FIXED INCOME MIDTERM 2004
FIXED INCOME MIDTERM
Today is March 4th 2004
Use the CIC secondary corporate bond sheet handed with this exam to answer
the following questions :
1. As a bright fixed income portfolio manager, you decide to buy 100 bonds
of each of the 2 “Electric” sector bonds, that is Siemens trading at 110
euros and Philips trading at 111. (In case you don’t know, they both build
phones !!!!). They both pay annual coupon only.
What is your total cost ?
2. Using duration and convexity what is the value of the “Electric” portfolio
if rates increase by 50BP? Siemens’ dur=5 convx=44
Philips’ dur= 6 convx= 41
3. What is the approximate YTM on those 2 bonds. Explain.
4. What would be your total cash flow generated by the Siemens bond if
held to maturity ?
5. Comment on the spread analysis of the 2 bonds since 2002.
6. For a large change in the yield, please explain why the percentage price
change of a bond is not the same for an increase in rates as it is for a
decrease.
7. Explain how convexity gives a better measure of sensitivity.
8. Consider a 20-year 6% bond trading at par is deliverable for a futures
contract that settles in 4 months. Funds can be borrowed at 9% annually.
Clearly show what the Treasury Bond futures contract should trade at to
eliminate any arbitrage possibilities ? (you can use an arbitrage strategy
to demonstrate your findings)
9. From the CIC bond sheet, which bond (s) would you recommend to buy
and why if you expect rates to stabilize until the US elections? Use your
macro economic, fixed income and reading knowledge to answer this
question (no more than 10 lines)
10. Assume the following information about a Treasury bond that pays twice
a year
Coupon: 7%
Maturity: November 15, 2006.
Purchase date: September 1, 2004.
Last coupon paid: May 15, 2004.
Yield: 6.75%.
Compute the modified duration of this bond.
11.
Today is March 4th 2004
Use the CIC secondary corporate bond sheet handed with this exam to answer
the following questions :
1. As a bright fixed income portfolio manager, you decide to buy 100 bonds
of each of the 2 “Electric” sector bonds, that is Siemens trading at 110
euros and Philips trading at 111. (In case you don’t know, they both build
phones !!!!). They both pay annual coupon only.
What is your total cost ?
2. Using duration and convexity what is the value of the “Electric” portfolio
if rates increase by 50BP? Siemens’ dur=5 convx=44
Philips’ dur= 6 convx= 41
3. What is the approximate YTM on those 2 bonds. Explain.
4. What would be your total cash flow generated by the Siemens bond if
held to maturity ?
5. Comment on the spread analysis of the 2 bonds since 2002.
6. For a large change in the yield, please explain why the percentage price
change of a bond is not the same for an increase in rates as it is for a
decrease.
7. Explain how convexity gives a better measure of sensitivity.
8. Consider a 20-year 6% bond trading at par is deliverable for a futures
contract that settles in 4 months. Funds can be borrowed at 9% annually.
Clearly show what the Treasury Bond futures contract should trade at to
eliminate any arbitrage possibilities ? (you can use an arbitrage strategy
to demonstrate your findings)
9. From the CIC bond sheet, which bond (s) would you recommend to buy
and why if you expect rates to stabilize until the US elections? Use your
macro economic, fixed income and reading knowledge to answer this
question (no more than 10 lines)
10. Assume the following information about a Treasury bond that pays twice
a year
Coupon: 7%
Maturity: November 15, 2006.
Purchase date: September 1, 2004.
Last coupon paid: May 15, 2004.
Yield: 6.75%.
Compute the modified duration of this bond.
11.