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第八章 市場風險與投資組合管理
Active Investment Strategies
1.
Which passive investment strategy differentiates between bonds that have been purchased for liquidity
versus income purposes?
a. Barbell maturity strategy
b. Riding the yield curve
c. Laddered maturity strategy
d. Timing maturity strategy
e. Cycle maturity strategy
Answer: a
2.
A portfolio is equally invested in securities with 1-, 2-, and 3-years to maturity. Each year as the 1-year
securities mature, the funds are reinvested in 3-year securities. This is an example of which investment
strategy?
a. Barbell maturity strategy
b. Riding the yield curve
c. Laddered maturity strategy
d. Timing maturity strategy
e. Cycle maturity strategy
Answer: c
3. Which of the following is considered an active investment strategy?
a. Barbell maturity strategy
b. Riding the yield curve
c. Laddered maturity strategy
d. Interest maturity strategy
e. Risk maturity strategy
Answer: b
4. Riding the yield curve:
a. is risk-free.
b. generally involves buying securities with a longer maturity than the intended holding period.
c. can only be accomplished with stripped Treasury securities.
d. all of the above
e. a. and c. only
Answer: b
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Use the following information for questions 5 and 6.
A bank has a planned 2-year investment horizon. It is considering investing in a 2-year bond that pays 6% annually
versus investing in a 4-year bond that pays 6.5% annually and then selling it after two years. The annual coupon
payments can be reinvested at 4%.
5. What will be the realized compound yield if the bank invests in the 2-year security and holds it until maturity?
a. 4.00%
b. 5.48%
c. 5.94%
d. 6.01%
e. 6.85%
Answer: c
i = [(Price Received + Coupon Interest + Reinvestment Income)/Price Paid]1/n – 1
i = [($1,000 + (2 * $60) + ($60 * 4%))/$1,000] 1/2 – 1 = .05943
6.
What will be the realized compound yield if the bank invests in the 4-year security and sells it at the end of
two years, assuming interest rates remain unchanged?
a. 4.00%
b. 5.48%
c. 5.94%
d. 6.01%
e. 6.85%
Answer: e
Price Received after selling the 4-year security in 2 years:
FV = 1,000
PMT = $65
I=6
N=2
PV = ? = $1,009.17
i = [(Price Received + Coupon Interest + Reinvestment Income)/Price Paid] 1/n – 1
i = [($1,009.17 + (2 * $65) + ($65 * .04))/$1,000] 1/2 – 1 = .06854
7. The yield curve tends to be inverted:
a. at the trough of the business cycle.
b. during periods of rapid inflation.
c. at the end of a contractionary period.
d. at the peak of the business cycle.
e. at the beginning of an expansionary period.
Answer: d
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8. Long-term interest rates tend to be higher than short-term interest rates:
a. at the bottom of the business cycle.
b. at the end of an expansionary period.
c. at the beginning of a contractionary period.
d. at the peak of the business cycle.
e. during periods of rapid deflation.
Answer: a
9.
If the Federal reserve is easing monetary policy at the end of a recession, you would expect the yield curve to
be:
a. upward sloping.
b. flat.
c. inverted.
d. humped.
e. none of the above
Answer: a
10. If the economy is entering into a recessionary period, you would expect the yield curve to be:
a. upward sloping.
b. flat.
c. inverted.
d. humped.
e. none of the above
Answer: c
Questions 11 and 12 are related.
11. A bank owns a zero coupon bond with 5 years to maturity and a face value of $10,000. If interest rates
increase from 6% to 7%, what is the approximate change in price, using Macaulay's duration?
a. $343
b. $352
c. -$343
d. -$352
e. not enough information is given to answer the question.
Answer: d
Price of Bond:
FV = 10,000
N=5
I=6
PV = ? = $7,472.58
ΔPrice ≈ - Duration * [Δi/(1+i)] * P
ΔPrice ≈ -5 * [.01/1.06] * $7,742.58 = -352.48
12. In the above question, what is the approximate pricing error when using Macaulay's duration?
a. $8
b. $10
c. $12
d. $14
e. $16
Answer: b
Price of Bond:
FV = 10,000
N=5
I=7
PV = ? = $7,129.86
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$7,129.86 - $7,472.58 = -$342.72
$352.48 - $342.72 = $9.76
13. Which of the following is/are true?
a. For rate increases, the estimated price based on duration will be below the actual price.
b. For rate increases, the estimated price based on duration will be above the actual price.
c. For rate decreases, the estimated price based on duration will be below the actual price.
d. a. and c.
e. b. and c.
Answer: d
14. A bond that has positive convexity:
a. is more price sensitive when rates fall then when rates rise.
b. is more price sensitive when rates rise then when rates fall.
c. has a negative duration.
d. has a duration greater than maturity.
e. a. and d.
