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Exam 16: Bond Portfolio Management Strategies

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Question 21

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Exhibit 16-6 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) The following information is given concerning a substitution swap: You currently hold a 25 year, Aa 10% coupon bond priced to yield 12%. As a swap candidate you are considering a 25 year, Aa 10% coupon bond priced to yield 13%. Assume a reinvestment rate of 12%, semiannual compounding, and a one-year workout period. $\begin{array}{lcc}&\text { Current Band } & \text { Candidate Band } \\\hline\text { Dollar Investment } & \$ 842.38 & ? \\\text { Coupon } & 100.00 & 100.00 \\\text { i on One Coupon } & 3.0 & 2.75 \\\text { Principal Value at Year End } & 843.50 & 780.46 \\\text { Total Accrued } & 946.50 & 883.21 \\\text { Total Gain } & 104.12 & ? \\\text { Gain per Invested Dollar } & ? & ? \\\text { Realized Compound Yield } & ? & ?\end{array}$ -Refer to Exhibit 16-6. The value of the swap is ____ basis points in one year.

A) 94.14
B) 0.9414
C) 9.414
D) 941.4
E) 0.09414

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Question 22

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Exhibit 16-10 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) You are creating a portfolio that consists of the following two bonds. Bond A pays an annual 7% coupon, matures in two years, has a yield to maturity of 8%, and a face value of $1,000. Bond B pays an annual 8% coupon, matures in three years, has a yield to maturity of 9%, and a face value of $1,000. -Refer to Exhibit 16-10. Calculate the Modified Duration for Bond A.

A) 0.98
B) 1.79
C) 1.90
D) 1.93
E) 2.31

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Question 23

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The term dedication, used to describe portfolio management techniques, is referring to servicing a prescribed set of

A portfolio of bonds is immunized from interest rate risk if the duration of the portfolio is always equal to the desired investment horizon.

Exhibit 16-5 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) The following information is given concerning a pure yield pick-up swap: You currently hold a 20 year, Aa 2% coupon bond priced to yield 9.5%. As a swap candidate you are considering a 20 year, Aa 14% coupon bond priced to yield 10.00. Assume a reinvestment rate of 11%, semiannual compounding, and a one-year workout period. $\begin{array}{lcc}&\text { Current Band } & \text { Candidate Band } \\\hline\text { Dollar Investment } & \$ 1222.04 & \$ 1343.18 \\\text { Coupon } & 110.00 & 140.00 \\\text { i on One Coupon } & 3.3 & ? \\\text { Principal Value at Year End } & 1218.04 & ? \\\text { Total Accrued } & 1341.34 & ? \\\text { Realized Compound Yield } & 9.5351 \% & ?\end{array}$ -Refer to Exhibit 16-5. The interest on one coupon for the candidate bond is

If an investor swaps identical issues to establish a loss, the loss is disallowed and the transaction is known as a

Horizon matching is a combination of

In a buy-and-hold strategy, bonds are purchased in light of the investor's objectives and constraints and then held until maturity.

In a barbell strategy

Assuming no change in interest rates the duration of a coupon bond

A substitution swap relies heavily on interest rate expectations.

Exhibit 16-2 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) The following information is given concerning a substitution swap: You currently hold a 15 year, 7% coupon bond priced to yield 8%. As a swap candidate you are considering a 15 year, 7% coupon bond priced to yield 8.5%. Assume a reinvestment rate of 8.5%, semiannual compounding, and a one-year workout period. $\begin{array}{lcc}&\text { Current Band } & \text { Candidate Band } \\\hline \text { Dollar Investment } & \$ 913.54 & ? \\\text { Coupon } & 70.00 & 70.00 \\\text { i on One Coupon } & 1.487 & 1.487 \\\text { Principal Value at Year End } & 916.68 & 878.55 \\\text { Total Accrued } & 988.17 & 950.04 \\\text { Total Gain } & 74.63 & ? \\\text { Gain per Invested Dollar } & ? & ? \\\text { Realized Compound Yield } & ? & ?\end{array}$ -Refer to Exhibit 16-2. The dollar investment in the candidate bond is

