You choose to hold a bond with a duration of 6 years and continue to match your investment horizon and duration throughout your holding period. Your realized rate of return will be the same as the promised yield on the bond if: I. Interest rates increase. II. Interest rates stay the same. III. Interest rates fall. A. I only B. II only C. I and II only D. I, II, and III

Q: What strategy might an insurance company employ to ensure that it will be able to meet the obligations of annuity holders? A. Cash flow matching B. Index tracking C. Yield pickup swaps D. Substitution swap

Q: You have an investment horizon of 6 years. You choose to hold a bond with a duration of 4 years. Your realized rate of return will be larger than the promised yield on the bond if ___________________. A. interest rates increase B. interest rates stay the same C. interest rates fall D. The answer cannot be determined from the information given.

Q: Market economists all predict a rise in interest rates. An astute bond manager wishing to maximize her capital gain might employ which strategy? A. Switch from low-duration to high-duration bonds. B. Switch from high-duration to low-duration bonds. C. Switch from high-grade to low-grade bonds. D. Switch from low-coupon to high-coupon bonds.

Q: A bond portfolio manager notices a hump in the yield curve at the 5-year point. How might a bond manager take advantage of this event? A. Buy the 5-year bonds, and short the surrounding maturity bonds. B. Buy the 5-year bonds, and buy the surrounding maturity bonds. C. Short the 5-year bonds, and short the surrounding maturity bonds. D. Short the 5-year bonds, and buy the surrounding maturity bonds.

Q: You have an investment horizon of 6 years. You choose to hold a bond with a duration of 10 years. Your realized rate of return will be larger than the promised yield on the bond if ___________________. A. interest rates increase B. interest rates stay the same C. interest rates fall D. The answer cannot be determined from the information given.

Q: The duration is independent of the coupon rate only for which one of the following? A. Discount bonds B. Premium bonds C. Perpetuities D. Short-term bonds

Q: Which one of the following statements correctly describes the weights used in the Macaulay duration calculation? The weight in year t is equal to ____________. A. the dollar amount of the investment received in year t B. the percentage of the future value of the investment received in year t C. the present value of the dollar amount of the investment received in year t D. the percentage of the total present value of the investment received in year t

Q: If an investment returns a higher percentage of your money back sooner, it will ______. A. be less price-volatile B. have a higher credit rating C. be less liquid D. have a higher modified duration

Q: You have an investment that in today's dollars returns 15% of your investment in year 1, 12% in year 2, 9% in year 3, and the remainder in year 4. What is the duration of this investment? A. 4 years B. 3.5 years C. 3.22 years D. 2.95 years

Q: 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? A. 6.7 years B. 8 years C. 10 years D. 13 years

Q: When bonds sell above par, what is the relationship of price sensitivity to rising interest rates? A. Price volatility increases at an increasing rate. B. Price volatility increases at a decreasing rate. C. Price volatility decreases at a decreasing rate. D. Price volatility decreases at an increasing rate.

Q: A 20-year maturity corporate bond has a 6.5% coupon rate (the coupons are paid annually). The bond currently sells for $925.50. A bond market analyst forecasts that in 5 years yields on such bonds will be at 7%. You believe that you will be able to reinvest the coupons earned over the next 5 years at a 6% rate of return. What is your expected annual compound rate of return if you plan on selling the bond in 5 years? A. 7.37% B. 7.56% C. 8.12% D. 8.54%

Q: Steel Pier Company has issued bonds that pay semiannually with the following characteristics: If the yield to maturity decreases to 8.045%, the expected percentage change in the price of the bond using modified duration would be ____. A. 11%B. 13%C. 12%D. 10%

Q: Steel Pier Company has issued bonds that pay semiannually with the following characteristics: If the maturity of the bond was less than 10 years, the modified duration would be _____ compared to the original modified duration. A. largerB. unchangedC. smallerD. The answer cannot be determined from the information given.

Q: Steel Pier Company has issued bonds that pay semiannually with the following characteristics: If the bond's coupon was smaller than 10%, the modified duration would be _____ compared to the original modified duration. A. largerB. unchangedC. smallerD. The answer cannot be determined from the information given.

Q: Steel Pier Company has issued bonds that pay semiannually with the following characteristics: The modified duration for the Steel Pier bond is ______. A. 6.15 yearsB. 5.95 yearsC. 6.49 yearsD. 9.09 years

Q: As compared with equivalent maturity bonds selling at par, deep discount bonds will have ________. A. greater reinvestment risk B. greater price volatility C. less call protection D. shorter average maturity

Q: 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 this bond. II. In the absence of default, you can be sure you will earn the promised yield rate. III. The duration of your bond is less than the time to your investment horizon. A. I only B. I and II only C. II and III only D. I, II, and III

Q: An investor who expects declining interest rates would maximize her capital gain by purchasing a bond that has a _________ coupon and a _________ term to maturity. A. low; long B. high; short C. high; long D. zero; long

