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Chapter 18 - Bonds - Analysis and Strategy
Chapter 18 - Bonds - Analysis and Strategy
Bond investors can avoid the risk that interest rates will rise and drive bond prices down
by:
A)
buying zero coupon bonds.
B)
buying Treasury bonds.
C)
holding bonds over one year.
D)
holding bonds till maturity.
Ans:
D
2.Which of the following is not a reason U.S.investors invest in foreign bonds?
A)
to gain diversification
B)
potentially higher returns than U.S. bonds
C)
lower transactions costs and taxes.
D)
All of the above are reasons U.S. investors invest in foreign bonds.
Ans:
C
A)
B)
C)
D)
Ans:
A)
B)
C)
D)
Ans:
4.Which of the following is considered to have the biggest impact on bond yields?
economic growth
business cycles
inflation
Federal Reserve actions
C
A)
B)
C)
D)
Ans:
6.Under the expectations theory, investors expecting interest rates to rise will:
invest more now in short term bonds rather than in long term bonds.
invest more now in long term bonds rather than in short term bonds.
invest more now in Treasury bonds rather than in corporate bonds.
invest more now in corporate bonds rather than in Treasury bonds.
A
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7.Which of the following yield curve theories expect investors to stay in one maturity
segment, regardless of opportunities in other maturity segments?
A)
expectations theory
B)
liquidity preference theory
C)
market segmentation theory
D)
preferred habitat theory
Ans:
C
A)
B)
C)
D)
Ans:
8.Since the 1930s, the yield curve most likely to be seen has been the:
upward sloping yield curve.
downward sloping yield curve.
flat yield curve.
skewed yield curve.
A
9.An inverted yield curve or flattening of the yield curve is considered a good predictor of
a:
A)
rising economy.
B)
recession.
C)
depression.
D)
stock market crash.
Ans:
B
10.Which of the following is not a reason for a yield spread?
A)
differences in call features.
B)
differences in coupon rates.
C)
differences in maturity
D)
differences in quality.
Ans:
C
11.Investors would expect a higher yield on a smaller, regional corporate bond than on a
large, national corporate bond mainly due to:
A)
differences in coupon rates.
B)
differences in quality.
C)
differences in tax treatments.
D)
differences in marketability.
Ans:
D
12.Which of the following statements concerning yield spreads is not true?
A)
Yield spreads may be positive or negative.
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B)
C)
D)
Ans:
Yield spreads are often calculated by changing the maturity of the different bonds.
Yield spreads are influenced by the level of interest rates in the market.
Yield spreads can change over time.
B
A)
B)
C)
D)
17.According to the expectations theory, an upward sloping curve indicates that investors
expect:
interest rates to become more volatile in the future.
interest rates to rise in the future.
interest rates to fall in the future.
interest rates to become negative in the future.
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Ans:
18.According to the preferred habitat theory, which of the following is NOT true?
A)
Borrowers and lenders have preferred maturity sectors.
B)
The yield curve can take any shape.
C)
Borrowers and lenders do not go outside their preferred maturity segments.
D)
Expectations of future interest rates affects the shape of the yield curve.
Ans:
C
19.Forward rates:
A)
are an average of current short-term and long-term rates.
B)
are observable and anticipated.
C)
are observable and unanticipated.
D)
are unobservable and anticipated
Ans:
D
20.Yield spreads tend to____ during recessions and ________ during times of economic
prosperity.
A)
narrow . . . widen
B)
widen . . . narrow
C)
stay constant . . . widen
D)
widen . . . stay constant
Ans:
B
21.The _________ theory of yield curves states that investors will not invest long term
unless they have an economic incentive.
A)
expectations.
B)
liquidity premium
C)
market segmentation
D)
economic value added
Ans:
B
22.Which of the following is not a passive bond strategy?
