Fixed Income Instrument Questions
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1) A bond manager who wishes to hold the bond with the greatest potential volatility would be wise to hold
a. short-term, high-coupon bonds.
b. long-term, low-coupon bonds
c. long-term, zero-coupon bonds
d. short-term, zero-coupon bonds
e. short-term, low-coupon bonds
2) A financial institution can hedge its interest rate risk by
a. matching the duration of its assets to the duration of its liabilities.
b. setting the duration of its assets equal to half that of the duration of its liabilities.
c. match the duration of its assets weighted by the market value of its assets with the duration of its liabilities weighted by the market value of its liabilities.
d. setting the duration of its assets weighted by the market value of its assets to one half that of the duration of the liabilities weighted by the market value of the liabilities
3) Assuming that the current ratio is currently 2, which of the following actions will increase it?
a. Purchasing inventory with cash
b. Purchasing inventory on short-term credit
c. Paying off a short-term bank loan with long-term debt
d. All of the above increase the current ratio.
e. None of the above increase the current ratio
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Solution Summary
This solution answers the following questions:
1. A bond manager who wishes to hold the bond with the greatest potential volatility would be wise to hold what type of bonds?
2. How can a financial institution can hedge its interest rate risk?
3. Assuming that the current ratio is currently 2, what action will increase it?
Solution Preview
1. Because zero-coupon bonds do not pay periodic interest, they are more volatile than coupon bonds. Also, long-term bonds are more volatile than short-term ...
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