Understanding Fixed-Income Risk and Return
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Question 1 of 11
1. Question
Sources of Return
Polly bought a fixed coupon bond at 7% YTM with 2 years to maturity. One year after she bought the bond, market interest rate increased to 8% and remained at that level until the maturity of the bond. If Polly held the bond to maturity, what is the annualised rate of return to her?
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Question 2 of 11
2. Question
Sources of Return
Wang expects interest rates to increase gradually over the next 5 years. Which strategy would most likely give him the highest return?
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Question 3 of 11
3. Question
Macaulay Duration
A bond with 10 years to maturity has a Macaulay Duration of 5.7. Rowsley has an investment horizon of 4 years. Which of the following scenario is most likely to produce the highest returns for him?
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Question 4 of 11
4. Question
Macaulay Duration
Calculate the Macaulay duration of a $100 par, 6% annual coupon bond with 2 years to maturity, currently trading at $94.72 (YTM=9%).
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Question 5 of 11
5. Question
Modified Duration and Money Duration
A $100 par, 6% annual coupon bond with 2 years to maturity, currently trading at $94.72 (YTM=9%), has a Macaulay duration of 1.94. On the next day, the YTM of the bond fell by 0.3%. The new market price is closest to ________.
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Question 6 of 11
6. Question
Modified Duration and Money Duration
Calculate the Price V value per Basis Point (PVBP) of a $100 par, 6% annual coupon bond with 2 years to maturity, currently trading at $94.72 (YTM=9%).
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Question 7 of 11
7. Question
Approximate Modified Duration and Convexity Adjustment
A $100 par, 6% annual coupon bond with 2 years to maturity is currently trading at $94.72267 (YTM=9%). Given that 1 bp V-= 94.73954, and V+= 94.70579, estimate the convexity of the bond.
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Question 8 of 11
8. Question
Approximate Modified Duration and Convexity Adjustment
A $100 par, 6% annual coupon bond with 2 years to maturity, currently trading at $94.72 (YTM=9%), has a Modified duration of 1.78 and approximate convexity of -10.55. On the next day, the YTM of the bond rose by 0.9%. The estimated percentage change in price is closest to:
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Question 9 of 11
9. Question
Effective Duration and Key Rate Duration
A putable bond is currently trading at 103.40 per 100 par. An analyst estimates that the price will rise to 105.10 if the yield curve shifts down by 25bp, and drop to 102.80 if the yield curve shifts up by 25bp. What is effective duration of the putable bond?
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Question 10 of 11
10. Question
Duration of a Bond Portfolio
A bond portfolio consists of 3 bonds:
Bond A’s market value is $1.2M and has a modified duration of 8.5.
Bond B’s market value is $0.3M and has a modified duration of 12.1.
Bond C’s market value is $1.5M and has a modified duration of 4.6.What is the estimated modified duration of the portfolio using the weighted average method?
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Question 11 of 11
11. Question
Factors that Influence Interest Rate Risks
Timothy feels that interest rates will be rising in the next 2 years, and he only has an investment horizon of 2 years. Which strategy is least suitable for him?
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