Interest Rate Risk

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Interest Rate Risk Questions and Answers

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a) What are the techniques used by top banking firms to manage interest rate risk? b) How do they validate their historical interest rate price risk?
Suppose interest rates increase from 8 percent to 9 percent. Which bond wiII suffer the greater percentage decline in price: a 30-year bond paying annual coupons of 8 percent, or a 30-year zero cou...
Calculate the duration of a $1,000, 5% coupon bond with three years to maturity. Assume that all market interest rates is 8% for next three years.
A bond currently has a price of $1,050. The yield on the bond is 6%. If the yield increases 24 basis points, the price of the bond will go down to $1,036. The duration of this bond is _ _ _ years....
Consider a semiannual bond with a 10% coupon and with yield to maturity 8%. If the bond's YTM remains constant, then in one year, will the bond price be higher, lower, of unchanged? Why? hat will...
A five-year bond with 3.5 years duration is worth 102. What is the approximate value of the bond if the yield decreases by fifty basis points?
Which has a long Macaulay's duration: a zero-coupon bond with a two-year maturity, or a two-year maturity coupon bond that pays 6% coupon interest if they both carry a 6% market yield? Explain.
Duration captures one important aspects of interest rate risk. Namely: a. the price risk deriving from a large shift in the term structure. b. the price risk deriving from a twist movement in the t...
The real risk-free rate is 2.5%. Inflation is expected to average 2.8% a year for the next 4 years, after which time inflation is expected to average 3.75% a year. Assume that there is no maturity...
Given a bond with a duration of 7.65 and convexity of 125 that pays interest semi-annually and has a yield to maturity of 4%, if the market interest rate (YTM) increases from 4% to 7%, what is the...
Question 2. Chapter 5. Finantial Management theroy and practice bringham ehardt 5 answers below "short term interest rates are more volatile than long term interest rates, so short term bond pric...
Bond 1 has a price of 88.35 and a Macaulay duration of 12.7. Bond 2 has a price of 130.49 and has a duration of 14.6. A portfolio is created with a combination of face amount F1 from Bond 1 and F2...
If the volatility of the interest rate decreases, the value of a callable convertible bond to an investor: a. Decreases. b. Increases. c. Stays the same. d. Insufficient information to determine.
A corporation plans to issue $10 million of 10-year bonds in 3 months. At current yields the bonds would have modified duration of 8 years. The T-note futures contract is selling at F0 = 100 and ha...
What is the gain on the purchase of a $20 million credit forward contract with a modified duration of seven years if the credit spread between a benchmark Treasury bond and a borrowing firm's debt...
Firm ABC enters a five-year swap with firm XYZ to pay LIBOR in return for a fixed 8% rate on notional principal of $10 million. Two years from now, the market rate on three-year swaps is LIBOR for...
A bondholder owns 15-year government bonds with a $5 million face value and a 6% coupon that is paid annually. The bonds are currently priced at $550,018.73 with a yield of 5.034%. The bonds have a...
An annuity-immediate has level payments for n years. The average time of the payments using the method of equated time is 7 years. Determine the modified duration of the payments if the annual ef...
Explain the concept of bond price elasticity. Would bond price elasticity suggest a higher price sensitivity for zero-coupon bonds or high-coupon bonds that are offering the same yield to maturity?...
Use the data on Treasury securities in the following table to answer the question: Year 1 = 0.38% Year 2 = 0.91% Year 3 = 1.43% Assuming that the liquidity premium theory is correct, on March 5,...
The duration of a 40-year, $1,000 bond at a market rate of 4% is [{Blank}] the duration of an identical bond at a market rate of 6%. A. greater than B. less than C. equal to D. There is not eno...
The highest duration and maximum price sensitivity relative to years to maturity are produced by: A. a coupon rate equal to the market rate B. a low coupon rate C. a zero-coupon D. None of the a...
Which of the following statements is CORRECT? A) If their maturities and other characteristics were the same, a 5% coupon bond would have more interest rate price risk than a 10% coupon bond. B)...
A bond has a duration of five years and a yield to maturity of 9 percent. If the yield to maturity changes to 10 percent, what should be the percentage price change of the bond?
Consider a 15-year zero-coupon bond and 30-year coupon bond with 12% annual coupons. By what percentage will the price of each bond change if its yield to maturity increases from 6% to 9%?
PepsiCo uses 30-year Treasury bonds to measure the risk-free rate because: A. these bonds are essentially free of business risk. B. they capture the long-term inflation expectations of investors as...
Does a bond's time to maturity ever equal its duration? Explain.
What is the duration of a two year zero coupon bond that is yielding 11.5 percent? Use $1,000 as the face value.
How long will it take to double your money if the rate of interest is 4%, 7%, 12% ?
Explain the relationship between market interest rates and bond prices.
