LOS h: Explain the importance of spread duration.

Q1. Which of the following is a relative measure of the interest rate sensitivity of a portfolio compared to an underlying index?

A)   Value at risk.

B)   Portfolio duration.

C)   Spread duration.

Q2. Which of the following is an absolute measure of the interest rate sensitivity of a portfolio?

A)   Spread duration.

B)   Portfolio duration.

C)   Value at risk.

Q3. If a portfolio manager is interested in the interest rate sensitivity of her portfolio as compared to a Treasury bond index, which measure should she examine?

A)   Spread duration.

B)   Portfolio duration.

C)   Value at risk.

Q4. Which of the following best describes the difference between spread duration and portfolio duration? Spread duration allows the manager to measure the sensitivity of portfolio value from changes in:

A)   yield levels relative to a benchmark yield.

B)   both convexity and yield changes.

C)   the price of the underlying securities.

Q5. Two portfolios have the same portfolio duration but one of them has a higher nominal spread duration. How does the higher spread duration affect the portfolio characteristics? The higher spread duration portfolio will have:

A)   the same exposure to small parallel shifts in the Treasury curve but will have a higher exposure to changes in the yield difference between long and short-term Treasury securities.

B)   the same exposure to small parallel shifts in the Treasury curve but will have a higher exposure to changes in the yield difference between non-Treasury and Treasury bonds.

C)   a higher exposure to small parallel shifts in the Treasury curve and a higher exposure to changes in the yield difference between non-Treasury and Treasury bonds.

LOS h: Explain the importance of spread duration. fficeffice" />

Q1. Which of the following is a relative measure of the interest rate sensitivity of a portfolio compared to an underlying index?

A)   Value at risk.

B)   Portfolio duration.

C)   Spread duration.

Correct answer is C)         

Spread duration is a relative measure of the interest rate sensitivity of a portfolio compared to an underlying index. The other choices are both absolute measures.

Q2. Which of the following is an absolute measure of the interest rate sensitivity of a portfolio?

A)   Spread duration.

B)   Portfolio duration.

C)   Value at risk.

Correct answer is B)

Portfolio duration is an absolute measure of the interest rate sensitivity of a portfolio.

Q3. If a portfolio manager is interested in the interest rate sensitivity of her portfolio as compared to a Treasury bond index, which measure should she examine?

A)   Spread duration.

B)   Portfolio duration.

C)   Value at risk.

Correct answer is A)

Since the portfolio manager is interested in the interest rate sensitivity of her portfolio as compared to a Treasury bond index, she should examine spread duration.

Q4. Which of the following best describes the difference between spread duration and portfolio duration? Spread duration allows the manager to measure the sensitivity of portfolio value from changes in:

A)   yield levels relative to a benchmark yield.

B)   both convexity and yield changes.

C)   the price of the underlying securities.

Correct answer is A)

With duration a parallel shift in the yield curve could be caused by a change in inflation expectations which causes the yields on all bonds, including treasuries, to increase/decrease the same amount. In spread duration, the shift is in the spread only, indicating an overall increase in risk aversion (risk premium) for all bonds in a given class.

Q5. Two portfolios have the same portfolio duration but one of them has a higher nominal spread duration. How does the higher spread duration affect the portfolio characteristics? The higher spread duration portfolio will have:

A)   the same exposure to small parallel shifts in the Treasury curve but will have a higher exposure to changes in the yield difference between long and short-term Treasury securities.

B)   the same exposure to small parallel shifts in the Treasury curve but will have a higher exposure to changes in the yield difference between non-Treasury and Treasury bonds.

C)   a higher exposure to small parallel shifts in the Treasury curve and a higher exposure to changes in the yield difference between non-Treasury and Treasury bonds.

Correct answer is B)         

Nominal spread is the spread between the nominal yield on a non-Treasury bond and a Treasury of the same maturity.

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