Chapter 10

Question 1

A bond’s annual coupon divided by its par value

Answer 1

Coupon Rate

Question 2

A bond’s annual coupon divided by its market price

Answer 2

Current Yield

Question 3

The discount rate that equates a bond’s price with the present value of its future cash flows

Answer 3

Yield to Maturity (YTM)

Question 4

The price of a bond net of accrued interest; this is the price that is typically quoted

Answer 4

Clean Price

Question 5

The price of a bond including accrued interest, also known as the full or invoice price

Answer 5

Dirty Price

Question 6

A bond is callable if the issuer can buy it back before it matures

Answer 6

Callable Bond

Question 7

The price the issuer of a callable bond must pay to buy it back back

Answer 7

Call Price

Question 8

The present value of the bond’s remaining cash flows

Answer 8

Make-Whole Call Price

Question 9

the period during which a callable bond cannot be called

Answer 9

Call Protection Period

Question 10

Measure of return that assumes a bond will be redeemed at the earliest call date

Answer 10

Yield to Call (YTC)

Question 11

The possibility that changes in interest rates will result in losses in a bond’s value

Answer 11

Interest Risk Rate

Question 12

The yield actually earned or “realized” on a bond

Answer 12

Realized Yield

Question 13

A widely used measure of a bond’s sensitivity to changes in bond yields

Answer 13

Duration

Question 14

Change in bond price resulting from a change in yield to maturity of one basis point

Answer 14

Dollar Value of an 01

Question 15

Change in yield to maturity that would lead to a 1/32 change in bond price

Answer 15

Yield Value of a 32nd

Question 16

A bond portfolio created to prepare for a future cash outlay

Answer 16

Dedicated Portfolio

Question 17

The uncertainty about the future or target date portfolio value that results form the need to reinvest bond coupons at yields not known in advance

Answer 17

Reinvestment Rate Risk

Question 18

Constructing a portfolio to minimize the uncertainty surrounding its target date value

Answer 18

Immunization

Question 19

The risk that bond prices will decrease, which arises in dedicated portfolios when the target date value of a bond or bond portfolio is not known with certainty

Answer 19

Price Risk

Question 20

Periodic rebalancing of a dedicated bond portfolio to maintain a duration that matches the target maturity date

Answer 20

Dynamic Immunization