Fixed Income - Fixed Income Section 2

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21. A bond was purchased two years back at a price above par value. The carrying value of this bond today will most likely be equivalent to the purchase price

  • Option : A
  • Explanation : Carrying value of a bond is computed using the effective interest rate method. It is the price along the bond's constant- yield price trajectory. For premium bonds, as the premium is amortized, the book value of the bond will decrease until we reach face value at maturity. The question tells us that the bond was purchased above par, therefore it is a premium bond. So among the three options A is correct.
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23. Analyst 1: Yield duration statistics measure the sensitivity of a bond’s full price to the bond’s own yield to maturity.
Analyst 2: Curve duration statistics measure the sensitivity of a bond’s full price to the benchmark yield curve. Which analyst’s statement is most likely correct?

  • Option : C
  • Explanation : Yield duration statistics measure the sensitivity of a bond’s full price to the bond’s own yield to maturity. Curve duration statistics measure the sensitivity of a bond’s full price to the benchmark yield curve.
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24. A bond with a Macaulay duration of 10 years, a yield to maturity of 8% and semiannual payments will have a modified duration of:

  • Option : B
  • Explanation : Modified duration = (Macaulay Duration) / (1 + r) = 10 / ( 1 + ( 0.08 / 2 ) ) = 9.62 years
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25. Which of the following statements about duration is incorrect? A bond’s:

  • Option : C
  • Explanation : Modified duration = Macaulay Duration / ( 1 + r ). Therefore a bonds Macaulay duration is typically more than its modified duration.
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