Fixed income Midterm March1 2008
Fixed income Midterm
March 1, 2008
All answers require to show calculations if necessary. For multiple
choice questions, no explanations are necessary.
Good luck!
1. You borrow 100 000 Eur for 2 years at 4%. What is your constant annuity
reimbursement amount? (1 point)
2. Guess what is the approximate sensitivity of a 10-year low coupon bond yielding 4%?
(1 point)
3. A fixed income position that expects to profit from a steepening yield curve would
better : (1 point)
a.
b.
c.
d.
have long term rates go up
have short term rates go up
have me look at my neighbour’s answer
very risky
4. A bond yielding 4% with an 8% sensitivity is down 4% for the year. This means that
(2 points):
a. Long term rates have gone up 100BP on the year
b. The fund manager is terrible
c. Long term rates have gone up 125BP on the year
d. The portfolio also contained an 8% yield paper that went bankrupt
5. What are the 3 main risks in Fixed Income management? (1 point)
6. A zero coupon bond that trades at 100% of face value means that (1 point):
a. It was issued today
b. It expires today
c. It must pay very high coupons to trade at 100% of face value
7. You hold a barbell position 2 years /10 years +25BP perfectly hedged. You are long
the 10-year and short the 2-year. You hope (2 points):
a. Interest rates vary strongly
b. A surprise cut in interest rate by the Fed
c. A steepening yield curve
d. A flattening yield curve
8. The “MSCIF Aggressive Fund” of US equities has a beta of 2. The 10-year rates are
at 4.04%. A brilliant ex MSCIf student is building a structured portfolio for its clients
called the MSCIF Guaranteed Fund. He invests 70% of the client fund in a zero
coupon 10-year Treasury bond and 30% remaining in the MSCIF Aggressive Fund.
a. Can you guarantee the client’s capital at maturity (10 years) with a 0.4%
management fee? Show calculations and explain) (2 points)
b. After 10 years, the S&P index has increased 50%. You can therefore reimburse
your client a total amount of (show calculations and explain)(2 points)
i)100%
9. Use the handout for this problem.
Face Value
Mc Donalds
$10 million
Boeing
$7 million
6-month Tbill
$3 million
ii) 130%
iii)150%
iv)160%
Price
?
?
?
Duration
?
12.82
?
i) What is the dollar value of the portfolio including accrued interest? Show
calculations. (3 points)
ii) Calculate the duration of the McDonalds bond and the 6-months Tbill. (2 points)
iii) Convexity for each fixed income investment is given to you on the Reuters sheet.
What is the value of the portfolio (without accrued interest) if rates move up by
100BP? (1 point)
iv) How many of the Boeing bond must be replaced by the Mc Donald’s bond to keep
the same dollar duration? (1 point)
10. You borrow $4 million for 6 months (183 days) and invest it for 3 months (91 days) at
the rates as indicated on your FRA quotes handout. (Watch the bid/ask rates you
choose). You wish to hedge the mismatched position based on the FRA quote handout.
a. Do you buy or sell the FRA? Which one? At what price ? (1 point)
b. For a complete hedge, what amount do you deal? (2 points)
When it comes to fixing the FRA, the 3-month rate is 3.25% / 3.35%.
c. What is the overall profit or loss on the book? (1 point)
11. What are the major differences between FRAs and Futures? (1 point)
12. Back to problem9. You believe interest rates will decrease in the near future and would
like to adjust (increase/decrease) your duration by 10%. How would you adjust your
portfolio using interest rates futures? (2 points)
13. What is the 2-10 year US Treasury spread in BP ? (1 point)
14. Explain why you’d expect the Fed to ease 25BP based on the following table.
(cancelled)
15. Explain the table below from your readings. (cancelled)
March 1, 2008
All answers require to show calculations if necessary. For multiple
choice questions, no explanations are necessary.
Good luck!
1. You borrow 100 000 Eur for 2 years at 4%. What is your constant annuity
reimbursement amount? (1 point)
2. Guess what is the approximate sensitivity of a 10-year low coupon bond yielding 4%?
(1 point)
3. A fixed income position that expects to profit from a steepening yield curve would
better : (1 point)
a.
b.
c.
d.
have long term rates go up
have short term rates go up
have me look at my neighbour’s answer
very risky
4. A bond yielding 4% with an 8% sensitivity is down 4% for the year. This means that
(2 points):
a. Long term rates have gone up 100BP on the year
b. The fund manager is terrible
c. Long term rates have gone up 125BP on the year
d. The portfolio also contained an 8% yield paper that went bankrupt
5. What are the 3 main risks in Fixed Income management? (1 point)
6. A zero coupon bond that trades at 100% of face value means that (1 point):
a. It was issued today
b. It expires today
c. It must pay very high coupons to trade at 100% of face value
7. You hold a barbell position 2 years /10 years +25BP perfectly hedged. You are long
the 10-year and short the 2-year. You hope (2 points):
a. Interest rates vary strongly
b. A surprise cut in interest rate by the Fed
c. A steepening yield curve
d. A flattening yield curve
8. The “MSCIF Aggressive Fund” of US equities has a beta of 2. The 10-year rates are
at 4.04%. A brilliant ex MSCIf student is building a structured portfolio for its clients
called the MSCIF Guaranteed Fund. He invests 70% of the client fund in a zero
coupon 10-year Treasury bond and 30% remaining in the MSCIF Aggressive Fund.
a. Can you guarantee the client’s capital at maturity (10 years) with a 0.4%
management fee? Show calculations and explain) (2 points)
b. After 10 years, the S&P index has increased 50%. You can therefore reimburse
your client a total amount of (show calculations and explain)(2 points)
i)100%
9. Use the handout for this problem.
Face Value
Mc Donalds
$10 million
Boeing
$7 million
6-month Tbill
$3 million
ii) 130%
iii)150%
iv)160%
Price
?
?
?
Duration
?
12.82
?
i) What is the dollar value of the portfolio including accrued interest? Show
calculations. (3 points)
ii) Calculate the duration of the McDonalds bond and the 6-months Tbill. (2 points)
iii) Convexity for each fixed income investment is given to you on the Reuters sheet.
What is the value of the portfolio (without accrued interest) if rates move up by
100BP? (1 point)
iv) How many of the Boeing bond must be replaced by the Mc Donald’s bond to keep
the same dollar duration? (1 point)
10. You borrow $4 million for 6 months (183 days) and invest it for 3 months (91 days) at
the rates as indicated on your FRA quotes handout. (Watch the bid/ask rates you
choose). You wish to hedge the mismatched position based on the FRA quote handout.
a. Do you buy or sell the FRA? Which one? At what price ? (1 point)
b. For a complete hedge, what amount do you deal? (2 points)
When it comes to fixing the FRA, the 3-month rate is 3.25% / 3.35%.
c. What is the overall profit or loss on the book? (1 point)
11. What are the major differences between FRAs and Futures? (1 point)
12. Back to problem9. You believe interest rates will decrease in the near future and would
like to adjust (increase/decrease) your duration by 10%. How would you adjust your
portfolio using interest rates futures? (2 points)
13. What is the 2-10 year US Treasury spread in BP ? (1 point)
14. Explain why you’d expect the Fed to ease 25BP based on the following table.
(cancelled)
15. Explain the table below from your readings. (cancelled)