Investments – Bodie [13th Edition] | Accredited Test Bank &
Solutions | All Lessons Included | 2025
FIXED-INCOME ANALYSIS & INTEREST RATE RISK (1–15)
1. Modified duration measures the approximate percentage price change
for a given change in:
A) 100 basis points in yield
B) 1 basis point in yield
C) 1% change in coupon
D) 1 year to maturity
Answer: A
Rationale: Modified duration estimates the percentage price change for a 100
basis point (1%) change in yield.
2. Effective duration differs from modified duration because it accounts
for:
A) Changes in the risk-free rate only
B) Embedded options (e.g., call or put features)
C) Default risk
D) Inflation
Answer: B
Rationale: Effective duration is used for bonds with embedded options (callable,
putable) because cash flows change with interest rates.
3. Convexity is desirable because it means:
A) Price losses are smaller than price gains for equal yield changes
B) Price gains are smaller than price losses
C) Duration is negative
D) The bond has high default risk
, Answer: A
Rationale: Positive convexity means bond prices rise more when yields fall than
they fall when yields rise.
4. A portfolio manager who wants to eliminate interest rate risk for a
known liability should:
A) Maximize convexity
B) Match the duration of assets and liabilities (immunization)
C) Buy only zero-coupon bonds
D) Sell all bonds
Answer: B
Rationale: Duration matching (immunization) protects portfolio value from
parallel interest rate shifts.
5. The key rate duration approach measures a bond's sensitivity to:
A) Parallel yield curve shifts only
B) Changes in specific maturity points along the yield curve
C) Credit spread changes
D) Inflation changes
Answer: B
Rationale: Key rate durations capture sensitivity to non-parallel yield curve shifts
(e.g., steepening, flattening).
6. A bullet bond portfolio has which characteristic?
A) Bonds maturing evenly across all maturities (ladder)
B) Bonds concentrated at one maturity point
C) Both short- and long-term bonds
D) Only floating-rate bonds
Answer: B
Rationale: Bullet portfolios hold bonds with similar maturities clustered at one
point on the yield curve.
, 7. A barbell bond portfolio often has higher convexity than a bullet
portfolio with the same duration because:
A) Barbell has more bonds
B) Barbell's cash flows are more dispersed (short and long maturities)
C) Bullet portfolios cannot have convexity
D) Convexity is unrelated to dispersion
Answer: B
Rationale: Greater dispersion of cash flows (short and long maturities) increases
convexity.
8. When the yield curve flattens, which strategy profits?
A) Buy long bonds, sell short bonds
B) Buy short bonds, sell long bonds
C) Buy intermediate bonds only
D) Sell all bonds
Answer: B
Rationale: Flattening (long yields fall relative to short yields) benefits buying short
and selling long.
9. When the yield curve steepens, which strategy profits?
A) Buy long bonds, sell short bonds
B) Buy short bonds, sell long bonds
C) Buy only floating-rate bonds
D) Sell all bonds
Answer: A
Rationale: Steepening (long yields rise relative to short yields) benefits buying
short and selling long.
, 10. Credit default swaps (CDS) allow investors to:
A) Hedge or speculate on default risk without owning the bond
B) Eliminate all interest rate risk
C) Convert fixed-rate bonds to floating-rate
D) Guarantee stock returns
Answer: A
Rationale: CDS are derivative contracts that transfer credit risk; the buyer pays
premium, seller pays if default occurs.
11. A CDS spread widening indicates:
A) Improving credit quality
B) Worsening credit quality (higher perceived default risk)
C) Lower interest rates
D) No change in risk
Answer: B
Rationale: Widening CDS spreads mean the market perceives higher default
probability.
12. In a CDS index (e.g., CDX), the investor can:
A) Hedge default risk for a basket of bonds
B) Only hedge a single bond
C) Eliminate all market risk
D) Convert to equity
Answer: A
Rationale: CDS indices provide default protection on a diversified portfolio of
corporate bonds.
