1.

The duration of a bond is a function of the bond's

A. coupon
rate.
B. yield to
maturity.
C. time to
maturity.
D. All of the
options
E. None of the
options

2. Ceteris paribus, the duration of a bond is positively correlated with the bond's

A. time to
maturity.
B. coupon
rate.
C. yield to
maturity.
D. All of the
options
E. None of the
options

3. Ceteris paribus, the duration of a bond is negatively correlated with the bond's

A. time to
maturity.
B. coupon
rate.
C. yield to
maturity.
D. coupon rate and yield to
maturity.
E. None of the
options
4. Holding other factors constant, the interest-rate risk of a coupon bond is higher when the
bond's

A. term to maturity is
lower.
B. coupon rate is
higher.
C. yield to maturity is
lower.
D. current yield is
higher.
E. None of the
options

5. Holding other factors constant, the interest-rate risk of a coupon bond is higher when the
bond's

A. term to maturity is
higher.
B. coupon rate is
higher.
C. yield to maturity is
higher.
D. All of the
options
E. None of the
options

6. Holding other factors constant, the interest-rate risk of a coupon bond is higher when the
bond's

A. term to maturity is
lower.
B. coupon rate is
lower.
C. yield to maturity is
higher.
D. term to maturity is lower and yield to maturity is
higher.
E. None of the
options
7. Holding other factors constant, the interest-rate risk of a coupon bond is lower when the
bond's

A. term to maturity is
lower.
B. coupon rate is
higher.
C. yield to maturity is
lower.
D. term to maturity is lower and coupon rate is
higher.
E. All of the
options

8. Holding other factors constant, the interest-rate risk of a coupon bond is lower when the
bond's

A. term to maturity is
lower.
B. coupon rate is
higher.
C. yield to maturity is
higher.
D. term to maturity is lower and coupon rate is
higher.
E. All of the
options

9. Holding other factors constant, the interest-rate risk of a coupon bond is lower when the
bond's

A. term to maturity is
higher.
B. coupon rate is
lower.
C. yield to maturity is
higher.
D. term to maturity is higher and coupon rate is
lower.
E. All of the
options
10. The "modified duration" used by practitioners is equal to the Macaulay duration

A. times the change in interest

rate.
B. times (one plus the bond's yield to
maturity).
C. divided by (one minus the bond's yield to
maturity).
D. divided by (one plus the bond's yield to
maturity).
E. None of the
options

11. The "modified duration" used by practitioners is equal to ______ divided by (one plus the
bond's yield to maturity).

A. current
yield
B. the Macaulay
duration
C. yield to
call
D. yield to
maturity
E. None of the
options

12. Given the time to maturity, the duration of a zero-coupon bond is higher when the
discount rate is

A. highe
r.
B. lower
.
C. equal to the risk-free
rate.
D. the bond's duration is independent of the discount
rate.
E. None of the
options
13. The interest-rate risk of a bond is

A. the risk related to the possibility of bankruptcy of the bond's

issuer.
B. the risk that arises from the uncertainty of the bond's return caused by changes in
interest rates.
C. the unsystematic risk caused by factors unique in the
bond.
D. the risk related to the possibility of bankruptcy of the bond's issuer and the risk that
arises from the uncertainty of the bond's return caused by changes in interest rates.
E. All of the
options

14. Which of the following two bonds is more price sensitive to changes in interest rates?

1) A par value bond, X, with a 5-year-to-maturity and a 10% coupon rate.

2) A zero-coupon bond, Y, with a 5-year-to-maturity and a 10% yield to maturity.

A. Bond X because of the higher yield to

maturity.
B. Bond X because of the longer time to
maturity.
C. Bond Y because of the longer
duration.
D. Both have the same sensitivity because both have the same yield to
maturity.
E. None of the
options

15. Holding other factors constant, which one of the following bonds has the smallest price
volatility?

A. 5-year, 0% coupon
bond
B. 5-year, 12% coupon
bond
C. 5 year, 14% coupon
bond
D. 5-year, 10% coupon
bond
E. Cannot tell from the information
given
16. Which of the following is not true?