Q: Which of the following set of conditions will result in a bond with the greatest price volatility? A. A high coupon and a short maturity B. A high coupon and a long maturity C. A low coupon and a short maturity D. A low coupon and a long maturity

Q: To create a portfolio with a duration of 4 years using a 5-year zero-coupon bond and a 3-year 8% annual coupon bond with a yield to maturity of 10%, one would have to invest ________ of the portfolio value in the zero-coupon bond. A. 50% B. 55% C. 60% D. 75%

Q: An 8%, 30-year bond has a yield to maturity of 10% and a modified duration of 8 years. If the market yield drops by 15 basis points, there will be a __________ in the bond's price. A. 1.15% decrease B. 1.2% increase C. 1.53% increase D. 2.43% decrease

Q: Compute the modified duration of a 9% coupon, 3-year corporate bond with a yield to maturity of 12%. A. 2.45 B. 2.75 C. 2.88 D. 3

Q: Compute the duration of an 8%, 5-year corporate bond with a par value of $1,000 and yield to maturity of 10%. A. 3.92 B. 4.28 C. 4.55 D. 5

Q: A fixed-income portfolio manager sets a minimum acceptable rate of return on the bond portfolio at 5% per year over the next 4 years. The portfolio is currently worth $10 million. One year later interest rates are at 6%. What is the portfolio value trigger point at this time that would require the manager to immunize the portfolio? A. $12,155,063 B. $10,205,625 C. $9,627,948 D. $10,500,000

Q: The duration of a bond normally increases with an increase in: I. Term to maturity II. Yield to maturity III. Coupon rate A. I only B. I and II only C. II and III only D. I, II, and III

Q: The historical yield spread between the AA bond and the AAA bond has been 25 basis points. Currently the spread is only 9 basis points. If you believe the spread will soon return to its historical levels, you should ________________________. A. buy the AA and short the AAA B. buy both the AA and the AAA C. buy the AAA and short the AA D. short both the AA and the AAA

Q: Duration facilitates the comparison of bonds with differing ___________. A. default risks B. conversion ratios C. maturities D. yields to maturity

Q: When interest rates increase, the duration of a 20-year bond selling at a premium _________. A. increases B. decreases C. remains the same D. increases at first and then declines

Q: 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 _________. A. $1,035 B. $1,036 C. $1,094 D. $1,124

Q: A 20-year maturity bond pays interest of $90 once per year and has a face value of $1,000. Its yield to maturity is 10%. You expect that interest rates will decline over the upcoming year and that the yield to maturity on this bond will be only 8% a year from now. Using horizon analysis, the return you expect to earn by holding this bond over the upcoming year is _________. A. 10% B. 12% C. 21.6% D. 29.6%

Q: A bond has a maturity of 12 years and a duration of 9.5 years at a promised yield rate of 8%. What is the bond's modified duration? A. 12 years B. 11.1 years C. 9.5 years D. 8.8 years

Q: A bond pays annual interest. Its coupon rate is 9%. Its value at maturity is $1,000. It matures in 4 years. Its yield to maturity is currently 6%. The modified duration of this bond is ______ years. A. 4 B. 3.56 C. 3.36 D. 3.05

Q: A bond pays annual interest. Its coupon rate is 9%. Its value at maturity is $1,000. It matures in 4 years. Its yield to maturity is currently 6%. The duration of this bond is _______ years. A. 2.44 B. 3.23 C. 3.56 D. 4.1

Q: A perpetuity pays $100 each and every year forever. The duration of this perpetuity will be __________ if its yield is 9%. A. 7 B. 9 C. 9.39 D. 12.11

Q: A bank has $50 million in assets, $47 million in liabilities, and $3 million in shareholders' equity. If the duration of its liabilities is 1.3 and the bank wants to immunize its net worth against interest rate risk and thus set the duration of equity equal to zero, it should select assets with an average duration of _________. A. 1.22 B. 1.5 C. 1.6 D. 2

Q: 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 _________. A. 4.32 B. 4 C. 3.25 D. 3.75

Q: 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 the bond will go down to $1,030. The duration of this bond is ____ years. A. 7.46 B. 8.08 C. 9.02 D. 10.11

Q: Where y = yield to maturity, the duration of a perpetuity would be _________. A. y B. y/(1 + y) C. 1/y D. (1 + y)/y

Q: The duration rule always ________ the value of a bond following a change in its yield. A. underestimates B. provides an unbiased estimate of C. overestimates D. The estimated price may be biased either upward or downward, depending on whether the bond is trading at a discount or a premium.

