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Exam 11: Managing Bond Portfolios

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Question 41

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You find a 5 year AA Xerox bond priced to yield 6%.You find a similar risk 5 year Canon bond priced to yield 6.5%.To take advantage of this you should do which of the following?

A) Short the Canon bond and buy the Xerox bond
B) Buy the Canon bond and short the Xerox bond
C) Short both the Canon bond and the Xerox bond
D) Buy both the Canon bond and the Xerox bond

E) A) and C)
F) All of the above

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Question 42

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Moving to higher yield bonds,usually with longer maturities is called ________.

A) a substitution swap
B) an intermarket spread swap
C) rate anticipation swap
D) pure yield pickup swap

E) All of the above
F) B) and C)

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Question 43

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A bond with a 9-year duration is worth $1,080.00 and its yield to maturity is 8%.If the yield to maturity falls to 7.84%,you would predict that the new value of the bond will be _________.

All other things equal,which of the following has the shortest duration?

A bond swap made in response to forecasts of interest rate changes is called ______.

Bond prices are _______ sensitive to changes in yield when the bond is selling at a _______ initial yield to maturity.

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 interest rate were to increase 200 basis points your predicted new price for the bond (including convexity) is _________.

______________ is an important characteristic of the relationship between bond prices and yields.

You own a bond that has a duration of 6 years.Interest rates are currently 7% but you believe the Fed is about to increase interest rates by 25 basis points.Your predicted price change on this bond is ________.

A bank has $50 million in assets,$47 million in liabilities and $3 million in shareholders' equity.If the duration of its liabilities are 1.3 and the bank wants to immunize its net worth against interest rate risk and thus set the duration of equity equal to zero,it should select assets with an average duration of _________.

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 has a current price of $1,030.The yield on the bond is 8.00%.If the yield changes from 8.00% to 8.10%,the price of the bond will go down to $1,025.88.The modified duration of this bond is _________.

In a pure yield pickup swap,________ bonds are exchanged for _________ bonds.

A zero coupon bond is selling at a deep discount price of $430.00.It matures in 13 years.If the yield to maturity of the bond is 6.7%,what is the duration of the bond?

Steel Pier Company has issued bonds that pay semiannually with the following characteristics: -If the yield to maturity decreases to 8.045% the expected percentage change in the price of the bond using Macauley's duration would be ____,while the expected percentage change in the price of the bond using modified duration would be ____.

Steel Pier Company has issued bonds that pay semiannually with the following characteristics: -If the bond's coupon was smaller than 10%,the modified duration would be _____ compared to the original modified duration.

You have an investment that in today's dollars returns 15% of your investment in year 1,12% in year two,9% in year 3 and the remainder in year 4.What is the duration of this investment?

Pension fund managers can generally best bring about an effective reduction in their interest rate risk by holding ___________________.

The pioneer of the duration concept was _________.

A pension fund must pay out $1 million next year,$2 million the following year and then $3 million the year after that.If the discount rate is 8% what is the duration of this set of payments?