Baran

 

2、A 10-year, 11 percent annual coupon bond with $100 par value currently yields 9 percent. What is the duration of the bond given a 50 basis point change in yield?

A) 4.80 years.  

B) 6.95 years. 

C) 6.19 years.  

D) 7.27 years.

Baran

 

The correct answer is C

 

I/Y = 9.00; FV = 100; N = 10; PMT = 0.11 x 100 = 11; PV = V0 = 112.84

I/Y = 8.50; FV = 100; N = 10; PMT = 0.11 x 100 = 11; PV = V- = 116.40

I/Y = 9.50; FV = 100; N = 10; PMT = 0.11 x 100 = 11; PV = V+ = 109.42

D = effective duration     =  [(V- - V+) / (2V0(Δy))]

                                   = (116.40 – 109.42)/(2x112.84x0.005)

                                   = 6.19

Baran

 

3、A major problem with the use of duration in interest rate risk management is that it assumes:

A) differential sensitivity of assets and liabilities to changes in interest rates.  

B) a nonlinear relationship between prices and rates.

C) only a single change in interest rates over the planning horizon.  

D) an inverse relationship between prices and rates.

Baran

 

The correct answer is C

 

Duration assumes only a single and parallel shift in interest rates over the interest rate management planning horizon.

Baran

 

4、A 10-year maturity Treasury bond has a par value of $10,000 and a 5 percent coupon. The yield on the bond is 4.5 percent. Assume that the yield can fall to 4.45 percent or rise to 4.55 percent.

The effective duration for the bond is closest to:

A) 8.07.  

B) 7.86. 

C) 7.24.  

D) 7.61.

Baran

 

The correct answer is B

N = 20; I/Y = 4.45/2; PMT = 500/2; FV = 10,000; CPT PV = 10,440.05 = V–

N = 20; I/Y = 4.55/2; PMT = 500/2; FV = 10,000; CPT PV = 10,358.33 = V+

N = 20; I/Y = 4.50/2; PMT = 500/2; FV = 10,000; CPT PV = 10,399.09 = V0

Baran

 

The effective convexity of the bond is closest to:

A) 57.69.  

B) 76.93.   

C) 38.46.

D) 19.23.

Baran

 

The correct answer is B

Baran

 

Given your answers to the two prior questions, the percentage price change associated with a 20-basis-point increase in yield is closest to a:

A) decrease of 1.56%.   

B) decrease of 1.60%.  

C) decrease of 1.58%.   

D) decrease of 1.54%. 

Baran

 

The correct answer is A

 

percentage price change = [–duration ′ Dy ′  [(1/2)+100]  ′ convexity ′ Dy2 ′ 100]

-7.86(0.002)100 + (0.5)76.93(0.002)²(100) = -1.5566