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

Q1. Which of the following statements about the yield curve is TRUE?

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

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

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

Q2. The structure of interest rates results from all the following EXCEPT:

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

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

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

Q3. Which of the following statements about the yield curve is 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.

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

Q1. Which of the following statements about the yield curve is TRUE?

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

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

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

Correct answer is C)        

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.

Q2. The structure of interest rates results from all the following EXCEPT:

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

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

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

Correct answer is A)

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

Q3. Which of the following statements about the yield curve is 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.

Correct answer is A)

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.

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yield curve risk

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