1) Consider a coupon bond. If the bond price is higher than the par value, then the yield exceeds its coupon rate.

True

False

2)  All else equal, the interest rate of a bond and its duration are positively related.

True

False

3) Minco Ltd, a large mining company, provides a superannuation fund for its employees. The fund's manager says: ‘We know the mining industry well, so we feel comfortable investing most of the fund in a portfolio of mining company shares’. Advise Minco's employees on whether to endorse the fund's investment policy.

Answer:

1.

True: If the bond price is higher than the par value, it is called as the premium bond and it takes place when the yield exceeds its coupon rate. In all the other cases, the yield of the bond does not exceed the coupon rate generally.

2.

False: The duration of the bond and the interest rate have an inverse relationship with each other.

Generally, for every 1% change in interest rate a bond price will change approximately 1% in the opposite direction for every year of duration.

3.

Superannuation fund is a fund which provides retirement benefits to employees. The fund invests in specific portfolios which earns returns over a period of time and that is distributed to the employees.

In the given case, the manager is planning to create a portfolio by investing most of the funds in the shares of mining companies. As a result of this investment, the entire portfolio will be invested in a single sector without any diversification of portfolio. Practically speaking, the portfolio should always be diversified wherein investments are spread in different sectors/companies instead of putting all money in one scheme or portfolio.

Minco’s employees not to endorse the fund’s investment policy as this may turn out to be a risky investment and the investment may not lead good results.