FIXEDINCOMEMSCINFMI - Knowledge FINAL__EXAM2
FINAL EXAM
This final is graded on a total of 30 points.
Today is April 7th,2002.
Iraki Al Jazzira Bank (AJB) top fixed income portfolio manager, John Benjamin , runs a
portfolio with the following securities (par value):
$50 Million 90-day T-Bill quoted at 6 with a duration of 0.5 and convexity of 7
$100 Million of Bond ABC 7% (semi annual coupon) maturing on January 20 , 2012
trading at 102 with a duration of 8.5 and a convexity of 52
$250 Million of bond XYZ 5% of 2006 (maturity April 9th) that pays annual interest.
Convexity is 21
The risk free rate today is 6%.
1.
2.
3.
4.
5.
What is the 90-day T-bill cash price ? ( 1point)
What is the price of Bond XYZ? (2 points)
What is the modified duration of Bond XYZ ? (2 points)
What is the portfolio’s overall modified duration? (2 points)
Co-manager, and awaiting a huge bonus this year for outstanding performance,
trader Conti recommends the additional purchase of some ABC Bond. What
would be the total cost, per bond, including accrued interest?( 1point)
6. Using duration and convexity, how would the portfolio’s percentage change if
rates increase by 200BP ? (2 points)
7. Technical analyst expert Thibault Berger warn his traders that the interest
rate futures chart shows a head and shoulder formation with a break of the
neckline, probably leading to a further increase in rates. Swap traders ,
Descrozailles and Rieffel, decide to swap ABC bonds for XYZ bonds while
keeping the duration of their portfolio the same.
How much in market value of bond XYZ bonds (or how many XYZ bonds)
should be purchased so that the portfolio dollar duration remain the same? (4
points)
Deutsche Bank (DB) Credit Derivatives analysts and non stop talkers, Koening and Detsher
expect short-term interest rates to increase in the close future and are considering swapping
some of their bonds with Al Jazzira Bank.
AJB rating by Moodys is BB and Deutschbank’s rating is AA.
8. Because of the extreme volatility due to the geopolitical situation, SB has
agreed to pay DB Libor +0.9% and receive 6% per annum (semi-annual
payments) on a principal of a principal of $100 million. The swap has a
remaining life of 1.75 years. The yield curve is flat at 5%.The 6-month LIBOR
rate at the last payment was 5.5%.
What is the value of the swap for DB? (3 points)
9. What are the risk, if any, encountered by DB ? Explain(1 point)
Below are fixed and floating rates at which each bank can borrow on the open credit market:
FIXED
9%
6%
SAHAN BANK
DEUTSCHE BANK
FLOATING
Libor + 0.9%
Libor + 0.4%
10. Which bank has a comparative advantage in floating rates? Explain (1point)
11. AJ Bank requires a fixed rate loan and DB requires a floating rate loan
Design a swap that will net Sonneck Investment Bank (SIB) acting as the
investment bank a fee of 0.3% per annum and that will appear equally
attractive for both AJB and DB. (3 points)
The life insurance department of AJB, headed by French Native but perfect
Oxfordian speaking Van Maenen and mate Philipot have a “great deal going”. A
extremely wealthy Middle Eastern client, Mohamed Haouache, just opened an
account with $25million. This client, very demanding yet never asking questions,
would be satisfied with a 10% return on his assets on a 3-year period. Van Maenen
and Philipot can use a 13% immunized rate of return.
12. What is the targeted client future value considering semi annual payments ?
(1 point)
13. What is the safety cushion (of boy!!) that Van Maenen and Philippot have ? (2
points)
14. Suppose the funds are invested in a 10-year 12% junk bond selling at par with
a duration of 6.
What is the value of the portfolio if rates decrease to 9% after 1 year?
(2points)
15. Would the portfolio managers have to immunize the portfolio if rates increase
to 14% within a year. Show calculations (3 points)
16.
BOND A
BOND B
BOND C
DURATION
9
11
14
MKT PRICE
90
80
85
QUNATITY
2 000 000
5 000 000
3 000 000
VOLATILITY
12%
14%
17%
Ruined Canadian portfolio manager, Haggar, expects interest rate to decrease in
the near future and wishes to increase the volatility of his bond portfolio by 20%.
Calculate the portfolio's overall duration (1 point)
What should he do, if using the interest rate futures market to increase his
duration ( 1 point)
How many contracts should he buy/sell to reach his targeted duration if the
futures contract trades at 102-16 and its duration stands at 14 ? ( 3 points)
Suppose instead that the Chinese dream team managers, Chen Zou, Ma Jia
Rong, and desk chief Li Jing expect an increase in rates in the coming
future and wishes to hedge this same bond portfolio using the futures
market. The volatility of the futures market stands at 18%.
How many contracts should be bought/sold in order to hedge their bond
portfolio? ( 3 points)
The trading day is ending at Al Jazzira Bank and everyone is exhausted so bank
chief Nahabdian decides to throw a party tomorrow in Biot where you are all invited to attend
and have a last blast before the trading result (exam grades) are officially published
Wednesday.
