答案和详解如下： 11.Negative convexity for a callable bond is most likely to be important when the: A) bond is first issued. B) S& or Moody's rating on the bond falls. C) price of the bond approaches the call price. D) market interest rate rises above the bond's coupon rate. The correct answer was C) Negative convexity illustrates how the relationship between the price of a bond and market yields changes as the bond price rises and approaches the call price. The convex curve that we generally see for non-callable bonds bends backward to become concave (i.e., exhibit negative convexity) as the bond approaches the call price. 12.Positive convexity in bond prices implies all but which of the following statements? A) Bond prices approach a ceiling as interest rates fall. B) As yields increase, changes in yield have a smaller effect on bond prices. C) As yields decrease, changes in yield have a larger effect on bond prices. D) The price volatility of non-callable bonds is inversely related to the level of market yields. The correct answer was A) The convexity of bond prices means that bond prices as a function of interest rates approach a floor as interest rates rise. 13.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) less convex. B) more convex. C) a straight line. D) inversely convex. The correct answer was A) When the option expires, the prices at the lower end of the curve will become lower. This will make the curve less convex. 14.Which of the following bonds may have negative convexity: A) Mortgage backed securities. B) High yield bonds. C) Callable bonds. D) All of these choices are correct. The correct answer was D) 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. High yield bonds may exhibit negative convexity because they are lower quality bonds with large coupon payments thus causing a larger potential for interest rate risk when interest rates fall because the investor has to reinvest their cash flows at a lower interest rate which is similar to both MBS and callable bonds. High yield issuers would be more prone to refinancing their debt as interest rates fall since they pay an initially high rate of interest and would greatly benefit by refinancing. 15.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 percent to 10 percent, both bonds will: A) increase in value, but bond A will increase more than bond B. B) increase in value, but bond B will increase more than bond A. C) decrease in value, but bond A will decrease more than bond B. D) decrease in value, but bond B will decrease more than bond A. The correct answer was B) 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. 16.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. D) bond price sensitivity is lowest when market yields are low. The correct answer was 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. | 
发表于 2008-5-15 16:47
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