1.

The duration of a bond is a function of the bond's

Select one:

a. All of these are correct.

b. coupon rate.

c. time to maturity.

d. yield to maturity.

e. None of these is correct.

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The correct answer is: All of these are correct.

Question 2

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10. The "modified duration" used by practitioners is equal to the Macaulay duration

Select one:

a. divided by (one minus the bond's yield to maturity).

b. times the change in interest rate.

c. None of these is correct

d. times (one plus the bond's yield to maturity).

e. divided by (one plus the bond's yield to maturity).

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The correct answer is: divided by (one plus the bond's yield to maturity).

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11. The "modified duration" used by practitioners is equal to ______ divided by (one plus the bond's
yield to maturity).

Select one:

a. yield to maturity

b. yield to call

c. None of these is correct.

d. current yield

e. the Macaulay duration

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The correct answer is: the Macaulay duration

Question 4

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12. Given the time to maturity, the duration of a zero-coupon bond is higher when the discount rate is

Select one:

a. None of these is correct.

b. The bond's duration is independent of the discount rate.

c. lower.

d. equal to the risk free rate.

e. higher.

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The correct answer is: The bond's duration is independent of the discount rate.

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13. The interest-rate risk of a bond is

Select one:

a. the risk that arises from the uncertainty of the bond's return caused by changes in interest rates.

b. the risk related to the possibility of bankruptcy of the bond's issuer.

c. the unsystematic risk caused by factors unique in the bond.

d. All of these are correct.

e. the risk related to the possibility of bankruptcy of the bond's issuer and the risk that arises from the
uncertainty of the bond's return caused by changes in interest rates.

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The correct answer is: the risk that arises from the uncertainty of the bond's return caused by changes
in interest rates.

Question 6

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14. Which of the following two bonds is more price sensitive to changes in interest rates? Bond 1 - A par
value bond, X, with a 5-year-to-maturity and a 10% coupon rate. Bond 2 - A zero-coupon bond, Y, with a
5-year-to-maturity and a 10% yield-to-maturity.

Select one:

a. Bond X because of the higher yield to maturity.

b. Bond Y because of the longer duration.

c. Bond X because of the longer time to maturity.

d. Both have the same sensitivity because both have the same yield to maturity.

e. None of these is correct.

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The correct answer is: Bond Y because of the longer duration.

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15. Holding other factors constant, which one of the following bonds has the smallest price volatility?

Select one:

a. 5-year, 10% coupon bond

b. 5-year, 0% coupon bond

c. Cannot tell from the information given.

d. 5-year, 12% coupon bond

e. 5 year, 14% coupon bond

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The correct answer is: 5 year, 14% coupon bond

Question 8

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16. Which of the following is not true?

Select one:

a. Given time to maturity and yield to maturity, the duration of a bond is higher when the coupon rate is
lower.

b. All of these are correct.

c. Holding other things constant, the duration of a bond increases with time to maturity.

d. Duration is a better measure of price sensitivity to interest rate changes than is time to maturity.

e. Given time to maturity, the duration of a zero-coupon decreases with yield to maturity.

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The correct answer is: Given time to maturity, the duration of a zero-coupon decreases with yield to
maturity.

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17. Which of the following is true?

Select one:

a. Given time to maturity and yield to maturity, the duration of a bond is higher when the coupon rate is
lower.

b. Holding other things constant, the duration of a bond decreases with time to maturity.

c. Duration is a better measure of price sensitivity to interest rate changes than is time to maturity.

d. Given time to maturity, the duration of a zero-coupon increases with yield to maturity.

e. Given time to maturity and yield to maturity, the duration of a bond is higher when the coupon rate
is lower, and duration is a better measure of price sensitivity to interest rate changes than is time to
maturity.

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The correct answer is: Given time to maturity and yield to maturity, the duration of a bond is higher
when the coupon rate is lower, and duration is a better measure of price sensitivity to interest rate
changes than is time to maturity.

Question 10

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18. The duration of a 5-year zero-coupon bond is

Select one:

a. None of these is correct.

b. equal to that of a 5-year 10% coupon bond.

c. larger than 5.

d. smaller than 5.

e. equal to 5.

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The correct answer is: equal to 5.

Question 11

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19. The basic purpose of immunization is to

Select one:

a. produce a zero net interest-rate risk.

b. eliminate default risk and produce a zero net interest-rate risk.

c. produce a zero net interest-rate risk and offset price and reinvestment risk.

d. offset price and reinvestment risk.

e. eliminate default risk.

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The correct answer is: produce a zero net interest-rate risk and offset price and reinvestment risk.

Question 12

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2. Ceteris paribus, the duration of a bond is positively correlated with the bond's

Select one:

a. coupon rate.

b. All of these are correct.

c. yield to maturity.

d. time to maturity.

e. None of these is correct.

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The correct answer is: time to maturity.

