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LOS e, (Part 1): Distinguish among the alternative definitions of duration.
Q1. The goal of computing effective duration is to get a:
A) preliminary estimate of modified duration.
B) measure of duration that is effectively constant for the life of the bond.
C) more accurate measure of the bond's price sensitivity when embedded options exist.
Q2. When compared to modified duration, effective duration:
A) factors in how embedded options will change expected cash flows.
B) is equal to modified duration for callable bonds but not putable bonds.
C) places less weight on recent changes in the bond's ratings.
Q3. Which of the following statements about modified duration and effective duration is FALSE?
A) Modified duration should be used for bonds with embedded options.
B) Effective duration should be used for bonds with embedded options.
C) The modified duration measure assumes that yield changes do not change the expected cash flows.
Q4. A bond with an 8% semi-annual coupon and 10-year maturity is currently priced at $904.52 to yield 9.5%. If the yield declines to 9%, the bond’s price will increase to $934.96, and if the yield increases to 10%, the bond’s price will decrease to $875.38. Estimate the percentage price change for a 100 basis point change in rates.
A) 6.58%.
B) 4.35%.
C) 2.13%.
Q5. When calculating duration, which of the following bonds would an investor least likely use effective duration on rather than modified duration?
A) Callable bond.
B) Convertible bond.
C) Option-free bond.
Q6. Which of the following statements about duration and convexity is FALSE?
A) convexity of a callable bond is always lower than that of a noncallable bond when rates fall.
B) option-adjusted duration cannot exceed duration to maturity.
C) duration to first call is longer than duration to maturity.
Q7. Which of the following statements about duration is FALSE?
A) Effective duration is the exact change in price due to a 100 basis point change in rates.
B) For a specific bond, the effective duration formula results in a value of 8.80%. For a 50 basis point change in yield, the approximate change in price of the bond would be 4.40%.
C) The numerator of the effective duration formula assumes that market rates increase and decrease by the same number of basis points.
Q8. An investor gathered the following information on two U.S. corporate bonds:
- Bond J is callable with maturity of 5 years
- Bond J has a par value of $10,000
- Bond M is option-free with a maturity of 5 years
- Bond M has a par value of $1,000
For each bond, which duration calculation should be applied?
Bond J Bond M
A) Modified Duration Effective Duration only
B) Effective Duration Effective Duration only
C) Effective Duration Modified Duration or Effective Duration
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发表于 2009-3-5 11:17
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