Chapter 21

Question 1

The approximate change in dollar value of a bond or portfolio for a given change in yield.

Answer 1

Dollar Duration

It helps investors understand interest rate risk.

If a bond’s dollar duration is $200, for a 1% increase in interest rates, the bond’s value would decrease by $200, and vice versa for a rate decrease.

Question 2

The portion of the spread attributable to the difference in credit risk is known as this.

Answer 2

credit spread

Question 3

These debt securities strategies are designed to meet specific targets and goals.

Answer 3

dedicated strategies

Question 4

In these debt securities strategies, the investor forms expectations and shifts assets around to take full advantage of those expectations.

Answer 4

active strategies

Question 5

It is the weighted-average term to maturity of the present value of the bond’s cash flows, including all coupon payments and the principal repayment.

Answer 5

Macaulay duration

Question 6

This type of strategy is designed to capitalize on the difference in yield spreads and expected changes in yield spreads between different sectors of the bond market.

Answer 6

intermarket spread strategy

Question 7

This type of strategy, also known as substitution swaps, involves swapping bonds that are largely similar

Answer 7

intramarket spread strategy

Question 8

It is a measure of the approximate percentage price change for a 100 basis point change in yield.

Answer 8

modified duration

Question 9

This theory is used to explain the behaviour of the portion of a bond’s spread that is due to embedded options.

Answer 9

Interest rate volatility theory

Question 10

It involves building a portfolio of debt securities with staggered maturities so that different portions of the portfolio mature at regular intervals.

Answer 10

laddering

Question 11

In these debt securities strategies, the investor’s portfolio is designed to approximate a market index or to reduce the requirement to make decisions based on expectations.

Answer 11

passive strategies

Question 12

This approach uses mathematical programming to optimize the portfolio based on the stated return objectives and constraints.

Answer 12

optimization approach

Question 13

It involves the purchase or sale of T-bills or government bonds by the Bank of Canada, which in turn influences the overall money supply.

Answer 13

open market operations

Question 14

This approach takes a market index and divides it into parts called cells.

Answer 14

stratified sampling approach

Question 15

This theory is based on the view that credit spreads are affected by the economic cycle.

Answer 15

Quality spread theory

Credit spreads widen in bad economy (seek safety

suggests that the difference in interest rates (credit spreads) between bonds of different credit qualities changes based on the economic cycle. During good economic times, the spread narrows because investors are more willing to take risks. During bad economic times, the spread widens as investors seek safer, higher-quality bonds.

Question 16

It tells us the approximate percentage price change in the value of the portfolio for a 100 basis point change in the yields of all bonds in the same direction.

Answer 16

portfolio modified duration

Question 18

In an effort to keep the economy healthy, the government influences interest rates through ______

Answer 18

monetary and fiscal policy.