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Homework for Chapter 16

1. Passive bond portfolio managers assume the bond market is


(a) semi-strong form efficient. (b) inefficient. (c) strong form efficient.
(d) not correlated with the stock market.
2. The length of time until a bond will make its last payment is its
(a) coupon rate. (b) yield-to-maturity. (c) promised yield-to-maturity.
(d) term-to-maturity.
3. If a bonds price is above its par value, its coupon rate will be
(a) equal to its term-to-maturity.
(b) greater than its yield-to-maturity.
(c) equals its yield-to-maturity.
(d) greater than its term-to-maturity.
4. If a bonds market price decreases, its
(a) yield-to-maturity increases.
(c) yield-to-maturity decreases.

(b) coupon rate decreases.


(d) coupon rate decreases.

5. A pricing theorem for the bond market states that if a bonds yield does not change
over its life, then the size of its discount or premium will ___ as its life gets
shorter.
(a) increases. (b) slightly increase. (c) decrease. (d) stay the same.
6. A pricing theorem for the bond market states that if a bonds yield does not change
over its life, then the size of its discount or premium will ___ at an increasing rate
as its life gets shorter.
(a) slightly increase. (b) increase. (c) slightly decrease. (d). decrease
7. ___ is the tendency for the bond prices to change asymmetrically relative to yield
changes. (a) Immunization. (b) Concavity. (c) Convexity. (d) Rebalancing.
8. ___ is a measure of average maturity of the stream of payments associated with a
bond.
(a) Cash flow matching. (b) Pure yield pickup. (c) Contingent immunization.
(d) Duration.
9. Duration is a ___ of the lengths of time until remaining payments are made.
(a) weighted average. (b) moving average. (c) sensitivity measure.
(d) arithmetic average.
10.Holding maturity constant, a bonds duration is ___ when the coupon rate is lower.
(a) lower. (b) higher. (c) the same. (d) slightly higher.
11.Immunization is accomplished by calculating the duration of the promised outflows and
then investing in a portfolio of bonds that has a(n) ___ duration.
(a)longer. (b) shorter. (c) identical. (d) slightly shorter.
12.___ management of a bond portfolio is based on the belief that the bond market is not
perfectly efficient. (a) Passive. (b) Buy-and-Hold. (c) Dynamic. (d) Active.
13.Contingent immunization
(a) uses the immunization amount as a benchmark to see if the manager can continue to
actively manager.
(b) allows the manager to actively manage at all time.
(c) combines active and passive bond management at the same time.
(d) requires duration matching at all times.
14.The concepts of immunization and duration are limited by the assumption that the bonds
will
(a) default at some future date.
(b) not default or be called before maturity.
(c) not be callable bonds.
(d) have a realized yield that equals the coupon rate.

15.A 5 year, zero-coupon bond has a maturity of $1,000 and a present market price of
$713. Its duration in years is (a) 4.7. (b) 5. (c) 4.2. (d) 3.9.
16.A bond has a duration of 8 years and a present yield-to-maturity of 8%. If the yieldto-maturity rises to 10%, the approximate bond price change would be
(a) +7.9%. (b) 25%. (c) 14.8%. (d) 12.9%.
17.Positive convexity on a bond implies that
(a) price increase at a faster rate as yields drop, than they decrease as yield
increases.
(b) the direction of change in yield is directly related to change to price.
(c) price changes are the same for both increase and decrease in yields.
(d) price increase and decrease at a faster rate than the change in yield.
18.Which of the following statement about the Macaulay duration of a zero-coupon bond is
true? The Macaulay duration of a zero-coupon bond
(a) is equal to one-half the bonds maturity in years.
(b) is equal to the bonds maturity in years divided by its yield to maturity.
(c) cannot be calculated because of the lack of coupons.
(d) is equal to the bonds maturity in years.
19.A four-year $1,000 bond will pay $60 in interest at the end of each year. With a
yield-to-maturity of 8%, its present market price is $934. Its duration is
(a) 1.88 years. (b) 3.66 years. (c) 3.28 years. (d) 4.32 years.
20.A pension plan will have a cash outflow in 3 years. They can invest in 2 year bonds
with duration of 1.7 years and 4 year bonds with a duration of 3.5 years. To immunize
the portfolio, the proportion invested in the 4 year bonds should be
(a) 0.44. (b) 0.28. (c) 0.5. (d) 0.72.

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