Fixed Income - Quiz 2

8 questions

1. 1. For issuers, callable zero-coupon bonds are appropriate for which of the following environments?
   Rising interest rate environmentsFalling interest rate environmentsStable interest rate environments
2. 2. Callable bonds are attractive to investors – when compared with similar non-callable issues. Why is this the case?
   Because they offer lower interest rate volatility Because they offer higher coupon rates Because they offer higher sensitivity to yield curve changes
3. 3. What is a callable bond equivalent to?
   The bond (value of the equivalent non-callable bond) - call option (value of the embedded option).The callable bond + call option (value of the embedded option).The bond (value of the equivalent non-callable bond) + call option (value of the embedded option).
4. 4. A bond is currently trading at $98.5. If interest rates change by 50 bps, the bond price changes by $2. The duration of the bond is closest to:
   8.1242.15
5. 5. Which of following statements about reinvestment risk and bond duration (interest rate risk) is FALSE?
   The lower the reinvestment risk, the lower is the bond’s durationA bond’s realized return is unlikely to be equal to the yield to maturity because of reinvestment risk.Reinvestment risk is eliminated in a zero-coupon bond
6. 6. A bond is currently trading at $995 and has a yield of 6.5%. The bond's duration is 4.5. If the yield decreases to 6.3%, calculate the bond's new price.
   986.045999.4771003.955
7. 7. A zero-coupon bond is least likely to have the following risk?
   Default RiskReinvestment riskInterest rate risk
8. 8. Which of the following bonds will have the least interest rate risk?
   6% yield and 5-year maturity6% yield and 10-year maturity7% yield and 5-year maturity