Q&A Hero

Q: Assume the U.S. government was to decide to increase the budget field. Holding all else constant, this will cause ______ to decrease. A. interest rates B. government borrowing C. unemployment D. -interest rates and government borrowing E. None of the options are correct.

Q: A firm in the early stages of the industry life cycle will likely have A. high market penetration. B. high risk. C. rapid growth. D. high market penetration and rapid growth. E. -high risk and rapid growth.

Q: The stock price index and new orders for nondefense capital goods are A. -leading economic indicators. B. coincidental economic indicators. C. lagging economic indicators. D. not useful as economic indicators.

Q: If the economy were going into a recession, an attractive industry to invest in would be the A. automobile industry. B. -medical services industry. C. construction industry. D. automobile and construction industries. E. medical services and construction industries.

Q: A firm in an industry that is very sensitive to the business cycle will likely have a stock beta A. -greater than 1.0. B. equal to 1.0. C. less than 1.0 but greater than 0.0. D. equal to or less than 0.0. E. There is no relationship between beta and sensitivity to the business cycle.

Q: The average duration of unemployment and changes in the consumer price index for services are A. leading economic indicators. B. coincidental economic indicators. C. -lagging economic indicators. D. composite economic indicators.

Q: A declining GDP indicates a(n) ______ economy with ______ opportunity for a firm to increase sales. A. -stagnant; little B. stagnant; ample C. expanding; little D. expanding; ample E. stable; no

Q: A rapidly growing GDP indicates a(n) ______ economy with ______ opportunity for a firm to increase sales. A. stagnant; little B. stagnant; ample C. expanding; little D. -expanding; ample E. stable; no

Q: GDP refers to A. the amount of personal disposable income in the economy. B. the difference between government spending and government revenues. C. the total manufacturing output in the economy. D. -the total production of goods and services in the economy. E. None of the options are correct.

Q: Industrial production refers to A. the amount of personal disposable income in the economy. B. the difference between government spending and government revenues. C. -the total manufacturing output in the economy. D. the total production of goods and services in the economy.

Q: If the economy is shrinking, firms with low operating leverage will experience A. larger decreases in profits than firms with high operating leverage. B. similar decreases in profits as firms with high operating leverage. C. -smaller decreases in profits than firms with high operating leverage. D. no change in profits.

Q: If the economy is growing, firms with low operating leverage will experience A. higher increases in profits than firms with high operating leverage. B. similar increases in profits as firms with high operating leverage. C. -smaller increases in profits than firms with high operating leverage. D. no change in profits.

Q: If the economy is shrinking, firms with high operating leverage will experience A. -larger decreases in profits than firms with low operating leverage. B. similar decreases in profits as firms with low operating leverage. C. smaller decreases in profits than firms with low operating leverage. D. no change in profits.

Q: If the economy is growing, firms with high operating leverage will experience A. -higher increases in profits than firms with low operating leverage. B. similar increases in profits as firms with low operating leverage. C. smaller increases in profits than firms with low operating leverage. D. no change in profits. E. None of the options are correct.

Q: A peak is A. -a transition from an expansion in the business cycle to the start of a contraction. B. a transition from a contraction in the business cycle to the start of an expansion. C. a depression that lasts more than three years. D. only a feature of geography and not an investment term. E. None of the options are correct.

Q: A trough is A. a transition from an expansion in the business cycle to the start of a contraction. B. -a transition from a contraction in the business cycle to the start of an expansion. C. a depression that lasts more than three years. D. only something used by farmers to feed pigs and not an investment term.

Q: Monetary policy is determined by A. government budget decisions. B. presidential mandates. C. -the Board of Governors of the Federal Reserve System. D. congressional actions. E. None of the options are correct.

Q: The "normal" range of price-earnings ratios for the S&P 500 Index is A. between 2 and 10. B. between 5 and 15. C. less than 8. D. -between 12 and 25. E. greater than 20.

Q: The "real," or inflation-adjusted, exchange rate is A. the balance of trade. B. the budget deficit. C. -the purchasing-power ratio. D. unimportant to the U.S. economy. E. None of the options are correct.

Q: The most widely used monetary tool is A. altering the discount rate. B. altering the reserve requirements. C. -open-market operations. D. altering marginal tax rates. E. None of the options are correct.

Q: Demand-side economics is concerned with A. government spending and tax levels. B. monetary policy. C. fiscal policy. D. government spending, tax levels, and monetary policy. E. -All of the options are correct.

Q: An example of a highly cyclical industry is A. -the automobile industry. B. the tobacco industry. C. the food industry. D. the automobile industry and the tobacco industry. E. the tobacco industry and the food industry.

