Chapter 8: Fixed-Income Securities - Analysis

Question 1

What is the slope for a NORMAL yield curve?

Answer 1

upward sloping

Question 2

What is the slope for an INVERTED yield curve?

Answer 2

downward sloping

Question 3

What does a normal yield curve indicate about the yields of bonds?

Answer 3

the normal yield curve indicates that yields on long-term bonds are higher than yields on short-term bonds

Question 4

What does an inverted yield curve indicate about the yields of bonds?

Answer 4

the inverted yield curve indicates that yields on long-term bonds are lower than yields on long-term bonds

Question 5

Current Yield Calculation

Answer 5

Annual Coupon payment in dollars
/
Current market price

Question 6

Call Risk

Answer 6

The risk that the bond will be called from the investor.

Question 7

reinvestment rate risk

Answer 7

the risk that cash flows cannot be invested at a rate as great as the rate earned by the original investment.

Question 8

Purchasing power risk

Answer 8

the risk that inflation will erode the purchasing power of an investor’s assets

Question 9

exchange rate

Answer 9

risk associated with fluctuations in currency rates

Question 10

liquidity risk

Answer 10

greater if the spread between the bid and ask prices for a security is larger

Question 11

There is a ____________ relationship betwen a bond’s coupon rate and its duration.

Answer 11

Inverse

Question 12

A longer term bond is more volatie than a _______ term bond

Answer 12

shorter

Question 13

There is _____________ relationship between a bond’s Yield to Maturity (YTM) and duration.

Answer 13

Inverse

Question 14

when YTM is increased on a coupon bond, the duration will….

Answer 14

decline

Question 15

what is the calculation for duration?

Answer 15

Question 16

what are the advantages of indexing the portfolio (4)?

Answer 16

diversification
lower management costs
reduced transaction costs
better performance

Question 17

what are the 3 most common Active Strategies for bond?

Answer 17

1. Ladder Strategy
2. Barbell Strategy
3. Bullet Strategy

Question 18

substitution swap of bonds

Answer 18

exchanging bonds with identical characteristics selling for different prices.

Question 19

intermarket swap of bonds

Answer 19

exchanging similar bonds from two different markets.

Question 20

what is the goal of the intermarket swap?

Answer 20

to capitalize on the spread between two similar bonds.

Question 21

rate anticipation swap of bonds

Answer 21

takes advantage of expected changes in market interest rates

Question 22

tax swaps

Answer 22

motivated by making use of unrecognized capital losses. must be careful to avoid a wash sale with a tax swap.

Question 23

Pure yield pickup swap

Answer 23

designed to increase the yield through a swap, such as trading a lower-yielding bond for a higher-yielding bond.