Exam 19: Bond Portfolio Management Strategies

Exhibit 19.7 Use the Information Below for the Following 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 19.7.Calculate the percentage gain per invested dollar for Bond B assuming a one year horizon,and a reinvestment rate of 9.5% per year.

The active strategies for bond management include all of the following,except

Exhibit 19.5 Use the Information Below for the Following Problem(S) The following information is given concerning a pure yield pick-up swap: You currently hold a 20 year, Aa 2 percent coupon bond priced to yield 9.5 percent. As a swap candidate you are considering a 20 year, Aa 14 percent coupon bond priced to yield 10.00. Assume a reinvestment rate of 11 percent, semiannual compounding, and a one-year workout period. Wurrent Bond Candidente Eand Dollar Investrent \ 1222.[4 1343.18 Caupan 110.00 140.00 i an One Coupan 3.3 ? Principal Value at Year End 1218.04 ? Total Accrued 1341.34 ? Realized Campund Yield 9.5351\% ? -Refer to Exhibit 19.5.The interest on one coupon for the candidate bond is

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

Exhibit 19.1 Use the Information Below for the Following Problem(S) The following information is given concerning a pure yield pick-up swap: You currently hold a 10 year, 7 percent coupon bond priced to yield 8 percent. As a swap candidate you are considering a 10 year, 8 percent coupon bond priced to yield 9 percent. Assume a reinvestment at 9 percent, semiannual compounding, and a one-year workout period. Current Bond Candidate Bond Dollar Investment \ 932.05 \ 934.96 Caupan \ 70.00 \ 80.000 i an One Coupon \ 1.575 ? Principal Value at Year End \ 936.70 ? Total Accrued \ 1008.28 ? Realized Compound Yield 8.018\% ? -Refer to Exhibit 19.1.The realized compound yield on the candidate bond is

In a barbell strategy

Exhibit 19.4 Use the Information Below for the Following Problem(S) The following information is given concerning a substitution swap. You currently hold a 25 year, Aa 8 percent coupon bond priced to yield 10 percent. As a swap candidate you are considering a 25 year, Aa 8 percent coupon bond priced to yield 10.50 percent. Assume a reinvestment rate of 10 percent, semiannual compounding, and a one-year workout period. Current Bond Candidate Bond Dollar Investment \ 817.44 ? Caupan 80.00 80.00 i an One Coupon 2.00 2.20 Principal Value at Year End 819.23 782.33 Total Accrued 901.23 864.53 Total Gain 83.79 ? Gain per Invested Dollar ? ? Realized Compound Yield ? ? -Refer to Exhibit 19.4.The realized compound yield on the current bond is

Exhibit 19.6 Use the Information Below for the Following Problem(S) The following information is given concerning a substitution swap. You currently hold a 25 year, Aa 10 percent coupon bond priced to yield 12 percent. As a swap candidate you are considering a 25 year, Aa 10 percent coupon bond priced to yield 13 percent. Assume a reinvestment rate of 12 percent, semiannual compounding, and a one-year workout period. Current Bond Candidate Bond Dollar Investment \ 842.38 ? Caupan 100.00 100.00 i an One Coupon 3.0 2.75 Principal Value at Year End 843.50 780.46 Total Accrued 946.50 883.21 Total Gain 104.12 ? Gain per Invested Dollar ? ? Realized Compound Yield ? ? -Refer to Exhibit 19.6.The realized compound yield on the current bond is

Exhibit 19.3 Use the Information Below for the Following Problem(S) The following information is given concerning a pure yield pick-up swap: You currently hold a 20 year, Aa 8 percent coupon bond priced to yield 10 percent. As a swap candidate you are considering a 20 year, Aa 10 percent coupon bond priced to yield 10.75 percent. Assume a reinvestment rate of 12.00 percent, semiannual compounding, and a one-year workout period. Curent Bond Candidate Bond Dollar Investment \ 828.41 \ 938.83 Coupon 80.00 100.00 i on One Coupon 2.4 ? Principal Value at Year End 831.32 ? Total Accrued 913.72 ? Realized Compound Yield ?                                                                                 10.5547 -Refer to Exhibit 19.3.The value of the swap is ____ basis points in one year.

Exhibit 19.10 Use the Information Below for the Following 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 19.10.Calculate the Modified Duration for Bond B.

When applying active management techniques to a global portfolio the additional concern is expectations regarding exchange rates between countries.

Exhibit 19.9 Use the Information Below for the Following 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 19.9.Calculate the modified duration for Bond X.

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

A pure yield pickup swap involves a switch from a low-coupon bond to a higher-coupon bond of similar quality and maturity.

Exhibit 19.9 Use the Information Below for the Following 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 19.9.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.

In a ladder strategy

An example of an active strategy for bond management would be

Horizon matching is a combination of

Credit analysis and core-plus management are examples of active bond portfolio management.

Exhibit 19.2 Use the Information Below for the Following Problem(S) The following information is given concerning a substitution swap. You currently hold a 15 year, 7 percent coupon bond priced to yield 8 percent. As a swap candidate you are considering a 15 year, 7 percent coupon bond priced to yield 8.5 percent. Assume a reinvestment rate of 8.5 percent, semiannual compounding, and a one-year workout period. Current Bond Candidate Bond Dollar Investment \ 913.54 ? Caupan 70.00 70.00 i an One Coupon 1.487 1.487 Principal Value at Year End 916.68 878.55 Total Accrued 988.17 950.04 Total Gain 74.63 ? Gain per Invested Dollar ? ? Realized Compound Yield ? ? -Refer to Exhibit 19.2.The dollar investment in the candidate bond is