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20. The duration of a par value bond with a coupon rate of 8% and a remaining time to maturity of 5
years is

Select one:

a. 4.17 years.

b. 5.4 years.

c. 5 years.

d. 4.31 years.

e. None of these is correct.

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The correct answer is: 4.31 years.

Question 14

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21. The duration of a perpetuity with a yield of 8% is

Select one:

a. None of these is correct.

b. 12.11 years.

c. 6.66 years.

d. 13.50 years.

e. cannot be determined.

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The correct answer is: 13.50 years.

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22. A seven-year par value bond has a coupon rate of 9% and a modified duration of

Select one:

a. 5.03 years.

b. 7 years.

c. None of these is correct.

d. 5.49 years.

e. 4.87 years.

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The correct answer is: 5.03 years.

Question 16

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23. Par value bond XYZ has a modified duration of 6. Which one of the following statements regarding
the bond is true?

Select one:

a. If the market yield increases by 1% the bond's price will increase by $60.

b. None of these is correct.

c. If the market yield increases by 1% the bond's price will increase by $50.

d. If the market yield increases by 1% the bond's price will decrease by $50.

e. If the market yield increases by 1% the bond's price will decrease by $60.

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The correct answer is: If the market yield increases by 1% the bond's price will decrease by $60.
Question 17

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24. Which of the following bonds has the longest duration?

Select one:

a. An 8-year maturity, 5% coupon bond.

b. Cannot tell from the information given.

c. An 8-year maturity, 0% coupon bond.

d. A 10-year maturity, 5% coupon bond.

e. A 10-year maturity, 0% coupon bond.

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The correct answer is: A 10-year maturity, 0% coupon bond.

Question 18

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25. 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?

Select one:

a. The bond with a duration of 5 years.

b. The bond with a duration of 2.7 years.

c. The bond with a duration of 5.15 years.

d. The bond with a duration of 6 years.

e. None of these is correct.

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The correct answer is: The bond with a duration of 5.15 years.
Question 19

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26. Which one of the following statements is true concerning the duration of a perpetuity?

Select one:

a. The duration of a 15% yield perpetuity that pays $100 annually is shorter than that of a 15% yield
perpetuity that pays $200 annually.

b. The duration of a perpetuity cannot be calculated.

c. The duration of 15% yield perpetuity that pays $100 annually is longer than that of a 15% yield
perpetuity that pays $200 annually.

d. The duration of a 15% yield perpetuity that pays $100 annually is equal to that of 15% yield
perpetuity that pays $200 annually.

e. None of these is true.

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The correct answer is: The duration of a 15% yield perpetuity that pays $100 annually is equal to that of
15% yield perpetuity that pays $200 annually.

Question 20

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27. Which one of the following statements is false concerning the duration of a perpetuity?

Select one:

a. All of these are false.

b. The duration of 15% yield perpetuity that pays $100 annually is longer than that of a 15% yield
perpetuity that pays $200 annually.

c. The duration of a 15% yield perpetuity that pays $100 annually is shorter than that of a 15% yield
perpetuity that pays $200 annually.
d. The duration of a 15% yield perpetuity that pays $100 annually is equal to that of 15% yield
perpetuity that pays $200 annually.

e. The duration of 15% yield perpetuity that pays $100 annually is longer than that of a 15% yield
perpetuity that pays $200 annually, and the duration of a 15% yield perpetuity that pays $100 annually
is shorter than that of a 15% yield perpetuity that pays $200 annually.

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The correct answer is: The duration of 15% yield perpetuity that pays $100 annually is longer than that
of a 15% yield perpetuity that pays $200 annually, and the duration of a 15% yield perpetuity that pays
$100 annually is shorter than that of a 15% yield perpetuity that pays $200 annually.

Question 21

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28. The two components of interest-rate risk are

Select one:

a. reinvestment risk and systematic risk.

b. None of these is correct.

c. call risk and price risk.

d. price risk and default risk.

e. price risk and reinvestment risk.

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The correct answer is: price risk and reinvestment risk.

Question 22

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29. The duration of a coupon bond

Select one:
a. will decrease as the yield to maturity decreases.

b. None of these is correct.

c. can accurately predict the price change of the bond for any interest rate change.

d. does not change after the bond is issued.

e. All of these are correct.

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The correct answer is: None of these is correct.

Question 23

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3. Ceteris paribus, the duration of a bond is negatively correlated with the bond's

Select one:

a. yield to maturity.

b. coupon rate and yield to maturity.

c. coupon rate.

d. time to maturity.

e. None of these is correct.

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The correct answer is: coupon rate and yield to maturity.

Question 24

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30. Indexing of bond portfolios is difficult because

Select one:

a. All of these are correct.

c. None of these is correct.

d. the composition of bond indexes is constantly changing.

e. many bonds are thinly traded so it is difficult to purchase them at a fair market price.

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The correct answer is: All of these are correct.

Question 25

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31. You have an obligation to pay $1,488 in four years and 2 months. In which bond would you invest
your $1,000 to accumulate this amount, with relative certainty, even if the yield on the bond declines to
9.5% immediately after you purchase the bond?