13. The Z-spread (zero-volatility spread) measures:
A) Yield spread over Treasuries assuming zero volatility in interest rates
B) Credit spread with no default risk
Solutions | All Lessons Included | 2025
FIXED-INCOME ANALYSIS & INTEREST RATE RISK (1–15)
1. Modified duration measures the approximate percentage price change
for a given change in:
A) 100 basis points in yield
B) 1 basis point in yield
C) 1% change in coupon
D) 1 year to maturity
Answer: A
Rationale: Modified duration estimates the percentage price change for a 100
basis point (1%) change in yield.
2. Effective duration differs from modified duration because it accounts
for:
A) Changes in the risk-free rate only
B) Embedded options (e.g., call or put features)
C) Default risk
D) Inflation
Answer: B
Rationale: Effective duration is used for bonds with embedded options (callable,
putable) because cash flows change with interest rates.
3. Convexity is desirable because it means:
A) Price losses are smaller than price gains for equal yield changes
B) Price gains are smaller than price losses
C) Duration is negative
D) The bond has high default risk
, Answer: A
Rationale: Positive convexity means bond prices rise more when yields fall than
they fall when yields rise.
4. A portfolio manager who wants to eliminate interest rate risk for a
known liability should:
A) Maximize convexity
B) Match the duration of assets and liabilities (immunization)
C) Buy only zero-coupon bonds
D) Sell all bonds
Answer: B
Rationale: Duration matching (immunization) protects portfolio value from
parallel interest rate shifts.
5. The key rate duration approach measures a bond's sensitivity to:
A) Parallel yield curve shifts only
B) Changes in specific maturity points along the yield curve
C) Credit spread changes
D) Inflation changes
Answer: B
Rationale: Key rate durations capture sensitivity to non-parallel yield curve shifts
(e.g., steepening, flattening).
6. A bullet bond portfolio has which characteristic?
A) Bonds maturing evenly across all maturities (ladder)
B) Bonds concentrated at one maturity point
C) Both short- and long-term bonds
D) Only floating-rate bonds
Answer: B
Rationale: Bullet portfolios hold bonds with similar maturities clustered at one
point on the yield curve.
, 7. A barbell bond portfolio often has higher convexity than a bullet
portfolio with the same duration because:
A) Barbell has more bonds
B) Barbell's cash flows are more dispersed (short and long maturities)
C) Bullet portfolios cannot have convexity
D) Convexity is unrelated to dispersion
Answer: B
Rationale: Greater dispersion of cash flows (short and long maturities) increases
convexity.
8. When the yield curve flattens, which strategy profits?
A) Buy long bonds, sell short bonds
B) Buy short bonds, sell long bonds
C) Buy intermediate bonds only
D) Sell all bonds
Answer: B
Rationale: Flattening (long yields fall relative to short yields) benefits buying short
and selling long.
9. When the yield curve steepens, which strategy profits?
A) Buy long bonds, sell short bonds
B) Buy short bonds, sell long bonds
C) Buy only floating-rate bonds
D) Sell all bonds
Answer: A
Rationale: Steepening (long yields rise relative to short yields) benefits buying
short and selling long.
, 10. Credit default swaps (CDS) allow investors to:
A) Hedge or speculate on default risk without owning the bond
B) Eliminate all interest rate risk
C) Convert fixed-rate bonds to floating-rate
D) Guarantee stock returns
Answer: A
Rationale: CDS are derivative contracts that transfer credit risk; the buyer pays
premium, seller pays if default occurs.
11. A CDS spread widening indicates:
A) Improving credit quality
B) Worsening credit quality (higher perceived default risk)
C) Lower interest rates
D) No change in risk
Answer: B
Rationale: Widening CDS spreads mean the market perceives higher default
probability.
12. In a CDS index (e.g., CDX), the investor can:
A) Hedge default risk for a basket of bonds
B) Only hedge a single bond
C) Eliminate all market risk
D) Convert to equity
Answer: A
Rationale: CDS indices provide default protection on a diversified portfolio of
corporate bonds.
13. The Z-spread (zero-volatility spread) measures:
A) Yield spread over Treasuries assuming zero volatility in interest rates
B) Credit spread with no default risk