If there is a decline in interest rates, which would you rather be holding, long-term bonds or short-term bonds? Why? Which type of bond has the greater interest-rate risk?
Assume that all interest rates in the economy decline from 10 percent to 9 percent. Which of the following bonds will have the largest percentage increase in price? a. A 10-year bond with a 10 perc...
What is the main reason why long-term bonds are subject to greater interest rate risk than short-term bonds?
You are managing a portfolio of $1 million. Your target duration is 10 years, and you can choose from two bonds: a zero-coupon bond with maturity of 5 years, and a perpetuity, each currently yieldi...
Identify the bond that has the longest duration (no calculations necessary). a. 20-year maturity with an 8% coupon b. 20-year maturity with a 12% coupon c. 15-year maturity with a 0% coupon d. 10-y...
A 6% coupon bond paying interest semiannually has a modified duration of 10 years, sells for $800, and is priced at a yield-to-maturity (YTM) of 8%. If the YTM increases to 9%, the predicted change...
Which one of the following bonds has the shortest duration? a. zero coupon, 10-year maturity b. zero coupon, 13-year maturity c. 8% coupon, 10-year maturity d. 8% coupon, 13-year maturity
A nine-year bond has a yield-to-maturity of 10% and a modified duration of 6.54 years. If the market yield changes by 50 basis points, what is the change in the bond's price? a. 3.27% b. 3.66% c....
The duration of a bond normally increases with an increase in: a. term-to-maturity. b. yield-to-maturity. c. coupon rate. d. all of the above
Which bond has the longest duration? a. 8-year maturity, 6% coupon b. 8-year maturity, 11% coupon c. 15-year maturity, 6% coupon d. 15-year maturity, 11% coupon
What is interest rate risk?
The interest rate risk of a noncallable bond is most likely to be positively related to the a. Risk-free rate b. Bond's coupon rate c. Bond's time to maturity d. Bond's yield to maturity
To immunize a portfolio consisting of a single coupon bond against future liability, an investor should select a bond that: A. has a duration that equals the liability horizon. B. has a duration th...
Which of the following statements is false? a. The "risk-free interest rate," means the rate on U.S. Treasuries. b. Interest rates vary with the investment horizon. c. All borrowers, besides th...
Which of the following statements is correct? a) All else equal, high-coupon bonds have less reinvestment risk than low-coupon bonds. b) All else equal, long-term bonds have less price risk than...
The current price of a bond is 100. The instantaneous rate of change or derivative of the price of the bond with respect to the yield rate is -700. The yield rate is an annual effective rate of 8%....
What is the Macaulay duration of a 6.8% coupon bond with eight years to maturity and a current price of $1,071.70? What is the modified duration? (Do not round intermediate calculations. Round your...
What is the Macaulay duration of a 9.6% coupon bond with nine years to maturity and a current price of $965.40? What is the modified duration?
A bond currently sells for $1,170, which gives it a yield to maturity of 5%. Suppose that if the yield increases by 30 basis points, the price of the bond falls to $1,140. What is the duration of t...
A bond currently sells for $1,060, which gives it a yield to maturity of 5%. Suppose that if the yield increases by 50 basis points, the price of the bond falls to $1,035. What is the duration of t...
You have a 25-year maturity, 10% coupon, 10% yield bond with a duration of 10 years and a convexity of 135.5. If the interest rate were to fall 125 basis points, your predicted new price for the bo...
All of the followings are true, except: (a) Bond prices increase when interest rates decrease. (b) YTM increases bring about proportionally smaller price changes than YTM decreased of the same magn...
When the market rate of return exceeds the coupon rate, a bond will sell: O at par. O face value. O a discount. O a premium.
All other things equal (YTM 10%), which of the following has the shortest duration? A. a 30-year bond with a 10% coupon B. a 20-year bond with a 9% coupon C. a 20-year bond with a 7% coupon D. a 10...
A 9-year bond has a yield of 5.5% and a duration of 7.523 years. If the market yield changes by 80 basis points, what is the percentage change in the bond's price?
A bond with a 9-year duration is worth $1,080.00 and its yield to maturity is 8%. If the yield to maturity falls to 7.84%, you would predict that the new value of the bond will be _ _ _.
A bond currently has a price of $1,050. The yield on the bond is 6.00%. If the yield increases 25 basis points, the price of the bond will go down to $1,030. The duration of this bond is _ _ _ years.
Change in YTM is 75 basis points. YTM is 8%. Duration is 15 years. What is the percentage price change of the bond? A. 7.64% B. 4.45% C. 2.22%
Citibank has determined that its bond portfolio has a duration of 9.5 years and a prevailing yield to maturity of 4.0%. If the yield to maturity changes to 5.5%, then Citibank should anticipate how...
Which has a longer Macaulay's duration: A. a $1 million face value zero coupon bond with a two-year maturity and a yield of 6 percent, or B. a $1 million face value coupon bond with a two-year ma...
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