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Q8. How does the price-yield relationship for a putable bond compare to the same relationship for an option-free bond? The price-yield relationship is: ffice ffice" />
A) the same for both bond types.
B) more convex at some yields for the putable bond than for the option-free bond.
C) more convex for a putable bond than for an option-free bond.
Correct answer is B)
Since the holder of a putable has an incentive to exercise his put option if yields are high and the bond price is depressed, this puts a lower limit on the price of the bond when interest rates are high. The lower limit introduces a higher convexity of the putable bond compared to an option-free bond when yields are high.
Q9. Can a fixed income security have a negative convexity?
A) Yes.
B) Need more information to answer question.
C) No.
Correct answer is A)
Yes, fixed income securities can have a negative security. The only type of fixed income security with a negative convexity will be callable bonds.
Q10. Negative convexity is most likely to be observed in:
A) zero coupon bonds.
B) callable bonds.
C) treasury bonds.
Correct answer is B)
All noncallable bonds exhibit the trait of being positively convex and callable bonds have a negative convexity. Callable bonds have a negative convexity because once the yield falls below a certain point, as yields fall, prices will rise at a decreasing rate, thus giving the curve a negative convex shape.
Q11. Which of the following statements best describes the concept of negative convexity in bond prices? As interest rates:
A) fall, the bond's price increases at an increasing rate.
B) fall, the bond's price increases at a decreasing rate.
C) rise, the bond's price decreases at a decreasing rate.
Correct answer is B)
Negative convexity occurs with bonds that have prepayment/call features. As interest rates fall, the borrower/issuer is more likely to repay/call the bond, which causes the bond’s price to approach a maximum. As such, the bond’s price increases at a decreasing rate as interest rates decrease.
Q12. Positive convexity means that:
A) the graph of a callable bond flattens out as the market value approaches the call price.
B) as interest rates change, bond prices will increase at an increasing rate and decrease at a decreasing rate.
C) the price of a fixed-coupon bond is inversely related to changes in interest rates.
Correct answer is B)
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.
Q13. Consider two bonds, A and B. Both bonds are presently selling at par. Each pays interest of $120 annually. Bond A will mature in 5 years while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 10%, both bonds will:
A) increase in value, but bond B will increase more than bond A.
B) increase in value, but bond A will increase more than bond B.
C) decrease in value, but bond B will decrease more than bond A.
Correct answer is A)
There are three features that determine the magnitude of the bond price volatility:
(1) The lower the coupon, the greater the bond price volatility.
(2) The longer the term to maturity, the greater the price volatility.
(3) The lower the initial yield, the greater the price volatility.
Since both of these bonds are the same with the exception of the term to maturity, the bond with the longer term to maturity will have a greater price volatility. Since bond value has an inverse relationship with interest rates, when interest rates decrease bond value increases.
Q14. Which of the following bonds may have negative convexity?
A) Mortgage backed securities.
B) Callable bonds.
C) Both of these choices are correct.
Correct answer is C)
Negative convexity is the idea that as interest rates decrease they get to a certain point where the value of certain bonds (bonds with negative convexity) will start to increase in value at a decreasing rate.
Interest rate risk is the risk of having to reinvest at rates that are lower than what an investor is currently receiving.
Mortgage backed securities (MBS) may have negative convexity because when interest rates fall mortgage owners will refinance for lower rates, thus prepaying the outstanding principle and increasing the interest rate risk that investors of MBS may incur.
Callable bonds are similar to MBS because of the possibility that the principle is being returned to the investor sooner than expected if the bond is called causing a higher level of interest rate risk.
Q15. If a put feature expires on a bond so that it becomes option-free, then the curve depicting the price and yield relationship of the bond will become:
A) more convex.
B) inversely convex.
C) less convex.
Correct answer is C)
When the option expires, the prices at the lower end of the curve will become lower. This will make the curve less convex.
Q16. Positive convexity in bond prices implies all but which of the following statements?
A) As yields increase, changes in yield have a smaller effect on bond prices.
B) The price volatility of non-callable bonds is inversely related to the level of market yields.
C) Bond prices approach a ceiling as interest rates fall.
Correct answer is C)
The convexity of bond prices means that bond prices as a function of interest rates approach a floor as interest rates rise.
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发表于 2009-3-5 10:01
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