Topic 7

Question 1

A defensive stock will have a beta equal to 1.

Answer 1

FALSE; it is beta<1

Question 2

The bond beta is always equal to zero

Answer 2

FALSE

Question 3

The bond duration measure the probability of default

Answer 3

FALSE; average time that takes place to recover the bond investment.

Question 4

The duration of a bond portfolio rises if the weight of the bond with greatest duration rises

Answer 4

TRUE

Question 5

Fixed income securities are securities that promise their holders the future payment of predetermined cashflows up to their maturity date.

Answer 5

TRUE

Question 6

The value of the bond is equal to the sum of the discounted cash flows which are promised, at time 0

Answer 6

TRUE

Question 7

The duration of a zero coupon is always equal to the time from period 0 to the maturity date of the bond.

Answer 7

TRUE

Question 8

Fixed income securities are securities that promise their holders the future payment of predetermined constant cashflows up to their maturity date.

Answer 8

FALSE; not constant CFs.

Question 9

Interest rate risk refers to the possibility that the value of a fixed income portfolio decreases with an increase of the market interest rate.

Answer 9

TRUE

Question 10

Credit risk refers to the possibility that a bond issuer does not fulfil its payment obligations.

Answer 10

TRUE

Question 11

The higher is the credit rating of a company, the higher is the return offered by its bonds

Answer 11

FALSE; high rating, high security, low return.

Question 12

The lower is the interest rate, the higher is the price of the bond.

Answer 12

TRUE

Question 13

Interest rate risk…

Answer 13

…can be mitigated by creating a portfolio with duration equal to the time horizon of the investor (immunisation).

Question 14

Interest rate risk does not affect to the investor that unwind their positions before maturity of the bond portfolio.

Answer 14

FALSE; not does affect.

Question 15

Interest rate risk are those changes in bond prices due to changes in the creditworthiness that affects the total value of the bond portfolio.

Answer 15

FALSE

Question 16

Interest risk is negatively correlated with the bond portfolio’s volatility.

Answer 16

FALSE, positively

Question 17

The higher the interest rate, the higher the bond’s duration is

Answer 17

FALSE, the lower the duration is

Question 18

The higher the bond’s maturity, the lower its duration is

Answer 18

FALSE; the higher its duration is

Question 19

The higher the coupons, the lower the bond’s duration is.

Answer 19

TRUE

Question 20

The lower the duration, the higher the bond’s price sensitivity to interest rate changes.

Answer 20

FALSE; the lower the bonds price…