Lesson 6: Fixed-Income Securities Analysis Flashcards
Eric wants to purchase a bond portfolio to fund his daughter’s education. If she starts college in 8 years, which of the following is most important to Eric?
A) That the bond portfolio has a duration of 8 years.
B) That the bond portfolio has a maturity of 8 years.
C) That the bond portfolio predominantly consists of coupon bonds.
D) That the bond portfolio predominantly consists of callable bonds.
The correct answer is (A).
Because Eric has a definite time horizon, he should immunize his portfolio by setting his portfolio’s duration equal to his time horizon (in this case, 8 years). Answer (B) is incorrect because the maturity of the bonds in the portfolio is far less important than their duration. Answer (C) is incorrect because Eric is unlikely to care whether his bonds pay coupons; he is interested in funding a future goal, not in receiving income. Answer (D) is incorrect because Eric would likely prefer not to have his bond portfolio called back before his time horizon.
Emily has just retired and wants to purchase a bond portfolio that will provide her with income each year. Which bond portfolio strategy is most appropriate for her?
A) The ladder strategy
B) The bullet strategy
C) The barbell strategy
D) The passive strategy
The correct answer is (A).
Emily would prefer a ladder strategy in which her bonds mature regularly to provide her with income.
A normal yield curve is one in which:
A) Interest rates gradually increase as bond maturities increase.
B) Interest rates gradually decrease as bond maturities increase.
C) Interest rates are unaffected by bond maturities.
D) Interest rates are generally flat for bond maturities of up to about 10 years, but then rise rapidly for bond maturities of 10 to 30 years.
The correct answer is (A).
A sign of a normal yield curve is that interest rates gradually increase as bond maturities increase.
A fixed-income portfolio consists of Bond A, Bond B, and Bond C. The bonds have durations of 5, 8, and 10, respectively. If 40% is invested in Bond A and 30% invested in each of the other two bonds, what is the duration for the portfolio?
A) 7.4
B) 7.7
C) 8.0
D) 10.0
The correct answer is (A).
(0.4 × 5) + (0.3 × 8) + (0.3 × 10) = 2 + 2.4 + 3 = 7.4
If a bond is trading at a premium, which of the following will be highest?
A) The coupon rate
B) The current yield
C) The yield to maturity
D) All of the above will be equal
The correct answer is (A).
When a bond is trading at a premium, its coupon rate will be higher than its current yield which, in turn, will be higher than its yield to maturity.
The Charlie bond is a 3 percent coupon bond with semiannual coupon payments that matures in 30 years. If the yield to maturity (YTM) for this bond is 6 percent, what is the value of the bond?
A) $622.28
B) $602.41
C) $587.06
D) $584.87
The correct answer is (D).
P/YR 2
FV $1,000.00
N 60
i 6.00%
PMT
$15.00
PV $584.87
Bennett is considering purchasing an 8-year bond that is selling for $700. What is the YTM for this bond if it has a 6 percent coupon paid semiannually?
A) 12.17%
B) 12.14%
C) 12.05%
D) 11.92%
The correct answer is (D).
END Mode
P/YR 2
PV -$700.00
N 8 × 2 = 16
PMT $30
FV $1,000.00
i 11.92%
Generally, fixed-income investors are subject to which of the following risks?
A) Purchasing power risk
B) Interest-rate risk
C) Default risk
D) All of the above
The correct answer is (D).
All fixed-income investors are subject to purchasing power risk and interest-rate risk, neither of which can be diversified away. Most investors are also subject to default risk.
Daniela is considering purchasing a 3-year bond that is selling for $1,000. What is the current yield for this bond if it has a 4 percent coupon paid semiannually?
A) 2%
B) 3%
C) 4%
D) None of the above
The correct answer is (C).
$40 ÷ $1000 = 4%
A coupon bond that pays interest semiannually has a par value of $1,000, matures in 7 years, and has a yield to maturity of 7.5 percent. If the annual coupon rate is 9 percent, what is the approximate value of the bond today?
A) $856
B) $1,000
C) $1,081
D) $1,083
The correct answer is (C).
P/YR =2
N =14
I =7.5
PMT =$45
FV =$1,000
PV =$1,080.55