Q: In a pure yield pickup swap, ________ bonds are exchanged for _________ bonds. A. longer-duration; shorter-duration B. shorter-duration; longer-duration C. high-coupon; high-yield D. low-yield; high-yield

Q: Moving to higher-yield bonds, usually with longer maturities, is called ________. A. a substitution swap B. an intermarket spread swap C. a rate anticipation swap D. a pure yield pickup swap

Q: A bond swap made in response to forecasts of interest rate changes is called ______. A. a substitution swap B. an intermarket spread swap C. a rate anticipation swap D. a pure yield pickup swap

Q: Rank the interest sensitivity of the following from the most sensitive to an interest rate change to the least sensitive: I. 8% coupon, noncallable 20-year maturity par bond II. 9% coupon, currently callable 20-year maturity premium bond III. Zero-coupon 30-year maturity bond A. I, II, III B. II, III, I C. III, I, II D. III, II, I

Q: The exchange of one bond for a bond that has similar attributes but is more attractively priced is called ______________. A. a substitution swap B. an intermarket spread swap C. a rate anticipation swap D. a pure yield pickup swap

Q: Which of the following is not a type of bond swap used in active portfolio management? A. Intermarket spread swap B. Substitution swap C. Rate anticipation swap D. Asset-liability swap

Q: Pension fund managers can generally best bring about an effective reduction in their interest rate risk by holding ___________________. A. long-maturity bonds B. long-duration bonds C. short-maturity bonds D. short-duration bonds

Q: The duration of a portfolio of bonds can be calculated as _______________. A. the coupon weighted average of the durations of the individual bonds in the portfolio B. the yield weighted average of the durations of the individual bonds in the portfolio C. the value weighted average of the durations of the individual bonds in the portfolio D. averages of the durations of the longest- and shortest-duration bonds in the portfolio

Q: You have purchased a guaranteed investment contract (GIC) from an insurance firm that promises to pay you a 5% compound rate of return per year for 6 years. If you pay $10,000 for the GIC today and receive no interest along the way, you will get __________ in 6 years (to the nearest dollar). A. $12,565 B. $13,000 C. $13,401 D. $13,676

Q: Bond portfolio immunization techniques balance ________ and ________ risk. A. price; reinvestment B. price; liquidity C. credit; reinvestment D. credit; liquidity

Q: In the context of a bond portfolio, price risk and reinvestment rate risk exactly cancel out at a time horizon equal to the ____. A. average bond maturity in the portfolio B. duration of the portfolio C. difference between the shortest duration and longest duration of the individual bonds in the portfolio D. average of the shortest duration and longest duration of the bonds in the portfolio

Q: Banks and other financial institutions can best manage interest rate risk by _____________. A. maximizing the duration of assets and minimizing the duration of liabilities B. minimizing the duration of assets and maximizing the duration of liabilities C. matching the durations of their assets and liabilities D. matching the maturities of their assets and liabilities

Q: All other things equal, a bond's duration is _________. A. higher when the coupon rate is higher B. lower when the coupon rate is higher C. the same when the coupon rate is higher D. indeterminable when the coupon rate is high

Q: A bank has an average duration of its liabilities equal to 2 years. The bank's average duration of its assets is 3.5 years. The bank's market value of equity is at risk if _______________________. A. interest rates fall B. credit spreads fall C. interest rates rise D. the price of all fixed-income securities rises

Q: All other things equal, a bond's duration is _________. A. higher when the yield to maturity is higher B. lower when the yield to maturity is higher C. the same at all yield rates D. indeterminable when the yield to maturity is high

Q: An increase in a bond's yield to maturity results in a price decline that is ________ the price increase resulting from a decrease in yield of equal magnitude. A. greater than B. equivalent to C. smaller than D. The answer cannot be determined.

Q: Given its time to maturity, the duration of a zero-coupon bond is _________. A. higher when the discount rate is higher B. higher when the discount rate is lower C. lowest when the discount rate is equal to the risk-free rate D. the same regardless of the discount rate

Q: 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 ________. A. +1.4% B. -1.4% C. -2.51% D. +2.51%

Q: A pension fund has an average duration of its liabilities equal to 15 years. The fund is looking at 5-year maturity zero-coupon bonds and 4% yield perpetuities to immunize its interest rate risk. How much of its portfolio should it allocate to the zero-coupon bonds to immunize if there are no other assets funding the plan? A. 52% B. 48% C. 33% D. 25%

Q: Duration is a concept that is useful in assessing a bond's _________. A. credit risk B. liquidity risk C. price volatility D. convexity risk

Q: Target date immunization would primarily be of interest to _________. A. banks B. mutual funds C. pension funds D. individual investors

Q: A portfolio manager believes interest rates will drop and decides to sell short-duration bonds and buy long-duration bonds. This is an example of __________ swap. A. a pure yield pickup B. a rate anticipation C. a substitution D. an intermarket spread

Q: The duration of a 5-year zero-coupon bond is ____ years. A. 4.5 B. 5 C. 5.5 D. 3.5

Q: A portfolio manager sells Treasury bonds and buys corporate bonds because the spread between corporate- and Treasury-bond yields is higher than its historical average. This is an example of __________ swap. A. a pure yield pickup B. a rate anticipation C. a substitution D. an intermarket spread

Q: The pioneer of the duration concept was _________. A. Eugene Fama B. John Herzog C. Frederick Macaulay D. Harry Markowitz