HW 6, quiz

Question 1

How is duration impacted by time to maturity and coupon rate

Answer 1

Longer time to maturity, greater duration

higher the coupon rate, the lower the duration

Question 1

Price risk

Answer 1

bond’s value decreases when interest rates rise

Question 2

Reinvestment risk

Answer 2

the income from a bond portfolio decreases when interest rates decrease

Question 3

PV of cash flows

Answer 3

CF1/(1+r) + CF2/(1+r)^2…

Question 4

What is true about duration? (3)

Answer 4

It presents a weighted average of the time to each principal and coupon payment of a bond.

It presents the effective average maturity of the bond’s cash flows.

The duration of a zero-coupon bond is equal to its time to maturity.

Question 5

Change in price given duration and change in yield

Answer 5

= - D * (change yield / 1 + y)

Question 6

Duration formula

Answer 6

= 1 / P * ( #pmt (coupon/1+r) + #pmt (coupon/(1+r)^2) ….. #pmt ((coupon + par)/(1+r)^n))

Question 7

Duration of liability

Answer 7

same formula as duration / PV of liability

Question 8

% change in bonds price formula

Answer 8

= (-D * change in yield) + 0.5(convexity)(change in yield)^2