Question 1

Duration is unaffected by changes in a security's yield to maturity.

Accepted Answer

Duration measures the sensitivity of a bond's price to changes in interest rates, so as the yield to maturity changes, the duration of the security also changes.

Question 2

Duration measures the price elasticity of a debt instrument with respect to changes in the instrument's yield to maturity.

Accepted Answer

Duration is a measure used in fixed income to assess a bond's sensitivity to changes in interest rates, specifically indicating how much the price of a debt instrument is expected to fluctuate in response to a change in its yield to maturity.

Question 3

Duration can exceed the amount of calendar time before a fixed-income debt security reaches maturity.

Accepted Answer

The answer of Duration can exceed the amount of calendar...

Question 4

Duration measures the average amount of time needed for an investor to recover his or her original cash outlay used to buy the security.

Accepted Answer

Duration is a measure used in fixed income to assess the sensitivity of a bond's price to changes in interest rates, and it also represents the weighted average time it takes for an investor to be repaid the bond's cash flows, which can be thought of as the time to recover the initial investment.

Question 5

Securities with a higher duration value have lower price risk.

Accepted Answer

Securities with a higher duration value have higher price risk because they are more sensitive to changes in interest rates, leading to greater price fluctuations.

Question 6

Zero-coupon bonds or a loan paid off in one lump sum at maturity have a duration of one.

Accepted Answer

The duration of a zero-coupon bond is equal to its time to maturity, not one, because it involves a single payment at maturity, and duration measures the bond's sensitivity to interest rate changes, effectively its weighted average time to receive the bond's cash flows.

Question 7

The duration of a zero-coupon bond is equal the length of time between its purchase and its maturity.

Accepted Answer

The duration of a zero-coupon bond is equal to its time to maturity because it pays no coupons and returns its face value only at maturity, meaning its price is solely affected by changes in interest rates over that period.

Question 8

When the investor's desired holding period equals the duration of the security he or she holds, the investor's total dollar return is immunized against changes in interest rates.

Accepted Answer

Duration matching, or immunization, is a strategy where the duration of the portfolio is matched with the investor's desired holding period. This approach minimizes the impact of interest rate changes on the total dollar return, effectively immunizing the portfolio against interest rate risk.

Question 9

Portfolio immunization is not affected by changes in the slope of the yield curve.

Accepted Answer

Portfolio immunization strategies are designed to protect against interest rate movements, but changes in the slope of the yield curve can affect the value of the immunized portfolio because they alter the relationship between the yields of different maturities, potentially impacting both the duration and the convexity of the portfolio.

Question 10

The Harrod-Keynes' effect argues that nominal rates will not necessarily be affected by inflation, but the real rate will be affected by inflation.

Accepted Answer

The Harrod-Keynes' effect states that nominal interest rates will not necessarily be affected by inflation, but real interest rates will be affected by inflation. This is because inflation erodes the purchasing power of money, so a nominal interest rate that is equal to the inflation rate will actually result in a negative real interest rate.

Question 11

Nominal rates of return decline by less than any given decrease in the expected inflation rate, according to recent research.

Accepted Answer

This phenomenon is often observed because nominal interest rates incorporate expectations about future inflation. When expected inflation decreases, nominal rates also tend to decrease but by a smaller magnitude, as they also reflect real rates of return and other factors not directly tied to inflation expectations.

Question 12

According to recent research, real interest rates are constant over time with very few fluctuations.

Accepted Answer

Real interest rates fluctuate over time due to changes in monetary policy, inflation expectations, and economic conditions.

Question 13

According to recent research, the Fisher effect is stable over time.

Accepted Answer

The Fisher effect, which describes the relationship between nominal interest rates, real interest rates, and inflation, may not be stable over time due to changing economic conditions, monetary policies, and inflation expectations.

Question 14

Accelerating inflation appears to be associated with a yield curve increasingly positive in slope, according to the results of recent research.

Accepted Answer

Accelerating inflation is typically associated with a yield curve that flattens or becomes inverted, as central banks raise interest rates to combat inflation, increasing short-term rates more than long-term rates.

Question 15

The real rate of interest is the dollar amount of interest the investor receives.

Accepted Answer

The real rate of interest is the rate of interest an investor expects to receive after allowing for inflation. It adjusts the nominal interest rate to remove the effects of inflation and reflects the true purchasing power of the interest income.

Question 16

Some researchers argue that because corporate contracts and balance sheets are in nominal terms, rising inflation reduces corporate profitability, causing stock prices to fall.

Accepted Answer

Inflation can lead to higher input costs for companies, reducing their profit margins if they are unable to pass these costs onto consumers. Additionally, inflation can lead to higher interest rates, which can increase borrowing costs and negatively affect stock prices. Contracts and balance sheets in nominal terms do not adjust automatically for inflation, exacerbating these effects.

Question 17

Most loans are either very short-term or very long-term.

Accepted Answer

Loans come in a variety of lengths, including short-term (a few months to a year), medium-term (1 to 5 years), and long-term (5 years or more), to accommodate different borrowing needs and financial situations.

Question 18

If an upward-sloping yield curve starts to flatten, portfolio managers should try to shorten the maturity of their liabilities.

Accepted Answer

A flattening yield curve suggests that short-term interest rates are rising closer to long-term rates, which typically indicates a slowing economy. Portfolio managers might actually consider lengthening the maturity of their assets to lock in higher long-term rates before they potentially decrease, rather than focusing on the maturity of their liabilities.

Question 19

Segmented markets hypothesis states that the market for investments is more appropriately thought of as a collection of disjoint or segmented markets based on the investment horizon of the assets in question.

Accepted Answer

The segmented markets hypothesis suggests that financial markets are divided into segments based on the maturity of the securities, and that the supply and demand within each segment determine the interest rates for that segment independently of other segments. This implies that investors have preferences for certain maturities based on their investment horizons, leading to disjoint or segmented markets for different maturities of investments.

Question 20

The yield curve measures the rate of return on bonds over a period of time.

Accepted Answer

The yield curve actually represents the relationship between the interest rates and the maturity dates of similar quality bonds, not the rate of return over time.

Quiz 7: Effects of Inflation and Yield Curves on Stock Prices and Investments