Fixed Income MCQ - Fixed Income Section 2

11 Investor A is a long-term bond investor. Investor B is a short-term bond investor. If the market interest rates are lower in future:

A decrease in market interest rates, benefits short term investors more than the long term investors. This is because in the short term, market price risk dominates the reinvestment risk.

12 Miss Williamson is long term investor. She recently purchased a 10- year, 8% annual coupon payment bond and plans to hold it till maturity. What will be the most likely impact on the returns of this bond, if the market interest rates are higher in future?

In a buy-and-hold strategy if the market interest rates are higher in the future, the returns will increase because the reinvestment income will increase.

13 A fixed-income security's current price is $102.50. The manager estimates that the price will rise to 104.25 if interest rates decrease by 0.50% or fall to 101.25 if interest rates increase by 0.5%. The security's effective duration is closest to:

14 A bond with a par value of $1,000 matures in 12 years with a coupon of 12% paid semiannually; it is priced to yield 13% and has a modified duration of 8.50. If the yield of the bond declines by 0.5%, the approximate percentage price change for the bond is closest to:

Approximate percentage price change = %ΔPVFull ≈ –AnnModDur × ΔYield = -8.50 (- 0.005) = 4.25%

15 Which of the following is most likely to be incorrect about investment horizon, Macaulay duration, and interest rate risk?

When the investment horizon is less than the Macaulay duration of a bond, the investor’s risk is to higher interest rates.