# Home Work

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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

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1.00 point You own a
Its coupon rate is 8.3%. Its value at maturity is \$1,000. It matures in 4 years. Its yield to maturity is currently 5.3%. The modified duration of this bond is ______ years.
4.00 3.59

3.41 3.19

D* = 3.59/1.053 = 3.41 years Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.

Multiple Choice

Difficulty: 3 Hard

award:

1.00 point A bond with a 7-year duration is worth \$1,073, and its yield to maturity is 7.3%. If the yield to maturity falls to 7.21%, you would predict that the new value of the bond will be approximately _________.
\$1,072.03 \$1,073.00

\$1,079.33 \$1,073.97

∆P/P = –D*(∆y) D* = D/(1 + y) = 7/1.073 = 6.52 ∆P/P = –D*(∆y) = –6.52(–0.09%) = .59% New price = \$1,073(1.0059) = \$1,079.33 Learning Objective: 11-02 Compute the duration of bonds; and use duration to measure interest rate sensitivity.

Multiple Choice

Difficulty: 3 Hard

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11/29/2014 1:56 PM

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1.00 point A fixed-income portfolio manager sets a minimum acceptable rate of return on the bond portfolio at 4.1% per year over the next 5 years. The portfolio is currently worth \$10 million. One year later interest rates are at 5.1%. What is the portfolio value trigger point at this time that would require the manager to immunize the portfolio?
\$12,225,135

\$10,019,425