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

1. For holders of bonds, investment horizon is always equal to time to maturity.

FALSE. The bondholders can sell the bonds before maturity. So, the investment horizon is not always equal to time to maturity.

2. The modified duration of a zero-coupon bond is equal to its time to maturity

TRUE. A zero-coupon bond has a modified duration equal to its time to maturity.

3. The purpose of duration immunizing is to maximize expected return.

FALSE. The purpose of duration immunizing is to minimize the interest rate risk.

4. Perpetuity bonds have a duration of infinity

FALSE. Perpetuity bonds have a finite duration. It's only that the number of coupon payments are infinite.

5. Duration increases with a rise in yield

FALSE. Duration decreases with a rise in yield.