Multiple Choice Questions
1. All other things equal (YTM = 10%), which of the following has the longest duration?
A. A 30-year bond with a 10% coupon
B. A 20-year bond with a 9% coupon
C. A 20-year bond with a 7% coupon
D. A 10-year zero-coupon bond
Answer: A. A 30-year bond with a 10% coupon
2. All other things equal(YTM = 10%), which of the following has the shortest duration?
A. A 30-year bond with a 10% coupon
B. A 20-year bond with a 9% coupon
C. A 20-year bond with a 7% coupon
D. A 10-year zero-coupon bond
Answer: D. A 10-year zero-coupon bond
3. A pension fund must pay out $1 million next year, $2 million the following year, and then
$3 million the year after that. If the discount rate is 8%, what is the duration of this set of
payments?
A. 2 years
B. 2.15 years
C. 2.29 years
D. 2.53 years
Answer: C. 2.29 years
4. All other things equal, which of the following has the longest duration?
A. A 21-year bond with a 10% coupon yielding 10%
B. A 20-year bond with a 10% coupon yielding 11%
C. A 21-year zero-coupon bond yielding 10%
D. A 20-year zero-coupon bond yielding 11%
Answer: C. A 21-year zero-coupon bond yielding 10%
5. The duration of a perpetuity varies _______ with interest rates.
A. directly
B. inversely
C. convexly
D. randomly
Answer: B. inversely
6. Because of convexity, when interest rates change, the actual bond price will ____________
the bond price predicted by duration.
A. always be higher than
B. sometimes be higher than
C. always be lower than
D. sometimes be lower than
Answer: A. always be higher than
7. You find a 5-year AA Xerox bond priced to yield 6%. You find a similar-risk 5-year Canon
bond priced to yield 6.5%. If you expect interest rates to rise, which of the following should
you do?
A. Short the Canon bond, and buy the Xerox bond.
B. Buy the Canon bond, and short the Xerox bond.
C. Short both the Canon bond and the Xerox bond.
D. Buy both the Canon bond and the Xerox bond.
Answer: B. Buy the Canon bond, and short the Xerox bond.
8. 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 immunization
B. dedication strategy
C. duration analysis
D. horizon analysis
Answer: D. horizon analysis
9. A bond's price volatility _________ at _________ rate as maturity increases.
A. increases; an increasing
B. increases; a decreasing
C. decreases; an increasing
D. decreases; a decreasing
Answer: B. increases; a decreasing
10. As a result of bond convexity, an increase in a bond's price when yield to maturity falls is
________ the price decrease resulting from an increase in yield of equal magnitude.
A. greater than
B. equivalent to
C. smaller than
D. The answer cannot be determined from the information given.
Answer: A. greater than
11. All else equal, bond price volatility is greater for __________.
A. higher coupon rates
B. lower coupon rates
C. shorter maturity
D. lower default risk
Answer: B. lower coupon rates
12. ______________ is an important characteristic of the relationship between bond prices
and yields.
A. Convexity
B. Concavity
C. Complexity
D. Linearity
Answer: A. Convexity
13. Bond prices are _______ sensitive to changes in yield when the bond is selling at a
_______ initial yield to maturity.
A. more; lower
B. more; higher
C. less; lower
D. equally; higher or lower
Answer: A. more; lower
14. The pioneer of the duration concept was _________.
A. Eugene Fama
B. John Herzog
C. Frederick Macaulay
D. Harry Markowitz
Answer: C. Frederick Macaulay
15. 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.
A. a pure yield pickup
B. a rate anticipation
C. a substitution
D. an intermarket spread
Answer: D. an intermarket spread
16. The duration of a 5-year zero-coupon bond is ____ years.
A. 4.5
B. 5
C. 5.5
D. 3.5
Answer: B. 5
17. A portfolio manager believes interest rates will drop and decides to sell short-duration
bonds and buy long-duration bonds. This is an example of __________ swap.
