CFA Level I：Fixed Income - Introduction to The Measurement of Interes

cityboy

1. A fixed income security’s current price is 101.65. You estimate that the price will rise to 102.98 if interest rates decrease 0.25% and fall to 100.91 if interest rates increase 0.25%. The security’s effective duration is closest to: A. 3.98 B. 4.07 C. 4.87

Ans: B; B is correct because the effective duration =(Bond price when yield falls-Bond price when yield rises) / (2 × Current price × Change in yield in decimal) =(102.98-100.91)/(2 ×101.65×0.0025) =4.07

jasminezhang

回复 8# cityboy
这道题是不是应该选C? convexity前面不是还需要乘以二分之一吗?

cityboy

17. Changes in a bond’s cash flows associated with yield changes would be reflected in the bond’s: A. modified duration B. Macaulay duration C. effective duration

Ans: C; C is correct because effective duration captures the effects from changes in a bond’s cash flows when the yield changes. Therefore, effective duration is the appropriate measures of interest rate sensitivity for bonds with embedded options ( changes in cash flows). A is incorrect because modified duration is calculated without any adjustment to a bond’s cash flows for embedded options. B is incorrect because Macaulay duration is frequently used by portfolio managers who use an immunization strategy and is irrelevant in this case.

cityboy

16. Bond B is currently trading at 1,015 with an effective duration of 6.88. If the market interest rate fell by 25 basis points, the new price would be closest to: A. $998 B. $1,015 C. $1,032

Ans: C; Because the market interest rate falls, the change would be positive. The change in price would be 6.88 × 0.0025= 0.0172 The new price= 1,018 × (1+0.0172)= $1,032

cityboy

15. Bond A is now trading at 97.384 with 8 years to maturity and a YTM of 5.38% and duration of 6.45, its price value of a basis point (PVBP) is closest to: A. 0.0524 B. 0.0628 C. 0.0779

Ans: B; The duration multiplied by one basis point (0.0001) multiplied by 100% is the percentage change in value of the bond for a one basis point change in interest rates. PVBP is the price multiplied by the percentage change in value for a one basis point change in interest rates. Therefore PVBP= 97.384 × 6.45 × 0.0001 ×100% = 0.0628

cityboy

14. Which of the following is an advantage of the full value approach to measuring the interest rate risk of a bond portfolio relative to the duration/convexity approach? A. less time consuming. B. easier to model. C. more accurate.

Ans: C; C is correct because *Full valuation approach: Advantage: It is more accurate and can be used to evaluate the price effects of more complex interest rate scenarios. It can be used for stress testing. Disadvantage: It is relatively time consuming, especially if some of the bonds have more complex structures. *Duration/convexity approach: Advantage: simplicity. Disadvantage: the duration-convexity approach is appropriate only for estimating the effects of parallel yield curve shifts.

cityboy

13. Which of the following is a shortcoming of the full value approach to measuring the interest rate risk of a bond portfolio, compared to the duration/convexity approach? A. It ignores the impact of  embedded options. B. It is relatively time consuming. C. It cannot be used for stress testing.

Ans: B; B is correct because the full valuation approach is relatively time consuming, especially if some of the bonds have more complex structures. A is incorrect because the full value approach does not ignore the impact of embedded options. It just gets quite complex and time consuming for bonds with embedded options. C is incorrect because the full value approach can be used for stress testing a bond portfolio, for situations with extreme changes in interest rates.

cityboy

12. Jim King makes the following statement about callable bonds: As yields rise, the callable bond behaves much the same as a comparable option-free bond. Kate King adds that as yields fall, the price of callable bonds will rise less quickly than comparable option-free bonds (beyond a critical point). Are their statements about callable bonds correct? A. Neither statement is correct. B. Both statements are correct. C. Only one of the statements is correct.

Ans: B; As indicated by the graph above, both Jim and Kate’s statements are correct. Therefore B is the correct answer.

cityboy

11. Lei Lee makes the following statement about putable bonds: As yields rise, the price of putable bonds will fall more quickly than comparable option-free bonds (beyond a critical point) due to the decline in value of the embedded put option. Meimei Han adds that as yields fall, the price of putable bonds will climb more quickly than comparable option-free bonds (beyond a critical point) due to the increase in value of the embedded put option. Are their statements about putable bonds correct? A. Neither statement is correct. B. Both statements are correct. C. Only one of the statements is correct.

Ans: A; Lei Lee is incorrect because as yields rise, the value of the embedded put option in a putable bond increases and reduces the decline in the value of the bond compared with a similar option-free bond. Meimei Han is incorrect because as yields fall, the value of the embedded put option decreases, and the putable bond behaves much the same as a similar option-free bond since the embedded put option has little or no value.

cityboy

10. David Zhao, a fixed-income analyst, determines that a 6.8% coupon option-free bond, with 7 years to maturity, would fall 2.5% in price if market interest rate rise by 0.5%. If market interest rates fall by 50 basis points, the bond’s price would climb by: A. less than 2.5% B. exactly 2.5% C. more than 2.5%

Ans: C; The bond is option-free and will therefore exhibit positive convexity, which means an equal change in rates will produce a greater percentage gain when rates decrease than the percentage loss produced when rates increase.