Reading 66: Introduction to the Measurement of Interest R

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Q8. How does the price-yield relationship for a putable bond compare to the same relationship for an option-free bond? The price-yield relationship is:

A) the same for both bond types.

B) more convex at some yields for the putable bond than for the option-free bond.

C) more convex for a putable bond than for an option-free bond.

Q9. Can a fixed income security have a negative convexity?

A) Yes.

B) Need more information to answer question.

C) No.

Q10. Negative convexity is most likely to be observed in:

A) zero coupon bonds.

B) callable bonds.

C) treasury bonds.

Q11. Which of the following statements best describes the concept of negative convexity in bond prices? As interest rates:

A) fall, the bond's price increases at an increasing rate.

B) fall, the bond's price increases at a decreasing rate.

C) rise, the bond's price decreases at a decreasing rate.

Q12. 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.

Q13. 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% to 10%, both bonds will:

A) increase in value, but bond B will increase more than bond A.

B) increase in value, but bond A will increase more than bond B.

C) decrease in value, but bond B will decrease more than bond A.

Q14. Which of the following bonds may have negative convexity?

A) Mortgage backed securities.

B) Callable bonds.

C) Both of these choices are correct.

Q15. 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) more convex.

B) inversely convex.

C) less convex.

Q16. Positive convexity in bond prices implies all but which of the following statements?

A) As yields increase, changes in yield have a smaller effect on bond prices.

B) The price volatility of non-callable bonds is inversely related to the level of market yields.

C) Bond prices approach a ceiling as interest rates fall.