Baran

 

8、The Macaulay and modified duration of a 2-year annual pay bond paying an 8 percent coupon and priced to yield 10 percent are closest to:

A) 1.75; 1.92.

B) 8.00; 10.00.

C) 1.92; 1.75.

D) 1.08; 1.10.

Baran

 

The correct answer is A

 

Based on bond values at yields to maturity of 7.5% and 8.5%,

Baran

 

6、Of the following, the bond with the lowest Macaulay duration is the:

A) 10%, 10-year Treasury.

B) 8.5%, 10-year Treasury.

C) 10-year, zero-coupon corporate.

D) 10%, perpetual pay (consol) bond.

Baran

 

The correct answer is A

Term	Cash Flow	PV of Cash Flow	Time-Weighted PV
0.5	3	2.8846	1.4423
1.0	3	2.7737	2.7737
1.5	3	2.6670	4.0005
2.0	103	88.0448	176.0896
		$96.3701	$184.3061

DMAC = $184.3061 / $96.3701 = 1.91; DMOD = 1.91/ 1.04 = 1.84

Baran

 

The convexity of this bond, based on a change in the yield to maturity of 50 basis points (i.e., Dy = 0.5%), is closest to:

A) 4.15.

B) 4.75.

C) 4.94.

D) 2.08.

Baran

 

The correct answer is D

 

The modified duration is:

Remember that while the Macaulay duration for a zero-coupon bond is the same as its maturity, an adjustment needs to be made for modified duration.

Baran

 

5、Consider a semiannual pay bond with two years to maturity, a 6 percent coupon, and a yield to maturity of 8 percent.

The Macaulay and modified duration of this bond are closest to:

A) 1.91 and 1.84.

B) 1.94 and 1.86.

C) 1.96 and 1.84.

D) 1.86 and 1.74.

Baran

 

4、Community Bank has a $5 million par value position in a bond with the following characteristics:

The bond is a 5-year, zero-coupon bond.

The bond is priced to yield 5%.

The historical mean change in daily yields is 0.0%.

The standard deviation in yield is 36 basis points.

The modified duration of the bond is closest to:

A) 4.395.

B) 2.524.

C) 5.000. 

D) 4.878.

Baran

 

2、One of the features of using only modified duration for estimating change in price is that the size of the estimated price change is:

A) the same for up or down movements in interest rates.

B) higher for an up move in interest rates as compared to a down move in interest rates.

C) lower for an up move in interest rates as compared to a down move in interest rates. 

D) higher for a callable bond as compared to an option-free bond.

Baran

 

The correct answer is A

 

Estimated price changes using only duration are symmetric for a change in interest rates. How the modified duration for a callable bond would compare with an otherwise identical option-free bond will depend upon the relevant range over which the measure would be calculated. If the relevant range includes a range in which the callable bond will experience price compression, the effective duration measure for the callable bond will be lower than for the option-free bond.