Exam 16: Bond Portfolio Management Strategies

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 Macaulay Duration for Bond B.

Which of the following is a passive bond portfolio strategy?

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. Current Band Candidate Band Dollar Investment \ 932.05 \ 934.96 Coupon \ 70.00 \ 80.00 on One Coupon \ 1.575 ? Principal Value at Year End \ 936.70 ? Total Accrued \ 1008.28 ? Realized Compound Yield 8.018\% ? -Refer to Exhibit 16-1. The value of the swap is ____ basis points in one year.

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. Current Band Candidate Band Dollar Investment \ 913.54 ? Coupon 70.00 70.00 i on 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 16-2. The value of the swap is ____ basis points in one year.

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 B.

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

Exhibit 16-8 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Consider two bonds, both pay annual interest. Bond C 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 D has a coupon of 8% per year, maturity of 15 years, yield to maturity of 6% per year, and a face value of $1000. -Refer to Exhibit 16-8. Assume that your investment horizon is 6 years and your portfolio consists only of Bond C and Bond D. 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. Current Band Candidate Band 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 16-3. The interest on one coupon for the candidate bond is

For a bond investor selecting a buy-and-hold strategy, which of the following would be the least important consideration?

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

Which of the following is a matched funding technique?

Exhibit 16-8 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) Consider two bonds, both pay annual interest. Bond C 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 D has a coupon of 8% per year, maturity of 15 years, yield to maturity of 6% per year, and a face value of $1000. -Refer to Exhibit 16-8. Calculate the modified duration for Bond C.

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. Current Band Candidate Band Dollar Investment \ 817.44 ? Coupon 80.00 80.00 on 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 16-4. The realized compound yield on the current bond is

In classical immunization, the effect of a change in interest rates is effectively neutralized because

Contingent immunization strategies:

Interest rate anticipation is one of the matched funding techniques that matches anticipated interest rates with the required rates on a portfolio.

In a ladder strategy, funds are invested equally among a wide range of maturities.

Which factors indicate that in-depth credit analysis of high-yield bonds is important.

The duration of a perpetual bond is always equal to its term to maturity.

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