Q&A Hero

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: 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) 52.38% B) 48.38% C) 33.58% D) 25.48%

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

Q: Bond prices are ________ sensitive to changes in yield when the bond is selling at a ________ initial yield to maturity. A) more; lower B) more; higher C) less; lower D) equally; higher or lower

Q: ________ is an important characteristic of the relationship between bond prices and yields. A) Convexity B) Concavity C) Complexity D) Linearity

Q: All else equal, bond price volatility is greater for ________. A) higher coupon rates B) lower coupon rates C) shorter maturity D) lower default risk

Q: As a result of bond convexity, an increase in a bond's price when yield to maturity falls is ________ the price decrease resulting from an increase in yield of equal magnitude. A) greater than B) equivalent to C) smaller than D) The answer cannot be determined from the information given.

Q: A bond's price volatility ________ at ________ rate as maturity increases. A) increases; an increasing B) increases; a decreasing C) decreases; an increasing D) decreases; a decreasing

Q: A forecast of bond returns based largely on a prediction of the yield curve at the end of the investment horizon is called a ________. A) contingent immunization B) dedication strategy C) duration analysis D) horizon analysis

Q: You find a 5-year AA Xerox bond priced to yield 6%. You find a similar-risk 5-year Canon bond priced to yield 6.5%. If you expect interest rates to rise, which of the following should you do? A) Short the Canon bond, and buy the Xerox bond. B) Buy the Canon bond, and short the Xerox bond. C) Short both the Canon bond and the Xerox bond. D) Buy both the Canon bond and the Xerox bond.

Q: Because of convexity, when interest rates change, the actual bond price will ________ the bond price predicted by duration. A) always be higher than B) sometimes be higher than C) always be lower than D) sometimes be lower than

Q: The duration of a perpetuity varies ________ with interest rates. A) directly B) inversely C) convexly D) randomly

Q: All other things equal, which of the following has the longest duration? A) A 20-year bond with a 10% coupon yielding 10% B) A 20-year bond with a 10% coupon yielding 11% C) A 20-year zero-coupon bond yielding 10% D) A 21-year bond with a 10% coupon yielding 10%

Q: 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? A) 2 years B) 2.15 years C) 2.29 years D) 2.53 years

Q: All other things equal (YTM = 10%), which of the following has the shortest duration? A) a 30-year bond with a 10% coupon B) a 20-year bond with a 9% coupon C) a 20-year bond with a 7% coupon D) a 10-year zero-coupon bond

Q: All other things equal (YTM = 10%), which of the following has the longest duration? A) a 30-year bond with a 10% coupon B) a 20-year bond with a 9% coupon C) a 20-year bond with a 7% coupon D) a 10-year zero-coupon bond

Q: Which country experienced the largest-ever sovereign default in 2012? A) Germany B) Ireland C) Greece D) Portugal

Q: What is the lowest grade a bond can receive and still be considered investment grade? A) AAA B) A C) BBB D) BB

Q: Which of the following yield curves generally implies a normal healthy economy? A) positive slope B) negative slope C) flat D) hump-shaped curve

Q: Which type of risk is most significant for bonds? A) maturity risk B) default risk C) interest rate risk D) reinvestment rate risk

Q: Which of the following rates represents a bond's annual interest payment per dollar of par value? A) holding period return B) coupon rate C) IRR D) YTM

Q: The ________ is the document that defines the contract between the bond issuer and the bondholder. A) indenture B) covenant agreement C) trustee agreement D) collateral statement

Q: A bond was purchased at a premium and is now selling at a discount because of a change in market interest rates. If the bond pays a 4% annual coupon, what is the likely impact on the holding-period return if an investor decides to sell now? A) increased B) decreased C) stayed the same D) The answer cannot be determined from the information given.

Q: The price of a bond (with par value of $1,000) at the beginning of a period is $980 and at the end of the period is $975. What is the holding-period return if the annual coupon rate is 4.5%? A) 4.08% B) 4.5% C) 5.1% D) 5.6%

Q: If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond? A) 4.3% B) 4.5% C) 5.2% D) 5.5%

Q: An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What is the current yield on this bond? A) 4.8% B) 4.85% C) 9.6% D) 9.7%

Q: You buy an 8-year $1,000 par value bond today that has a 6% yield and a 6% annual payment coupon. In 1 year promised yields have risen to 7%. Your 1-year holding-period return was ________. A) .61% B) −5.39% C) 1.28% D) −3.25%

