Investment Finance
Showing posts with label Investment Finance. Show all posts
Showing posts with label Investment Finance. Show all posts

Convexity of a bond is ___________.

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








Answer: B

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 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 _________. 




A. $638.85

B. $642.54

C. $666.88

D. $705.03








Answer: C

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 _________.

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 _________. 




A. $1,098.45

B. $1,104.56

C. $1,113.41

D. $1,124.22








Answer: D

Convexity implies that duration predictions:

Convexity implies that duration predictions:


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 III only

B. II and IV only

C. I and IV only

D. II and III only






Answer: C

Advantages of cash flow matching and dedicated strategies include:

Advantages of cash flow matching and dedicated strategies include:


I. Once the cash flows are matched, there is no need for rebalancing.
II. Cash flow matching typically earns a higher rate of return than active bond portfolio management.
III. Financial institutions' liabilities often exceed the maturity of available bonds, making cash matching even more desirable.


A. I only

B. II only

C. I and III only

D. I, II, and III




Answer: A

Immunization of coupon-paying bonds does not imply that the portfolio manager is inactive because:

Immunization of coupon-paying bonds does not imply that the portfolio manager is inactive because:


I. The portfolio must be rebalanced every time interest rates change.
II. The portfolio must be rebalanced over time even if interest rates don't change.
III. Convexity implies duration-based immunization strategies don't work.


A. I only

B. I and II only

C. II only

D. I, II, and III






Answer: B

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:

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:


I. Interest rates increase.
II. Interest rates stay the same.
III. Interest rates fall.



A. I only

B. II only

C. I and II only

D. I, II, and III







Answer: D

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 ___________________.

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 ___________________. 




A. interest rates increase

B. interest rates stay the same

C. interest rates fall

D. The answer cannot be determined from the information given.







Answer: A

Market economists all predict a rise in interest rates. An astute bond manager wishing to maximize her capital gain might employ which strategy?

Market economists all predict a rise in interest rates. An astute bond manager wishing to maximize her capital gain might employ which strategy? 




A. Switch from low-duration to high-duration bonds.

B. Switch from high-duration to low-duration bonds.

C. Switch from high-grade to low-grade bonds.

D. Switch from low-coupon to high-coupon bonds.









Answer: B

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?

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? 




A. Buy the 5-year bonds, and short the surrounding maturity bonds.

B. Buy the 5-year bonds, and buy the surrounding maturity bonds.

C. Short the 5-year bonds, and short the surrounding maturity bonds.

D. Short the 5-year bonds, and buy the surrounding maturity bonds.









Answer: A

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 ___________________.

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 ___________________. 






A. interest rates increase

B. interest rates stay the same

C. interest rates fall

D. The answer cannot be determined from the information given.






Answer: C

Which one of the following statements correctly describes the weights used in the Macaulay duration calculation? The weight in year t is equal to ____________.

Which one of the following statements correctly describes the weights used in the Macaulay duration calculation? The weight in year t is equal to ____________. 




A. the dollar amount of the investment received in year t

B. the percentage of the future value of the investment received in year t

C. the present value of the dollar amount of the investment received in year t

D. the percentage of the total present value of the investment received in year t








Answer: D

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?

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? 




A. 7.37%

B. 7.56%

C. 8.12%

D. 8.54%







Answer: A
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