Question

1. T/F Duration is a measure of interest rate sensitivity and a bond with a duration of 9 should go up 9% if rates go down 1%

2. T/F A bond that matures in 8 years has a shorter duration then a bond that matures in 5 years all else equal.

3. T/F A bond with a 5% coupon has a shorter duration than a bond with a 4% coupon all else equal

4. T/F   U.S. Treasury notes and bonds have no credit spread as they have no risk of default.

5. T/F If the risk free rate is 4% and my required rate of return is 9%, the credit spread is 5%

6. If the Fed is cutting rates because the economy is entering a recession should you invest in longer term BB- corporate bonds? List the reasons for your decision.

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2

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7. What types of risks do T-bonds have and what types of risk do AA rated corporate bonds have?

Answer 1

True - Duration is a measure of interest rate sensitivity

False - Higher the time to maturity, higher will be duration

True - Higher the coupon rate, shorter will be duration

True - Treasury notes are risk free securities and has no credit spread

True - Credit spread = required rate of return - risk free rate