Chapter 3: Q11-5B (page 360)
Macaulay’s duration is less than the modified duration except for:
a . Zero-coupon bonds.
b. Premium bonds.
c. Bonds selling at par value.
d. None of the above.
The correct answer is (d).
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What would be the likely effect on the yield to maturity of a bond resulting from:
a. An increase in the issuing firm’s times-interest-earned ratio?
b. An increase in the issuing firm’s debt-equity ratio?
c. An increase in the issuing firm’s quick ratio?
The ability to immunize a bond portfolio is very desirable for bond portfolio managers in some instances.
a. Discuss the components of interest rate risk—that is, assuming a change in interest rates over time, explain the two risks faced by the holder of a bond.
b. Define immunization and discuss why a bond manager would immunize his or her portfolio.
c. Explain why a duration-matching strategy is a superior technique to a maturity matching strategy for the minimization of interest rate risk.
a. Footnote 2 in the chapter presents the formula for the convexity of a bond. Build a spreadsheet to calculate the convexity of the 8% coupon bond in Spreadsheet 11.1 at the initial yield to maturity of 10%.
b. What is the convexity of the zero-coupon bond?
The stated yield to maturity and realized compound yield to maturity of a (default-free) zero-coupon bond will always be equal. Why?
You are managing a portfolio of $1 million. Your target duration is ten years, and you can choose from two bonds: a zero-coupon bond with a maturity of 5 years and an infinity, each yielding 5%.
An a. How much of each bond will you hold in your portfolio?
b. How will these fractions change next year if the target duration is nine years?
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