A)
an immunization strategy
B)
a bond swap strategy
C)
a buy and hold strategy
D)
an indexing strategy
Ans:
B
23.A bond strategy attempting to immunize the portfolio from interest rate risk is based on
Page 4
A)
B)
C)
D)
Ans:
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B)
C)
D)
Ans:
A)
B)
C)
D)
33.Which of the following is not one of the strategies normally employed by conservative
bond investors?
flexible-income funds strategy
buy-and-hold approach
shorter-term Treasury bonds
bond swaps
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Ans:
34.Which of the following often emphasize short-term European securities and have been
popular in recent years?
A)
international money market fund
B)
short-term world multimarket income funds
C)
global short-term government securities funds
D)
foreign short-term index funds
Ans:
B
35.Speculation in the bond market has decreased significantly in the last 20 years.
A)
True
B)
False
Ans:
B
36.A weaker dollar increases the value of dollar-denominated assets to foreign investors.
A)
True
B)
False
Ans:
B
37.An increase in expected inflation tends to decrease bond prices and bond yields.
A)
True
B)
False
Ans:
A
38.The term structure of interest rates shows the relationship between yields of several
categories of bonds, such as municipals and corporates, and their maturities.
A)
True
B)
False
Ans:
B
39.The term structure of interest rates consists of a set of forward rates and a current known
rate.
A)
True
B)
False
Ans:
A
40.A commercial bank that always invested in short-term bonds in order to meet deposit
withdrawals is a a good example of the liquidity preference theory.
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A)
B)
Ans:
True
False
B
41.The yield curve is considered one of the best ways to price a bond.
A)
True
B)
False
Ans:
B
42.A noncallable bond would be expected to have a higher yield to maturity than a
comparable callable bond.
A)
True
B)
False
Ans:
B
43.The size of yield spreads tends to remain constant over time.
A)
True
B)
False
Ans:
B
44.Yield spreads were at their widest during the Great Depression.
A)
True
B)
False
Ans:
A
45.A strong argument made for passive bond strategies is that it is very difficult to time bond
transactions in order to take advantage of swings in the bond market.
A)
True
B)
False
Ans:
A
46.Under the ladder approach, bond investors purchase bonds with different maturities in
order to gain some protection from default risk.
A)
True
B)
False
Ans:
B
47.If interest rates rise, then price risk and reinvestment risk decline.
A)
True
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B)
Ans:
False
B
48.Why are upward sloping yield curves more consistent with the usual risk-return tradeoff
than downward sloping yield curves?
Ans:
Long-term bonds have more interest-rate risk than short-term bonds. Thus the
added risk of long-term is rewarded with higher returns on an upward sloping yield
curve.
49.Briefly explain the four theories explaining the term structure of interest rates.
Ans:
Expectations theory long-term rates are the geometric average of the present yield
on short term securities and expected short-term rates.
Liquidity preference theory like expectations theory with a liquidity premium
added.
Preferred habitat theory investors have preferred maturity sectors but may shift if
they expect adequate compensation.
Market segmentation theory investors have preferred maturity sectors but are
unwilling to shift.
50.What are the two components of interest-rate risk? How do they work to immunize a
portfolio?
Ans:
The two parts are price risk and reinvestment rate risk. Together immunization can
occur because they offset each other. When interest rates go down, bond prices go
up, but the income from reinvestment goes down. The two offset one another.
51.What are two passive management strategies? Two active strategies?
Ans:
Passive buy and hold and indexing.
Active forecasting interest rate changes and identifying mispricing.
52.A client tells you that he strongly believes that interest rates in general will fall abruptly
over the next six months. He asks you to recommend bonds for a portfolio to provide
capital gains on the interest rate move. Generally, what would you suggest? What if he
expected rates to rise?
Ans:
He will get the biggest price increases from low-coupon, long-term bonds if rates
fall. If rates rise he will experience capital losses, so he should hold cash or shortterm securities.
53.What are the advantages of index funds for an individual bond investor?
Ans:
Many aggressively managed funds do not beat the market performance. Index
funds should have lower advisory fees and operating expenses because indexing is
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Then (1 W) is
= 5
= 1.5
= 0.70
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