Bonds (Term Structure and Volatility)

Question 1

What does this formula describe?

Mcauley Duration / (1+YTM)

Answer 1

Modified Duration

Question 2

Term used to describe the curvilinear shape of Price/yield relationship

Answer 2

Convexity

Question 3

A theory of term structure that states that investors should demand higher interest rates on longer-term securities because they hold greater risk

Answer 3

Liquidity Preference theory

Question 4

A measure that shows an estimate of bond price change to a change in interest rates

Answer 4

Modified Duration

Question 5

A measure that shows the estimated time until a bond’s cash flows recoup the original cost of the bond

Answer 5

Duration

Question 6

True or False?

Modified duration takes into consideration the inverse price/yield relationship and can show the curvilinear response to a change in interest rates

Answer 6

False

Question 7

Expectations theory of term structure states that…

Answer 7

The yields on different assets are determined primarily by market expectations of future yields

Question 8

True or False?

Ceteris paribus, the higher the coupon the more volatile

Answer 8

False

Question 9

A zero coupon bond sells for a price of $54.

It has a face value of 100 and 12 years until maturity.

Work out the yield

Answer 9

5.27%

=(face value/price)^(1/years to maturity) -1