1. A bond has a duration of 6. If yield decreases by 50 basis points, what is the approximate change in price?

a. 3% decrease

b. 3% increase

c. 6% decrease

d. 6% increase

2. Identify the difference in the major risk associated with the following investment options:

Suppose an investor plans to hold a bond for one year. The investor has two options: the first option is to purchase a Treasury note that matures in 5 years. The second option is to purchase a Treasury note that matures in 10 years.

a. Price risk

b. Credit risk

c. Foreign currency risk

d. Liquidity risk

3. Which statement is false?

a. Convexity refers to the general shape of the price-yield relationship, while the convexity measure relates to the quantification of how the price of the bond will change when interest rates change.

b. Given two bonds that are similar except for their convexity, the one with greater convexity is more valuable because it provides greater capital gains and smaller capital losses for the same absolute changes in yields.

c. If two bonds have the same duration, the actual change in their prices for the same change in yields will be the same.

d. The total return is a measure of the yield obtained by assuming the cash flows are to be reinvested to the investors horizon at an assumed reinvestment rate, and at the horizon the bond is sold at an assumed rate given the horizon is not at maturity.

4. The first-order derivative on a bonds percentage price change given a change in yield-to-maturity can be best described as:

a. Macaulay duration.

b. convexity.

c. DV01

d. modified duration.