A. a pure yield pickup
B. a rate anticipation
C. a substitution
D. an intermarket spread
Answer: B. a rate anticipation
18. Target date immunization would primarily be of interest to _________.
A. banks
B. mutual funds
C. pension funds
D. individual investors
Answer: C. pension funds
19. Duration is a concept that is useful in assessing a bond's _________.
A. credit risk
B. liquidity risk
C. price volatility
D. convexity risk
Answer: C. price volatility
20. A pension fund has an average duration of its liabilities equal to 15 years. The fund is
looking at 5-year maturity zero-coupon bonds and 4% yield perpetuities to immunize its
interest rate risk. How much of its portfolio should it allocate to the zero-coupon bonds to
immunize if there are no other assets funding the plan?
A. 52%
B. 48%
C. 33%
D. 25%
Answer: A. 52%
Duration of the perpetuity = 1.04/.04 = 26 years
Duration of the zero = 5 years
15 = (wz)(5) + (1 - wz)26; wz = 52.38%
21. You own a bond that has a duration of 6 years. Interest rates are currently 7%, but you
believe the Fed is about to increase interest rates by 25 basis points. Your predicted price
change on this bond is ________.
A. +1.4%
B. -1.4%
C. -2.51%
D. +2.51%
Answer: B. -1.4%
D* = 6/1.07 = 5.61
ΔP/P = -D*(Δy) = -5.61(.25%) = -1.4%
22. Given its time to maturity, the duration of a zero-coupon bond is _________.
A. higher when the discount rate is higher
B. higher when the discount rate is lower
C. lowest when the discount rate is equal to the risk-free rate
D. the same regardless of the discount rate
Answer: D. the same regardless of the discount rate
23. An increase in a bond's yield to maturity results in a price decline that is ________ the
price increase resulting from a decrease in yield of equal magnitude.
A. greater than
B. equivalent to
C. smaller than
D. The answer cannot be determined.
Answer: C. smaller than
24. All other things equal, a bond's duration is _________.
A. higher when the yield to maturity is higher
B. lower when the yield to maturity is higher
C. the same at all yield rates
D. indeterminable when the yield to maturity is high
Answer: B. lower when the yield to maturity is higher
25. A bank has an average duration of its liabilities equal to 2 years. The bank's average
duration of its assets is 3.5 years. The bank's market value of equity is at risk if
_______________________.
A. interest rates fall
B. credit spreads fall
C. interest rates rise
D. the price of all fixed-income securities rises
Answer: C. interest rates rise
26. All other things equal, a bond's duration is _________.
A. higher when the coupon rate is higher
B. lower when the coupon rate is higher
C. the same when the coupon rate is higher
D. indeterminable when the coupon rate is high
Answer: B. lower when the coupon rate is higher
27. Banks and other financial institutions can best manage interest rate risk by
_____________.
A. maximizing the duration of assets and minimizing the duration of liabilities
B. minimizing the duration of assets and maximizing the duration of liabilities
C. matching the durations of their assets and liabilities
D. matching the maturities of their assets and liabilities
Answer: C. matching the durations of their assets and liabilities
28. In the context of a bond portfolio, price risk and reinvestment rate risk exactly cancel out
at a time horizon equal to the ____.
A. average bond maturity in the portfolio
B. duration of the portfolio
C. difference between the shortest duration and longest duration of the individual bonds in the
portfolio
D. average of the shortest duration and longest duration of the bonds in the portfolio
Answer: B. duration of the portfolio
29. Bond portfolio immunization techniques balance ________ and ________ risk.
A. price; reinvestment
B. price; liquidity
C. credit; reinvestment
D. credit; liquidity
Answer: A. price; reinvestment
30. You have purchased a guaranteed investment contract (GIC) from an insurance firm that
promises to pay you a 5% compound rate of return per year for 6 years. If you pay $10,000
for the GIC today and receive no interest along the way, you will get __________ in 6 years
(to the nearest dollar).
A. $12,565
B. $13,000
C. $13,401
D. $13,676
Answer: C. $13,401
(10,000)(1.05)6 = $13,401
31. The duration of a portfolio of bonds can be calculated as _______________.
A. the coupon weighted average of the durations of the individual bonds in the portfolio
B. the yield weighted average of the durations of the individual bonds in the portfolio
C. the value weighted average of the durations of the individual bonds in the portfolio
D. averages of the durations of the longest- and shortest-duration bonds in the portfolio
Answer: C. the value weighted average of the durations of the individual bonds in the
portfolio
32. Pension fund managers can generally best bring about an effective reduction in their
interest rate risk by holding ___________________.