Q: A top-down analysis of a firm starts with A. the relative value of the firm. B. the absolute value of the firm. C. the domestic economy. D. -the global economy. E. the industry outlook.

Q: The duration of a par-value bond with a coupon rate of 8.7% and a remaining time to maturity of 6 years is A. 6.0 years. B. 5.1 years. C. 4.27 years. D. 3.95 years. E. None of the options are correct.

Q: The duration of a par-value bond with a coupon rate of 7% and a remaining time to maturity of 3 years is A. 3 years. B. 2.71 years. C. 2.81 years. D. 2.91 years.

Q: The duration of a par-value bond with a coupon rate of 6.5% and a remaining time to maturity of 4 years is A. 3.65 years. B. 3.45 years. C. 3.85 years. D. 4.00 years.

Q: Consider a bond selling at par with modified duration of 22 years and convexity of 415. A 2% decrease in yield would cause the price to increase by 44% according to the duration rule. What would be the percentage price change according to the duration-with-convexity rule? A. 21.2% B. 25.4% C. 17.0% D. 52.3%

Q: Consider a bond selling at par with modified duration of 12 years and convexity of 265. A 1% decrease in yield would cause the price to increase by 12%, according to the duration rule. What would be the percentage price change according to the duration-with-convexity rule? A. 21.2% B. 25.4% C. 17.0% D. 13.3%

Q: A 7%, 14-year bond has a yield to maturity of 6% and duration of 7 years. If the market yield changes by 44 basis points, how much change will there be in the bond's price? A. 1.85% B. 2.91% C. 3.27% D. 6.44%

Q: A 9%, 16-year bond has a yield to maturity of 11% and duration of 9.25 years. If the market yield changes by 32 basis points, how much change will there be in the bond's price? A. 1.85% B. 2.01% C. 2.67% D. 6.44%

Q: A 6%, 30-year corporate bond was recently being priced to yield 8%. The Macaulay duration for the bond is 8.4 years. Given this information, the bond's modified duration would be A. 8.05. B. 9.44. C. 9.27. D. 7.78.

Q: A 10%, 30-year corporate bond was recently being priced to yield 12%. The Macaulay duration for the bond is 11.3 years. Given this information, the bond's modified duration would be A. 8.05. B. 10.09. C. 9.27. D. 11.22.

Q: Which of the following bonds has the longest duration? A. A 12-year maturity, 0% coupon bond. B. A 12-year maturity, 8% coupon bond. C. A 4-year maturity, 8% coupon bond. D. A 4-year maturity, 0% coupon bond. E. Cannot tell from the information given

Q: Which of the following bonds has the longest duration? A. A 15-year maturity, 0% coupon bond. B. A 15-year maturity, 9% coupon bond. C. A 20-year maturity, 9% coupon bond. D. A 20-year maturity, 0% coupon bond. E. Cannot tell from the information given

Q: Par-value-bond GE has a modified duration of 11. Which one of the following statements regarding the bond is true? A. If the market yield increases by 1%, the bond's price will decrease by $55. B. If the market yield increases by 1%, the bond's price will increase by $55. C. If the market yield increases by 1%, the bond's price will decrease by $110. D. If the market yield increases by 1%, the bond's price will increase by $110.

Q: Par-value-bond F has a modified duration of 9. Which one of the following statements regarding the bond is true? A. If the market yield increases by 1%, the bond's price will decrease by $90. B. If the market yield increases by 1%, the bond's price will increase by $90. C. If the market yield increases by 1%, the bond's price will decrease by $60. D. If the market yield decreases by 1%, the bond's price will increase by $60.

Q: The duration of a perpetuity with a yield of 6% is A. 13.50 years. B. 12.11 years. C. 17.67 years. D. Cannot be determined

Q: The duration of a perpetuity with a yield of 10% is A. 13.50 years. B. 11 years. C. 6.66 years. D. Cannot be determined

Q: The duration of a 20-year zero-coupon bond is A. equal to 20. B. larger than 20. C. smaller than 20. D. equal to that of a 20-year 10% coupon bond.

Q: The duration of a 15-year zero-coupon bond is A. smaller than 15. B. larger than 15. C. equal to 15. D. equal to that of a 15-year 10% coupon bond. E. None of the options are correct.

Q: Holding other factors constant, which one of the following bonds has the smallest price volatility? A. 20-year, 0% coupon bond B. 20-year, 6% coupon bond C. 20 year, 7% coupon bond D. 20-year, 9% coupon bond E. Cannot tell from the information given

Q: Holding other factors constant, which one of the following bonds has the smallest price volatility? A. 7-year, 0% coupon bond B. 7-year, 12% coupon bond C. 7 year, 14% coupon bond D. 7-year, 10% coupon bond E. Cannot tell from the information given

Q: 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 an 8% coupon rate. 2) A zero-coupon bond, E, with a 2 year to maturity and an 8% yield to maturity. A. Bond D because of the higher yield to maturity B. Bond E because of the longer duration C. Bond D because of the longer time to maturity D. Both have the same sensitivity because both have the same yield to maturity.

