Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.

1) When bonds sell above par, what is the relationship of price sensitivity to rising interest 1)
rates?
A) Price volatility increases at a decreasing rate.
D
B) Price volatility increases at an increasing rate. For bonds selling above par, as IR rise, price
C) Price volatility decreases at an increasing rate. decrease but the sensitivity to further increases in rates
D) Price volatility decreases at a decreasing rate. declines
volatility decreases at decreasing rate.

2) As a result of bond convexity, an increase in a bond's price when yield to maturity falls 2)
is ________ the price decrease resulting from an increase in yield of equal magnitude.
A) The answer cannot be determined from the information given.
B) equivalent to D
Due to convexity, the price increase when rates fall is larger than the price decrease
C) smaller than when rates rise by the same amount
D) greater than

3) All else equal, bond price volatility is greater for ________. D 3)

A) shorter maturity B) lower default risk
C) higher coupon rates D) lower coupon rates
Bond with low coupon rate has longer duration ==> more volatility
4) Which of the following set of conditions will result in a bond with the greatest price 4)
volatility? A - file in
A) a low coupon and a long maturity B) a low coupon and a short maturity
C) a high coupon and a short maturity D) a high coupon and a long maturity

5) At a 4% yield, the duration of a perpetuity that pays $100 once a year forever is 5)
________. (1+y)/y - y is yield to maturity ==> (1+4%)/4% = 26 ==> B
A) 3.85 years B) 26 years C) 100 years D) 4 years

6) You have an investment horizon of 6 years. You choose to hold a bond with a duration 6)
of 10 years. Your realized rate of return will be larger than the promised yield on the
bond if ________.
A) interest rates fall
B) The answer cannot be determined from the information given.
C) interest rates increase
D) interest rates stay the same

A
Since bond has duration > horizon, the capital gain from price increase will more than offset the lost from
reinvesting coupons at lower rate.

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 7) A bond has a current price of $1,030. The yield on the bond is 8%. If the yield changes 7)
from 8% to 8.1%, the price of the bond will go down to $1,025.88. The modified
4 - file in
duration of this bond is ________.
A) 3.75 B) 3.25 C) 4 D) 4.32

B
8) All other things equal, a bond's duration is ________. 8)
A) the same when the coupon rate is higher The bonds pays more cash earlier through bigger coupon
B) lower when the coupon rate is higher payments
C) indeterminable when the coupon rate is high More weight is placed on early payments
==> The average time to receive cash flows decreases
D) higher when the coupon rate is higher ==> Duration is shorter

9) Steel Pier Company has issued bonds that pay semiannually with the following 9)
characteristics: D* = D/ (1+y) D* = 6.76/(1+10%) = 6.15 years
D = Macaulay Duration

B
The modified duration for the Steel Pier bond is ________.
A) 6.49 years B) 6.15 years C) 5.95 years D) 9.09 years

10) Which one of the following statements correctly describes the weights used in the 10)
D
Macaulay duration calculation? The weight in year t is equal to ________.
A) the present value of the dollar amount of the investment received in year t
B) the dollar amount of the investment received in year t
C) the percentage of the future value of the investment received in year t
D) the percentage of the total present value of the investment received in year t
Wt in Macaulay Duration formula is evidence
11) Duration facilitates the comparison of bonds with differing ________. 11)
A) default risks B) conversion ratios
C) yields to maturity D) maturities
D

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12) Steel Pier Company has issued bonds that pay semiannually with the following 12)
characteristics:
trong file NLDT question mid 2

If the maturity of the bond was less than 10 years, the modified duration would be
________ compared to the original modified duration.
A) unchanged
B) larger
B
C) smaller
D) The answer cannot be determined from the information given.

13) Compute the duration of an 8%, 5-year corporate bond with a par value of $1,000 and 13)
yield to maturity of 10%. A
A) 4.28 B) 5 C) 3.92 D) 4.55
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14) All other things equal (YTM = 10%), which of the following has the longest duration? B 14)
A) a 10-year zero-coupon bond D = 10y B) a 30-year bond with a 10% coupon
C) a 20-year bond with a 7% coupon D) a 20-year bond with a 9% coupon

D
15) ________ is an important characteristic of the relationship between bond prices and 15)
yields.
A) Complexity B) Concavity C) Linearity D) Convexity

16) Because of convexity, when interest rates change, the actual bond price will ________
A 16)
the bond price predicted by duration.
A) always be higher than B) sometimes be lower than
C) always be lower than D) sometimes be higher than

17) Convexity implies that duration predictions: 17)

I. Underestimate the percentage increase in bond price when the yield falls.
II. Underestimate the percentage decrease in bond price when the yield rises.
III. Overestimate the percentage increase in bond price when the yield falls.
IV. Overestimate the percentage decrease in bond price when the yield rises.
A) I and IV only B) II and III only
C
C) I and III only D) II and IV only

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 B
18) Convexity of a bond is ________. 18)
A) a measure of bond duration
B) the rate of change of the slope of the price-yield curve divided by the bond price
C) the same as horizon analysis
D) none of these options

19) You have a 15-year maturity, 4% coupon, 6% yield bond with duration of 10.5 years 19)
and a convexity of 128.75. The bond is currently priced at $805.76. If the interest rate
were to increase 200 basis points, your predicted new price for the bond (including
convexity) is ________.
C - in file
A) $705.03 B) $642.54 C) $666.88 D) $638.85

20) A pension fund must pay out $1 million next year, $2 million the following year, and 20)
then $3 million the year after that. If the discount rate is 8%, what is the duration of this
set of payments? D - in file
A) 2.53 years B) 2.15 years C) 2 years D) 2.29 years