2009 Fixed Income Midterm exam
Easiest Fixed Income Midterm exam ever
March 2nd, 2009 (30 points)
Please answer in order of questions
1. (5 points) Today is March 2nd 2009. You borrow $1MM (1,00,000 USD) for 18
months and decide to invest it for 15 months at the current market rates shown below :
(use bid rates for his problem)
You wish to hedge the mismatched position. Use the adequate Eurodollar contract
quotes from Eurodollar future handout to determine which FRA to use and its price
(use last trade quote)
What amount to you deal for a complete hedge ?
When it comes to fixing the FRA after 15 months, the 3-month rate is
3.50% / 3.60%.
What is the settlement amount?
What is the overall profit or loss on the overall position at the end of the 18 months?
2. (4points)
Dollar and oil prices are inversely related :
a) True b) False
What is the price of a zero coupon bond expiring in 10 years with a YTM of
6%?
a) $558
b) $441
c) $ 553
d) $690
A corporate bond trades at par with a coupon of 5% paid semi annually
every
January 1st. Today is March 2nd, 2009 . You wish to buy 50 bonds.
What is your total cost including accrued interest(consider 2-day
settlement)?
a)$51 020
b) $50 043
c) $50 437
d) $50 431
A floating rated bond pegged to Libor will increase in coupon revenue as
Libor increase
a) True
b) False
If a corporate bond is priced above par and its YTM is 8%, its coupon rate
should be:
a) below 8%
b) above 8%
c) at 8%
d) none of the above
What is the dollar price of a 2 year bond with a coupon of 4% paying
annually if the yield curve is flat at 5%
a) 74.37
b) 97.75
c) 105.75
d) 98.14
A callable bond has a higher YTM than a non-callable bond
a) True
b) False
The greater the liquidity, the highest yield required by the investor :
a. True
b. False
3. (3 points)What is the modified duration of a 2-year 4% coupon bond paying annually?
Assume a flat yield curve at 5.5%.
This bond has a convexity of 20. What is the bond’s new price for a 100BP increase in
yield using duration and convexity?
4. (2 points)Here are the following bids on the $70 billion face value of the 10-year
Treasury bond auction. The Fed requested $20 billion.
JPM : 20 billion @4.65%
Merrill :15 billion @4.68%
Goldman Sachs: 15 billion @4.63%
Morgan Stanley : 22 billion @4.66%
Who gets what and what is the Fed’s bid on its share ?
5. (3 points) Based on the Eurodollar futures handout, what should a 6 X 12 FRA be
priced at to eliminate any arbitrage possibility? Specify which futures contracts you
use.
6. (2 points) If you expect the economy to recover in the second half of 2009, how
would you expect the 2-10 year spread to behave and why? (3 lines max)
7. (2 points) You take a barbell spread trade long the 10-year and short the 5 year. You
hope that :
a)
b)
c)
d)
Rates vary strongly
The ECB surprises the market
The yield curve will steepen
The yield curve will flatten
8. (3 points)A portfolio manager own $10 million face value of Bond A trading at 70 and
$15 million face value of Bond b trading at 110. The duration of Bond A is 7 and the
duration of Bond B is 10. He wishes to swap all his Bond As for Bond B.
a) What quantity of Bond B must he buy to maintain the same sensitivity of his
portfolio ? Show calculations.
9. (6 points)Use the Reuters Bond quotation handout to answer the following questions :
a) Price each bond using the annuity formula. Use the circled information.
b) Calculate the accrued interest of each bond if necessary.
c) Suppose you own $10 million faced value of each of the 3 . What is the value
of your portfolio?
d) You believe rates will decrease in the future and would like to adjust your
duration by 20%. How many futures contracts should you buy/sell short to
reach your objective ? (Tbond duration = 11)
BONUS Question: There are 3 people in a room. What is the probability that there are 2
persons of the same sex. Explain (2 points)
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March 2nd, 2009 (30 points)
Please answer in order of questions
1. (5 points) Today is March 2nd 2009. You borrow $1MM (1,00,000 USD) for 18
months and decide to invest it for 15 months at the current market rates shown below :
(use bid rates for his problem)
You wish to hedge the mismatched position. Use the adequate Eurodollar contract
quotes from Eurodollar future handout to determine which FRA to use and its price
(use last trade quote)
What amount to you deal for a complete hedge ?
When it comes to fixing the FRA after 15 months, the 3-month rate is
3.50% / 3.60%.
What is the settlement amount?
What is the overall profit or loss on the overall position at the end of the 18 months?
2. (4points)
Dollar and oil prices are inversely related :
a) True b) False
What is the price of a zero coupon bond expiring in 10 years with a YTM of
6%?
a) $558
b) $441
c) $ 553
d) $690
A corporate bond trades at par with a coupon of 5% paid semi annually
every
January 1st. Today is March 2nd, 2009 . You wish to buy 50 bonds.
What is your total cost including accrued interest(consider 2-day
settlement)?
a)$51 020
b) $50 043
c) $50 437
d) $50 431
A floating rated bond pegged to Libor will increase in coupon revenue as
Libor increase
a) True
b) False
If a corporate bond is priced above par and its YTM is 8%, its coupon rate
should be:
a) below 8%
b) above 8%
c) at 8%
d) none of the above
What is the dollar price of a 2 year bond with a coupon of 4% paying
annually if the yield curve is flat at 5%
a) 74.37
b) 97.75
c) 105.75
d) 98.14
A callable bond has a higher YTM than a non-callable bond
a) True
b) False
The greater the liquidity, the highest yield required by the investor :
a. True
b. False
3. (3 points)What is the modified duration of a 2-year 4% coupon bond paying annually?
Assume a flat yield curve at 5.5%.
This bond has a convexity of 20. What is the bond’s new price for a 100BP increase in
yield using duration and convexity?
4. (2 points)Here are the following bids on the $70 billion face value of the 10-year
Treasury bond auction. The Fed requested $20 billion.
JPM : 20 billion @4.65%
Merrill :15 billion @4.68%
Goldman Sachs: 15 billion @4.63%
Morgan Stanley : 22 billion @4.66%
Who gets what and what is the Fed’s bid on its share ?
5. (3 points) Based on the Eurodollar futures handout, what should a 6 X 12 FRA be
priced at to eliminate any arbitrage possibility? Specify which futures contracts you
use.
6. (2 points) If you expect the economy to recover in the second half of 2009, how
would you expect the 2-10 year spread to behave and why? (3 lines max)
7. (2 points) You take a barbell spread trade long the 10-year and short the 5 year. You
hope that :
a)
b)
c)
d)
Rates vary strongly
The ECB surprises the market
The yield curve will steepen
The yield curve will flatten
8. (3 points)A portfolio manager own $10 million face value of Bond A trading at 70 and
$15 million face value of Bond b trading at 110. The duration of Bond A is 7 and the
duration of Bond B is 10. He wishes to swap all his Bond As for Bond B.
a) What quantity of Bond B must he buy to maintain the same sensitivity of his
portfolio ? Show calculations.
9. (6 points)Use the Reuters Bond quotation handout to answer the following questions :
a) Price each bond using the annuity formula. Use the circled information.
b) Calculate the accrued interest of each bond if necessary.
c) Suppose you own $10 million faced value of each of the 3 . What is the value
of your portfolio?
d) You believe rates will decrease in the future and would like to adjust your
duration by 20%. How many futures contracts should you buy/sell short to
reach your objective ? (Tbond duration = 11)
BONUS Question: There are 3 people in a room. What is the probability that there are 2
persons of the same sex. Explain (2 points)
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