Sample Questions
Question 1
Easy
What is the Macaulay duration of a 5-year zero-coupon bond?
Solution
D is correct. Macaulay duration is the weighted average time to cash flows, where the weights are the present values of each cash flow as a fraction of price. A zero-coupon bond has a single cash flow at maturity, so 100% of the weight sits at year 5. Macaulay duration therefore equals the maturity: 5.00 years.
Question 2
Medium
A bond is described as a Eurobond. Which characteristic most accurately distinguishes a Eurobond from a domestic bond?
Solution
C is correct.
A Eurobond is a bond issued and sold outside the home country of the currency in which it is denominated. For example, a USD-denominated bond issued and sold outside the United States is a Eurobond (or Eurodollar bond). Eurobonds are typically issued in bearer form and are subject to less regulatory oversight than domestic bonds.
A Eurobond is a bond issued and sold outside the home country of the currency in which it is denominated. For example, a USD-denominated bond issued and sold outside the United States is a Eurobond (or Eurodollar bond). Eurobonds are typically issued in bearer form and are subject to less regulatory oversight than domestic bonds.
Question 3
Hard
A bond currently trades at par ($100), with a modified duration of 6.5 and convexity of 80. Yields are expected to fall by 75 basis points. Using the duration-plus-convexity approximation, estimate the new bond price.
Solution
A is correct. The second-order Taylor expansion of bond price with respect to yield is With , , and : The convexity term adds 0.225% on top of the 4.875% duration estimate. Applying this to the par price:
