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Description Chapter 16 Managing Bond Portfolios Multiple Choice Questions 1. The duration of a bond is a function of the bond's A) coupon rate. B) yield to maturity. C) time to maturity. D) all of the above. E) none of the above. Answer: D Difficulty: Easy Rationale: Duration is calculated by discounting the bond's cash flows at the bond's yield to maturity and, except for zero-coupon bonds, is always less than time to maturity. 2. Ceteris paribus, the duration of a bond is positively correlated with the bo
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Chapter 16 Managing Bond Portfolios 360 Multiple Choice Questions 1. The duration of a bond is a function of the bond'sA) coupon rate.B) yield to maturity.C) time to maturity.D) all of the above.E) none of the above.Answer: D Difficulty: EasyRationale: Duration is calculated by discounting the bond's cash flows at the bond'syield to maturity and, except for zero-coupon bonds, is always less than time tomaturity.2. Ceteris paribus, the duration of a bond is positively correlated with the bond'sA) time to maturity.B) coupon rate.C) yield to maturity.D) all of the above.E) none of the above.Answer: A Difficulty: ModerateRationale: Duration is negatively correlated with coupon rate and yield to maturity.3. Holding other factors constant, the interestrate risk of a coupon bond is higher whenthe bond's:A) term-to-maturity is lower.B) coupon rate is higher.C) yield to maturity is lower.D) current yield is higher.E) none of the above.Answer: C Difficulty: ModerateRationale: The longer the maturity, the greater the interest-rate risk. The lower thecoupon rate, the greater the interest-rate risk. The lower the yield to maturity, thegreater the interest-rate risk. These concepts are reflected in the duration rules;duration is a measure of bond price sensitivity to interest rate changes (interest-raterisk). Chapter 16 Managing Bond Portfolios 361 4. The modified duration used by practitioners is equal to the Macaulay durationA) times the change in interest rate.B) times (one plus the bond's yield to maturity).C) divided by (one minus the bond's yield to maturity).D) divided by (one plus the bond's yield to maturity).E) none of the above.Answer: D Difficulty: ModerateRationale: D* = D/(1 + y)5. Given the time to maturity, the duration of a zero-coupon bond is higher when thediscount rate isA) higher.B) lower.C) equal to the risk free rate.D) The bond's duration is independent of the discount rate.E) none of the above.Answer: D Difficulty: ModerateRationale: The duration of a zero-coupon bond is equal to the maturity of the bond.6. The interest-rate risk of a bond isA) the risk related to the possibility of bankruptcy of the bond's issuer.B) the risk that arises from the uncertainty of the bond's return caused by changes ininterest rates.C) the unsystematic risk caused by factors unique in the bond.D) A and B above.E) A, B, and C above.Answer: B Difficulty: ModerateRationale: Changing interest rates change the bond's return, both in terms of the priceof the bond and the reinvestment of coupon payments. Chapter 16 Managing Bond Portfolios 362 7. Which of the following two bonds is more price sensitive to changes in interest rates?1) A par value bond, X, with a 5-yearto-maturity and a 10% coupon rate.2) A zero-coupon bond, Y, with a 5-year-to-maturity and a 10% yield-to-maturity.A) Bond X because of the higher yield to maturity.B) Bond X because of the longer time to maturity.C) Bond Y because of the longer duration.D) Both have the same sensitivity because both have the same yield to maturity.E) None of the aboveAnswer: C Difficulty: ModerateRationale: Duration is the best measure of bond price sensitivity; the longer theduration the higher the price sensitivity.8. Holding other factors constant, which one of the following bonds has the smallest price volatility?A) 5-year, 0% coupon bondB) 5-year, 12% coupon bondC) 5 year, Web 2.0 (/search/web+2+0) Diabetes Mellitus Type 2 (/search/diabetes+mellitus+type+2) 14% coupon bondD) 5-year, 10% coupon bondE) Cannot tell from the information given.Answer: C Difficulty: ModerateRationale: Duration (and thus price volatility) is lower when the coupon rates Interleukin 2 (/search/interleukin+2) 2 D Computer Graphics (/search/2+d+computer+graphics) arehigher.9. Which of the following is not true?A) Holding other things constant, the duration of a bond increases with time tomaturity.B) Given time to maturity, the duration of a zero-coupon Bcl 2 (/search/bcl+2) V 2 Rocket (/search/v+2+rocket) decreases with yield tomaturity.C) Given time to maturity and yield to maturity, the duration of a Lockheed U 2 (/search/lockheed+u+2) bond is higher when the coupon rate is lower.D) Duration is a better measure of price sensitivity to interest rate changes than istime to maturity.E) All of the above.Answer: B Difficulty: ModerateRationale: The duration of a zero-coupon bond is equal to time to maturity, and isindependent of yield to maturity. Chapter 16 Managing Bond Portfolios 363 10. The duration of a 5-year zero-coupon bond isA) smaller than 5.B) larger than 5.C) equal to 5.D) equal to that of a 5-year 10% coupon bond.E) none of the above.Answer: C Difficulty: EasyRationale: Duration of a zero-coupon bond equals the bond's maturity.11. The basic purpose of immunization is toA) eliminate default risk.B) produce a zero net interest-rate risk.C) offset price and reinvestment risk.D) A and B.E) B and C.Answer: E Difficulty: ModerateRationale: When a portfolio is immunized, price risk and reinvestment risk exactlyoffset each other resulting in zero net interestrate risk.12. The duration of a par value bond with a coupon rate of 8% and a remaining time tomaturity of 5 years isA) 5 years.B) 5.4 years.C) 4.17 years.D) 4.31 years.E) none of the above.Answer: D Difficulty: ModerateRationale:Calculations are shown below.Yr. CF PV of CF@08% Weight * Yr.1 $80 $80/1.08 = $74.07 0.0741 * 1 = 0.07412 $80 $80/(1.08) 2 = $68.59 0.0686 * 2 = 0.13723 $80 $80/(1.08) 3 = $63.51 0.0635 * 3 = 0.19054 $80 $80/(1.08) 4 = $58.80 0.0588 * 4 = 0.23525 $1,080 $1,080/(1.08) 5 = $735.03 0.7350 * 5 = 3.6750Sum $1000.00 4.3120 CONTROLLING BUCKTHORN WITH SHEEP (/controlling-buckthornyrs. (duration)
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