"Fixed Income":Long-term bond investors

来源: 正保会计网校编辑：小鞠橘桔 2020/12/14 11:20:45　字体：大小

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Questions 1:

A long-term bond investor with an investment horizon of 8 years invests in option-free, fixed-rate bonds with a Macaulay duration of 10.5. The investor most likely currently has a:

A 、positive duration gap and is currently exposed to the risk of lower interest rates.

B 、positive duration gap and is currently exposed to the risk of higher interest rates.

C、 negative duration gap and is currently exposed to the risk of higher interest rates.

Questions 2:

If an issuer is required to retire a specified portion of the bond’s principal each year, the bond most likely:

A、 is callable.

B 、is a step-up note

C、 has a sinking fund provision.

View answer resolution

【Answer to question 1】B

【analysis】

B is correct. The duration gap is the bond’s Macaulay duration minus the investment horizon, which is positive in this case. A positive duration gap implies that the investor is currently exposed to the risk of higher interest rates.

A is incorrect because while the duration gap is positive the investor is currently exposed to the risk of higher, not lower, interest rates.

C is incorrect because the duration gap is positive, not negative, implying that the investor is currently exposed to the risk of higher interest rates.

【Answer to question 2】C

【analysis】

C is correct. A sinking fund provision requires retirement of a portion of the bond’s principal every year, rather than retirement of the entire issue at maturity.

A is incorrect because a bond that is currently callable may be retired by the issuer, but the issuer is not required to do so.

B is incorrect because a step-up note has a coupon rate that increases over time according to a predetermined schedule.

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