Concept that is useful in assessing a bond

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1. Duration is a concept that is useful in assessing a bond's ________.

A) credit risk

B) liquidity risk

C) price volatility

D) convexity risk

2. Duration measures

A) the effective maturity of a bond.

B) the weighted average of the time until each payment is received, with weights proportional to the present value of the payment.

C) the average maturity of the bond's promised cash flows.

D) all of the options.

3. The duration of a 5-year zero-coupon bond is ________ years.

A) 4.5

B) 5

C) 5.5

D) 3.5

4. 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

5. A perpetuity pays $100 each and every year forever. The duration of this perpetuity will be ________ if its yield is 9%. [Use the formula for perpetuity from the slides]

A) 7

B) 9

C) 9.39

D) 12.11

6. A $1000 par value bond pays 8% annual coupon and it matures in 5 years. Its yield to maturity is currently 10%. The YTM changes to 14%. What will be the effect of this YTM change on the duration of the bond? [You can use excel to calculate the duration.]

A) Duration will be increased by .06 years

B) Duration will be increased by .04 years

C) Duration will be decreased by .04 years

D) Duration will be decreased by .06 years

E) There will be no effect on the duration

7. All other things equal (YTM = 10%), which of the following has the longest duration and 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

8. ________ is an important characteristic of the relationship between bond prices and yields.

A) Convexity

B) Concavity

C) Complexity

D) Linearity

9. 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

10. 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

11. 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

12. All other things equal, a bond's duration (and also price volatility) 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

13. 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

14. Which of the following statements is false?

A) Bond prices and yields are inversely related.

B) An increase in a bond's YTM results in a smaller price change than a decrease in yield of equal magnitude.

C) Prices of short-term bonds tend to be more sensitive to interest rate changes than prices of long-term bonds.

D) Interest rate risk is inversely related to the bond's coupon rate.

15. Bond portfolio immunization techniques balance ________ and ________ risk.

A) price; reinvestment

B) price; liquidity

C) credit; reinvestment

D) credit; liquidity

16. 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

17. 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

18. 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

19. A ________ investment strategy takes market prices of securities as set fairly.

A) passive

B) active

C) interest rate focused

D) convex

20. 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

Reference no: EM132487847

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