Q: 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. A. Bond A because of the higher yield to maturity B. Bond A because of the longer time to maturity C. Bond B because of the longer duration D. Both have the same sensitivity because both have the same yield to maturity. E. None of the options are correct.

Q: 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 false about the durations of these bonds? A. The duration of the higher coupon bond will be higher. B. The duration of the lower coupon bond will be higher. C. The duration of the higher coupon bond will equal the duration of the lower coupon bond. D. There is no consistent statement that can be made about the durations of the bonds. E. The duration of the higher coupon bond will be higher, and the duration of the higher coupon bond will equal the duration of the lower coupon bond.

Q: 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? A. The duration of the higher coupon bond will be higher. B. The duration of the lower coupon bond will be higher. C. The duration of the higher coupon bond will equal the duration of the lower coupon bond. D. There is no consistent statement that can be made about the durations of the bonds. E. The bond's durations cannot be determined without knowing the prices of the bonds.

Q: 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. IV) it is a good predictor of interest-rate changes. A. I and II B. I and III C. III and IV D. I, II, and III E. I, II, III, and IV

Q: According to the duration concept, A. only coupon payments matter. B. only maturity value matters. C. the coupon payments made prior to maturity make the effective maturity of the bond greater than its actual time to maturity. D. the coupon payments made prior to maturity make the effective maturity of the bond less than its actual time to maturity. E. coupon rates don't matter.

Q: Which of the following researchers have contributed significantly to bond portfolio management theory? I) Sidney Homer II) Harry Markowitz III) Burton Malkiel IV) Martin Liebowitz V) Frederick Macaulay A. I and II B. III and V C. III, IV, and V D. I, III, IV, and V E. I, II, III, IV, and V

Q: Which of the following are false 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. III) Interest-rate risk is correlated with the bond's coupon rate. 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. A. I B. III C. I, II, and IV D. II, III, and IV E. I, II, III, and IV

Q: 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. III) Interest-rate risk is correlated with the bond's coupon rate. 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. A. I and II B. I and III C. I, II, and IV D. II, III, and IV E. I, II, III, and IV

Q: Interest-rate risk is important to A. active bond portfolio managers. B. passive bond portfolio managers. C. both active and passive bond portfolio managers. D. neither active nor passive bond portfolio managers. E. obsessive bond portfolio managers.

Q: An analyst who selects a particular holding period and predicts the yield curve at the end of that holding period is engaging in A. a rate anticipation swap. B. immunization. C. horizon analysis. D. an intermarket spread swap. E. None of the options are correct.

Q: A rate anticipation swap is an exchange of bonds undertaken to A. shift portfolio duration in response to an anticipated change in interest rates. B. shift between corporate and government bonds when the yield spread is out of line with historical values. C. profit from apparent mispricing between two bonds. D. change the credit risk of the portfolio. E. increase return by shifting into higher yield bonds.

Q: A substitution swap is an exchange of bonds undertaken to A. change the credit risk of a portfolio. B. extend the duration of a portfolio. C. reduce the duration of a portfolio. D. profit from apparent mispricing between two bonds. E. adjust for differences in the yield spread.

Q: Consider a bond selling at par with modified duration of 10.6 years and convexity of 210. A 2% 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? A. 21.2% B. 25.4% C. 17.0% D. 10.6%

Q: The curvature of the price yield curve for a given bond is referred to as the bond's A. modified duration. B. immunization. C. sensitivity. D. convexity. E. tangency.

Q: Immunization through duration matching of assets and liabilities may be ineffective or inappropriate because A. conventional duration strategies assume a flat yield curve. B. duration matching can only immunize portfolios from parallel shifts in the yield curve. C. immunization only protects the nominal value of terminal liabilities and does not allow for inflation adjustment. D conventional duration strategies assume a flat yield curve, and immunization only protects the nominal value . of terminal liabilities and does not allow for inflation adjustment. All of the options are correct. All of the options are correct statements about the limitations of immunization through duration matching. Gradable: automatic

Q: Cash flow matching on a multiperiod basis is referred to as A. immunization. B. contingent immunization. C. dedication. D. duration matching. E. rebalancing.

