Exam 13: Bond Analysis and Portfolio Management Strategies

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 Macaulay duration of the Talmart corporate bonds?

Investment horizon is the future time when an investor must begin an investment program to generate the required funds for a future liability.

Which duration is computed by discounting flows using the yield to maturity 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 Modified Duration for Bond A.

The investment style of a bond portfolio can be summarized by its two most important characteristics: credit quality and interest rate sensitivity.

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 dollar investment in the candidate bond is

Two common methods for constructing a bond index are

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

Indexing is an active portfolio management strategy that seeks to copy the composition and performance of a selected market index.

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

The option adjusted duration will approach the duration to maturity, when

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. -Refer to Exhibit 13.4. The interest on one coupon for 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 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. -Refer to Exhibit 13.6. The value of the swap is ____ basis points in one year.

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 value of the swap is ____ basis points in one year.

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 realized compound yield on the current bond is

If you expected interest rates to fall, you would prefer to own bonds with

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

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) A $1000 par value bond with five years to maturity and a 6 percent coupon has a yield to maturity of 8 percent. Interest is paid semiannually. -Refer to Exhibit 13.1. Calculate the Macaulay duration for the bond.

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

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider two bonds: both pay semiannual interest. Bond X has a coupon of 7 percent per year, maturity of 20 years, yield to maturity of 8 percent per year, and a face value of $1000. Bond Y has a coupon of 7 percent per year, maturity of 20 years, yield to maturity of 8.5 percent per year, and a face value of $1000. -Refer to Exhibit 13.11. Calculate the percentage gain per invested dollar for Bond X assuming a one-year horizon and a reinvestment rate of 8 percent per year.