Question

In: Finance

For the following statements: (I) The average lifetime of a debt security's stream of payments is...

For the following statements: (I) The average lifetime of a debt security's stream of payments is called duration. (II) The duration of a portfolio is the weighted average of the durations of the individual securities, with the weights reflecting the proportion of the portfolio invested in each. (III) Duration measures the expected percentage change in bond price in relation to interest rates.

Group of answer choices

(I) is true, (II) false.

(I) is false, (II) true.

(I) is true, (II) true, (III) true.

(I) is true, (II) true, (III) false.

All are false.

Solutions

Expert Solution

Answer: (I) is true, (II) true, (III) false.

(I) The average lifetime of a debt security's stream of payments is called duration.

Duration = (Present value of a Future cash flows * Year of receipt )/ divided by the bond's current market value.

(II) The duration of a portfolio is the weighted average of the durations of the individual securities, with the weights reflecting the proportion of the portfolio invested in each.

In Order to Immunise the Portfolio against Interest Rate Risk, The Investment should be done in such a way that the Weighted Average Duration of the Portfolio should equal to Duration of the Payments.

The duration of a portfolio is the weighted average of the durations of the individual securities, with the weights reflecting the proportion of the portfolio invested in each.

(III) Duration measures the expected percentage change in bond price in relation to interest rates.

Modified duration is the name given to the price sensitivity and is the percentage change in price for one percent change in interest rates.

Mofified Duration = Duration / (1+YTM)

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

Which one of the following statements is INCORRECT? Group of answer choices An overpriced security's reward-to-risk...
Which one of the following statements is INCORRECT? Group of answer choices An overpriced security's reward-to-risk ratio would be lower than the reward-to-risk ratio of the market The reward-to-risk ratio of the market would be lower than the reward-to-risk ratio of an overpriced security An under-priced security's reward-to-risk ratio would be higher than the reward-to-risk ratio of the market The reward-to-risk ratio of the market would be lower than the reward-to-risk ratio of an under-priced security
The lifetime of a certain kind of battery is exponentially distributed, with an average lifetime of...
The lifetime of a certain kind of battery is exponentially distributed, with an average lifetime of 25 hours 4. Find the value of the 60th percentile for the lifetime of one battery. Remember units! 5. Write an interpretation (a sentence) of the 60th percentile for the lifetime of one battery. Your interpretation should include the value of the 60th percentile with correct units. 6. We are interested in the average lifetime of 16 of these batteries. Call this random variable....
Let X be the lifetime of an electronic device. It is known that the average lifetime...
Let X be the lifetime of an electronic device. It is known that the average lifetime of the device is 767 days and the standard deviation is 121 days. Let x¯ be the sample mean of the lifetimes of 157 devices. The distribution of X is unknown, however, the distribution of x¯ should be approximately normal according to the Central Limit Theorem. Calculate the following probabilities using the normal approximation. (a) P(x¯≤754)= Answer (b) P(x¯≥784)= Answer 0.0392 (c) P(749≤x¯≤784)= Answer
Let X be the lifetime of an electronic device. It is known that the average lifetime...
Let X be the lifetime of an electronic device. It is known that the average lifetime of the device is 762 days and the standard deviation is 150 days. Let x¯ be the sample mean of the lifetimes of 156 devices. The distribution of X is unknown, however, the distribution of x¯should be approximately normal according to the Central Limit Theorem. Calculate the following probabilities using the normal approximation. (a) P(x¯≤746) (b) P(x¯≥782) (c) P(738≤x¯≤781)
What is the accumulated sum of the following stream of payments? $1,938 every year at the...
What is the accumulated sum of the following stream of payments? $1,938 every year at the end of the year for 8 years at 5.51 percent, compounded annually.
The following statements are related to the cash flow statement: i. Cash payments for interest expenses...
The following statements are related to the cash flow statement: i. Cash payments for interest expenses can be classified into operating or investing activities ii. Cash payments for dividends can be classified into operating or financing activities. iii. Cash receipts from dividends can be classified into operating or financing activities iv. Cash receipts from interest income can be grouped into operating or investing activities The correct statement is .... A. i, ii, iii, and iv B. i, ii, and iii...
Identify which of the following statements is false    A. The Lifetime Exemption applies only to...
Identify which of the following statements is false    A. The Lifetime Exemption applies only to gifts given. B. Casualty or theft losses incurred during the administration of the estate are deductible on the estate tax return. C. The estate tax return is due, ignoring extensions, 9 months after the decedent's date of death.    Which of the following transactions constitutes a taxable gift made by Ellen, a widow, in the current year?       A. Ellen transfers $60,000 to a...
7) (I) A coupon bond (not perpetual) is a debt security that promises to make payments...
7) (I) A coupon bond (not perpetual) is a debt security that promises to make payments periodically for a specified period of time. (II) A stock is a security that would be a residual claim on the earnings and assets of a corporation. A) (I) is true, (II) false. B) (I) is false, (II) true. C) Both are false. D) Both are true.
Find the present value of the following cash flows. A perpetual stream of consecutive annual payments...
Find the present value of the following cash flows. A perpetual stream of consecutive annual payments (made at year-end) of $800, which starts at the end of year 5 and grows by 6% per year forever. Discount rate is 10%.
Question 1 What is the accumulated sum of the following stream of payments? $924 every year...
Question 1 What is the accumulated sum of the following stream of payments? $924 every year at the end of the year for 11 years at 5.88 percent, compounded annually. Round the answer to two decimal places and show work Question 2 For the next 15 years, you decide to place $4,171 in equal year-end deposits into a savings account earning 14.91 percent per year. How much money will be in the account at the end of that time period?...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT