6.Which one of the following option-free bonds has the largest interest rate risk?

A)   Bond issue 1.

B)   Bond issue 2.

C)   Bond issue 3.

D)   Bond issue 4.

7.Which of the following statements concerning the price volatility of bonds is TRUE?

A)   Bonds with higher coupons have lower interest rate risk.

B)   Bonds with longer maturities have lower interest rate risk.

C)   As the yield on callable bonds approaches the coupon rate, the bond's price will approach a "floor" value.

D)   Bond prices go down faster than they go up.

8.Which of the following statements about how the features of a bond impact interest rate risk is TRUE?

A)   Market yields are the most important determinant of bond price volatility.

B)   Cash flows that occur further in the future add more to the price of a bond than near-term cash flows.

C)   For a given change in yield, a higher coupon bond will experience a larger change in price than a lower-coupon bond.

D)   Zero-coupon bonds have the highest price volatility.

9.The factors that determine how changes in interest rates affect bond values include all of the following EXCEPT:

A)   term to maturity.

B)   coupon rate.

C)   embedded options.

D)   issue price.

10.  Which of the following statements about how the features of a bond impact interest rate risk is FALSE?

A)   Bond price movements depend upon the direction and magnitude of changes in interest rates.

B)   All else equal, a longer-term bond is more sensitive to interest rates than a shorter-term bond.

C)   An inverse relationship between interest rates and bond prices means that the greater the change in interest rates, the less the change in fixed-coupon bond prices.

D)   A lower-coupon bond is more sensitive to interest rate movements than a higher-coupon bond (all else equal).

答案和详解如下：

6.Which one of the following option-free bonds has the largest interest rate risk?

Bond issue	Coupon rate	Maturity (Years)	Required Market Yield
1	5.00%	10	6.50%
2	6.00%	10	7.00%
3	5.80%	11	6.30%
4	5.30%	11	6.00%

A)   Bond issue 1.

B)   Bond issue 2.

C)   Bond issue 3.

D)   Bond issue 4.

The correct answer was D)

The price sensitivity is higher when the level of interest rates is low. Bond issue 4 has the lowest market yield and therefore is most susceptible to larger price swings as interest rates change. Put another way, Bond issue 4 has the highest duration and is therefore the most sensitive to changes in interest rates.

7.Which of the following statements concerning the price volatility of bonds is TRUE?

A)   Bonds with higher coupons have lower interest rate risk.

B)   Bonds with longer maturities have lower interest rate risk.

C)   As the yield on callable bonds approaches the coupon rate, the bond's price will approach a "floor" value.

D)   Bond prices go down faster than they go up.

The correct answer was A)

Bonds with higher coupons have lower interest rate risk. Note that the other statements are false. Bonds with longer maturities have higher interest rate risk. Callable bonds have a ceiling value as yields decline, and bond prices tend to rise faster than they decline, which is referred to as positive convexity.

8.Which of the following statements about how the features of a bond impact interest rate risk is TRUE?

A)   Market yields are the most important determinant of bond price volatility.

B)   Cash flows that occur further in the future add more to the price of a bond than near-term cash flows.

C)   For a given change in yield, a higher coupon bond will experience a larger change in price than a lower-coupon bond.

D)   Zero-coupon bonds have the highest price volatility.

The correct answer was D)

Zero-coupon bonds have the highest interest rate risk because they deliver all their cash flows at maturity. Another way to think about this: A zero-coupon bond has the lowest coupon (0.00%), so it has the highest price volatility, since the coupon rate is inversely related to price volatility.

In addition to market yields, the timing and magnitude of cash flows affect price volatility. Cash flows that occur further in the future add less to the price of a bond than near-term cash flows (think time value of money). For a given change in yield, a higher coupon bond will experience a smaller change in price than a lower-coupon bond. The relationship between maturity and price volatility (all else equal) is direct – a greater maturity results in greater price volatility.

9.The factors that determine how changes in interest rates affect bond values include all of the following EXCEPT:

A)   term to maturity.

B)   coupon rate.

C)   embedded options.

D)   issue price.

The correct answer was D)

The issue price determines whether a bond is said to trade at a premium or at a discount. The change in price of a fixed-coupon bond is inversely related to the direction of the change in interest rates whether the bond was sold at a discount or at a premium. The other choices are correct factors.

10.  Which of the following statements about how the features of a bond impact interest rate risk is FALSE?

A)   Bond price movements depend upon the direction and magnitude of changes in interest rates.

B)   All else equal, a longer-term bond is more sensitive to interest rates than a shorter-term bond.

C)   An inverse relationship between interest rates and bond prices means that the greater the change in interest rates, the less the change in fixed-coupon bond prices.

D)   A lower-coupon bond is more sensitive to interest rate movements than a higher-coupon bond (all else equal).

The correct answer was C)

The inverse relationship between interest rates and bond prices means that when interest rates increase, fixed-coupon bond prices decrease. In other words, the inverse relationship means that interest rates and bond prices move in opposite directions, it does not infer anything about the magnitude of the change.

The relationship between maturity and price volatility (all else equal) is direct – a greater maturity results in greater price volatility. The relationship between the coupon rate and price volatility (all else equal) is inverse – a greater coupon results in less price volatility. Remember, if you have a problem with this on the examination, keep in mind that a zero-coupon bond has the highest interest rate risk because it delivers all its cash flows at maturity. Since a zero-coupon bond has a 0.00% coupon, a low coupon equates to high price volatility.