INDIVIDUAL TEST 04

Name of student:
………………………………………………………………………………………………………………

Student ID:………………….

1. The duration of a bond is a function of the bond's

A. coupon rate.
B. yield to maturity.
C. time to maturity.
D. All of the options
E. None of the options
2. Ceteris paribus, the duration of a bond is positively correlated with the bond's
A. time to maturity.
B. coupon rate.
C. yield to maturity.
D. All of the options
E. None of the options
3. Ceteris paribus, the duration of a bond is negatively correlated with the bond's
A. time to maturity.
B. coupon rate.
C. yield to maturity.
D. coupon rate and yield to maturity.
E. None of the options
4. Holding other factors constant, the interest-rate risk of a coupon bond is higher when the bond's
A. term to maturity is lower.
B. coupon rate is higher.
C. yield to maturity is lower.
D. current yield is higher.
E. None of the options
5. The "modified duration" used by practitioners is equal to the Macaulay duration
A. times the change in interest rate.
B. times (one plus the bond's yield to maturity).
C. divided by (one minus the bond's yield to maturity).
D. divided by (one plus the bond's yield to maturity).
E. None of the options
6. The "modified duration" used by practitioners is equal to ______ divided by (one plus the bond's yield to maturity).
A. current yield
B. the Macaulay duration
C. yield to call
D. yield to maturity
E. None of the options
7. Given the time to maturity, the duration of a zero-coupon bond is higher when the discount rate is
A. higher.
B. lower.
C. equal to the risk-free rate.
D. the bond's duration is independent of the discount rate.
E. None of the options
8. The interest-rate risk of a bond is
A. the risk related to the possibility of bankruptcy of the bond's issuer.
B. the risk that arises from the uncertainty of the bond's return caused by changes in interest rates.
C. the unsystematic risk caused by factors unique in the bond.
D. the risk related to the possibility of bankruptcy of the bond's issuer and the risk that arises from the uncertainty of
the bond's return caused by changes in interest rates.
E. All of the options
9. Which of the following two bonds is more price sensitive to changes in interest rates?
1) A par value bond, X, with a 5-year-to-maturity and a 10% coupon rate.
2) A zero-coupon bond, Y, with a 5-year-to-maturity and a 10% yield to maturity.
A. Bond X because of the higher yield to maturity.
B. Bond X because of the longer time to maturity.
C. Bond Y because of the longer duration.
D. Both have the same sensitivity because both have the same yield to maturity.
E. None of the options
10. Holding other factors constant, which one of the following bonds has the smallest price volatility?
A. 5-year, 0% coupon bond
B. 5-year, 12% coupon bond
C. 5 year, 14% coupon bond
D. 5-year, 10% coupon bond
E. Cannot tell from the information given
11. Which of the following is true?
A. Holding other things constant, the duration of a bond decreases with time to maturity.
B. Given time to maturity, the duration of a zero-coupon increases with yield to maturity.
C. Given time to maturity and yield to maturity, the duration of a bond is higher when the coupon rate is lower.
D. Duration is a better measure of price sensitivity to interest rate changes than is time to maturity.
E. Given time to maturity and yield to maturity, the duration of a bond is higher when the coupon rate is lower and
duration is a better measure of price sensitivity to interest rate changes than is time to maturity
12. The duration of a 5-year zero-coupon bond is
A. smaller than 5.
B. larger than 5.
C. equal to 5.
D. equal to that of a 5-year 10% coupon bond.
E. None of the options
13. The duration of a par value bond with a coupon rate of 8% (paid annually) and a remaining time to maturity of 5 years
is
A. 5 years.
B. 5.4 years.
C. 4.17 years.
D. 4.31 years.
14. A seven-year par value bond has a coupon rate of 9% (paid annually) and a modified duration of
A. 7 years.
B. 5.49 years.
C. 5.03 years.
D. 4.87 years.
15. Par value bond XYZ has a modified duration of 6. Which one of the following statements regarding the bond is true?
A. If the market yield increases by 1%, the bond's price will decrease by $60.
B. If the market yield increases by 1%, the bond's price will increase by $50.
C. If the market yield increases by 1%, the bond's price will decrease by $50.
D. If the market yield increases by 1%, the bond's price will increase by $60.
16. Which of the following bonds has the longest duration?
A. An 8-year maturity, 0% coupon bond.
B. An 8-year maturity, 5% coupon bond.