Q: You buy a bond with a $1,000 par value today for a price of $875. The bond has 6 years to maturity and makes annual coupon payments of $75 per year. You hold the bond to maturity, but you do not reinvest any of your coupons. What was your effective EAR over the holding period? A) 10.4% B) 9.57% C) 7.45% D) 8.78%

Q: The price on a Treasury bond is 104.3625, with a yield to maturity of 3.45%. The price on a comparable maturity corporate bond is 103.75, with a yield to maturity of 4.59%. What is the approximate percentage value of the credit risk of the corporate bond? A) 1.14% B) 3.45% C) 4.59% D) 8.04%

Q: A bond has a 5% coupon rate. The coupon is paid semiannually, and the last coupon was paid 35 days ago. If the bond has a par value of $1,000, what is the accrued interest? A) $4.81 B) $14.24 C) $25 D) $50

Q: If the quote for a Treasury bond is listed in the newspaper as 99.25 bid, 99.26 ask, the actual price at which you can sell this bond given a $10,000 par value is ________. A) $9,828.12 B) $9,925 C) $9,934.37 D) $9,955.43

Q: A bond has a flat price of $985, and it pays an annual coupon. The last coupon payment was made 90 days ago. What is the invoice price if the annual coupon is $69? A) $999.55 B) $1,002.01 C) $1,007.45 D) $1,012.13

Q: A bond pays a semiannual coupon, and the last coupon was paid 61 days ago. If the annual coupon payment is $75, what is the accrued interest? (Assume 182 days in the 6-month period.) A) $13.21 B) $12.57 C) $15.44 D) $16.32

Q: If the price of a $10,000 par Treasury bond is $10,237.50, the quote would be listed in the newspaper as ________. A) 102.237 B) 102.102 C) 102.375 D) 102.750

Q: If the quote for a Treasury bond is listed in the newspaper as 98.2812 bid, 98.4062 ask, the actual price at which you can purchase this bond given a $10,000 par value is ________. A) $9,828.12 B) $9,809.38 C) $9,840.62 D) $9,813.42

Q: One-, two-, and three-year maturity, default-free, zero-coupon bonds have yields to maturity of 7%, 8%, and 9%, respectively. What is the implied 1-year forward rate 1 year from today? A) 2.07% B) 8.03% C) 9.01% D) 11.12%

Q: Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments. Time Inflation in year just ended Par value Coupon payment + Principal repayment = Total payment 0 $ 1000.00 1 3 % $ 1030.00 $ 51.50 0 $ 51.50 2 2 % $ 1050.60 $ 52.53 0 $ 52.53 3 4 % $ 1092.62 $ 54.63 $ 1092.62 $ 1,147.25 What is the real rate of return on the TIPS bond in the first year? A) 5% B) 8.15% C) 7.15% D) 4%

Q: On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. Description Coupon Price Callable Call Price Wildwood, due May 1, 2015 5 % 100 noncallable NA Asbury, due May 1, 2015 5.4 % 100 currently callable 102 If the volatility of interest rates is expected to increase, then Joe Hill should ________. A) prefer the Wildwood bond to the Asbury bond B) prefer the Asbury bond to the Wildwood bond C) be indifferent between the Wildwood bond and the Asbury bond D) The answer cannot be determined from the information given.

Q: Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments. Time Inflation in year just ended Par value Coupon payment + Principal repayment = Total payment 0 $ 1000.00 1 3 % $ 1030.00 $ 51.50 0 $ 51.50 2 2 % $ 1050.60 $ 52.53 0 $ 52.53 3 4 % $ 1092.62 $ 54.63 $ 1092.62 $ 1,147.25 What is the nominal rate of return on the TIPS bond in the first year? A) 5% B) 5.15% C) 8.15% D) 9%

Q: On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. Description Coupon Price Callable Call Price Wildwood, due May 1, 2015 5 % 100 noncallable NA Asbury, due May 1, 2015 5.4 % 100 currently callable 102 If interest rates are expected to rise, then Joe Hill should ________. A) prefer the Wildwood bond to the Asbury bond B) prefer the Asbury bond to the Wildwood bond C) be indifferent between the Wildwood bond and the Asbury bond D) The answer cannot be determined from the information given.

