Investment Analysis - Exam 3 - Part 1 - Shatz Actual Questions And Correct Detailed Verified Answers.
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Course
BPV
Institution
BPV
Since investors prefer positive convexity, given all else equal, investments with greater convexity have lower yields
BPV Calculation - correct answer BPV = Mod Duration/ 100 * Full price (total USD in invoice/ 100)
A $100 face value bond would change in full price by $.08708 for a 1 bp ...
Bonds - correct answer Issued by a borrower to obtain funds
Bought and held by investors to earn a return Most bonds pay the face value upon maturity plus regular
coupon payments
Bond Pricing - correct answer Look at slide (& phone later) for formula.
Coupon payments are reoccurring and get lower overtime (all else being equal) & maturity valued is paid
at the end with all coupon payments
Price/Yield Relationship - correct answer Bond's price is just equal to the present value of its cash
flows; there is an inverse relationship between price and yield.
Yield to Maturity (Yield Measure) - correct answer the internal rate of return or the interest rate that
will make the present value of the cash flows equal to the price
Yield to Call (Yield Measure) - correct answer the internal rate of return when the cashflows
terminate on the call date
Current Yield (Yield Measure) - correct answer Coupon/Price
Problem with YTM - correct answer The problem with using yield to maturity to discount the cash
flows of a bond is that it assumes that all cash flows are reinvested at the same rate, the yield to
maturity (ie. flat yield curve).
Cash flows should each be discounted by the rates at which they could have actually been invested out
to that date.
Macaulay Duration - correct answer *Need to look at formula on ppt and see math in following
slides*
Greater the value the greater the volatility w/ interest rates
Last Year's cash flow is amount given at beginning + reg coupon (CFI says same thing)
, - The Macaulay duration measures, in years, the average weighted time required for an investor to be
repaid his initial investment in a bond.
- Also measures time until next cash flow
- Duration of a zero-coupon bond is equal to its maturity
Effects on Duration D (Sensitivity to changes in interest rates) - correct answer Maturity (up) -->
Duration (up)
Yields (up) --> Duration (down)
Coupons (up) --> Duration (down)
Coupon Freq (up)-> Duration (down)
I think it's because the things are relative. Time adds volitity, but increases in coupon or rate made
future changes less sig.
Modified Duration D - correct answer Assume percentage change in full price of a bond given a 100
bp. change in yield
First order derivative; based on the slope of a particular point on the price_yield curve
Provides a measure of percentage price volatility --> since time to get paid is different
Basic Formula:
D mod = D / (1 + (YTM/# of pymts a year))
Duration Movements - correct answer Duration decreases with higher coupons, with higher yields
Duration increases with longer maturities-(time)
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