Page 27 - FINAL CFA SLIDES DECEMBER 2018 DAY 15
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Session Unit 16:
54. Understanding Fixed Income Risk and Return (B/B)C)
3. A 14% annual-pay coupon bond has six years to maturity. The bond is currently trading at par. Using a 25 basis point change in yield, the
approximate modified duration of the bond is closest to:
A. 0.392.
B. 3.888.
C. 3.970.
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4. Assuming coupon interest is reinvested at a bond’s YTM, what is the interest portion of an 18-year, $1,000 par, 5% annual coupon bond’s return if
it is purchased at par and held to maturity?
A. $576.95
B. $1,406.62.
C. $1,476.95.
5. Effective duration is more appropriate than modified duration for estimating interest rate risk for bonds with embedded options because these
bonds:
A. tend to have greater credit risk than option-free bonds.
B. exhibit high convexity that makes modified duration less accurate.
C. have uncertain cash flows that depend on the path of interest rate changes.
