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wonderfuldream

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tT
发表于 2011-7-11 18:44 | 只看该作者

fixed income question

interest, increase, question, following, advantage
a fixed income manager wants to take advantage of a forecast decline in interest rates over the next several months. Which of the following combinations of matureity and coupon rate MOST likely result in the largest increase in portfolio value?

a. Maturity 2015, coupon rate 10%
b. Maturity 2015, coupon rate 12%
c. Maturity 2030, coupon rate 10%
d. Maturity 2030, coupon rate 12%

shouldn't the answer be the Shortest maturity with the Highest Rate?



Edited 1 time(s). Last edit at Wednesday, June 3, 2009 at 11:54PM by Movado1108.
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dmar

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2#
发表于 2011-7-11 18:44 | 只看该作者
Would also say C.

Duration/interest rate risk would be greatest for bonds with longer maturities and lower coupons and this the value of the portfolio would increase.

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Penny-wenny

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3#
发表于 2011-7-11 18:44 | 只看该作者
Duration can be understood as the percent change in price due to a change in rates. The question states that there is going to be a decline in interest rates..thus what would be the best portfolio to choose from...the one that would have the highest duration or interest rate risk.

Duration is greatest for bonds that have:

longer maturities,
lower coupons,
lower initial yields.

Based on that definition, and those guidelines..C would have the greatest increase in value.

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dece2011

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4#
发表于 2011-7-11 18:44 | 只看该作者
C...>>>>>longer maturity plus lower coupon (if possible zero coupon) because you expect price decline. You know bond price will go up. In this case, you want bonds with the maximum interest rate sensitivity so that you will enjoy the largest price changes (capital gain) from the change in the interest rate.
You will act in reverse (shorter maturity + higher coupon) if it was a forecast interest increase. This combination will give you minimal price volatility for change in the interest rate.

Thanks.

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FVPV

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5#
发表于 2011-7-11 18:44 | 只看该作者
Could anyone help me:
why longer maturity results in more interest rate risk??
why low coupon rate have the same response too??

how to understand the relationship between interest rate and coupon rate??
And what's the relationship between YTM and interest rate??

Crazy~~~~

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