This final is graded on a total of 30 points.
Today is April 7th,2002.
Iraki Al Jazzira Bank (AJB) top fixed income portfolio manager, John Benjamin , runs a
portfolio with the following securities (par value):
$50 Million 90-day T-Bill quoted at 6 with a duration of 0.5 and convexity of 7
$100 Million of Bond ABC 7% (semi annual coupon) maturing on January 20 , 2012
trading at 102 with a duration of 8.5 and a convexity of 52
$250 Million of bond XYZ 5% of 2006 (maturity April 9th) that pays annual interest.
Convexity is 21
The risk free rate today is 6%.
1.
2.
3.
4.
5.
What is the 90-day T-bill cash price ? ( 1point)
What is the price of Bond XYZ? (2 points)
What is the modified duration of Bond XYZ ? (2 points)
What is the portfolio’s overall modified duration? (2 points)
Co-manager, and awaiting a huge bonus this year for outstanding performance,
trader Conti recommends the additional purchase of some ABC Bond. What
would be the total cost, per bond, including accrued interest?( 1point)
6. Using duration and convexity, how would the portfolio’s percentage change if
rates increase by 200BP ? (2 points)
7. Technical analyst expert Thibault Berger warn his traders that the interest
rate futures chart shows a head and shoulder formation with a break of the
neckline, probably leading to a further increase in rates. Swap traders ,
Descrozailles and Rieffel, decide to swap ABC bonds for XYZ bonds while
keeping the duration of their portfolio the same.
How much in market value of bond XYZ bonds (or how many XYZ bonds)
should be purchased so that the portfolio dollar duration remain the same? (4
points)
Deutsche Bank (DB) Credit Derivatives analysts and non stop talkers, Koening and Detsher
expect short-term interest rates to increase in the close future and are considering swapping
some of their bonds with Al Jazzira Bank.
AJB rating by Moodys is BB and Deutschbank’s rating is AA.
8. Because of the extreme volatility due to the geopolitical situation, SB has
agreed to pay DB Libor +0.9% and receive 6% per annum (semi-annual
payments) on a principal of a principal of $100 million. The swap has a
remaining life of 1.75 years. The yield curve is flat at 5%.The 6-month LIBOR
rate at the last payment was 5.5%.
What is the value of the swap for DB? (3 points)
9. What are the risk, if any, encountered by DB ? Explain(1 point)
Below are fixed and floating rates at which each bank can borrow on the open credit market:
FIXED
9%
6%
SAHAN BANK
DEUTSCHE BANK
FLOATING
Libor + 0.9%
Libor + 0.4%
10. Which bank has a comparative advantage in floating rates? Explain (1point)
11. AJ Bank requires a fixed rate loan and DB requires a floating rate loan
Design a swap that will net Sonneck Investment Bank (SIB) acting as the
investment bank a fee of 0.3% per annum and that will appear equally
attractive for both AJB and DB. (3 points)
The life insurance department of AJB, headed by French Native but perfect
Oxfordian speaking Van Maenen and mate Philipot have a “great deal going”. A
extremely wealthy Middle Eastern client, Mohamed Haouache, just opened an
account with $25million. This client, very demanding yet never asking questions,
would be satisfied with a 10% return on his assets on a 3-year period. Van Maenen
and Philipot can use a 13% immunized rate of return.
12. What is the targeted client future value considering semi annual payments ?
(1 point)
13. What is the safety cushion (of boy!!) that Van Maenen and Philippot have ? (2
points)
14. Suppose the funds are invested in a 10-year 12% junk bond selling at par with
a duration of 6.
What is the value of the portfolio if rates decrease to 9% after 1 year?
(2points)
15. Would the portfolio managers have to immunize the portfolio if rates increase
to 14% within a year. Show calculations (3 points)
16.
BOND A
BOND B
BOND C
DURATION
9
11
14
MKT PRICE
90
80
85
QUNATITY
2 000 000
5 000 000
3 000 000
VOLATILITY
12%
14%
17%
Ruined Canadian portfolio manager, Haggar, expects interest rate to decrease in
the near future and wishes to increase the volatility of his bond portfolio by 20%.
Calculate the portfolio's overall duration (1 point)
What should he do, if using the interest rate futures market to increase his
duration ( 1 point)
How many contracts should he buy/sell to reach his targeted duration if the
futures contract trades at 102-16 and its duration stands at 14 ? ( 3 points)
Suppose instead that the Chinese dream team managers, Chen Zou, Ma Jia
Rong, and desk chief Li Jing expect an increase in rates in the coming
future and wishes to hedge this same bond portfolio using the futures
market. The volatility of the futures market stands at 18%.
How many contracts should be bought/sold in order to hedge their bond
portfolio? ( 3 points)
The trading day is ending at Al Jazzira Bank and everyone is exhausted so bank
chief Nahabdian decides to throw a party tomorrow in Biot where you are all invited to attend
and have a last blast before the trading result (exam grades) are officially published
Wednesday.