A pension fund has an average duration of its liabilities equal to 15 years. The fund is looking at 5-year maturity zero-coupon bonds and 4% yield perpetuities to immunize its interest rate risk. How much of its portfolio should it allocate to the zero-coupon bonds to immunize if there are no other assets funding the plan?
A. 52%
B. 48%
C. 33%
D. 25%
Answer: A
Investment Finance
- Convexity of a bond is ___________.
- You have a 15-year maturity, 4% coupon, 6% yield bond with duration of 10.5 years 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 _________.
- You have a 25-year maturity, 10% coupon, 10% yield bond with a duration of 10 years and a convexity of 135.5. If the interest rate were to fall 125 basis points, your predicted new price for the bond (including convexity) is _________.
- Convexity implies that duration predictions:
- Advantages of cash flow matching and dedicated strategies include:
- Immunization of coupon-paying bonds does not imply that the portfolio manager is inactive because:
- You have an investment horizon of 6 years. You choose to hold a bond with a duration of 6 years and continue to match your investment horizon and duration throughout your holding period. Your realized rate of return will be the same as the promised yield on the bond if:
- What strategy might an insurance company employ to ensure that it will be able to meet the obligations of annuity holders?
- You have an investment horizon of 6 years. You choose to hold a bond with a duration of 4 years. Your realized rate of return will be larger than the promised yield on the bond if ___________________.
- Market economists all predict a rise in interest rates. An astute bond manager wishing to maximize her capital gain might employ which strategy?
- A bond portfolio manager notices a hump in the yield curve at the 5-year point. How might a bond manager take advantage of this event?
- You have an investment horizon of 6 years. You choose to hold a bond with a duration of 10 years. Your realized rate of return will be larger than the promised yield on the bond if ___________________.
- The duration is independent of the coupon rate only for which one of the following?
- Which one of the following statements correctly describes the weights used in the Macaulay duration calculation? The weight in year t is equal to ____________.
- If an investment returns a higher percentage of your money back sooner, it will ______.
- You have an investment that in today's dollars returns 15% of your investment in year 1, 12% in year 2, 9% in year 3, and the remainder in year 4. What is the duration of this investment?
- A zero-coupon bond is selling at a deep discount price of $430. It matures in 13 years. If the yield to maturity of the bond is 6.7%, what is the duration of the bond?
- When bonds sell above par, what is the relationship of price sensitivity to rising interest rates?
- A 20-year maturity corporate bond has a 6.5% coupon rate (the coupons are paid annually). The bond currently sells for $925.50. A bond market analyst forecasts that in 5 years yields on such bonds will be at 7%. You believe that you will be able to reinvest the coupons earned over the next 5 years at a 6% rate of return. What is your expected annual compound rate of return if you plan on selling the bond in 5 years?
- As compared with equivalent maturity bonds selling at par, deep discount bonds will have ________.
- If you choose a zero-coupon bond with a maturity that matches your investment horizon, which of the following statements is (are) correct?
- An investor who expects declining interest rates would maximize her capital gain by purchasing a bond that has a _________ coupon and a _________ term to maturity.
- Which of the following set of conditions will result in a bond with the greatest price volatility?
- To create a portfolio with a duration of 4 years using a 5-year zero-coupon bond and a 3-year 8% annual coupon bond with a yield to maturity of 10%, one would have to invest ________ of the portfolio value in the zero-coupon bond.
- An 8%, 30-year bond has a yield to maturity of 10% and a modified duration of 8 years. If the market yield drops by 15 basis points, there will be a __________ in the bond's price.