Understanding Fixed- Income Risk and Return

Question 1

The three sources of return on a fixed- rate bond purchased at par value are:

Answer 1

(1) receipt of the promised coupon and principal payments on the scheduled dates,
(2) reinvestment of coupon payments, and (3) potential capital gains, as well as
losses, on the sale of the bond prior to maturity

Question 2

The ________ is the internal rate of return

between the total return and purchase price of the bond

Answer 2

horizon yield (or holding period rate of return)

Question 3

Capital gains and losses are measured from the _________ of the bond and not from the purchase price. The _________ includes the amortization of
the discount or premium if the bond is purchased at a price below or above par
value. The carrying value is any point on the constant- yield price trajectory

Answer 3

carrying value, carrying value

Question 4

The two types of interest rate risk on a fixed- rate bond are ___________ and ___________. These risks offset each other to a certain extent.

Answer 4

coupon reinvestment

risk, market price risk

Question 5

_________ measuring the sensitivity of a bond’s full price to the
bond’s own yield- to- maturity include the Macaulay duration, modified duration,
money duration, and price value of a basis point.

Answer 5

Yield duration statistics

Question 6

Curve duration statistics measuring the sensitivity of a bond’s full price to the
benchmark yield curve are usually called ______________.

Answer 6

effective durations

Question 7

___________ is a measure of a bond’s sensitivity to a change in the benchmark yield curve at specific maturity segments. Key rate durations can be used
to measure a bond’s sensitivity to changes in the shape of the yield curve.

Answer 7

Key rate duration

Question 8

___________ is the weighted average of the time to receipt of coupon
interest and principal payments, in which the weights are the shares of the full price corresponding to each payment. This statistic is annualized by dividing
by the periodicity (number of coupon payments or compounding periods in a
year).

Answer 8

Macaulay duration

Question 9

The duration of a bond portfolio can be calculated in two ways:

Answer 9

(1) the weighted
average of the time to receipt of aggregate cash flows
(2) the weighted average of the durations of individual bonds that compose the portfolio

Question 10

________ is a measure of the price change in terms of units of the currency in which the bond is denominated

Answer 10

Money duration

Question 11

___________ is an estimate of the change in the full

price of a bond given a 1 bp change in the yield- to- maturity.

Answer 11

The price value of a basis point (PVBP)

Question 12

_________ is convexity times the full price of the bond. Combined with
money duration,________ estimates the change in the full price of a
bond in units of currency given a change in the yield- to- maturity.

Answer 12

Money convexity

Question 13

The change in a bond price is the product of:

Answer 13

(1) the impact per basis- point
change in the yield- to- maturity
(2) the number of basis points in the yield
change. The first factor is estimated by duration and convexity. The second
factor depends on yield volatility

Question 14

When the investment horizon is ________ than the Macaulay duration of the
bond, coupon reinvestment risk dominates price risk. The investor’s risk is to _____
interest rates. The duration gap is _________.

Answer 14

greater, lower, negative