CHAPTER 16
1. According to Malkiel’s first rule, bond prices and yields are:
A. Directly proportional
B. Inversely related
C. Not related
D. Constant
2. Which bond is most sensitive to interest rate changes?
A. 1-year coupon bond
B. 5-year coupon bond
C. 10-year zero-coupon bond
D. 5-year zero-coupon bond
3. What happens to bond duration as coupon rate increases (holding maturity
constant)?
A. It increases
B. It remains constant
C. It decreases
D. It fluctuates randomly
4. Which of the following most accurately defines Macaulay duration?
A. Total number of years to maturity
B. Average time to receive cash flows weighted by PV
C. Future value of all coupons
D. Coupon rate divided by yield
5. Modified duration is used to measure:
A. Default risk
B. Yield to maturity
C. Price sensitivity to interest rate changes
D. Coupon frequency
6. A bond has a higher duration if:
A. Yield to maturity is higher
B. Coupon rate is higher
C. Time to maturity is longer
D. None of the above
7. For zero-coupon bonds, duration is always equal to:
A. Yield to maturity
B. Time to maturity
C. Coupon rate
D. Convexity
8. Convexity corrects for what limitation in duration?
A. Pricing in taxes
B. Bond default risk
C. Large yield changes
D. Short-term volatility
9. A bond has a Macaulay duration of 4 years and a YTM of 5%. What is its
modified duration?
A. 3.81
B. 4.20
C. 3.45
D. 4.00
10. A bond’s modified duration is 6. What is the approximate % price change
if YTM increases by 0.50%?
A. -3.0%
B. -6.0%
C. -0.30%
D. -12.0%
11. If a bond has a convexity of 150 and a duration of 10, estimate price
change for a 1% yield increase.
A. -10.75%
B. -10.00%
C. -9.25%
D. -11.00%
12. What is the duration of a perpetuity bond with a 5% annual yield?
A. 10
B. 20
C. 21
D. None of the above
13. A bond’s price is 950, 𝑎𝑛𝑑𝑖𝑡𝑝𝑎𝑦𝑠100 in 1 year and $1,100 in 2 years. YTM
is 10%. What’s its duration?
A. 1.50 years
B. 1.82 years
C. 2.00 years
D. 1.91 years
14. A bond has duration 11.26 and convexity 212.4. Yield increases 2%.
Estimate price change using duration+convexity.
A. -22.52%
B. -18.27%
C. -20.00%
D. -19.00%
15. Bond pays
𝟒𝟎 𝐬𝐞𝐦𝐢𝐚𝐧𝐧𝐮𝐚𝐥𝐥𝐲 𝐚𝐧𝐝 𝐡𝐚𝐬 𝟐𝐲𝐞𝐚𝐫𝐬 𝐭𝐨 𝐦𝐚𝐭𝐮𝐫𝐢𝐭𝐲. 𝐏𝐫𝐢𝐜𝐞 𝐢𝐬 964.54. Calculate
Macaulay Duration.
A. 1.95
B. 1.88
C. 2.00
D. 1.75
16. How does bond duration change if coupon frequency increases from
annually to semiannually?
A. Increases
B. Decreases
C. No change
D. Doubles
17. A 10-year bond has a higher coupon rate than another 10-year bond. Its
duration is likely:
A. Longer
B. Equal
C. Shorter
D. Indeterminate
18. A zero-coupon bond has 5 years to maturity. What is its duration?
A. 2.5
B. 5.0
C. Depends on yield
D. Can’t be determined
19. [Theoretical] What is the primary reason convexity improves the
duration-based estimate of bond price change?
A. It eliminates interest rate risk entirely
B. It accounts for reinvestment risk
C. It adjusts for the curvature in the price-yield relationship
D. It increases yield-to-maturity accuracy
20. [Calculation] A bond has a modified duration of 5.5 and convexity of 80. If
interest rates fall by 1%, estimate the percentage price change.
A. +5.50%
B. +5.90%
C. +6.10%
D. +6.90%