Answer: a
15. Which of the following is not true regarding prepayments?
a. The greater the prepayments, the shorter the security's duration.
b. Prepayments are relatively low during the first two years of a mortgage.
c. Mortgages to older people tend to have more prepayments than mortgages to younger people.
d. Prepayments increase as interest rates fall.
e. all of the above are true
Answer: c
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16. A security might exhibit negative convexity because:
a. its duration is greater than its maturity.
b. it has a fixed interest rate below current market rates.
c. a bank has a negative GAP.
d. it has embedded options.
e. markets are not efficient.
Answer: d
17. As market rates rise, prepayment speed _______, while modified duration _________.
a. slows, lengthens
b. slows, shortens
c. accelerates, lengthens
d. accelerates, shortens
e. accelerates, is unaffected
Answer: a
18.
a.
b.
c.
d.
e.
The static spread is:
the difference between the yield on a zero coupon bond and the yield on a coupon bond.
the difference between a fixed-rate yield and a floating-rate yield.
the difference between the yield on new Treasury bills versus new Treasury bonds.
the difference between expected inflation and the current Treasury bill rate.
the difference between the yield on a security with options and the yield on a maturity-matched zero coupon
Treasury security.
Answer: e
19. Securities with embedded options:
a. often have higher yields than comparable Treasury securities.
b. generally have no prepayment risk.
c. are always free of default risk.
d. all of the above.
e. a. and b. only
Answer: a
20. An investor can invest in either a tax-exempt security that pays 5% or a taxable corporate security of
comparable risk and maturity that pays 8%. At what marginal tax rate will the investor be indifferent
between these two securities?
a. 25.0%
b. 32.5%
c. 37.5%
d. 57.5%
e. 62.5%
Answer: c
1 – (5%/8%) = .375
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21. Banks can effectively improve their portfolios by:
a. shortening maturities when yields are expected to fall.
b. obtaining less call protection when rates are expected to fall.
c. reducing diversification when the economy is slowing down.
d. increasing bond quality when quality yield spreads are low.
e. all of the above
Answer: d
22. Which of the following would not be considered a bank qualified municipal security?
a. A Hays County general obligation bond to modernize the county fire department.
b. A Lubbock County general obligation bond to build a new sewer plant.
c. A City of San Marcos general obligation bond to pay for street repairs.
d. A City of El Paso general obligation bond to pay for a new city jail.
e. A State of Texas bond to finance road repairs.
Answer: e
Multiple Choice
46. An important investment security popular with banks that must by law mature within one year from the date of
issue and which has a high degree of safety and marketability is the:
A. Treasury bill
B. Treasury note
C. FNMA note
D. Bankers’ acceptance
E. Eurodollar CD
Ans: A
47. A bank's promise to pay the holder a designated amount of money on a designated future date is known as a (or
an):
A. Promissory guarantee
B. Discount security
C. Bankers’ acceptance
D. In the money option
E. Accretion note
Ans: C
48. Packages of high-quality mortgages put together either by a government agency or by a private investment
banking corporation to raise more loanable funds for the issuer are known as a (or an):
A. Accretion bond
B. Participation certificate
C. CMO
D. Stripped security
E. Commercial paper
Ans: C
49. Fluctuations in the timing of cash payments flowing from an underlying pool of securitized assets is referred to as:
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A. Income risk
B. Prepayment risk
C. Liquidity risk
D. Capital risk
E. None of the above
Ans: B
50. Principal roles that a bank's investment portfolio play include which of the following?
A. Income stability
B. Geographic diversification
C. Hedging interest rate risk
D. Backup liquidity
E. All of the above
Ans: E
51. _____________ is the method by which banks can provide a safeguard for the deposits of governmental units.
A. Hedging
B. Collateralization
C. Pledging
D. Securitization
E. Window dressing
Ans; C
52. The most aggressive investment maturity strategy that calls for the bank to continually shift the maturities of its
securities in response to changes in interest rates and other economic conditions is the
A. Barbell strategy
B. Rate expectations approach
C. Front-end-loaded policy
D. Ladder approach
E. None of the above
Ans: B
53. Which of the following statements is (are) correct regarding duration?
A. In comparing two bonds with the same yield to maturity and the same maturity, a bond with a higher coupon rate
will have a longer duration.
B. In comparing two loans with the same maturity and the same interest rate, a fully amortized loan will have a shorter
duration than a loan with a balloon payment.
