Question

1. T or F: For holders of bonds, investment horizon is always equal to time to maturity

2. T or F: the modified duration of a zero-coupon bond is equal to its time to maturity

3. T or F: the purpose of duration immunizing is to maximize expected return.

4. T or F: Perpetuity bonds have a duration of infinity

5. T or F: Duration increases with a rise in yield

6. T or F: Prices rise more with a decrease in yield than they fall with an equivalent rise in yield.

7. T or F: If you think there will be an increase in inflation it is better to increase the duration of your bond portfolio.

8. T or F: If interest rates are about to fall, it is better to be in treasury bonds than corporate bonds.

9. T or F: The Efficient Market Hypothesis relies on everybody understanding how to correctly value assets.

10. T or F: If fundamental analysis is valid, then the weak form of the EMH is violated.

11. T or F: If markets are efficient then stock prices should never increase.

12. T or F: If there is no evidence of arbitrage then markets are efficient.

Answer 1

Answers-

Q 1)

The statement is False. The bondholders can sell the bonds before maturity. So, the investment cn be different from the time to maturity.

Q 2)

The statement is False.

The Macaulay duration of a zero-coupon bond is equal to time till maturity.

The modified duration = Macaulay duration / (1 + yield to maturity/discounting frequency per year)

Q 3)

The statement is True.

The duration immunization helps in maximizing return on the investment.

Q 4)

The statement is True.

Perpetual bond has no maturity value. The duration is forever or infinity.

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