Q: A 6% coupon U.S. Treasury note pays interest on May 31 and November 30 and is traded for settlement on August 10. The accrued interest on the $100,000 face amount of this note is ________. A) $581.97 B) $1,170.33 C) $2,327.87 D) $3,000

Q: On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. Description Coupon Price Callable Call Price Wildwood, due May 1, 2015 5 % 100 noncallable NA Asbury, due May 1, 2015 5.4 % 100 currently callable 102 Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this decline would be ________. A) the price of the Wildwood bond would decline by more than the price of the Asbury bond B) the price of the Wildwood bond would decline by less than the price of the Asbury bond C) the price of the Wildwood bond would increase by more than the price of the Asbury bond D) the price of the Wildwood bond would increase by less than the price of the Asbury bond

Q: A discount bond that pays interest semiannually will: I. Have a lower price than an equivalent annual payment bond II. Have a higher EAR than an equivalent annual payment bond III. Sell for less than its conversion value A) I and II only B) I and III only C) II and III only D) I, II, and III

Q: Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in ________. A) marketability B) risk C) taxation D) call protection

Q: The yield to maturity on a bond is: I. Above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium II. The discount rate that will set the present value of the payments equal to the bond price III. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity A) I only B) II only C) I and II only D) I, II, and III

Q: Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward-sloping yield curve would indicate ________. A) expected increases in inflation over time B) expected decreases in inflation over time C) the presence of a liquidity premium D) that the equilibrium interest rate in the short-term part of the market is lower than the equilibrium interest rate in the long-term part of the market

Q: Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, 1 year from now the price of this bond will be ________. A) higher B) lower C) the same D) indeterminate

Q: You can be sure that a bond will sell at a premium to par when ________. A) its coupon rate is greater than its yield to maturity B) its coupon rate is less than its yield to maturity C) its coupon rate is equal to its yield to maturity D) its coupon rate is less than its conversion value

Q: Consider the following $1,000 par value zero-coupon bonds: Bond Years to Maturity Yield to Maturity A 1 6.00 % B 2 7.00 % C 3 7.99 % D 4 9.41 % E 5 10.70 % The expected 1-year interest rate 4 years from now should be ________. A) 16% B) 18% C) 20% D) 22%

Q: Consider the following $1,000 par value zero-coupon bonds: Bond Years to Maturity Yield to Maturity A 1 6.00 % B 2 7.00 % C 3 8.32 % D 4 8.49 % E 5 10.70 % The expected 1-year interest rate 3 years from now should be ________. A) 7% B) 8% C) 9% D) 10%

Q: A 1% decline in yield will have the least effect on the price of a bond with a ________. A) 10-year maturity, selling at 80 B) 10-year maturity, selling at 100 C) 20-year maturity, selling at 80 D) 20-year maturity, selling at 100

Q: Which of the following bonds would most likely sell at the lowest yield? A) a callable debenture B) a puttable mortgage bond C) a callable mortgage bond D) a puttable debenture

Q: Consider the following $1,000 par value zero-coupon bonds: Bond Years to Maturity Yield to Maturity A 1 6.00 % B 2 7.50 % C 3 8.00 % D 4 8.50 % E 5 10.25 % The expected 1-year interest rate 2 years from now should be ________. A) 7% B) 8% C) 9% D) 10%

Q: A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with interest paid annually. If the current market price is $750, what is the capital gain yield of this bond over the next year? A) .72% B) 1.85% C) 2.58% D) 3.42%

Q: The ________ of a bond is computed as the ratio of the annual coupon payment to the market price. A) nominal yield B) current yield C) yield to maturity D) yield to call

Q: $1,000 par value zero-coupon bonds (ignore liquidity premiums) Bond Years to Maturity Yield to Maturity A 1 6.00% B 2 7.50% C 3 7.99% D 4 8.49% E 5 10.70% The expected 2-year interest rate 3 years from now should be ________. A) 9.55% B) 11.74% C) 14.89% D) 13.73%

Q: $1,000 par value zero-coupon bonds (ignore liquidity premiums) Bond Years to Maturity Yield to Maturity A 1 6.00% B 2 7.50% C 3 7.99% D 4 8.49% E 5 10.70% One year from now bond C should sell for ________ (to the nearest dollar). A) $857 B) $894 C) $835 D) $821

Q: $1,000 par value zero-coupon bonds (ignore liquidity premiums) Bond Years to Maturity Yield to Maturity A 1 6.00% B 2 7.50% C 3 7.99% D 4 8.49% E 5 10.70% The expected 1-year interest rate 1 year from now should be about ________. A) 6% B) 7.5 % C) 9.02% D) 10.08%

Q: Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called ________. A) multiyear analysis B) horizon analysis C) maturity analysis D) reinvestment analysis

Q: Yields on municipal bonds are typically ________ yields on corporate bonds of similar risk and time to maturity. A) lower than B) slightly higher than C) identical to D) twice as high as