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1.00 point A pension fund has an average duration of its liabilities equal to 14 years. The fund is looking at 5-year maturity zero-coupon bonds and 4% yield perpetuities to immunize its interest rate risk. How much of its portfolio should it allocate to the zero-coupon bonds to immunize if there are no other assets funding the plan? →
57.14% 42.86% 35.71% 26.00% Duration of the perpetuity = 1.04/0.04 = 26 years Duration of the zero = 1 years 14 = (wz)(5) + (1 – wz)26; wz = 57.14% Learning Objective: 11-04 Formulate fixed-income immunization strategies for various investment horizons.

Multiple Choice

Difficulty: 3 Hard

award:

1.00 point You own a bond that has a duration of 5 years. Interest rates are currently 6%, but you believe the Fed is about to increase interest rates by 29 basis points. Your predicted price change on this bond is ________. (Select the closest answer.)
+1.37%

→

–1.37% –4.72% +4.72%

D* = 5/1.06 = 4.72 ∆P/P = –D*(∆y) = –4.72(0.29%) = –1.37% Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.

Multiple Choice

Difficulty: 2 Medium

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11/29/2014 1:56 PM

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1.00 point You have purchased a guaranteed investment contract (GIC) from an insurance firm that promises to pay you a 7% compound rate of return per year for 5 years. If you pay $10,000 for the GIC today and receive no interest along the way, you will get __________ in 6 years (to the nearest dollar).
$13,500 $14,071

→

$14,026 $13,108

(10,000)(1.07)5 = $14,026 Learning Objective: 11-04 Formulate fixed-income immunization strategies for various investment horizons.

Multiple Choice

Difficulty: 1 Easy

award:

1.00 point A