A. long-maturity bonds
B. long-duration bonds
C. short-maturity bonds
D. short-duration bonds
Answer: B. long-duration bonds
33. Which of the following is not a type of bond swap used in active portfolio management?
A. Intermarket spread swap
B. Substitution swap
C. Rate anticipation swap
D. Asset-liability swap
Answer: D. Asset-liability swap
34. The exchange of one bond for a bond that has similar attributes but is more attractively
priced is called ______________.
A. a substitution swap
B. an intermarket spread swap
C. a rate anticipation swap
D. a pure yield pickup swap
Answer: A. a substitution swap
35. Rank the interest sensitivity of the following from the most sensitive to an interest rate
change to the least sensitive:
I. 8% coupon, noncallable 20-year maturity par bond
II. 9% coupon, currently callable 20-year maturity premium bond
III. Zero-coupon 30-year maturity bond
A. I, II, III
B. II, III, I
C. III, I, II
D. III, II, I
Answer: C. III, I, II
36. A bond swap made in response to forecasts of interest rate changes is called ______.
A. a substitution swap
B. an intermarket spread swap
C. a rate anticipation swap
D. a pure yield pickup swap
Answer: C. a rate anticipation swap
37. Moving to higher-yield bonds, usually with longer maturities, is called ________.
A. a substitution swap
B. an intermarket spread swap
C. a rate anticipation swap
D. a pure yield pickup swap
Answer: D. a pure yield pickup swap
38. In a pure yield pickup swap, ________ bonds are exchanged for _________ bonds.
A. longer-duration; shorter-duration
B. shorter-duration; longer-duration
C. high-coupon; high-yield
D. low-yield; high-yield
Answer: B. shorter-duration; longer-duration
39. The duration rule always ________ the value of a bond following a change in its yield.
A. underestimates
B. provides an unbiased estimate of
C. overestimates
D. The estimated price may be biased either upward or downward, depending on whether the
bond is trading at a discount or a premium.
Answer: A. underestimates
40. Where y = yield to maturity, the duration of a perpetuity would be _________.
A. y
B. y/(1 + y)
C. 1/y
D. (1 + y)/y
Answer: D. (1 + y)/y
41. A bond currently has a price of $1,050. The yield on the bond is 6%. If the yield increases
25 basis points, the price of the bond will go down to $1,030. The duration of this bond is
____ years.
A. 7.46
B. 8.08
C. 9.02
D. 10.11
Answer: B. 8.08
ΔP/P = -D*(Δy)
-20/1,050 = -D*(.25%)
-1.9% = -D*(.25%)
D* = 7.6
D = D*(1 + y)
D = 7.6(1.0625) = 8.075
42. A bond has a current price of $1,030. The yield on the bond is 8%. If the yield changes
from 8% to 8.1%, the price of the bond will go down to $1,025.88. The modified duration of
this bond is _________.
A. 4.32
B. 4
C. 3.25
D. 3.75
Answer: B. 4
ΔP/P = -D*(Δy)
-.40% = -D*(.10%)
D* = .40%/.10% = 4
43. A bank has $50 million in assets, $47 million in liabilities, and $3 million in shareholders'
equity. If the duration of its liabilities is 1.3 and the bank wants to immunize its net worth
against interest rate risk and thus set the duration of equity equal to zero, it should select
assets with an average duration of _________.
A. 1.22
B. 1.5
C. 1.6
D. 2
Answer: A. 1.22
(50,000,000)(DA) = (47,000,000)(1.3); DA = 1.22
44. A perpetuity pays $100 each and every year forever. The duration of this perpetuity will
be __________ if its yield is 9%.
A. 7
B. 9
C. 9.39
D. 12.11
Answer: D. 12.11
45. A bond pays annual interest. Its coupon rate is 9%. Its value at maturity is $1,000. It
matures in 4 years. Its yield to maturity is currently 6%.
The duration of this bond is _______ years.
