QUESTION 20 Consider an instrument paying a single cash flow sometime in the future. Which of the following is true? Choose two, 2 points each The further in the future the cash is to be paid, the greater the present value. The greater the cash flow, the greater the present value The lower the spot rate, the lower the present value The nearer in the future the cash is to be paid, the greater the present value. The higher the spot rate, the higher the present value 4 points

QUESTION 21 If the two-year interest rate today is 2% and the three-year rate is 3%, then the implied 1-year forward rate in two years is: 5.03% 4.04% 3.00% 2.50% 1.00% 3 points

QUESTION 22 You are lending $25,000 for 3 years at 2%, compounded annually. What must be your lending period in order to achieve the same proceeds with the same interest rate but compounded semi-annually? longer than 3 years the same 3 years shorter than 3 years 3 points

QUESTION 23 Convexity describes which of the following characteristics of Fixed Income instruments? Choose two, 2 points each. Each successive equal yield decrease causes less of an increase in price Each successive equal yield decrease causes more of an increase in price Each successive equal yield increase causes less of a decline in price Each successive equal yield increase causes more of a decline in price 3 points

QUESTION 24 An investor has a 5-year horizon. Which of the following US Treasury bonds present her with the most risk? 5-year maturity, 8% coupon 5-year maturity, 4% coupon 5-year maturity, 0% coupon 2-year maturity, 2% coupon 3 points

QUESTION 25 A 20-yr bond has 5% coupon and you purchase it at a 5.25% yield. You reinvest any coupon at 5% and sells after a two-year holding period at a 5.25% yield. Your ROR is: 4 points above 5.25% 5.25% between (but not equal to) 5% & 5.25% 5% below 5% 3 points

QUESTION 26 A bond has a coupon of 5%, face value of $1,000 and yield-to-maturity of 6%. You purchase it for $980. Each year you will receive: $49 $50 $58.80 $60 3 points

QUESTION 27 If you are confident that interest rates are about to drop, then: 4 points you believe bond prices are about to rise. So, you should buy bonds, particularly those with long duration you believe bond prices are about to fall. So, you should buy bonds, particularly those with long duration you believe bond prices are about to fall. So, you should sell bonds, particularly those with long duration you believe bond prices are about to rise. So, you should sell bonds, particularly those with long duration 4 points

QUESTION 28 A ten-year bond has a duration of 7.65. An 11-year bond with the same coupon (greater than zero) and yield-to-maturity will have a duration: below 7.65 equal to 7.65 above 6.65 but below 7.65 above 7.65 but below 8.65 above 8.65 cannot answer without knowledge of the coupon 3 points

QUESTION 29 Consider a 20-year bond with a 5% coupon. If its yield-to-maturity were to increase significantly: Its price would fall but its duration would rise Its price would fall and its duration would fall Its price would rise but its duration would fall its price would rise and its duration would rise 3 points

QUESTION 30 Is it possible for a bond's price to be higher a year from today than it is now even though its yield then is higher than it is today? Of course a higher yield always causes a higher price Of course not a higher yield always causes a lower price Yes if it is a discount bond today Yes if it is a premium bond today 3 points

QUESTION 31 You have a 2-year horizon and are considering a 5-year bond. For the purpose of Rate-of-Return, your prefer: 4 points A high yield on the investment date and a high yield on the horizon date A low yield on the investment date and a high yield on the horizon date A high yield on the investment date and a low yield on the horizon date A low yield on the investment date and a low yield on the horizon date 4 points

QUESTION 32 Compared to that of a bond with an annual coupon, the duration of a bond with the same maturity, coupon rate and yield but monthly coupon is: the same higher lower 3 points

QUESTION 33 You have a $1 million bond portfolio, with half invested in a five-year note and half in a twenty-year bond. Which of the following actions will increase the portfolio s duration? Sell some of the five-year and use the money to buy more of the twenty-year Sell some of the five-year and keep that amount in cash Either of the above 3 points

QUESTION 34 if the yield curve is upward sloping you may infer that: investors expect both real interest rates to rise and inflation to accelerate in the future investors expect neither real interest rates to rise nor inflation to accelerate in the future investors expect either real interest rates to rise or inflation to accelerate in the future (or both) investors expect real interest rates to fall but inflation to accelerate in the future 3 points

QUESTION 35 Your portfolio comprises ten 10-year bonds and five 20-year bonds. It has a (portfolio) modified duration of 11.65 and a value of $25 million. How much does its value change if all yields rise by 10 bps? +$291,250 $291,250 +$250,000 $250,000 Need to know the durations and prices of each bond separately. 3 points

QUESTION 36 Suppose the yield curve is upward sloping throughout and you purchase a 20-year bond. If you are following a "yield curve ride" strategy, then: you expect the yield on the bond to be lower next year than it is today you expect the yield on the bond to be the same next year than it is today you expect the yield on the bond to be higher next year than it is today 3 points

QUESTION 37 A twenty-year bond has a 5% coupon and 4.75% yield-to-maturity. If the maturity is lengthened by two years with the yield unchanged: 4 points its price decreases and duration increases its price increases and duration decreases its price and duration both decrease its price and duration both increase