| Question 101
A bond has a modified duration of 7 and convexity of 50. If interest rates decrease by 1%, the price of the bond will most likely:
A) decrease by 7.5%.
B) increase by 7.5%. C) increase by 6.5%. D) decrease by 6.5%.
The correct answer was B) increase by 7.5%. Percentage Price Change = –(duration) (∆i) + convexity (∆i)2 therefore  ercentage Price Change = –(7) (–0.01) + (50) (–0.01)2=7.5%. This question tested from Session 16, Reading 69, LOS g, (Part 2)
Question 102
Which of the following approaches in determining the discount factor will lead to more accurate bond pricing when the term structure is upward sloping? The:
A) use of a single discount factor.
B) use of a series of spot interest rates that reflect the current term structure. C) arithmetic average of the spot interest rates. D) geometric average of the spot interest rates.
The correct answer was B) The use of multiple discount rates (i.e., a series of spot rates that reflect the current term structure) will result in more accurate bond pricing and in so doing, will eliminate any meaningful arbitrage opportunities. That is why the use of a series of spot rates to discount bond cash flows is considered to be an arbitrage-free valuation procedure. This question tested from Session 16, Reading 67, LOS f, (Part 1)
Question 103
Portfolio duration least accurately approximates the sensitivity of the value of a bond portfolio to:
A) parallel shifts in the yield curve.
B) non-parallel shifts in the yield curve. C) upward shifts in the yield curve. D) downward shifts in the yield curve.
The correct answer was B) non-parallel shifts in the yield curve. Portfolio duration is an approximation of the price sensitivity of a portfolio to parallel shifts of the yield curve (yields for all maturities increase or decrease by equal amounts). Duration can be a poor approximation of interest rate risk for non-parallel shifts in the yield curve.
This question tested from Session 15, Reading 63, LOS g
Question 104
Which of the following best describes a Treasury note? Pays:
A) explicit interest; is non-callable; has a 2- to 10-year maturity.
B) implicit interest; is non-callable; has a 2- to 10-year maturity. C) explicit interest; is callable; has a 1- to 15-year maturity. D) implicit interest; is non-callable; has a 1- to 15-year maturity.
The correct answer was A) explicit interest; is non-callable; has a 2- to 10-year maturity. While some Treasury bonds issued prior to 1984 are callable, notes are not. They pay explicit, semi-annual interest and have original maturities ranging from 2 to 10 years. This question tested from Session 15, Reading 64, LOS b, (Part 1)
Question 105
The current 1-period spot rate is 8.97%, the current 2-year spot rate is 10.53%, and the current 3-period spot rate is 11.47%. The 1-year forward rate 2 years from now is closest to:
A) 11.8%.
B) 7.9%. C) 16.6%. D) 13.4%.
The correct answer was D) 13.4%.
This question tested from Session 16, Reading 68, LOS h, (Part 1) | 
发表于 2008-5-26 13:42
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