C. A 10-year maturity, 5% coupon bond.
D. A 10-year maturity, 0% coupon bond.
E. Cannot tell from the information given
17. Which one of the following par value 12% coupon bonds experiences a price change of $23 when the market yield
changes by 50 basis points?
A. The bond with a duration of 6 years
B. The bond with a duration of 5 years
C. The bond with a duration of 2.7 years
D. The bond with a duration of 5.15 years
18. The duration of a coupon bond
A. does not change after the bond is issued.
B. can accurately predict the price change of the bond for any interest rate change.
C. will decrease as the yield to maturity decreases.
D. All of the options are true.
E. None of the options is true.
19. Duration measures
A. weighted average time until a bond's half-life.
B. weighted average time until cash flow payment.
C. the time required to make excessive profit from the investment.
D. weighted average time until a bond's half-life and the time required to make excessive profit from the investment.
E. weighted average time until cash flow payment and the time required to make excessive profit from the investment.
20. Duration
A. assesses the time element of bonds in terms of both coupon and term to maturity.
B. allows structuring a portfolio to avoid interest-rate risk.
C. is a direct comparison between bond issues with different levels of risk.
D. assesses the time element of bonds in terms of both coupon and term to maturity and allows structuring a portfolio
to avoid interest-rate risk
E. assesses the time element of bonds in terms of both coupon and term to maturity and is a direct comparison between
bond issues with different levels of risk
21. Identify the bond that has the longest duration (no calculations necessary).
A. 20-year maturity with an 8% coupon
B. 20-year maturity with a 12% coupon
C. 20-year maturity with a 0% coupon
D. 10-year maturity with a 15% coupon
E. 12-year maturity with a 12% coupon
22. An 8%, 30-year corporate bond was recently being priced to yield 10%. The Macaulay duration for the bond is 10.20
years. Given this information, the bond's modified duration would be
A. 8.05.
B. 9.44.
C. 9.27.
D. 11.22.
E. None of the options
23. An 8%, 15-year bond has a yield to maturity of 10% and duration of 8.05 years. If the market yield changes by 25
basis points, how much change will there be in the bond's price?
A. 1.83%
B. 2.01%
C. 3.27%
D. 6.44%
24. Consider a bond selling at par with modified duration of 10.6 years and convexity of 210. A 2% decrease in yield
would cause the price to increase by 21.2%, according to the duration rule. What would be the percentage price
change according to the duration-with-convexity rule?
A. 21.2%
B. 25.4%
C. 17.0%
D. 10.6%
25. 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.
E. The bond's durations cannot be determined without knowing the prices of the bonds.
26. A 9%, 16-year bond has a yield to maturity of 11% and duration of 9.25 years. If the market yield changes by 32 basis
points, how much change will there be in the bond's price?
A. 1.85%
B. 2.01%
C. 2.67%
D. 6.44%
27. A 7%, 14-year bond has a yield to maturity of 6% and duration of 7 years. If the market yield changes by 44 basis
points, how much change will there be in the bond's price?
A. 1.85%
B. 2.91%
C. 3.27%
D. 6.44%
28. Consider a bond selling at par with modified duration of 12 years and convexity of 265. A 1% decrease in yield would
cause the price to increase by 12%, according to the duration rule. What would be the percentage price change
according to the duration-with-convexity rule?
A. 21.2%
B. 25.4%
C. 17.0%
D. 13.3%
29. Consider a bond selling at par with modified duration of 22 years and convexity of 415. A 2% decrease in yield would
cause the price to increase by 44%, according to the duration rule. What would be the percentage price change
according to the duration-with-convexity rule?
A. 21.2%

B. 25.4%
C. 17.0%
 D. 52.3%

30. You have purchased a bond for $973.02. The bond has a coupon rate of 6.4%, pays interest annually, has a face value of
$1,000, 4 years to maturity, and a yield to maturity of 7.2%. The bond's duration is 3.6481 years. You expect that interest rates
will fall by .3% later today.
Use the modified duration to find the approximate percentage change in the bond's price. Find the new price of the bond from this
calculation.
Find the bond's new price at its new yield to maturity.
What is the amount of the difference between the two answers? Why are your answers different? Explain the reason in words and
illustrate it graphically.

1 6 11 16 21 26
2 7 12 17 22 27
3 8 13 18 23 28
4 9 14 19 24 29
5 10 15 2- 25