A. 2.44
B. 3.23
C. 3.56
D. 4.1
Answer: C. 3.56
Duration = 3.56
46. A bond pays annual interest. Its coupon rate is 9%. Its value at maturity is $1,000. It
matures in 4 years. Its yield to maturity is currently 6%.
The modified duration of this bond is ______ years.
A. 4
B. 3.56
C. 3.36
D. 3.05
Answer: C. 3.36
D* = 3.56/1.06 = 3.36 years
47. A bond has a maturity of 12 years and a duration of 9.5 years at a promised yield rate of
8%. What is the bond's modified duration?
A. 12 years
B. 11.1 years
C. 9.5 years
D. 8.8 years
Answer: D. 8.8 years
D* = 9.5/1.08 = 8.8 years
48. A 20-year maturity bond pays interest of $90 once per year and has a face value of $1,000.
Its yield to maturity is 10%. You expect that interest rates will decline over the upcoming year
and that the yield to maturity on this bond will be only 8% a year from now. Using horizon
analysis, the return you expect to earn by holding this bond over the upcoming year is
_________.
A. 10%
B. 12%
C. 21.6%
D. 29.6%
Answer: D. 29.6%
Calculator entries for the price today are N = 20, I/Y = 10, PMT = 90, FV = 1,000, CPT PV → 914.86
calculator entries for the price in 1 year are N = 19, I/Y = 8, PMT = 90, FV = 1,000, CPT PV
→ -1,096.04
49. A bond with a 9-year duration is worth $1,080, 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
approximately _________.
A. $1,035
B. $1,036
C. $1,094
D. $1,124
Answer: C. $1,094
ΔP/P = -D*(Δy)
D* = D/(1 + y) = 9/1.08 = 8.33
ΔP/P = -D*(Δy) = -8.33(-.16%) = 1.33%
New price = $1,080(1.01333) = $1,094.40
50. When interest rates increase, the duration of a 20-year bond selling at a premium
_________.
A. increases
B. decreases
C. remains the same
D. increases at first and then declines
Answer: B. decreases
51. Duration facilitates the comparison of bonds with differing ___________.
A. default risks
B. conversion ratios
C. maturities
D. yields to maturity
Answer: C. maturities
52. 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. buy the AA and short the AAA
B. buy both the AA and the AAA
C. buy the AAA and short the AA
D. short both the AA and the AAA
Answer: C. buy the AAA and short the AA
53. The duration of a bond normally increases with an increase in:
I. Term to maturity
II. Yield to maturity
III. Coupon rate
A. I only
B. I and II only
C. II and III only
D. I, II, and III
Answer: A. I only
54. A fixed-income portfolio manager sets a minimum acceptable rate of return on the bond
portfolio at 5% per year over the next 4 years. The portfolio is currently worth $10 million.
One year later interest rates are at 6%. What is the portfolio value trigger point at this time
that would require the manager to immunize the portfolio?
A. $12,155,063
B. $10,205,625
C. $9,627,948
D. $10,500,000
Answer: B. $10,205,625
Minimum terminal value = ($10 million)(1.05)4 = $12,155,062.50
Trigger point value = $12,155,062.50/1.063 = $10,205,625
55. Compute the duration of an 8%, 5-year corporate bond with a par value of $1,000 and
yield to maturity of 10%.
A. 3.92
B. 4.28
C. 4.55
D. 5
Answer: B. 4.28
56. Compute the modified duration of a 9% coupon, 3-year corporate bond with a yield to
maturity of 12%.
A. 2.45
B. 2.75
C. 2.88
D. 3
Answer: A. 2.45
57. An 8%, 30-year bond has a yield to maturity of 10% and a modified duration of 8 years. If
the market yield drops by 15 basis points, there will be a __________ in the bond's price.
A. 1.15% decrease
B. 1.2% increase
C. 1.53% increase
D. 2.43% decrease
Answer: B. 1.2% increase
(ΔP/P) = -8(-.0015) = .012
58. To create a portfolio with a duration of 4 years using a 5-year zero-coupon bond and a 3year 8% annual coupon bond with a yield to maturity of 10%, one would have to invest
________ of the portfolio value in the zero-coupon bond.
A. 50%
B. 55%
C. 60%
D. 75%
Answer: B. 55%
The duration of the 3-year bond is 2.78, as shown in the table below.