C. The duration will always be shorter than the maturity for all debt instruments.
D. All of the above
E. B and C
Ans: B
54. Which of the following is not one of the Capital Market instruments in which banks invest?
A. U.S. Treasury notes
B. Corporate notes and bonds
C. U.S. Treasury bonds
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D. Municipal bonds
E. Commercial paper
Ans: E
55. In recent years security dealers have assembled pools of federal agency securities whose principal interest yield
may be periodically reset based on what happens to a stated interest rate or may carry multiple coupon rates that are
periodically adjusted; the foregoing describes a:
A. Financial futures contract
B. Revenue-anticipation note
C. Zero coupon instrument
D. Structured note
E. None of the above
Ans: D
56. A “bank qualified" municipal security is issued by a:
A. Small local government issuing no more than $10 million of public-purpose securities
B. State or local governmental unit whose credit rating is at least single A.
C. State or local governmental unit whose security issues have been acceptably rated by bank examiners.
D. State or local government that has issued private-purpose securities to promote local economic development.
E. None of the above.
Ans: A
57. Banks are generally not allowed to invest in speculative grade bonds. What kind of risk is this designed to limit?
A. Liquidity risk
B. Business risk
C. Credit risk
D. Tax exposure
E. Interest rate risk
Ans: C
58. A security where the interest payments and the principal payments are sold separately is called:
A. A Treasury note
B. An accretion
C. A structured note
D. A stripped security
E. None of the above
Ans: D
59. Which of the following is true? Mortgage prepayment risk:
A. Is higher on high interest rate mortgages
B. Is felt most dramatically when interest rates rise
C. Is eliminated by the use of mortgage backed securities
D. Is eliminated by the purchase of a stripped mortgage obligation
E. All of the above are true
Ans: A
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60. A bank replaces 5-year corporate bonds with a yield to maturity of 9.75 percent with 5-year municipal bonds with
a yield to maturity of 7 percent. This bank is in the 35 percent tax bracket and these bonds have the same default risk.
What is the most likely reason this bank changed from the corporate to the municipal bonds?
A. Liquidity risk
B. Business risk
C. Credit risk
D. Tax exposure
E. Interest rate risk
Ans: D
61. Suppose a bank has found bank qualified municipal bonds which have a nominal gross rate of return of 8 percent
and that it can borrow funds needed for this purchase at a rate of 6.25 percent. This bond is in the 35 percent tax
bracket. What is the net after-tax return on this bond?
A. 5.20 percent
B. 3.5 percent
C. 1.75 percent
D. 0 percent
E. None of the above
Ans: B
62. A bond has three years to maturity and has a coupon rate of 15 percent. This bond is selling in the market for
$1072 and has a yield to maturity of 12%. What is the duration of this bond?
A. 3 years
B. 1 year
C. 1.92 years
D. 2.45 years
E. 2.64 years
Ans: E
((150*1)/(1+0.12)^1+(150*2)/(1+0.12)^2+(1150*3)/(1+0.12)^3)/1072=2.64
63. A bond has six years to maturity and has a coupon rate of 7.5 percent. Coupon payments are made annually and
this bond has a face value of $1000. This bond is selling in the market for $1127. What is the yield to maturity on this
bond?
A. 7.5 percent
B. 5 percent
C. 11.5 percent
D. 2.5 percent
E. None of the above
Ans: B
1127=75/(1+IRR)+75/(1+IRR)^2+75/(1+IRR)^3+75/(1+IRR)^4+75/(1+IRR)^5+1075/(1+IRR)^6
IRR=5%
64. A bond has eight years to maturity and a coupon rate of 6.5 percent. Coupon payments are made annually and this
bond has a face value of $1000. This bond is selling in the market for $862. What is the yield to maturity on this
bond?
A. 6.5 percent
B. 10 percent
C. 8.5 percent
D. 9 percent
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E. None of the above
Ans: D
65. A bond has eight years to maturity and a coupon rate of 6.5 percent. Coupon payments are made annually and this
bond has a face value of $1000. This bond is selling in the market for $862. If this bond is sold at the end of four years
for $1046, what is the holding period return on this bond?
A. 6.5 percent
B. 12 percent
C. 9 percent
D. 6 percent
E. None of the above
Ans: B
864=65/(1+IRR)+65/(1+IRR)^2+65/(1+IRR)^3+(65+1046)/(1+IRR)^4
IRR=12%
66. A new security which was created by the Treasury to protect against inflation risk is called a(n):
A. CMO
B. FNMA
C. GNMA
D. TIPS
E. CD
Ans: D
67. banks that are concerned about the possibility that the purchasing power of both the interest income and principal
income on a loan is concerned about which of the following things?
A. Business risk
B. Liquidity risk
C. Tax exposure
D. Credit risk
E. Inflation risk
Ans: E
68. A bank that is concerned that the economic conditions of the market area they serve may take a downturn with
falling demand for loans and higher bankruptcies in the areas is concerned about which of the following things?
A. Business risk
B. Liquidity risk
C. Tax exposure
D. Credit risk
E. Inflation risk
Ans: A
69. Which of the following is a characteristic of Treasury bills?
A. They are coupon instruments
B. They are the short term debt instruments issued by major corporations
C. They are discount securities
D. They have more risk than other money market securities
E. All of the above are characteristics of Treasury bills
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Ans: C
70. The investment maturity strategy which calls for the bank to put all of their investment assets into very long term
securities is called the:
A. Front-end-loaded maturity policy
B. Back-end-loaded maturity policy
C. Ladder or spaced maturity polcy
D. Barbell investment portfolio strategy
E. Rate expectation approach
Ans: B
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