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 price of Bond A.

Interest rate risk is comprised of which of the following risks?

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

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. Assume that your investment horizon is 2 years and your portfolio consists only of bonds A and B. What proportion should be invested in each bond to immunize the portfolio?

The substitution swap is generally long term and relies heavily on interest rate expectations.

The bond management strategy intended to eliminate interest rate risk is immunization.

Exhibit 16-5 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 2% coupon bond priced to yield 9.5%. As a swap candidate you are considering a 20 year, Aa 14% coupon bond priced to yield 10.00. Assume a reinvestment rate of 11%, semiannual compounding, and a one-year workout period. Current Band Candidate Band Dollar Investment \ 1222.04 \ 1343.18 Coupon 110.00 140.00 i on One Coupon 3.3 ? Principal Value at Year End 1218.04 ? Total Accrued 1341.34 ? Realized Compound Yield 9.5351\% ? -Refer to Exhibit 16-5. The value of the swap is ____ basis points in one year

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 realized compound yield on the candidate bond is

Exhibit 16-9 USE THE FOLLOWING INFORMATION FOR THE NEXT 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 16-9. Calculate the modified duration for Bond Y.

In core-plus bond management

Exhibit 16-7 USE THE FOLLOWING INFORMATION FOR THE NEXT 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 16-7. Calculate the percentage gain per invested dollar for Bond A assuming a one year horizon, and a reinvestment rate of 9% per year.

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

Exhibit 16-6 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 10% coupon bond priced to yield 12%. As a swap candidate you are considering a 25 year, Aa 10% coupon bond priced to yield 13%. Assume a reinvestment rate of 12%, semiannual compounding, and a one-year workout period. Current Band Candidate Band Dollar Investment \ 842.38 ? Coupon 100.00 100.00 i on 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 16-6. The realized compound yield on the current bond is

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 D.

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

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.

Horizon matching is a combination of

A bond swap involves liquidating a current bond position, and later investing in a similar issue under more favorable conditions.

A pure yield pickup swap involves swapping out of a

Exhibit 16-7 USE THE FOLLOWING INFORMATION FOR THE NEXT 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 16-7. Calculate the percentage gain per invested dollar for Bond B assuming a one year horizon, and a reinvestment rate of 9.5% per year.