Question

You have just purchased a 10-year zero-coupon bond with a yield to maturity of 10% and a par value of $1,000. What would the rate of return on your investment at the end of the year be if you sold the bond? Assume the yield to maturity on the bond is 11% at the time you sell.

A) 10.00%

B) 20.42%

C) 13.85%

D) 1.4%

2. Consider a 5-year bond with a 7% coupon and a yield to maturity of 5%. If interest rates remain constant, one year from now the price of this bond will be _________.

A) higher

B) lower

C) the same

D) indeterminate

3. A 16-year bond with a coupon rate of 9% has a yield to maturity of 11% and Macaulay’s duration of 9.25 years. If the market yield decreases by 32 basis points, by how much the bond's price will change according to the approximate formula of bond’s price sensitivity?

A) 1.85%

B) 2.01%

C) 2.67%

D) 6.44%

4. Which of the following bonds has the longest duration?

A) A 15-year maturity, 0% coupon bond.

B) A 15-year maturity, 9% coupon bond.

C) A 20-year maturity, 9% coupon bond.

D) A 20-year maturity, 0% coupon bond.

5. Which of the following statements regarding premium and discount bonds is true?

A) For a premium bond, its coupon rate is greater than its current yield, and its current yield is greater than its yield to maturity.

B) For a discount bond, its coupon rate is greater than its current yield, and its current yield is greater than its yield to maturity.

C) For a premium bond, its coupon rate is greater than its current yield, and its current yield is less than its yield to maturity.

D) For a discount bond, its coupon rate is less than its current yield, and its current yield is greater than its yield to maturity.

6. A 10% coupon bond with a par value of $1000, annual coupon payments, and 10 years to maturity is callable in 3 years at a call price of $1,100. If the bond is selling today for $975, the yield to call is _________.

A) 13.98%

B) 10.26%

C) 10.00%

D) 9.29%

7. A 7% coupon bond with a market price of $100.00 pays interest every 182 days. The par value of the bond is $1,000. If the bond paid interest 32 days ago, the invoice price of the bond would be _________.

A) $1,005.67

B) $1,007.35

C) $1,006.35

D) $1,006.15

8. Two bonds are selling at par value, and each has 17 years to maturity. The first bond has a coupon rate of 6%, and the second bond has a coupon rate of 13%. Which of the following is true about the durations of these bonds?

A) The duration of the higher coupon bond will be higher.

B) The duration of the lower coupon bond will be higher.

C) The duration of the higher coupon bond will equal the duration of the lower coupon bond.

D) There is no consistent statement that can be made about the durations of the bonds.

9. When computing yield to maturity, the implicit reinvestment assumption is that the interest payments are reinvested at the _________.

A) coupon rate

B) current yield

C) yield to maturity at the time of the investment

D) the average yield to maturity throughout the investment period

10. The Sharpe, Treynor, and Jensen portfolio performance measures are derived from the CAPM, _________.

A) therefore, it does not matter which measure is used to evaluate a portfolio manager

B) however, the Sharpe and Treynor measures use different risk measures. Therefore, the measures vary as to whether they are appropriate, depending on the investment scenario

C) therefore, all measure the same attributes

D) None of the above three options are correct.

11. Duration is important in bond portfolio management because ___ . I) it can be used in immunization strategies. II) it provides a gauge of the effective average maturity of the portfolio. III) it is related to the interest rate sensitivity of the portfolio. IV) it is a good predictor of interest-rate changes.

A) I and II only

B) I and III only

C) III and IV only

D) I, II, and III only

12. For bond management, immunization is not a strictly passive strategy because ________.

A) it requires choosing an asset portfolio that matches an index

B) there is likely to be a gap between the values of assets and liabilities in most portfolios

C) it requires frequent rebalancing as maturities and interest rates change

D) durations of assets and liabilities fall at the same rate

13. An investor who expects declining interest rates would be likely to purchase a bond that has a ___ coupon rate and a ___ term to maturity.

A) low; long

B) high; short

C) high; long

D) zero; long Short-answer questions

14.A bond with a par value of $1000 sells for $960. The bond matures in 5 years and has a 7% annual coupon rate paid semi-annually. Calculate the realized compound yield for an investor who holds this bond for 3 years with a reinvestment rate of 6% per year over the holding period. Assume that at the end of the holding period, this bond with 2 years remaining until maturity will sell at its par value.

15. Pension funds pay lifetime annuities to recipients. If a firm remains in business indefinitely, the pension obligation will resemble a perpetuity. Suppose that you are managing a pension fund with obligations to make perpetual payments of $4 million per year to beneficiaries. The yield to maturity on all bonds is 10%. a) Assume that the duration of 5-year maturity bonds with coupon rates of 12% (paid annually) is 4 years, and the duration of 20-year maturity bonds with coupon rates of 6% (paid annually) is 14 years. Calculate how much of each of these two coupon bonds (in market value) you will want to hold in order to both fully fund and immunize your obligation. b) Calculate the total par value of your holdings in the 20-year coupon bond.

16. The investment portfolio of Saver Mutual Fund consists of the following asset classes with the returns for each asset class over an investment period: Asset Class Weight Return Equity 0.80 15% Bonds 0.20 5% During the investment period, the return on a benchmark portfolio was calculated from the following information. Asset Class Weight Return Equity (S&P500 Index) 0.50 17% Bonds (Lehman Brothers Index) 0.50 5% a) Calculate the contribution of asset allocation across markets to the Saver Mutual Fund's total excess return over the total return of the benchmark portfolio. (1 mark) b) Calculate the contribution of security selection to the Saver Mutual Fund's total excess return over the total return of the benchmark portfolio.

Answer 1

(1) Option D

(2) With the passage of time bond price falls therefore option B is correct.   

(3) Option C   

(4) Duration of the zero coupon bond is longest as duration of coupon bearing bond is weighted average and hence duration of ZCB is highest.Also duration of ZCB is equal to maturity of the bond.Therefore Option D that is 20 years maturity of ZCB will have longest duration.

(6) Option A is correct.