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Exam 16: Bond Portfolio Management Strategies

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Question 41

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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) 0.98
B) 1.79
C) 1.90
D) 1.93
E) 2.31

F) B) and D)
G) A) and D)

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Question 42

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In a ladder strategy

A) One half of funds are invested in short duration bonds and the test in long duration bonds.
B) Seventy five percent of funds are invested in short duration bonds and the test in long duration bonds.
C) Twenty five percent of funds are invested in short duration bonds and the test in long duration bonds.
D) An equal amount of funds are invested in a wide range of maturities.
E) None of the above.

F) A) and E)
G) A) and D)

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Question 43

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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. $\begin{array}{lcc}&\text { Current Band } & \text { Candidate Band } \\\hline\text { Dollar Investment } & \$ 842.38 & ? \\\text { Coupon } & 100.00 & 100.00 \\\text { i on One Coupon } & 3.0 & 2.75 \\\text { Principal Value at Year End } & 843.50 & 780.46 \\\text { Total Accrued } & 946.50 & 883.21 \\\text { Total Gain } & 104.12 & ? \\\text { Gain per Invested Dollar } & ? & ? \\\text { Realized Compound Yield } & ? & ?\end{array}$ -Refer to Exhibit 16-6. The dollar investment in the candidate bond is

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

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

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

A tax swap involves swapping out of a

Interest rate anticipation is the most conservative management strategy.

An example of an active strategy for bond management would be

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. $\begin{array}{lcc}&\text { Current Band } & \text { Candidate Band } \\\hline \text { Dollar Investment } & \$ 913.54 & ? \\\text { Coupon } & 70.00 & 70.00 \\\text { i on One Coupon } & 1.487 & 1.487 \\\text { Principal Value at Year End } & 916.68 & 878.55 \\\text { Total Accrued } & 988.17 & 950.04 \\\text { Total Gain } & 74.63 & ? \\\text { Gain per Invested Dollar } & ? & ? \\\text { Realized Compound Yield } & ? & ?\end{array}$ -Refer to Exhibit 16-2. The realized compound yield on the current bond is

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

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

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

A substitution pickup swap involves swapping out of a

Junk bonds are high yield bond bonds rated below

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.

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

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.

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. $\begin{array}{lcc}&\text { Current Band } & \text { Candidate Band } \\\hline\text { Dollar Investment } & \$ 817.44 & ? \\\text { Coupon } & 80.00 & 80.00 \\\text { on One Coupon } & 2.00 & 2.20 \\\text { Principal Value at Year End } & 819.23 & 782.33 \\\text { Total Accrued } & 901.23 & 864.53 \\\text { Total Gain } & 83.79 & ? \\\text { Gain per Invested Dollar } & ? & ? \\\text { Realized Compound Yield } & ? & ?\end{array}$ -Refer to Exhibit 16-4. The value of the swap is ____ basis points in one year.