Nagarjuna College of Engineering and Technology

Department of MBA
Security Analysis & Portfolio Management (15MBAFM232)
AAT-1
1. Marketability risk of bond is
a. The market risk which affects all the bonds
b. Variation in return caused by difficulty in selling bonds
c. The failure to pay the agreed value of the bond by the issuer
d. Both a & b

2. Default risk is lower in

a. Treasury bonds
b. Government bonds
c. ICICI bonds
d. IDBI bonds

3. The value of the bond depends on

a. The coupon rate
b. Years to maturity
c. Expected yield to maturity
d. All the above

4. The bond yield remains constant over its life and the discount or premium amount will
decrease
a. At a decreasing rate as its life gets shorter
b. At a decreasing rate as its life gets longer
c. At an increasing rate as its life gets shorter
d. At an increasing rate as its life gets longer

5. Yield to maturity is the single discount factor that makes

a. The future value of the present cash flows from a bond equal to bond value
b. The future value of the present cash flows equal to the future price of the bond
c. Present value of the future cash flows of the bond equal to the current price of the bond
d. The future value of the bond equal to the present price

6. The term structure of the bond is the relationship between the

a. Interest rate and bonds maturity period
b. Interest rate of the bond and market rate of interest
c. Interest rate and the price of bond
d. Yield and time taken to mature

7. Riding the yield curve means

a. Switching over from short term bonds to long term when the latter yields better
b. Switching from bonds to stocks
c. Switching over from long term bonds to short term bonds to get more yield
d. Switching over to short term bonds from long term bonds when yield curve is downward
sloping

8. Coupon yield of the bond is

a. The discounted value of the bond
b. Coupon payment stated as a percentage of bonds features
c. Coupon payment stated as a percentage of bonds present price
d. Both a and c
9. The bond portfolio manager has to watch carefully
a. The shape of the yield curve
b. The market interest rate
c. The shape of the yield curve and shifts that occur in the market interest rate
d. The repaying capacity of the issuers

10. Duration is the measure of

a. Time structure of the bond
b. Interest rate risk
c. Time structure and market risk
d. Time structure and the interest rate risk.

CASE STUDY:
1. Sajith is considering 2 bonds, IGI flexi bond and CCP safety bond. Both the bonds have 5
years to maturity and face value of Rs 1000. IGI Flexi bond offers coupon rate of 8% payable
annually whereas CCP safety bond has a coupon rate of 16% payable annually. IGI flexi bond is
traded at a yield of 8% at present. Calculate the intrinsic value, duration and modified duration of
both the bonds and suggest the bond with low risk to Sajith.

2. Madhav Dhar set up Magnum Securities in 1985 as a stock broking firm, which acquired
membership of Bombay Stock Exchange. Till 2010, the bulk of the income of Magnum
Securities came from stock broking. Magnum Securities has recently set up a debt division.
Madhav Dhar sees a great potential in the debt market.
After graduating from a premier business school, you have worked in a mutual
fund organization looking after its debt schemes. Recently Madhav Dhar met you at an
investment conference, where you gave a talk on debt funds.
Mr. Madhav Dhar has requested you to use the following data on Bond A, which is currently one
of the most actively traded bonds.

Face Value Rs. 100

Coupon (interest rate) 15% p.a.
Years to Maturity 6 years
Redemption Value Rs. 100
Yield to Maturity 18%
a. What is the duration of the bond A?
b. Calculate the modified Duration.
c. What is the conceptual difference between year to maturity and duration?
d. If the yield on bond A increases by 20 basis points, what will be the percentage change in the
bond price?