Question

1. Which of the following bonds has the lowest interest rate risk?

A. 3-year 5% corporate bond.

B. 30-year 5% corporate bond.

C. 30-year zero-coupon corporate bond.

2. If the effective duration of a callable bond is 5 and the negative convexity adjustment is 1%. If yield were to fall by 100 basis point, the duration combined with convexity would:

A. Produce a price change of 5%

B. Produce a price change of less than 5%.

C. Produce a price change of more than 5%.

3. Credit rating agencies may assign different credit rating to the debt securities from the same issuer. This process is known as:

A. Notching.

B. Seniority ranking.

C. Structural subordination.

Answer 1

1]

A- 3-year 5%. This is because bonds with longer maturities have higher interest rate risk.

B and C are incorrect. These are long-term (30 year) bonds, and hence their interest rate risk is much higher than that of a 3-year bond.