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LOS g: Describe yield-curve risk and explain why duration does not account for yield-curve risk for a portfolio of bonds.

A)	A nonparallel shift is more common than a parallel shift.

B)	A nonparallel shift occurs when rates change by the same number of basis points for all maturities.

C)	The yield curve usually has a nonzero slope because rates change by approximately the same number of basis points across maturities.

The definitions for parallel and nonparallel shifts are reversed. The first part of the statement that begins, "The yield curve usually has a nonzero slope,…" is correct. However, the second part is incorrect – the slope occurs because rates change by different basis points across maturities.

A)	assuming that individual discount rates do not change by the same amount.

B)	creating the yield curve by plotting term to maturity against the coupon rate.

C)	viewing each bond coupon payment as a separate zero coupon bond.

The yield curve plots term to maturity and yield to maturity. The other choices are true.

A)	In a typical upward sloping yield curve, short and intermediate term rates are lower than long term rates.

B)	Parallel shifts in the yield curve are not of concern to bond investors.

C)	If long-term rates are low, the present value of cash flows far into the future will be low,and the bond's value will be low.

The statement, "If long-term rates are low, the present value of cash flows far into the future will be low,and the bond’s value will be low," should read, "If long-term rates are low, the present value of cash flows far into the future will be high,and the bond’s value will be high." The value of a bond is comprised of discounted cash flows, and a lower discount rate translates to higher cash flows. Any shift in the yield curve creates uncertainty and is of concern to bond investors.

A)	sensitivity of a portfolio’s value to changes in the term structure of interest rates.

B)	sensitivity of a portfolio’s value to equal changes in yield for all the bonds in the portfolio.

C)	arithmetic mean of the durations of each bond in a portfolio.

Portfolio duration is a measure of a portfolio’s interest rate risk. It measures the sensitivity of the portfolio’s value to an equal change in yield for all the bonds in the portfolio. It can be calculated as the weighted average of the individual bond durations using the proportions of the total portfolio value represented by each of the bonds. Portfolio duration does not capture the effect of changes in the yield curve (term structure).