Exam 13: Bond Analysis and Portfolio Management Strategies

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider two bonds: both pay annual interest. Bond C has a coupon of 6 percent per year, maturity of five years, yield to maturity of 6 percent per year, and a face value of $1000. Bond D has a coupon of 8 percent per year, maturity of 15 years, yield to maturity of 6 percent per year, and a face value of $1000. -Refer to Exhibit 13.12. Calculate the modified duration for Bond D.

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. -Refer to Exhibit 13.9. The dollar investment in the candidate bond is

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. -Refer to Exhibit 13.8. The interest on one coupon for the candidate bond is

Studies by Reilly and Wright (1994, 2001) and Fabozzi (2005) suggest analysis of high-yield bonds should be expanded to include all of the following EXCEPT

Calculate the duration of a 6 percent, $1,000 par bond maturing in three years if the yield to maturity is 10 percent and interest is paid semiannually.

For a given change in yield bond price, volatility is inversely related to coupon.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) A $1000 par value bond with four years to maturity and a 5 percent coupon has a yield to maturity of 6 percent. Interest is paid annually. -Refer to Exhibit 13.3. Estimate the percentage price change for this four-year, $1,000 par value bond, with an annual 5 percent coupon, if the yield falls from 6 percent to 5.5 percent.

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

The breakeven yield is the same as the implied forward rate.

Coupon reinvestment risk arises because the yield to maturity computation implicitly assumes that all coupon flows will be reinvested at the

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. -Refer to Exhibit 13.5. The realized compound yield on the current bond is

When there are no embedded options, ____ duration can be used to provide an approximation of the interest rate sensitivity of the bond.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider two bonds: both pay annual interest. Bond Y has a coupon of 6 percent per year, maturity of five years, yield to maturity of 6 percent per year, and a face value of $1000. Bond X has a coupon of 7 percent per year, maturity of 10 years, yield to maturity of 4 percent per year, and a face value of $1000. -Refer to Exhibit 13.13. Assume that your investment horizon is five 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.

The price-yield curve is a concave curve representing the relationship of bond prices and yields.

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 percent coupon, matures in two years, has a yield to maturity of 8 percent, and a face value of $1,000. Bond B pays an annual 8 percent coupon, matures in three years, has a yield to maturity of 9 percent, and a face value of $1,000. -Refer to Exhibit 13.14. Calculate the Macaulay Duration for Bond A.

Suppose the current seven-year rate is 8 percent and the current six-year rate is 6 percent. What is the one year forward rate for six years?

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Talmart Corporation bonds have a $1,000 face value and will mature in four years. The bonds have a 7 percent coupon rate. Interest is paid annually, and the required rate of return is 6 percent for these bonds. -Refer to Exhibit 13.2. What is the Modified duration of the Talmart corporate bonds?

Consider a bond with a duration of 6 years having a yield to maturity of 8 percent, and interest rates are expected to rise by 50 basis points. What is the percentage change in the price of the bond?

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 percent coupon, matures in two years, has a yield to maturity of 8 percent, and a face value of $1,000. Bond B pays an annual 8 percent coupon, matures in three years, has a yield to maturity of 9 percent, and a face value of $1,000. -Refer to Exhibit 13.14. Calculate the price of Bond A.

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider two bonds: both pay annual interest. Bond Y has a coupon of 6 percent per year, maturity of five years, yield to maturity of 6 percent per year, and a face value of $1000. Bond X has a coupon of 7 percent per year, maturity of 10 years, yield to maturity of 4 percent per year, and a face value of $1000. -Refer to Exhibit 13.13. Calculate the modified duration for Bond Y.