Chapter 10
If market interest rates rise, what happens to existing bond prices?
They fall
What is the Macaulay duration of a 10-year zero-coupon bond?
10 years
Botanically speaking, which common fruit is a berry, while a strawberry is not?
Banana
A bond’s coupon rate equals its YTM. Does it trade above, below, or at par?
At par
If you expect interest rates to fall, should you increase or decrease portfolio duration?
Increase
What is the largest desert on Earth?
Antarctica
A €1,000 bond has an 8% annual coupon rate. How much coupon does it pay per year?
€80 (€1,000×8%=80)
A portfolio holds two bonds in equal amounts, one with a duration of 4 years and one with a duration of 10 years. What is the portfolio's duration?
7 years. Portfolio duration is the weighted average of the component durations.
Which animal has fingerprints remarkably similar to human fingerprints?
Koala
For a discount bond, which is highest: coupon rate, current yield, or YTM?
YTM
To immunise a fully funded liability against interest-rate risk, what must the duration of the assets equal?
The duration of the liabilities
Which country has more ancient pyramids than Egypt?
Sudan
A bond has an 8% YTM, but its coupons are reinvested at only 5%. Will its realised compound return be above, below, or equal to 8%?
Below 8%
For a positively convex bond, when yields rise substantially, does duration alone overestimate or underestimate the price loss?
Overestimate the loss
Which country has the world’s oldest continuously used national flag?
Denmark