1. This is a weighted average of the time to receipt of the bonds promised payments. It identifies the number of years necessary to hold the bond so that the losses (or gains) from coupon reinvestment offset the gains (or losses) from market price changes. What is this?

a. Convexity

b. Effective duration

c. Macaulay duration.

d. Modified duration.

2. Which bond will most likely experience the smallest percent change in price if the market discount rates for all three bonds increase by 100 basis points? I provide the quoted bond price, coupon rate, and time-to-maturity of each bond below. You do not need a calculation.

a. Bond D: 100.00, 9%, 6 years

b. Bond A: 101.89, 5%, 2 years

c. Bond C: 97.33, 5%, 3 years

d. Bond B: 100.00, 9%, 2 years

3. What is true about liquidity risk?

a. The bond with greater bid-ask spread has lower liquidity risk.

b. Credit ratings measure liquidity risk of the bond.

c. Investors buy the bond at the bid price.

d. The bond with lower trading volume has greater liquidity risk.

4. Which set of conditions will result in a bond with the lowest price risk?

a. A bond with 5% coupon rate and 10-year maturity

b. A bond with 2% coupon rate and 10-year maturity

c. A bond with 10% coupon rate and 10-year maturity

d. A bond with 2% coupon rate and 20-year maturity

5. Which statement is true?

a. Duration is good for estimating the impact of large interest rate changes.

b. The duration estimate is less accurate, the less convex the bond price/yield relationship.

c. Effective duration is used to measure the price risk of the bonds with call options.

d. The tangent line always overestimates the actual price.