FIXEDINCOMEMSCINFMI - Knowledge QUIZZ_7
QUIZZ 7
1. Below are 2 portfolios with a market value of $500 million. The bonds in both
portfolios
are trading at par value. The dollar duration of these two portfolios is the
same.
Portfolio 1
Issue
A
B
C
D
Years to maturity
2
2.5
20
20.5
Par value (in milions)
120
130
150
100
Portfolio 2
Issue
E
F
G
Years to Maturity
9.7
10
10.2
Par value (in millions)
200
230
70
a. Which portfolio can be characterised as a bullet portfolio? Why ? ( 1 point)
b. Which portfolio can be characterised as a barbell portfolio ? Why ? (1 point)
c. The 2 portfolios have the same dollar duration; explain whether their performance will
be the same if interest rate change. (2 points)
2. Explain why you agree or disagree with the following statements (start your answer
with “agree” or “disagree” and then explain why.
“It is always better to have a portfolio with more convexity than one with less
convexity.” (2 points)
“A bullet portfolio will always outperform (do better) a barbell portfolio with
the same duration if the yield curve steepens”. (2 points)
3. Why might the investment objective of a portfolio manager of a life insurance
company be different from that of a mutual fund. (Be specific in your answer and use
key words) (3 points)
4. What are the 3 sources of income from a bond ? (1 point)
5. How does convexity lead to a more precise bond pricing ? Illustrate with a graph(3
points)
6. How does the yield spread between long term and short term rates react in a
steepening yield curve environment ? Explain and illustrate with graph (2 points)
7. Consider the following 2-year bond, 8% coupon (semi annual payment), yielding 8%.
What is its modified duration ? (3 points)
1. Below are 2 portfolios with a market value of $500 million. The bonds in both
portfolios
are trading at par value. The dollar duration of these two portfolios is the
same.
Portfolio 1
Issue
A
B
C
D
Years to maturity
2
2.5
20
20.5
Par value (in milions)
120
130
150
100
Portfolio 2
Issue
E
F
G
Years to Maturity
9.7
10
10.2
Par value (in millions)
200
230
70
a. Which portfolio can be characterised as a bullet portfolio? Why ? ( 1 point)
b. Which portfolio can be characterised as a barbell portfolio ? Why ? (1 point)
c. The 2 portfolios have the same dollar duration; explain whether their performance will
be the same if interest rate change. (2 points)
2. Explain why you agree or disagree with the following statements (start your answer
with “agree” or “disagree” and then explain why.
“It is always better to have a portfolio with more convexity than one with less
convexity.” (2 points)
“A bullet portfolio will always outperform (do better) a barbell portfolio with
the same duration if the yield curve steepens”. (2 points)
3. Why might the investment objective of a portfolio manager of a life insurance
company be different from that of a mutual fund. (Be specific in your answer and use
key words) (3 points)
4. What are the 3 sources of income from a bond ? (1 point)
5. How does convexity lead to a more precise bond pricing ? Illustrate with a graph(3
points)
6. How does the yield spread between long term and short term rates react in a
steepening yield curve environment ? Explain and illustrate with graph (2 points)
7. Consider the following 2-year bond, 8% coupon (semi annual payment), yielding 8%.
What is its modified duration ? (3 points)