Exhibit 16-9 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Consider two bonds, both pay annual interest. Bond Y has a coupon of 6% per year, maturity of 5 years, yield to maturity of 6% per year, and a face value of $1000. Bond X has a coupon of 7% per year, maturity of 10 years, yield to maturity of 4% per year, and a face value of $1000. -Refer to Exhibit 16-9. Assume that your investment horizon is 5 years and your portfolio consists only of Bond Y and Bond X. Indicate the proportions invested in each bond, so that the portfolio is immunized.

Exhibit 16-3 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) The following information is given concerning a pure yield pick-up swap: You currently hold a 20 year, Aa 8% coupon bond priced to yield 10%. As a swap candidate you are considering a 20 year, Aa 10% coupon bond priced to yield 10.75%. Assume a reinvestment rate of 12.00%, semiannual compounding, and a one-year workout period. $\begin{array}{lcc}&\text { Current Band } & \text { Candidate Band } \\\hline\text { Dollar Investment } & \$ 828.41 & \$ 938.83 \\\text { Coupon } & 80.00 & 100.00 \\\text { i on One Coupon } & 2.4 & ? \\\text { Principal Value at Year End } & 831.32 & ? \\\text { Total Accrued } & 913.72 & ? \\\text { Realized Compound Yield } & 10.5547 & ?\end{array}$ -Refer to Exhibit 16-3. The value of the swap is ____ basis points in one year

Exhibit 16-4 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) The following information is given concerning a substitution swap: You currently hold a 25 year, Aa 8% coupon bond priced to yield 10%. As a swap candidate you are considering a 25 year, Aa 8% coupon bond priced to yield 10.50%. Assume a reinvestment rate of 10%, semiannual compounding, and a one-year workout period. $\begin{array}{lcc}&\text { Current Band } & \text { Candidate Band } \\\hline\text { Dollar Investment } & \$ 817.44 & ? \\\text { Coupon } & 80.00 & 80.00 \\\text { on One Coupon } & 2.00 & 2.20 \\\text { Principal Value at Year End } & 819.23 & 782.33 \\\text { Total Accrued } & 901.23 & 864.53 \\\text { Total Gain } & 83.79 & ? \\\text { Gain per Invested Dollar } & ? & ? \\\text { Realized Compound Yield } & ? & ?\end{array}$ -Refer to Exhibit 16-4. The dollar investment in the candidate bond is

Exhibit 16-1 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) The following information is given concerning a pure yield pick-up swap: You currently hold a 10 year, 7% coupon bond priced to yield 8%. As a swap candidate you are considering a 10 year, 8% coupon bond priced to yield 9%. Assume a reinvestment at 9%, semiannual compounding, and a one-year workout period. $\begin{array}{lcc}&\text { Current Band } & \text { Candidate Band } \\\hline \text { Dollar Investment } & \$ 932.05 & \$ 934.96 \\\text { Coupon } & \$ 70.00 & \$ 80.00 \\\text { on One Coupon } & \$ 1.575 & ? \\\text { Principal Value at Year End } & \$ 936.70 & ? \\\text { Total Accrued } & \$ 1008.28 & ? \\\text { Realized Compound Yield } & 8.018 \% & ?\end{array}$ -Refer to Exhibit 16-1. The interest on one coupon for the candidate bond is

A portfolio manager that attempts to select bonds based on their intrinsic value would be carrying out

A manager following an interest rate anticipation strategy would shorten portfolio duration if interest rates were expected to increase.

Which of the following statements is true?

Exhibit 16-7 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Consider two bonds, both pay semiannual interest. Bond A has a coupon of 8% per year, maturity of 30 years, yield to maturity of 9% per year, and a face value of $1000. Bond B has a coupon of 8% per year, maturity of 30 years, yield to maturity of 9.5% per year, and a face value of $1000. -Refer to Exhibit 16-7. Calculate the value of swap out of Bond A into Bond B.