Question

29. What is the relationship between the price of a straight bond and the price of a callable bond? (a) (b) The straight bond's price will be higher than the callable bond's price for low interest rates. The straight bond's price will be lower than the callable bond's price for low interest rates. There is no consistent relationship between the two types of bonds' prices. The straight bond and callable bond will have the same price. (c) 30. The basic purpose of immunization is to (a) (b) eliminate default risk offset price and reinvestment risk produce a zero net interest rate risk and offset price and reinvestment risk eliminate default risk and produce a zero net interest rate risk (d) 31. Immunization is not a strictly passive strategy because (a) (b) it requires choosing a portfolio that matches an index there is likely to be a gap between the values of assets and liabilities in most portfolios duration of assets and liabilities fall at the same rate it requires frequent rebalancing as maturities and interest rates change (d)

Answer 1

29. The price of callable bonds will always be relatively cheaper than straight bond because they have a callable feature which are embedded into them by the issue and they can be callable by Issuer, so this will provide them with discount to the other bonds prices because other bonds are not callable in nature.

prices of straight bonds will be higher than callable bonds.

Correct answer is option (A)

30. The strategy for bond immunization is to eliminate the interest rate risk which has been associated with the bond.

Bond immunization is always done in order to eliminate the interest rate risk associated with the overall bond portfolio by matching the duration of the bond.

Correct answer is option (C)