Q: If a bond portfolio manager believes I) in market efficiency, he or she is likely to be a passive portfolio manager. II) that he or she can accurately predict interest-rate changes, he or she is likely to be an active portfolio manager. III) that he or she can identify bond-market anomalies, he or she is likely to be a passive portfolio manager. A. I only B. II only C. III only D. I and II E. I, II, and III

Q: Some of the problems with immunization are A. duration assumes that the yield curve is flat. B. duration assumes that if shifts in the yield curve occur, these shifts are parallel. C. immunization is valid for one interest-rate change only. D. durations and horizon dates change by the same amounts with the passage of time. E. immunization is valid for one interest-rate change only, duration assumes that the yield curve is flat, and that if shifts in the yield curve occur, these shifts are parallel.

Q: Immunization is not a strictly passive strategy because A. it requires choosing an asset portfolio that matches an index. B. there is likely to be a gap between the values of assets and liabilities in most portfolios. C. it requires frequent rebalancing as maturities and interest rates change. D. durations of assets and liabilities fall at the same rate. E. None of the options are correct.

Q: The duration of a bond normally increases with an increase in A. term to maturity. B. yield to maturity. C. coupon rate. D. All of the options are correct. E. None of the options are correct.

Q: One way that banks can reduce the duration of their asset portfolios is through the use of A. fixed-rate mortgages. B. adjustable-rate mortgages. C. certificates of deposit. D. short-term borrowing.

Q: 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? A. 1.83% B. 2.01% C. 3.27% D. 6.44%

Q: 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 A. 8.05. B. 9.44. C. 9.27. D. 11.22. E. None of the options are correct.

Q: When interest rates decline, the duration of a 10-year bond selling at a premium A. increases. B. decreases. C. remains the same. D. increases at first, then declines. E. decreases at first, then increases.

Q: Identify the bond that has the longest duration (no calculations necessary). A. 20-year maturity with an 8% coupon B. 20-year maturity with a 12% coupon C. 20-year maturity with a 0% coupon D. 10-year maturity with a 15% coupon E. 12-year maturity with a 12% coupon

Q: Duration A. assesses the time element of bonds in terms of both coupon and term to maturity. B. allows structuring a portfolio to avoid interest-rate risk. C. is a direct comparison between bond issues with different levels of risk. D. 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. E. assesses the time element of bonds in terms of both coupon and term to maturity and is a direct comparison between bond issues with different levels of risk.

Q: Duration measures A. weighted-average time until a bond's half-life. B. weighted-average time until cash flow payment. C. the time required to make excessive profit from the investment. D. weighted-average time until a bond's half-life and the time required to make excessive profit from the investment. E. weighted-average time until cash flow payment and the time required to make excessive profit from the

Q: 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. D. All of the options are true.

Q: The duration of a coupon bond A. does not change after the bond is issued. B. can accurately predict the price change of the bond for any interest-rate change. C. will decrease as the yield to maturity decreases. D. All of the options are true. E. None of the options are true.

Q: The two components of interest-rate risk are A. price risk and default risk. B. reinvestment risk and systematic risk. C. call risk and price risk. D. price risk and reinvestment risk. E. None of the options are correct.

Q: Which one of the following statements is true concerning the duration of a perpetuity? A. The duration of a 15% yield perpetuity that pays $100 annually is longer than that of a 15% yield perpetuity that pays $200 annually. B. The duration of a 15% yield perpetuity that pays $100 annually is shorter than that of a 15% yield perpetuity that pays $200 annually. C. The duration of a 15% yield perpetuity that pays $100 annually is equal to that of a 15% yield perpetuity that pays $200 annually. D. The duration of a perpetuity cannot be calculated.

Q: 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? A. The bond with a duration of 6 years B. The bond with a duration of 5 years C. The bond with a duration of 2.7 years D. The bond with a duration of 5.15 years

Q: Which of the following bonds has the longest duration? A. An 8-year maturity, 0% coupon bond B. An 8-year maturity, 5% coupon bond C. A 10-year maturity, 5% coupon bond D. A 10-year maturity, 0% coupon bond E. Cannot tell from the information given

Q: Par-value bond XYZ has a modified duration of 6. Which one of the following statements regarding the bond is true? A. If the market yield increases by 1%, the bond's price will decrease by $60. B. If the market yield increases by 1%, the bond's price will increase by $50. C. If the market yield increases by 1%, the bond's price will decrease by $50. D. If the market yield increases by 1%, the bond's price will increase by $60.

Q: A seven-year par value bond has a coupon rate of 9% (paid annually) and a modified duration of A. 7 years. B. 5.49 years. C. 5.03 years. D. 4.87 years.

Q: The duration of a perpetuity with a yield of 8% is A. 13.50 years. B. 12.11 years. C. 6.66 years. D. Cannot be determined

Q: The duration of a par-value bond with a coupon rate of 8% (paid annually) and a remaining time to maturity of 5 years is A. 5 years. B. 5.4 years. C. 4.17 years. D. 4.31 years.