MIDTERM FIXED INCOME MANAGEMENT
MIDTERM FIXED INCOME MANAGEMENT
FEB 24, 2003-02-20
Answers with sound logic but wrong numbers will be looked at kindly.
Conversely, numbers without explanation will be viewed as incomplete
1. Today is February 24, 2003.
Deutsche Bank has among its liabilities a corporate bond with a coupon of 10% that
pays semi annually and that matures August 15, 2010. Bloomberg quotes its dirty price
today at 103.
a) What is the accrued interest ? (1point)
b) What is the bond’s clean price stated in $ ? (1point)
c) What do you think the approximate YTM of this bond is without calculation?
Explain. (1point)
d) Rates are expected to drop in the near future. Would you recommend DB to
swap this bond or not? Explain. (1point)
2.
Suppose we know from market prices the following zero rates :
Maturity
6 months
9 months
1 year
Zero coupon rates
3.60%
3.80%
4%
Now, we consider bonds priced by the market until the 2 year maturity :
MATURITY
COUPON
1 ½ year
4%
2 year
4.5%
2 ½ year
3.5%
Using the bootstrapping method, calculate (and show calculations) the 11/2
1/2
year zero rates (bonds pay twice a year). (3points)
PRICE
102.8
102.5
98.3
year , 2 year and 2
3. . Consider the following Treasury securities :
Bonds
(years)
A
B
Price
$1000
$ 800
Modified duration
8
12
Which bond will have the greatest dollar price volatility for a 0.50% change in interest rate ?
(2 points)
4. A fund manager has the following position:
Investment ($million)
125
375
Maturity
2
10
Duration
1.8
7.4
a) What is the duration of the portfolio? ( 1point)
b) How much is lost if rates rise by 50BP? ( 1point)
c) Suppose the fund manager would like to change the overall duration of his
portfolio to 5. by modifying the amount invested in the 2 securities. What
new position should accomplish this ? (2 points)
5. Suppose that the coupon rate for a TIPS (Treasury Inflation Protection Security) is
3%.
Suppose further that an investor purchases $10 000 of par value of this
issue today. The semi annual inflation rate is 1%.
a. What is the dollar coupon interest that will be paid in cash at the end of the
first 6 month? (( 1point)
b. What is the the inflation adjusted principal at the end of 6 month? ( 1point)
6. From the latest Treasury Bill Auction Results, determine the dollar price of each of
the 3 securities (show calculations) (2 points)
Dollar price
28-DAY 02-20-2003 03-20-2003 1.155
91-DAY 02-20-2003 05-22-2003 1.160
182-DAY 02-20-2003 08-21-2003 1.180
7. Bonds are higher this morning following a slate of mostly negative economic
data, intact geopolitical concerns and seesawing equities. Thirty-year bonds
are up 2/32, yield 4.81%. Ten-year notes are up 6/32, yield 3.86%. Two-year
notes are up 1/32, yield 1.57%
Record trade deficit…dependence on strangers? The trade deficit rose to a
record $44.242 billion in December
The rising deficit has several negative implications. Fourth quarter GDP could
revised lower from its initial report of .7%. The higher trade deficit will offset
higher retail sales and inventories. With so many dollars in foreign hands the
dollar and US assets are vulnerable to sale. Foreigners could demand a
higher price to retain dollars. Currently the US needs about $1.4 billion/day to
fund its current account deficit (the broadest measure of net flow of trade and
investment income
Where are we going?…not sure. Leading economic indicators were
unchanged in January as expected
From what you’ve learned so far in class, what does this mean to the future
look of interest rate (short-term and long-term )? ( 3points)
FEB 24, 2003-02-20
Answers with sound logic but wrong numbers will be looked at kindly.
Conversely, numbers without explanation will be viewed as incomplete
1. Today is February 24, 2003.
Deutsche Bank has among its liabilities a corporate bond with a coupon of 10% that
pays semi annually and that matures August 15, 2010. Bloomberg quotes its dirty price
today at 103.
a) What is the accrued interest ? (1point)
b) What is the bond’s clean price stated in $ ? (1point)
c) What do you think the approximate YTM of this bond is without calculation?
Explain. (1point)
d) Rates are expected to drop in the near future. Would you recommend DB to
swap this bond or not? Explain. (1point)
2.
Suppose we know from market prices the following zero rates :
Maturity
6 months
9 months
1 year
Zero coupon rates
3.60%
3.80%
4%
Now, we consider bonds priced by the market until the 2 year maturity :
MATURITY
COUPON
1 ½ year
4%
2 year
4.5%
2 ½ year
3.5%
Using the bootstrapping method, calculate (and show calculations) the 11/2
1/2
year zero rates (bonds pay twice a year). (3points)
PRICE
102.8
102.5
98.3
year , 2 year and 2
3. . Consider the following Treasury securities :
Bonds
(years)
A
B
Price
$1000
$ 800
Modified duration
8
12
Which bond will have the greatest dollar price volatility for a 0.50% change in interest rate ?
(2 points)
4. A fund manager has the following position:
Investment ($million)
125
375
Maturity
2
10
Duration
1.8
7.4
a) What is the duration of the portfolio? ( 1point)
b) How much is lost if rates rise by 50BP? ( 1point)
c) Suppose the fund manager would like to change the overall duration of his
portfolio to 5. by modifying the amount invested in the 2 securities. What
new position should accomplish this ? (2 points)
5. Suppose that the coupon rate for a TIPS (Treasury Inflation Protection Security) is
3%.
Suppose further that an investor purchases $10 000 of par value of this
issue today. The semi annual inflation rate is 1%.
a. What is the dollar coupon interest that will be paid in cash at the end of the
first 6 month? (( 1point)
b. What is the the inflation adjusted principal at the end of 6 month? ( 1point)
6. From the latest Treasury Bill Auction Results, determine the dollar price of each of
the 3 securities (show calculations) (2 points)
Dollar price
28-DAY 02-20-2003 03-20-2003 1.155
91-DAY 02-20-2003 05-22-2003 1.160
182-DAY 02-20-2003 08-21-2003 1.180
7. Bonds are higher this morning following a slate of mostly negative economic
data, intact geopolitical concerns and seesawing equities. Thirty-year bonds
are up 2/32, yield 4.81%. Ten-year notes are up 6/32, yield 3.86%. Two-year
notes are up 1/32, yield 1.57%
Record trade deficit…dependence on strangers? The trade deficit rose to a
record $44.242 billion in December
The rising deficit has several negative implications. Fourth quarter GDP could
revised lower from its initial report of .7%. The higher trade deficit will offset
higher retail sales and inventories. With so many dollars in foreign hands the
dollar and US assets are vulnerable to sale. Foreigners could demand a
higher price to retain dollars. Currently the US needs about $1.4 billion/day to
fund its current account deficit (the broadest measure of net flow of trade and
investment income
Where are we going?…not sure. Leading economic indicators were
unchanged in January as expected
From what you’ve learned so far in class, what does this mean to the future
look of interest rate (short-term and long-term )? ( 3points)