Then 5wZ + 2.78(1 - wZ) = 4
2.22wZ = 1.22
wZ = .5495
59. Which of the following set of conditions will result in a bond with the greatest price
volatility?
A. A high coupon and a short maturity
B. A high coupon and a long maturity
C. A low coupon and a short maturity
D. A low coupon and a long maturity
Answer: D. A low coupon and a long maturity
60. An investor who expects declining interest rates would maximize her capital gain by
purchasing a bond that has a _________ coupon and a _________ term to maturity.
A. low; long
B. high; short
C. high; long
D. zero; long
Answer: D. zero; long
61. 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. In the absence of 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. I only
B. I and II only
C. II and III only
D. I, II, and III
Answer: B. I and II only
62. As compared with equivalent maturity bonds selling at par, deep discount bonds will have
________.
A. greater reinvestment risk
B. greater price volatility
C. less call protection
D. shorter average maturity
Answer: B. greater price volatility
63. Steel Pier Company has issued bonds that pay semiannually with the following
characteristics:
The modified duration for the Steel Pier bond is ______.
A. 6.15 years
B. 5.95 years
C. 6.49 years
D. 9.09 years
Answer: A. 6.15 years
D* = 6.76/1.1 = 6.15 years
64. Steel Pier Company has issued bonds that pay semiannually with the following
characteristics:
If the bond's coupon was smaller than 10%, the modified duration would be _____ compared
to the original modified duration.
A. larger
B. unchanged
C. smaller
D. The answer cannot be determined from the information given.
Answer: A. larger
65. Steel Pier Company has issued bonds that pay semiannually with the following
characteristics:
If the maturity of the bond was less than 10 years, the modified duration would be _____
compared to the original modified duration.
A. larger
B. unchanged
C. smaller
D. The answer cannot be determined from the information given.
Answer: C. smaller
66. Steel Pier Company has issued bonds that pay semiannually with the following
characteristics:
If the yield to maturity decreases to 8.045%, the expected percentage change in the price of
the bond using modified duration would be ____.
A. 11%
B. 13%
C. 12%
D. 10%
Answer: C. 12%
Δy = 8.045% - 10% = -1.995%
%ΔP = -D*(Δy) = -6.76(-1.995%) = 12.01%
67. A 20-year maturity corporate bond has a 6.5% coupon rate (the coupons are paid
annually). The bond currently sells for $925.50. A bond market analyst forecasts that in 5
years yields on such bonds will be at 7%. You believe that you will be able to reinvest the
coupons earned over the next 5 years at a 6% rate of return. What is your expected annual
compound rate of return if you plan on selling the bond in 5 years?
A. 7.37%
B. 7.56%
C. 8.12%
D. 8.54%
Answer: A. 7.37%
68. When bonds sell above par, what is the relationship of price sensitivity to rising interest
rates?
A. Price volatility increases at an increasing rate.
B. Price volatility increases at a decreasing rate.
C. Price volatility decreases at a decreasing rate.
D. Price volatility decreases at an increasing rate.
Answer: C. Price volatility decreases at a decreasing rate.
69. A zero-coupon bond is selling at a deep discount price of $430. It matures in 13 years. If
the yield to maturity of the bond is 6.7%, what is the duration of the bond?
A. 6.7 years
B. 8 years
C. 10 years
D. 13 years
Answer: D. 13 years
Duration of a zero-coupon bond is equal to its maturity.
70. You have an investment that in today's dollars returns 15% of your investment in year 1,
12% in year 2, 9% in year 3, and the remainder in year 4. What is the duration of this
investment?
A. 4 years
B. 3.5 years
C. 3.22 years
D. 2.95 years
Answer: C. 3.22 years
D = (15%)(1) + (12%)(2) + (9%)(3) + (64%)(4) = 3.22 years
71. If an investment returns a higher percentage of your money back sooner, it will ______.
A. be less price-volatile
B. have a higher credit rating
C. be less liquid
D. have a higher modified duration
Answer: A. be less price-volatile
72. Which one of the following statements correctly describes the weights used in the
Macaulay duration calculation? The weight in year t is equal to ____________.
