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Exam 10: Managing Bond Portfolios

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Question 1

Multiple Choice

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A forecast of bond returns based largely on a prediction of the yield curve at the end of the investment horizon is called a ________.

A) contingent immunisation
B) dedication strategy
C) duration analysis
D) horizon analysis

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

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Question 2

Multiple Choice

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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 institution's 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

E) A) and B)
F) A) and C)

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Question 3

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A perpetuity pays $100 each and every year forever. The duration of this perpetuity will be ________ if its yield is 9%.

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 ________.

A bond portfolio manager notices a hump in the yield curve at the five-year point. How might a bond manager take advantage of this event?

A portfolio manager sells Treasury bonds and buys corporate bonds because the spread between corporate and Treasury bond yields is higher than its historical average. This is an example of ________ swap.

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

When interest rates increase, the duration of a 20-year bond selling at a premium ________.

An investor who expects declining interest rates would maximise their capital gain by purchasing a bond that has a ________ coupon and a ________ term to maturity.

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 realised 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

The historical yield spread between the AA bond and the AAA bond has been 25 basis points. Currently the spread is only 9 basis points. If you believe the spread will soon return to its historical levels you should ________.

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?

Convexity implies that duration predictions ________. I. underestimate the % increase in bond price when the yield falls II. underestimate the % decrease in bond price when the yield rises III. overestimates the % increase in bond price when the yield falls IV. overestimates the % decrease in bond price when the yield rises

Banks and other financial institutions can best manage interest rate risk by ________.

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

As compared with equivalent maturity bonds selling at par, deep discount bonds will have ________.

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

If you choose a zero coupon bond with a maturity that matches your investment horizon which of the following statements is/are correct? I. You will have no interest rate risk on this bond. II. Absent default, you can be sure you will earn the promised yield rate. III. The duration of your bond is less than the time to your investment horizon.

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 ________.

Bond portfolio immunisation techniques balance ________ and ________ risk.