Select one:

a. a 5-year; zero-coupon bond

b. a 6-year; 10% coupon par value bond

c. a 5-year; 10% coupon par value bond

d. None of these is correct.

e. a 4-year; 10% coupon par value bond

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The correct answer is: a 5-year; 10% coupon par value bond

Question 26

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32. Duration measures

Select one:
a. weighted average time until cash flow payment.

b. weighted average time until a bond's half-life and the time required to make excessive profit from
the investment.

c. weighted average time until a bond's half-life.

d. 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 investment.

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The correct answer is: weighted average time until cash flow payment.

Question 27

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33. Duration

Select one:

a. allows structuring a portfolio to avoid interest-rate risk.

b. 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.

c. assesses the time element of bonds in terms of both coupon and term to maturity.

d. 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.

e. is a direct comparison between bond issues with different levels of risk.

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The correct answer is: 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.

Question 28

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34. Identify the bond that has the longest duration (no calculations necessary).

Select one:

a. 20-year maturity with an 8% coupon.

b. 20-year maturity with a 12% coupon.

c. 12-year maturity with a 12% coupon.

d. 20-year maturity with a 0% coupon.

e. 10-year maturity with a 15% coupon.

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The correct answer is: 20-year maturity with a 0% coupon.

Question 29

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35. When interest rates decline, the duration of a 10-year bond selling at a premium

Select one:

a. decreases at first, then increases.

b. decreases.

c. remains the same.

d. increases.

e. increases at first, then declines.

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The correct answer is: increases.

Question 30

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36. 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 ________.

Select one:

a. 11.22

b. None of these is correct.

c. 9.44

d. 9.27

e. 8.05

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The correct answer is: 9.27

Question 31

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37. 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?

Select one:

a. 3.27%

b. 2.01%

c. 6.44%

d. 1.85%

e. None of these is correct.

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The correct answer is: 1.85%

Question 32

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38. One way that banks can reduce the duration of their asset portfolios is through the use of

Select one:

a. short-term borrowing.

b. fixed rate mortgages.

c. certificates of deposit.

d. adjustable rate mortgages.

e. None of these is correct.

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The correct answer is: adjustable rate mortgages.

Question 33

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39. The duration of a bond normally increases with an increase in

Select one:

a. None of these is correct.

b. term to maturity.

c. coupon rate.

d. All of these are correct.

e. yield to maturity.

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The correct answer is: term to maturity.

Question 34

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4. Holding other factors constant, the interest-rate risk of a coupon bond is higher when the bond's:

Select one:

a. None of these is correct.

b. current yield is higher.

c. term-to-maturity is lower.

d. yield to maturity is lower.

e. coupon rate is higher.

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The correct answer is: yield to maturity is lower.

Question 35

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40. Which one of the following is an incorrect statement concerning duration?

Select one:

a. The difference in duration is small between two bonds with different coupons each maturing in more
than 15 years.

b. The higher the yield to maturity, the greater the duration.

c. The duration is the same as term to maturity only in the case of zero-coupon bonds.

d. The higher the coupon, the shorter the duration.

e. All of the statements are correct.

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The correct answer is: The higher the yield to maturity, the greater the duration.

Question 36

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5. Holding other factors constant, the interest-rate risk of a coupon bond is higher when the bond's:

Select one:

a. yield to maturity is higher.

b. term-to-maturity is higher.

c. coupon rate is higher.

d. All of these are correct.

e. None of these is correct.

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The correct answer is: term-to-maturity is higher.

Question 37

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6. Holding other factors constant, the interest-rate risk of a coupon bond is higher when the bond's:

Select one:

a. None of these is correct.

b. term-to-maturity is lower and yield to maturity is higher.

c. coupon rate is lower.

d. yield to maturity is higher.

e. term-to-maturity is lower.

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The correct answer is: coupon rate is lower.

Question 38

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7. Holding other factors constant, the interest-rate risk of a coupon bond is lower when the bond's:
Select one:

a. term-to-maturity is lower and coupon rate is higher.

b. yield to maturity is lower.

c. All of these are correct.

d. term-to-maturity is lower.

e. coupon rate is higher.

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The correct answer is: term-to-maturity is lower and coupon rate is higher.

Question 39

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8. Holding other factors constant, the interest-rate risk of a coupon bond is lower when the bond's:

Select one:

a. yield to maturity is higher.

b. term-to-maturity is lower.

c. coupon rate is higher.

d. term-to-maturity is lower and coupon rate is higher.

e. All of these are correct.

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The correct answer is: All of these are correct.

Question 40

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9. Holding other factors constant, the interest-rate risk of a coupon bond is lower when the bond's:

Select one:
a. All of these are correct.

b. term-to-maturity is higher.

c. coupon rate is lower.

d. yield to maturity is higher.

e. term-to-maturity is higher and coupon rate is lower.

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The correct answer is: yield to maturity is higher