Reading 63: Risks Associated with Investing in Bonds - LO measures, color, style

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16.Duration measures the:

A)   timing of cash flows weighted by the proportionate value of each flow's present value.

B)   length of time until a bond matures.

C)   cash flows weighted by the timing of the cash flows.

D)   length of time until a bond is callable.

17.Duration of a bond normally increases with an increase in:

A)   coupon rate.

B)   yield to maturity.

C)   par value.

D)   time to maturity.

18.Which of the following statements about duration of a bond is least accurate?

A)   The duration of a zero coupon bond is approximately equal to its maturity.

B)   The duration of a floater is equal to the time to the next reset date.

C)   If a bond has an effective duration of 7.5, it means that a 1% change in rates will result in a 7.5% change in price.

D)   The dollar change in price is approximately equal to the product of the duration and the current value of the bond divided by 100.

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答案和详解如下：

16.Duration measures the:

A)   timing of cash flows weighted by the proportionate value of each flow's present value.

B)   length of time until a bond matures.

C)   cash flows weighted by the timing of the cash flows.

D)   length of time until a bond is callable.

The correct answer was A)

The sensitivity of a bond’s price to changes in yield is known as a bond’s effective duration. Macaulay’s duration is calculated by the timing of cash flows weighted by the proportionate value of each flow’s present value.

17.Duration of a bond normally increases with an increase in:

A)   coupon rate.

B)   yield to maturity.

C)   par value.

D)   time to maturity.

The correct answer was D)

Duration is directly related to maturity and inversely related to the coupon rate and yield to maturity (YTM). Duration is approximately equal to the point in years where the investor receives half of the present value of the bond's cash flows. Therefore, the later the cash flows are received, the greater the duration.

The longer the time to maturity, the greater the duration (and vice versa). A longer-term bond pays its cash flows later than a shorter-term bond, increasing the duration. The lower the coupon rate, the greater the duration (and vice versa). A lower coupon bond pays lower annual cash flows than a higher-coupon bond and thus has less influence on duration. The lower the YTM, the higher the duration. This is because the bond's price (or present value) is inversely related to interest rates. When market yields fall, the value (or cash flow) of a bond increases without increasing the time to maturity.

18.Which of the following statements about duration of a bond is least accurate?

A)   The duration of a zero coupon bond is approximately equal to its maturity.

B)   The duration of a floater is equal to the time to the next reset date.

C)   If a bond has an effective duration of 7.5, it means that a 1% change in rates will result in a 7.5% change in price.

D)   The dollar change in price is approximately equal to the product of the duration and the current value of the bond divided by 100.

The correct answer was C)

Because of convexity, it will be approximately a 7.5 percent change in price, not an actual 7.5 percent change in price. The readings are very explicit about this distinction.