Exam 16: Bond Portfolio Management Strategies

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 dollar investment in 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 X.

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 realized compound yield on the current bond is

Junk bonds are high yield bond bonds rated below

In a ladder strategy

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 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 Macaulay Duration for Bond A.

A tax swap involves swapping out of a

A substitution pickup swap involves swapping out of a

An example of an active strategy for bond management would be

A pure yield pickup swap involves a switch from a low-coupon bond to a higher-coupon bond of similar quality and maturity.

The components of interest rate risk are: price risk and maturity risk.

Interest rate anticipation is the most conservative management strategy.

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

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

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

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

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 B.

Which of the following would not normally be a reason for a bond swap?