Baran

 

4、Which of the following statements about portfolio duration is FALSE? It is:

A) a measure of interest rate risk.  

B) a simple average of the duration estimates of the securities in the portfolio.

C) the weighted average of the duration estimates of the securities in the portfolio.  

D) measured using market prices of the bonds. 

Baran

 

The correct answer is B

 

Portfolio duration uses a weighted average figure, not a simple average.

Baran

 

AIM 9: Interpret the impact of changes in maturity, yield, and rating have on a bond’s duration.

1、Interest rate risk is most commonly associated with:

A) futures market. 

B) fixed income instruments. 

C) equity market. 

D) commodity market.  

Baran

 

The correct answer is B

 

Interest rate risk is most commonly associated with fixed income instruments or bonds. Futures, equity, and commodity markets are affected by interest rate risk only indirectly.

Baran

 

AIM 10: Explain the effect negative convexity has on hedging fixed income securities.

 

1、Positive convexity means that:

A) the graph of a callable bond flattens out as the market value approaches the call price.

B) the price of a fixed-coupon bond is inversely related to changes in interest rates.

C) bond price sensitivity is lowest when market yields are low.

D) as interest rates change, bond prices will increase at an increasing rate and decrease at a decreasing rate.

Baran

 

The correct answer is D

 

Positive convexity refers to the principle that for a given change in market yields, bond price sensitivity is lowest when market yields are high and highest when market yields are low.

Although the statements that begin, the graph of a callable bond . . . and the price of a fixed-coupon bond . . . are true, they are not the best choices to describe positive convexity.

Baran

 

2、Jayce Arnold, a CFA candidate, is studying how the market yield environment affects bond prices. She considers a $1,000 face value, option-free bond issued at par. Which of the following statements about the bond’s dollar price behavior is most likely accurate when yields rise and fall by 200 basis points, respectively? Price will:

A) increase by $124, price will decrease by $149.

B) decrease by $124, price will increase by $149.

C) decrease by $149, price will increase by $124.

D) increase by $149, price will decrease by $124.

Baran

 

The correct answer is B

 

As yields increase, bond prices fall, the price curve gets flatter, and changes in yield have a smaller effect on bond prices. As yields decrease, bond prices rise, the price curve gets steeper, and changes in yield have a larger effect on bond prices. Thus, the price increase when interest rates decline must be greater than the price decrease when interest rates rise (for the same basis point change). Remember that this applies to percentage changes as well.

Baran

 

3、Non-callable bond prices go up faster than they go down. This is referred to as:

A) inverse features.

B) negative convexity.

C) positive convexity.

D) embedded benefits.

Baran

 

The correct answer is C

 

When bond prices go up faster than they go down, it is called positive convexity.