Question

1. With respect to passive strategies, immunization is accomplished by matching the cash flows of the assets and liabilities while dedication is accomplished by aligning the duration of the assets and liabilities, risk adjusted for interest rate sensitivities. Active bond management, on the other hand, seeks to match the ratings (i.e., AAA or BBB for example), the type (government, mortgage or corporate), and duration of the benchmark being targeted.

   1. True

   2. False

2. For a given maturity, the yield to maturity on a zero coupon bond is labeled as the short rate. In turn, the spot rate for a given time interval refers to the interest rate for that interval available at different points in times. The future interest rate is the future interest rate that is inferred from the yield curve by using spot and short rate.

   1. True

   2. False

3. Consumption CAPM. The consumption based on CAPM (via Rubenstein et al) is a factor model in which the market portfolio excess return is replaced by that fact of a consumption tracking portfolio. The consumption CAPM is designed to accommodate investors who are concerned with time - varying lifetime consumption by balancing between savings and investment and current consumption.

   1. True

   2. False

4. Factor loadings - or factor betas - measure the sensitivity of security returns to changes in a systematic factor (i.e., interest rate, exchange rates, inflation, quality, momentum, liquidity, etc.). In other words, factor loadings measure the relationship of each systematic variable to incremental excess returns

   1. True

   2. False

5. Modified duration is a natural measure of the bonds exposure to changes in interest rates. It depicts the change in price from the product of the duration measure times the change in yield.

   1. True

   2. False

6. Bond default risk is usually referred to as credit risk and is orchestrated under the heading of “credit analysis.” Goldman Sachs, Morgan Stanley, and CS First Boston are some of the largest providers of quality ratings on government, corporate and municipal bonds issues.

   1. True

   2. False

Answer 1

1. With respect to passive strategies, immunization is accomplished by matching the cash flows of the assets and liabilities while dedication is accomplished by aligning the duration of the assets and liabilities, risk adjusted for interest rate sensitivities. Active bond management, on the other hand, seeks to match the ratings (i.e., AAA or BBB for example), the type (government, mortgage or corporate), and duration of the benchmark being targeted.

   1. True

2. For a given maturity, the yield to maturity on a zero coupon bond is labeled as the short rate. In turn, the spot rate for a given time interval refers to the interest rate for that interval available at different points in times. The future interest rate is the future interest rate that is inferred from the yield curve by using spot and short rate.

   1. False

3. Consumption CAPM. The consumption based on CAPM (via Rubenstein et al) is a factor model in which the market portfolio excess return is replaced by that fact of a consumption tracking portfolio. The consumption CAPM is designed to accommodate investors who are concerned with time - varying lifetime consumption by balancing between savings and investment and current consumption.

   1. True

4. Factor loadings - or factor betas - measure the sensitivity of security returns to changes in a systematic factor (i.e., interest rate, exchange rates, inflation, quality, momentum, liquidity, etc.). In other words, factor loadings measure the relationship of each systematic variable to incremental excess returns

   1. True

5. Modified duration is a natural measure of the bonds exposure to changes in interest rates. It depicts the change in price from the product of the duration measure times the change in yield.

   1. False

6. Bond default risk is usually referred to as credit risk and is orchestrated under the heading of “credit analysis.” Goldman Sachs, Morgan Stanley, and CS First Boston are some of the largest providers of quality ratings on government, corporate and municipal bonds issues.

   1. True