Describe in your own words the meaning of DURATION and how Duration is a measure of interest rate sensitivity?

  1. Why do investors like CONVEXITY when managing bonds?

  2. Describe the price and yield curve changes for a callable bond? Why does a callable bond exhibit negative convexity?

  3. Which one of the following bonds is more price sensitive to changes in interest rates and why?

a. Exxon 10% coupon due in 12/31/2022 selling at $100

b. USTN 0% due in 12/31/2022with a yield of 10% (this is a zero coupon bond)

  1. An Apple bond has a duration of 6. If yields increase by 1%, what will be the effect on the bond’s price?

  2. If an investor desires a bond with a lower duration, holding other factors constant

a. Should he choose a HIGHER or LOWER coupon?

b. Should he choose a SHORTER or LONGER maturity?

c. Should he choose a HIGHER or LOWER yield to maturity?

  1. If a bond manager expects the yield curve to sharply steepen with longer rates going higher and shorter rates going lower, what type of duration would the manager prefer? Which of the following bonds would best accommodate the manager under this scenario?

a. ATT 12% due 12/31/2017 @ 10% yield

b. DuPONT 3% due 12/31/2047 @ 10% yield

c. USTN 3% due 12/31/2047 @ 6% yield

  1. Calculate the duration of the following bond: 1,000 JNJ 6% due 12/31/2019 with a yield of 4%.

  2. Consider a bond with a 30 maturity, an 8% coupon, and a yield of 8%. The duration of this bond is 11.26 and the convexity is 212.4. If the bond’s yield increases from 8% to 11%, tell me how the price of the bond will change.

  3. When evaluating between two different mutual funds, discuss how an investor can use the Sharpe Ratio and the Treynor Ratio to determine which fund is most appropriate.

  4. You are an investor who has just retired after 45 years in the work place. Up until now, your investment portfolio consisted of low –yielding and high risk growth stocks. However, as medical costs continue to rise and you need to supplement your Social security with more monthly income, discuss some changes to this investor’s portfolio to meet his need for higher income.


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