A. the dollar amount of the investment received in year t
B. the percentage of the future value of the investment received in year t
C. the present value of the dollar amount of the investment received in year t
D. the percentage of the total present value of the investment received in year t
Answer: D. the percentage of the total present value of the investment received in year t
73. The duration is independent of the coupon rate only for which one of the following?
A. Discount bonds
B. Premium bonds
C. Perpetuities
D. Short-term bonds
Answer: C. Perpetuities
74. You have an investment horizon of 6 years. You choose to hold a bond with a duration of
10 years. Your realized rate of return will be larger than the promised yield on the bond if
___________________.
A. interest rates increase
B. interest rates stay the same
C. interest rates fall
D. The answer cannot be determined from the information given.
Answer: C. interest rates fall
75. A bond portfolio manager notices a hump in the yield curve at the 5-year point. How
might a bond manager take advantage of this event?
A. Buy the 5-year bonds, and short the surrounding maturity bonds.
B. Buy the 5-year bonds, and buy the surrounding maturity bonds.
C. Short the 5-year bonds, and short the surrounding maturity bonds.
D. Short the 5-year bonds, and buy the surrounding maturity bonds.
Answer: A. Buy the 5-year bonds, and short the surrounding maturity bonds.
76. Market economists all predict a rise in interest rates. An astute bond manager wishing to
maximize her capital gain might employ which strategy?
A. Switch from low-duration to high-duration bonds.
B. Switch from high-duration to low-duration bonds.
C. Switch from high-grade to low-grade bonds.
D. Switch from low-coupon to high-coupon bonds.
Answer: B. Switch from high-duration to low-duration bonds.
77. You have an investment horizon of 6 years. You choose to hold a bond with a duration of
4 years. Your realized rate of return will be larger than the promised yield on the bond if
___________________.
A. interest rates increase
B. interest rates stay the same
C. interest rates fall
D. The answer cannot be determined from the information given.
Answer: A. interest rates increase
78. What strategy might an insurance company employ to ensure that it will be able to meet
the obligations of annuity holders?
A. Cash flow matching
B. Index tracking
C. Yield pickup swaps
D. Substitution swap
Answer: A. Cash flow matching
79. 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 realized 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.
A. I only
B. II only
C. I and II only
D. I, II, and III
Answer: D. I, II, and III
80. Immunization of coupon-paying bonds does not imply that the portfolio manager is
inactive because:
I. The portfolio must be rebalanced every time interest rates change.
II. The portfolio must be rebalanced over time even if interest rates don't change.
III. Convexity implies duration-based immunization strategies don't work.
A. I only
B. I and II only
C. II only
D. I, II, and III
Answer: B. I and II only
81. 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 institutions' 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
Answer: A. I only
82. Convexity implies that duration predictions:
I. Underestimate the percentage increase in bond price when the yield falls.
II. Underestimate the percentage decrease in bond price when the yield rises.
III. Overestimate the percentage increase in bond price when the yield falls.
IV. Overestimate the percentage decrease in bond price when the yield rises.
A. I and III only
B. II and IV only
C. I and IV only
D. II and III only
Answer: C. I and IV only
83. You have a 25-year maturity, 10% coupon, 10% yield bond with a duration of 10 years
and a convexity of 135.5. If the interest rate were to fall 125 basis points, your predicted new
price for the bond (including convexity) is _________.
A. $1,098.45
B. $1,104.56
C. $1,113.41
D. $1,124.22
Answer: D. $1,124.22
84. 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 the interest rate were to
increase 200 basis points, your predicted new price for the bond (including convexity) is
_________.
A. $638.85
B. $642.54
C. $666.88
D. $705.03
Answer: C. $666.88
85. Convexity of a bond is ___________.
A. the same as horizon analysis
B. the rate of change of the slope of the price-yield curve divided by the bond price
C. a measure of bond duration
D. none of these options
Answer: B. the rate of change of the slope of the price-yield curve divided by the bond price
Test Bank for Essentials of Investments
Zvi Bodie, Alex Kane, Alan Marcus
9780078034695, 9789389957877, 9781264140251, 9781260316148, 9780073382401, 9780078034695, 9781260013924, 9780077835422
