CFA Level I：Fixed Income - Risks associated with investing in bonds 习题精选 investing

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1. An investor purchases a 5% coupon bond maturing in 15 years for par value. Immediately after purchase, the yield required by the market increases. The investor would then most likely have to sell the bond at: A. par. B. a discount. C. a premium.

Ans: B; B is correct because the bond would sell below par or at a discount if the yield required by the market rises above the coupon rate. Because the bond initially was purchased at par, the coupon rate equals the yield required by the market. Subsequently, if yields rise above the coupon, the bond’s market price would fall below par.

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2. Given two otherwise identical bonds, when interest rates rise, the price of Bond A declines more than the price of Bond B. Compared to Bond B, Bond A most likely: A. is callable. B. has a lower coupon. C. has a shorter maturity.

Ans: B; Since Bond A declines more than the price of Bond B when interest rates rise, Bond A has greater price sensitivity to changes in interest rates and thus greater interest rate risk/duration than Bond B. B is correct. The lower the coupon rate, the greater the bond’s price sensitivity to changes in interest rates. A in not correct. The presence of an embedded option decreases the bond’s price sensitivity to changes in interest rates. C is not correct. The longer the maturity, the greater the bond’s price sensitivity to changes in interest rates.

cityboy

3. An analyst is evaluating the two bonds below: Bond A Bond B Coupon 6.90% 8.25% Maturity Oct 29, 2022 Nov 5, 2022 Callable No No Price $102.17 $102.39 Yield 6.60% 7.90% Compared with Bond A, Bond B most likely will have: A. less interest rate risk and more reinvestment risk. B. more interest rate risk and less reinvestment risk. C. less interest rate risk and less reinvestment risk.

Ans: A; Since both securities have essentially the same maturity, all else the same, the bond with the lower coupon rate will have a higher sensitivity to changes in interest rates. Therefore, Bond B will have less interest rate risk. The higher the yield on the bond, the more the reinvestment risk, because the investor must be able to reinvest at the same yield. Therefore, Bond B will have more reinvestment risk.

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4. When interest rates fall, the price of a callable bond will: A. rise more than an option-free bond. B. rise less than an option-free bond. C. fall less than an option-free bond.

Ans: B; The call feature limits the upside price movement of a bond when interest rates fall. The price of a callable bond will not rise above the call price, which leads to that the value of a callable bond will be less sensitive to interest rate changes than an otherwise option-free bond. Therefore B is the correct answer. When interest rates fall, the price of a callable bond will rise less than an option-free bond.

cityboy

5. If market interest rates rise, the price of a callable bond, compared to an otherwise identical option-free bond, will most likely decrease by: A. more than the option-free bond. B. the same amount as the option-free bond. C. less than the option-free bond.

Ans: C; Value of a callable bond = Value of an option-free bond – Value of the call As interest rates rise, the value of the call decreases by a decreasing amount. Therefore, as interest rates rise, the value of a callable bond decreases by a less amount than an option-free bond.

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6. For a 10-year floating-rate security, if market interest rates change by 1%, the change in the value of the security will most likely be: A. zero. B. related to the security’s coupon reset frequency. C. similar to an otherwise identical fixed-rate security.

Ans: B; B is correct. Change in the value of the security corresponding to a 1% change in market interest rates is termed as duration. The problem is asking for the duration of a 10-year floating-rate security. The duration of a floating-rate security is equal to the fraction of a year until the next reset date, therefore related to the security’s coupon reset frequency.

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7. Duration is most accurate as a measure of interest rate risk for a bond portfolio when the slope of the yield curve: A. increases. B. decreases. C. stays the same.

Ans: C; C is correct because duration measures the change in bond’s price if the yields for all maturities change by the same amount; that is, it assumes the slope of the yield curve stays the same.

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8. One reason why the duration of a portfolio of bonds does not properly reflect that portfolio’s yield curve risk is that the duration measure: A. ignores differences in coupon rates across bonds. B. assumes all the bonds have the same discount rate. C. assumes all yields change by the same amount.

Ans: C; C is correct because duration assumes that yields change by the same amount across all maturities.

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9. A bond is selling for 98.6. It is estimated that the price will fall to 97.0if yields rise 30 bps and that the price will rise to 100.5 if yields fall 30 bps. Based on these estimates, the duration of the bond is closest: A. 5.92. B. 1.78 C. 2.96.

Ans: A; Duration = ==5.92

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10. A fixed income portfolio manager owns a $4 million par value non-callable bond. The bond’s duration is 5.4 and the current market value is $4,125,000. The dollar duration of the bond is closest to: A. 200,000. B. 216,000. C. 222,750.

Ans: C; Dollar duration is the price change in dollars in response of a change in yield of 100 basis points (1%). Dollar Duration = Duration 0.01Market Value =5.40.01$4,125,000 =222,750