A. Holding other things constant, the duration of a bond increases with time to
maturity.
B. Given time to maturity, the duration of a zero-coupon decreases with yield to
maturity.
C. Given time to maturity and yield to maturity, the duration of a bond is higher when the
coupon rate is lower.
D. Duration is a better measure of price sensitivity to interest rate changes than is time
to maturity.
E. All of the
options

17. Which of the following is true?

A. Holding other things constant, the duration of a bond decreases with time to
maturity.
B. Given time to maturity, the duration of a zero-coupon increases with yield to
maturity.
C. Given time to maturity and yield to maturity, the duration of a bond is higher when the
coupon rate is lower.
D. Duration is a better measure of price sensitivity to interest rate changes than is time
to maturity.
E. Given time to maturity and yield to maturity, the duration of a bond is higher when the
coupon rate is lower and duration is a better measure of price sensitivity to interest
rate changes than is time to maturity

18. The duration of a 5-year zero-coupon bond is

A. smaller than
5.
B. larger than
5.
C. equal to
5.
D. equal to that of a 5-year 10% coupon
bond.
E. None of the
options
19. The basic purpose of immunization is to

A. eliminate default
risk.
B. produce a zero net-interest-rate
risk.
C. offset price and reinvestment
risk.
D. eliminate default risk and produce a zero net-interest-
rate risk.
E. produce a zero net-interest-rate risk and offset price and
reinvestment risk.

20. The duration of a par value bond with a coupon rate of 8% (paid annually) and a
remaining time to maturity of 5 years is

A. 5
years.
B. 5.4
years.
C. 4.17
years.
D. 4.31
years.

21. The duration of a perpetuity with a yield of 8% is

A. 13.50
years.
B. 12.11
years.
C. 6.66
years.
D. Cannot be
determined
22. A seven-year par value bond has a coupon rate of 9% (paid annually) and a modified
duration of

A. 7
years.
B. 5.49
years.
C. 5.03
years.
D. 4.87
years.

23. Par value bond XYZ has a modified duration of 6. Which one of the following statements
regarding the bond is true?

A. If the market yield increases by 1%, the bond's price will decrease
by $60.
B. If the market yield increases by 1%, the bond's price will increase
by $50.
C. If the market yield increases by 1%, the bond's price will decrease
by $50.
D. If the market yield increases by 1%, the bond's price will increase
by $60.

24. Which of the following bonds has the longest duration?

A. An 8-year maturity, 0% coupon

bond.
B. An 8-year maturity, 5% coupon
bond.
C. A 10-year maturity, 5% coupon
bond.
D. A 10-year maturity, 0% coupon
bond.
E. Cannot tell from the information
given
25. Which one of the following par value 12% coupon bonds experiences a price change of
$23 when the market yield changes by 50 basis points?

A. The bond with a duration of 6

years
B. The bond with a duration of 5
years
C. The bond with a duration of 2.7
years
D. The bond with a duration of 5.15
years

26. Which one of the following statements is true concerning the duration of a perpetuity?

A. The duration of 15% yield perpetuity that pays $100 annually is longer than that of a
15% yield perpetuity that pays $200 annually.
B. The duration of a 15% yield perpetuity that pays $100 annually is shorter than that of
a 15% yield perpetuity that pays $200 annually.
C. The duration of a 15% yield perpetuity that pays $100 annually is equal to that of 15%
yield perpetuity that pays $200 annually.
D. The duration of a perpetuity cannot be
calculated.

27. Which one of the following statements is false concerning the duration of a perpetuity?

A. The duration of 15% yield perpetuity that pays $100 annually is longer than that of a
15% yield perpetuity that pays $200 annually.
B. The duration of a 15% yield perpetuity that pays $100 annually is shorter than that of
a 15% yield perpetuity that pays $200 annually.
C. The duration of a 15% yield perpetuity that pays $100 annually is equal to that of 15%
yield perpetuity that pays $200 annually.
D. The duration of 15% yield perpetuity that pays $100 annually is longer than that of a
15% yield perpetuity that pays $200 annually, and the duration of a 15% yield
perpetuity that pays $100 annually is shorter than that of a 15% yield perpetuity that
pays $200 annually
E. All of the
options
28. The two components of interest-rate risk are

A. price risk and default

risk.
B. reinvestment risk and systematic
risk.
C. call risk and price
risk.
D. price risk and reinvestment
risk.
E. None of the
options

29. The duration of a coupon bond

A. does not change after the bond is

issued.
B. can accurately predict the price change of the bond for any interest rate
change.
C. will decrease as the yield to maturity
decreases.
D. All of the options are
true.
E. None of the options is
true.

30. Indexing of bond portfolios is difficult because

A. the number of bonds included in the major indexes is so large that it would be difficult
to purchase them in the proper proportions.
B. many bonds are thinly traded so it is difficult to purchase them at a fair
market price.
C. the composition of bond indexes is constantly
changing.
D. All of the options are
true.