FINM3402 INVESTMENTS AND PORTFOLIO MANAGEMENT
TOPIC 7 – MANAGING BOND PORTFOLIOS (1)
TUTORIAL QUESTIONS
Textbook Questions
CH16 - Problem Sets: Q1- Q3; Q4; Q6-Q8; Q12-Q15
CH16 - CFA Problems: Q3, Q12, Q13
PROBLEM S
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FINM3402 INVESTMENTS AND PORTFOLIO MANAGEMENT
TOPIC 7 – MANAGING BOND PORTFOLIOS (1)
TUTORIAL QUESTIONS
Textbook Questions
CH16 - Problem Sets: Q1- Q3; Q4; Q6-Q8; Q12-Q15
CH16 - CFA Problems: Q3, Q12, Q13
PROBLEM SETS
1. Prices of long-term bonds are more volatile than prices of short-term
bonds. However, yields to maturity of short-term bonds fluctuate more
than yields of long-term bonds. How do you reconcile these two empirical
observations?
2. How can a perpetuity, which has an infinite maturity, have a duration as
short as 10 or 20 years?
3. A 9-year bond has a yield of 10% and a duration of 7.194 years. If the
market yield changes by 50 basis points, what is the percentage change in
the bond's price?
4. Find the duration of a 6% coupon bond making annual coupon payments if it has 3 years
until maturity and has a yield to maturity of 6%. What is the duration if the yield to maturity
is 10%?
6. The historical yield spread between AAA bonds and Treasury bonds widened dramatically
during the financial crisis in 2008. If you believed that the spread would soon return to more
typical historical levels, what should you have done? This would be an example of what sort
of bond swap?
7. You predict that interest rates are about to fall. Which bond will give you the highest
capital gain?
a. Low coupon, long maturity.
b. High coupon, short maturity.
c. High coupon, long maturity.
d. Zero coupon, long maturity.
8. Rank the durations or effective durations of the following pairs of bonds:
a. Bond A is a 6% coupon bond, with a 20-year time to maturity selling at par value.
Bond B is a 6% coupon bond, with a 20-year maturity time selling below par value.
b. Bond A is a 20-year noncallable coupon bond with a coupon rate of 6%, selling at par.
Bond B is a 20-year callable bond with a coupon rate of 7%, also selling at par.
12. You will be paying $10,000 a year in tuition expenses at the end of the next 2 years.
Bonds currently yield 8%
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