Exam 13: Bond Analysis and Portfolio Management Strategies

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 B.

Contingent procedures for managing bond portfolios are a form of what has come to be called structured active management.

Suppose the current six-year rate is 9 percent and the current five-year rate is 7 percent. What is the one year forward rate for five years?

Consider a bond with a duration of 7 years having a yield to maturity of 7 percent, and interest rates are expected to rise by 50 basis points. What is the percentage change in the price of the bond?

With a matched funding technique, portfolio managers try to match specific liability obligations due at specific times to a portfolio of bonds that minimize the portfolio's interest rate risk.

Altman-Nammacher (1987) created a modified Z-score model using a multiple regression analysis technique.

Interest rate anticipation is the most conservative management strategy.

All of the following are one of Malkiel's stated relationships between yield changes and bond prices EXCEPT

Calculate the modified duration for a 10-year, 12 percent bond with a yield to maturity of 10 percent and a Macaulay duration of 7.2 years.

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 realized compound yield on the candidate bond is

Option adjusted duration can be calculated as

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S) Consider two bonds, both pay semiannual interest. Bond A has a coupon of 8 percent per year, maturity of 30 years, yield to maturity of 9 percent per year, and a face value of $1000. Bond B has a coupon of 8 percent per year, maturity of 30 years, yield to maturity of 9.5 percent per year, and a face value of $1000. -Refer to Exhibit 13.10. Calculate the percentage gain per invested dollar for Bond A assuming a one-year horizon, and a reinvestment rate of 9 percent per year.

In core-plus bond management,

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

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 Y assuming a one-year horizon and a reinvestment rate of 8.5 percent per year.

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 B.

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. -Refer to Exhibit 13.7. The value of the swap is ____ basis points in one year.

In valuation analysis, undervalued bonds are bonds in which the expected YTMs are lower than the prevailing YTM.

An example of an active strategy for bond management would be

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 modified duration for the bond.